Regional integration has helped strengthen trade ties

The global economic recession that began in 2008 has underlined the significance and strength of emerging markets, and highlighted regions that were previously in the shadows. In addition to developing in their own right, Latin America and South-east Asia rapidly recognised their potential as trade partners. On April 28, 2011 a regional initiative was launched in the Peruvian capital, Lima. The Pacific Alliance (PA) was created with the objective of integrating the economies of Peru, Colombia, Chile and Mexico, and intended from the beginning to strengthen trade ties between Latin American markets and those in the Asia-Pacific. Although the bloc still only consists of its initial members, Panama and Costa Rica have applied and hope to enter the group shortly. The PA comprises 40% of GDP in Latin America and, if considered as a bloc, would be the world’s sixth-largest economy.

A Rising Power

Just a year after its creation on June 6, 2012, the PA formalised its existence during the celebration of its first presidential summit. Since then, progress has been swift and impressive. The first step was the elimination of visas between the four countries, which came into force on November 1, 2012. Also in November, the free movement of goods and services between member countries was proposed. This initiative, which was subsequently formalised in February 2014 in Cartagena de Indias, removes up to 92% of the tariffs that have hitherto existed between the PA’s four member economies.

Trade Agreement

The trade agreement signed within the PA bloc provides 100% tariff reduction for those goods that had tariffs reduced, with a maximum time limit of 17 years for it to come into effect. The 8% of tariffs left to be eliminated are mostly on agricultural products. Foreign companies with investments in the PA’s member countries also enjoy the elimination of tariffs. This is the case with Canada’s Scotiabank, which acquired 51% of Colombian bank Colpatria two years ago. The firm’s CEO, Brian Porter, told local press that the group is keenly aware of the large opportunities that could arise in the alliance’s four countries. “We can now offer our customers broader connectivity by giving support in the PA countries and in Asia,” Porter told local newspaper La República.

During 2013, once the economic integration of the member countries was agreed upon, the PA dedicated its various summits to strengthening the economic attractiveness of the region for investors outside the region, and especially those in Asia. The summit held in Cali in May 2013 saw the creation of a PA visa for foreigners, designed to promote tourism within the region. Immediately afterwards, a June summit hosted the first macro-business conference in the history of the PA, which was intended to promote business within the region, both domestically and abroad.

Tourism Alliance

Perhaps the sector that will benefit the most from the shaping of the PA, at least in the short term, is tourism. Promotion agencies from the member countries – Proexport Colombia, ProMé xico, PromPerú and ProChile – realised that Asian tourists often like to make long trips and visit different countries. With this as a premise, they decided to work towards an integrated touristic offer for international visitors, and a macro-business round on the tourism sector was held in July 2014.

During the event, companies involved in tourism spent two days discussing how to increase the total figure of 32.7m foreign visitors who, according to the World Tourism Organisation, came to Mexico, Colombia, Peru and Chile in 2013. More than 1750 business appointments took place at the macro-business round, according to Proexport Colombia. “The governments of the four member countries are giving a special boost to the bloc by the integration of tourism,” Sandra Howard, Colombia’s vice-minister of tourism, told reporters at the event. “This is an appropriate place to tell the world what the PA is and what are the touristic offerings of each of the member countries.”

The elimination of visas in 2012 had a direct impact on tourism from other PA countries. According to the Immigration Office, 21,000 visitors came to Colombia from Mexico, Peru and Chile in 2013, a rise of 16% on the previous year. Other initiatives being discussed could further increase tourism rates within member countries. The four PA countries are working to standardise their immigration processes for Asian tourists. They are also working to increase the number of flights between them so that the offer is better and prices for flights between countries more affordable.

Member countries are already planning their first promotion campaign. This will take place during the second half of 2015 in the Chinese market and aims to showcase a selection of destinations that the four countries offer. The campaign will focus on cultural tourism and ecotourism. “The Chinese are not looking for beaches or sun; they are interested in visiting historic icons. There is also demand for birdwatching, surfing and trekking,” Maria del Carmen de Reparaz, tourism promotion director at PromPerú, told reporters.

Food Exports

The PA will also provide a boost to the agricultural sector. The four member countries are in a privileged position to be major food suppliers for Asian countries like Japan, China and Korea. That was the theme of the macro round held in Puerto Vallarta in Mexico in June 2014, with the participation of 500 companies from both sides of the Pacific. The aim is for member countries to complement one another’s strengths. As Maria Claudia Lacouture, director of Proexport Colombia, told OBG. “A fruit produced in Colombia, such as a pineapple, can be processed in Chile, which can then export juices to Japan.” The integration of this and other production chains linked to international trade holds enormous potential for generating business among the PA countries.

Traders

Mexico, Chile and Peru have a longer history of economic and trade relations with the Asia-Pacific region. For its part, Colombia tried to join the Asia-Pacific Forum for Economic Cooperation in 1995, unsuccessfully due to a moratorium on accepting new members. Bilaterally, the country concluded a free trade agreement (FTA) with South Korea in 2013, although it has been unable to approve it in Congress. It is currently negotiating an economic agreement with Japan. “The results of FTAs signed with other countries and regions in recent times, specifically the US, the EU and South Korea, are helping the country to maintain in 2013 the levels of foreign direct investment seen in 2012,” Carlos Iván Villegas Giraldo, president of Central de Inversiones S.A., the property arm of the Ministry of Finance, told OBG.

In 2012 Colombia exported $5.5bn to the Asia-Pacific region. Its main customer, China, mainly sought Colombian oil and plastics. Other exports to Asia included oil, gold, coal, coffee, flowers, sugar, bananas and precious stones, all non-value-added products. As the member country that exports the least to Asia-Pacific, Colombia is now seeking to increase the figures through the development of production chains.

At least in the short term, Colombian trade with Asia will continue to be dominated by imports, primarily textiles, electronics and vehicles. This presents opportunities for logistics firms. As Andrés Osorio, country manager of Maersk in Colombia, told OBG, “The increase in imports from the Far East represents significant business for sea cargo companies. Electronics, textiles and auto parts compose the majority of the containers that we bring from that side of the world.”

Mercosur

While Asia remains the priority for the bloc, the PA is also looking at other markets. During the summit held in Nayarit, Mexico, in June 2014, the presidents of the member countries agreed to work to increase trade with the southern Mercosur bloc, formed by Argentina, Brazil, Paraguay, Uruguay and Venezuela. Brazil has announced the elimination of tariffs on products coming from Peru, Chile and Colombia. Its bilateral agreement with the three countries was initially planned to begin in 2019 before the regional giant brought its implementation date forward. Over the past 10 years, trade between Brazil and Colombia has increased by 300%, while trade with Peru rose by 400% and trade with Chile grew by 200%, according to the Brazilian authorities. The member countries of the PA are planning to relax trade barriers with other Mercosur members as well.

Only three years after the idea of forming the PA was confirmed in Lima, the progress achieved on it is considerable. The regional bloc’s short-term priorities include the integration of Panama and Costa Rica, and the confirmation of Mexico as a member country of the regional capital market, the Mercado Integrado Latinoamericano, also known as MILA.

In relation to its partners, the most recent PA summits have focused on promoting trade and tourism with its neighbours across the Pacific Ocean. The success of the PA as a bloc will depend on the ability of its member countries to maintain their attractiveness for international investment while they continue to further strengthen their domestic industries. If the seriousness, the efficiency and the good work continue, substantial growth of trade between the PA and the Asian markets will become a hard reality in the near future.