1. Negotiations
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EU-Latin trade up

SPECIAL REPORT
April 17, 2006

EU-Latin Trade Up

The European Union posted strong trade growth with Latin America last year, led by Venezuela and Mexico. But future EU relations with the region will depend on expanding free trade agreements.

BY CHRONICLE STAFF

As European and Latin American business executives and policymakers prepare to meet in Vienna next month they have reason to celebrate some good news. Trade between the European Union and Latin America is at an all-time high. Meanwhile, the EU is the top foreign investor in countries like Argentina, Brazil, Chile, Colombia and Peru.

All in all, EU trade with Latin America reached € 118.3 billion (approximately $147.2 billion) last year, an increase of 13.0 percent from 2004. Exports grew by 13.7 percent to € 54.4 billion, while imports increased by 12.4 percent to € 64.0 billion, according to Eurostat. That means the EU posted a trade deficit of € 9.6 billion with Latin America last year. That was an increase of 5.5 percent, or €502 million, from 2004, our analysis shows.

Leading EU exports to Latin America last year included autos and power generators, iron and steel and pharmaceuticals. Leading imports from Latin America included oil, vegetables and fruit, feeding stuff for animals, non-ferrous metals and iron and steel.

The Netherlands was the second-leading foreign direct investor in Latin America last year, accounting for 12 percent of all FDI to the region, according to the UN Economic Commission for Latin America and the Caribbean (ECLAC). Spain followed with 6 percent of overall FDI.

CRITICISM

The data comes as the European Union is being criticized for not moving fast enough to liberalize trade with Latin America. The EU still maintains subsidies and high import tariffs on many products, including bananas, Latin American exporters and governments complain.

"I don’t see a policy of the EU yet on Latin America," says Isaac Cohen, president of Washington D.C.-based consultancy InverWay and former Washington director of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). "They have been reacting to U.S. free trade initiatives, with Mexico, Chile and now Central America and Peru. Perhaps the Vienna summit will clarify the EUs relationship with Latin America."

The EU started FTA negotiations in Mexico after the country implemented the North American Free Trade Area (NAFTA) with the United States and Canada in 1994 and started similar negotiations with Chile after that country had started talks with the United States for an FTA. Due to US congressional delays, Chile in the end actually implemented its FTA with the EU before its FTA with the United States.

CENTRAL AMERICA

Now, the EU is looking at launching free trade negotiations with Central America, possibly at the Vienna Summit. Central America and the Dominican Republic last year negotiated and signed a free trade agreement with the United States (CAFTA).

Central America has long wanted to open up trade with Europe. Cohen recalls a trip to Brussels as far back as 1977. The goal of the trip was to explore an association agreement between Central America and the EU, but negotiations never seriously took off due to hurdles in Europe and Central America. The Europeans complained of a lack of a Central American counterpart to their institutions. Meanwhile, Central America entered more than a decade of political violence that distracted from any focus on trade, Cohen says. "Now I see an interesting possibility with the association agreement," he says.

The EU is also likely to use Vienna to start free trade negotiations with the Andean Community. Colombia and Peru signed free trade agreements with the United States in February and last week, respectively, and Ecuador is expected to do so soon.

"The fact that these countries have agreements with the US show that they are better trade partners, also for the EU," Cohen says. "A EU company can set up a plant in Mexico for exports to USA."

US and EU efforts at reaching trade agreements with Latin America should not be seen as alternatives, but complementary tools for the countries in the area, he says.

"If a country comes to an FTA with the US, it’s in their interest to have an agreement with EU as well," Cohen says "Nobody wants exclusive relations with anyone. In matters of trade, the more the merrier."

MERCOSUR

Interestingly enough, neither the EU nor the United States have been able to reach any free trade agreement with Mercosur, the South American Common Market that consists of Brazil, Argentina, Uruguay and Paraguay. The EU started FTA negotiations with Mercosur in 1999, but those talks have been stalled for several years due to disagreements over agricultural subsidies.

"Mercosur should be a trading partner with EU, but when negotiations started, in the beginning EU didn’t want to talk about agriculture, then Brazil and Argentina were upset, saying if we cant talk about agriculture, then what can we talk about," Cohen says.

The EU itself emphasizes that it still sees an FTA with Mercosur as a viable goal. "Although the Doha Development agenda WTO negotiations are a priority for the EU, it remains committed to a successful FTA negotiation with Mercosur," the European Commission said in a statement at the end of March. "An EU-Mercosur FTA would be the world’s first region-to-region free trade agreement. By encouraging and building on regional integration among the Mercosur countries themselves it would create new economies of scale and a wide new market to attract investment."

Also the private sector is keen on the creation of EU-Mercosur FTA. The speedy conclusion of an EU-Mercosur free trade agreement can help Germany maintain its strategic position in Latin America, argued Sigrid Zirbel, regional director for the Latin America Initiative of German Business in a Latin Business Chronicle column in December.

VIENNA SUMMIT

With Austria presiding the EU during the first half of the year, it falls to the country to host the fourth EU-Latin American summit, which brings heads of states from EU, Latin America and the Caribbean. Previous summits have been held in Guadaljara, Madrid and Rio de Janeiro.

"The success of our two EU association agreements with Mexico and Chile, the advanced negotiations with the Mercosur, the plans for EU associations agreements with the Andean Community and Central America, and not least the rapidly moving international environment, all require a deepened partnership, that we hope to concretise at Vienna," Benita Ferrero-Waldner, the EU’s Commissioner for External relations, said in a statement in connection with the summit.

However, trade is only one of 12 topics that will be dicussed at the summit. Others include crime and terrorism, migration and development aid.

While the policymakers meet at the Hofburg Palace, business executives from Latin America and Europe will convene to the Belvedere Palace to discuss key issues and network.

Latin American executives scheduled to speak at the business summit include Luis Alejandro Pagani, CEO Of Argentine candymaker Arcor; Bernardo Quintana, Chairman and CEO of Mexican construction company ICA; Roberto Stern, CEO of Brazilian jeweler H. Stern; and Gabriel Ortega, CEO of Colombian electricity company Generadora Union. And the summit will also hear from European executives like Javier Nadal, vice president of Spanish telecom giant Telefonica and Jean Marc Duvoisin, CEO of the Mexico operations of Swiss food producer Nestle.

GROWTH WINNERS: VENEZUELA AND MEXICO

Venezuela posted the strongest percentage growth in EU trade last year, followed by Ecuador, Mexico, Cuba and Colombia. The fastest-growing Latin American markets for EU exports are Cuba, Mexico, Colombia, Chile and Venezuela, while Venezuela, Panama, Ecuador, Mexico and Colombia are the fastest-growing providers of imports from Latin America into the EU. Measured in value terms, EU trade with Mexico grew most, followed by Brazil, according to Eurostat.

Of the EU’s top 13 Latin American trade partners, only two posted declines last year: Panama and Peru, while Costa Rica and Uruguay posted minimal growth.

The EU accounted for about 12.2 percent of total Latin American trade last year. By comparison, US trade accounted for 38.4 percent of the region’s total trade in 2005. EU trade with Latin America grew at about the same rate as U.S. trade with the region last year (13.7 percent), but its deficit grew at a lower pace than the US deficit did (15.7) and ended up eight times lower as well (the US trade deficit with Latin America was $97.2 billion).

The top EU partners of Latin America are Germany, Spain, The Netherlands, Italy and France in that order. The UK fell from the 2004 top five ranking due to France showing stronger trade growth during 2005 (10.1 percent versus 1.7 percent).

The top Latin American trading partners of the EU are Brazil, Mexico, Chile, Argentina and Venezuela
in that order.

TOP TRADING PARTNERS
2005 trade with Latin America
in billions of € euro.
Percent change from 2004.

Sources: Eurostat,
Latin Business Chronicle.

Germany’s trade with Latin America last year grew by 17.3 percent to €26.2 billion. Exports increased by 17.1 percent to € 16.2 billion, while imports grew by 17.8 percent to € 10.0 billion.

Germany’s top trading partner is Brazil, followed by Mexico. Although Mexico is Germany’s top export market in Latin America, imports from that country were signifantly lower than those from Brazil. German trade with Brazil grew by 21.3 percent to € 9.8 billion, while trade with Mexico increased by 21.6 percent to € 7.7 billion.

Spain’s trade with Latin America last year grew by 20.0 percent to €16.3 billion, largely thanks to a strong boost in imports. Total imports from the region grew by 28.5 percent to € 9.4 billion, while exports to Latin America increased by 10.0 percent to € 6.9 billion.

Spain’s top trading partner in Latin America is Mexico. Total trade between the two countries grew by 27.2 percent to € 5.1 billion, while trade with Brazil (its second largest trading partner in the region) grew by 2.4 percent to €3.0 billion.

Although Spain is the second-largest EU trading of Latin America, it is neither the second-largest exporter or importer. The second-largest EU exporter to Latin America is Italy, while the second-largest importer is The Netherlands.

Spain is the top foreign direct investor in Argentina and Chile and the second-leading investor in Brazil, Colombia, Mexico and Venezuela, according to ECLAC.

BRAZIL

EU trade with Brazil grew by 10.6 percent last year to € 39.1 billion. EU exports to Brazil grew by 12.8 percent to € 15.9 billion, while imports from Brazil expanded by 9.2 percent to € 23.1 billion.

"Brazil is extremely competitive in soybeans and minerals," says Cohen. "Brazil also needs a lot of imports."

Brazil is the top EU trading partner in Latin America, accounting for a third of all EU trade with the region. It ranks as the top import partner, with imports that are almost three times higher than those from Mexico. However, since 2003 it has ranked behind Mexico as an export market for the EU.

"That’s a country that would benefit spectacularly from a free trade agreement with the EU," Cohen says. "But they have been trying to negotiate one through Mercosur and that has not worked very well. "

Brazil, which has doubled its agricultural exports to the EU over the last decade, is ranked as the 18th-largest export market for the EU last year, ahead of such countries as Saudi Arabia, Israel and Taiwan.

Leading EU exports to Brazil include machinery and chemical products, while leading imports from Brazil include raw materials and food.

The EU is also the top investor in Brasil, with two EU countries (Spain and The Netherlands) alone accounting for higher FDI than the United States last year, according to ECLAC.

MEXICO

EU trade with Mexico grew by 19.1 percent last year to € 25.7 billion. The high growth was mainly due to a strong export increase, but also imports grew substantially. Total EU exports to Mexico grew by 30.4 percent to € 16.7 billion, while imports expanded by 21.5 percent to
€ 9.0 billion. Both growth levels are the highest in five years and since the EU-Mexico free trade agreement went into force.

"The fact that it was the first Latin American country that was able to sign a FTA with EU benefited Mexico tremendouly and is impacting trade with EU," Cohen says.

The agreement was signed in 1997, but implemented in October 2000. That coincided with a slowdown in both the Mexican and EU economies and the full benefits have not been felt until last year. Mexico’s economy went from 6.6 percent growth in 2000 to a decrease of 0.2 percent in 2001 and a GDP expansion of 1.4 percent in 2002. Meanwhile, the EU went from a 3.9 percent GDP increase in 2000 to 2.0 percent growth in 2001 and 1.3 percent in 2002 and 2003. Both the Mexican and EU economies started picking up only in 2004.

Leading EU exports to Mexico include machinery and manufactured goods, while leading imports from Mexico include machinery and oil.

Mexico ranked as the 17th-largest export market for the EU last year.

The EU trailed the United States as the top foreign investor in Mexico last year, but top EU investors include Spain, The Netherlands and the UK, according to ECLAC.

CHILE

EU trade with Chile grew by 13.2 percent last year to € 11.7 billion. The growth was mainly due to a strong export increase: total EU exports to Chile increased by 24.2 percent to € 3.9 billion. But also imports saw healthy growth of 8.5 percent to € 7.8 billion.

A free trade agreement between the EU and Chile, implemented in 2003, has helped boost their trade. In 2004, the second year of the agreement, EU imports from Chile grew by 45.7 percent and led to Chile passing Argentina in terms of EU imports from Latin America. Although the growth was slower last year, it was still among the highest and contributed to Chile keeping its position as the third-largest import partner after giants like Mexico and Brazil.

And the EU is important for Chile as well. It is now the largest export market (ahead of the United States) and the EU has become the top foreign investor in the country. Spain alone holds that position, accounting for 30 percent of all FDI to Chile last year, followed by the United States and Canada, ECLAC data shows.

The increased ties are largely due to the EU Chile free trade agreement, which is he most wide-ranging and innovative agreement of its kind negotiated by Chile or the EU, EU Trade Commissioner Peter Mandelson argued during a trip to Chile three weeks ago.

Leading EU exports to Chile include machinery and manufactured goods, while leading imports from Chile include manufactured goods and raw materials.

ARGENTINA

EU trade with Argentina grew by 5.4 percent last year to € 10.4 billion. The growth was mainly driven by a strong export increase of 10.1 percent to € 4.0 billion. That helped offset a weak - 2.6 percent - increase in imports from Argentina, which reached € 6.4 billion.

"Argentina’s economy is picking up [so the EU export growth] results are not surprising," says Cohen. "And the third economy in region, consequently their rank in trade is compatible."

Leading EU exports to Argentina include machinery and manufactured goods, while the leading import from Argentina is meat.

Spain was the top foreign investor in Argentina last year, followed by the United States and France, ECLAC data shows.

VENEZUELA AND COLOMBIA

EU trade with Venezuela grew by 46.9 percent last year to € 6.4 billion. The high growth was mainly due to a strong - 73.3 percent - increase of imports from Venezuela, which reached € 3.6 billion. EU exports to Venezuela also grew strongly - by 22.7 percent to € 2.8 billion.

Leading EU exports to Venezuela include machinery, manufactured goods and chemical goods, while the leading import from Venezuela is oil.

The EU trailed the United States as the top foreign investor in Venezuela last year, but top EU investors include Spain, France and the UK, according to ECLAC.

EU trade with Colombia grew by 16.4 percent last year to € 5.7 billion. The high growth was mainly due to a strong export increase, although imports also grew at respectable levels. Total EU exports to Colombia increased by 26.3 percent to € 2.4 billion, while imports expanded by 9.9 percent to € 3.2 billion.

The EU had higher combined investments in Colombia last year than the United States, although measured individually, the top EU investor (Spain) trailed the United States, according to ECLAC.

PERU

EU trade with Peru fell by 1.0 percent last year to € 3.4 billion. The decrease was due to a strong - 7.0 percent - decrease of imports from Peru, which reached € 2.3 billion. EU exports to Peru, meanwhile, grew strongly - by 15.4 percent to € 1.0 billion.

The top foreign investor in Peru last year was the UK, followed by the United States, The Netherlands and Spain.

EU trade with other key partners varied. Trade with Costa Rica grew by 0.7 percent, while trade with Uruguay only expanded by 1.1 percent. While it fell with Panama, it grew strongly with the Dominican Republic (9.5 percent) and Cuba (19.1 percent).

Eurostat did not provide trade data for other countries, but ECLAC data shows that the EU trails the United States in investment in Central America. In Costa Rica, El Salvador and Honduras ranked third or fourth among top foreign investors, whil the United States ranked top, ECLAC data shows.