In 2005, several economies in our region received a frontal thrust following the elimination of the Multifiber Agreement. Under that agreement, developing nations could export a certain amount of textiles to industrialized countries at pre-established quotas. Given the fact that Asian countries like China, Taiwan, and Vietnam had and indeed continue to have a comparative advantage in exporting textiles over their Latin American counterparts, as markets liberalized they won and we lost.
Mexico closed dozens of maquiladoras on the border with the United States. In Central America and the Caribbean, alike; Most of the textile production free zones significantly reduced their operations or closed definitively in order to relocate to an Asian country where they had access to more and better cheap labor. Consequently, the unemployment rate in the Latin American region increased and the economic dynamism of certain areas, such as the northern border of Mexico, decreased.
Today, fifteen years after that setback, Latin America could retake part of the ground it lost in the textile market. This is due to the mistrust towards China that the covid-19 pandemic has generated coupled with the trade war that the White House has waged against Asia, especially against the communist-dictatorial government of Xi Jinping.
The opportunity that Latin America has in this regard is even more formidable when we consider not only the weaknesses of the Asian market, but also the relative strengths that our countries have vis-à-vis the eastern economies. Specifically in what has to do with the export of textile products to the United States and Canada.
What are those relative strengths?
On the one hand, there is the trade balance of our countries vis-à-vis the US Currently, in most cases, Latin America presents a deficit in this indicator, which means that, in aggregate terms, we are importing more than we are exporting to developed countries in North America. And how is it that said deficit is a strength for Latin America? It is in the sense that it puts our economies out of the sights of the United States and Canada when it comes to protectionist policies.
In the case of China, for example, the White House has been significantly increasing import restrictions because that country has a trade surplus with the United States in the order of $ 400 billion. It should also be noted that this surplus is due, in part, to the devaluation of the Chinese currency fostered by the Communist government as a way to maintain and strengthen its leadership in export markets. This devaluation policy, in fact, constitutes a clear violation of the rules instituted by the World Trade Organization for member countries, since it artificially unbalances the playing field on which economic actors compete for opportunities to export and import.
On the other hand, Latin America is ahead of China due to the fact that our economies are closer to the United States and Canada not only in geographical terms, but also in what has to do with our political and idiosyncratic systems. This, in turn, significantly reduces the cost of freight and increases the fluidity of the negotiation between the parties involved in the export-import dynamics.
Several Latin American countries, including Mexico, Peru, Colombia, the Dominican Republic, as well as the entire Central American region, have free trade agreements signed with the United States. In Asia, only South Korea, Japan and Singapore have signed agreements of this nature with the Americans. And in the case of these three Asian countries, their strength is not in the export of goods whose production requires the intensive use of cheap labor, but in goods with a much more sophisticated degree of added value. For this reason, despite the free trade agreement they have with the United States, these Asian countries are not a threat to Latin America in the area of textile production for export.
In summary, for all of the above, Latin America, especially the regions of Central America, Mexico and the Caribbean, should take advantage of the current economic circumstances to rethink their value proposals to multinational companies in the textile industry in order to relocate here. This, in the medium term, can help alleviate the high unemployment rates that prevail in our towns.
Now, let’s be clear, this type of foreign direct investment is not and will not be the panacea that will take our region to the next step in the process of transformation towards developed economies in the information age. For this we need to train our human resources in a more sophisticated education system and under leadership that fosters competition and cooperation; not the exploitation and the culture of “take off yourself to wear me”.
The author is an economist and public policy expert. Website: www.jonathandoleo.com