The EIU’s exclusive report shows the opportunities and challenges for the regions supply chains

Amongst all of Latin America’s major economies, Mexico has undoubtedly had the most success in regional supply chain integration, owing in no small part to the 1994 North American Free Trade Agreement (NAFTA) with the US and Canada. Even before the onset of the Covid-19 pandemic, Mexico had begun to reap benefits from supply chain shifts caused by the US-China trade war. The new US-Mexico-Canada Agreement (USMCA) trade deal that replaced NAFTA and came into force on July 1st adds further impetus to nearshoring by raising regional content requirements to 75% in some sectors (from 62.5%), which may incentivise greater local production. Yet, concerns over the business environment may deter firms from moving to and expanding operations in Mexico.

Key findings from our report include:

• The disruption to global supply chains due to COVID-19 will present lucrative opportunities for Latin America, which, for the most part, has not really been a part of the boom in global supply chains in recent decades.

• The EIU believes that the region has the potential to gain considerably from nearshoring in the coming decade, given some comparative advantages, including its long list of free trade agreements, proximity to the US market and increasingly competitive wages.

• However, Latin America faces large obstacles to supply chain integration, including poor infrastructure and logistics capabilities, and legal and regulatory deficiencies.

• According to key metrics used in the EIU’s business environment rankings, Mexico, Costa Rica, Chile and Colombia are, relatively speaking, well positioned to compete with Asia in supply chains. However, progress elsewhere in the region will be difficult.

Looking more broadly at Latin America and the Caribbean, the region faces several challenges that have largely prevented participation in global supply chains to date (apart from at the bottom, as natural resource providers).

“Latin America’s greatest weakness is clearly its poor infrastructure, which has kept logistical costs for businesses high by global comparison. Large-scale projects aimed at closing infrastructure gaps—such as the Trans‑Amazonian Railway, which would connect the ports of Açu in Brazil and Ilo in Peru for eventual shipment to China—have not made much headway, partly owing to issues around transparency and corruption. Moreover, logistical weaknesses are emblematic of larger policy deficiencies, especially in the areas of external trade, foreign direct investment and technological readiness.”

FIONA MACKIE, REGIONAL DIRECTOR, LATIN AMERICA AND THE CARIBBEAN

Find out more by downloading the full report