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IDB report: Europe remains leading source of investment and aid, second biggest trade partner for Latin America and the Caribbean

The European Union is still the leading source of foreign direct investment and official development assistance as well as the second biggest trade partner for Latin America and the Caribbean, according to a report released today by the Inter-American Development Bank.

The study, a detailed analysis of EU-LAC economic links over the past 10 years, was issued ahead of Friday’s summit of heads of state and government of 33 Latin American and Caribbean countries and 25 European nations due to take place in Guadalajara, Mexico.

Trade between these two regions is still recovering from the abrupt drop it suffered in 1999, which marked the end of a decade-long expansion. In 2003 EU-LAC commerce came to $91.3 billion, below the $93.1 billion tallied in 1998, the report says.

Some of the factors affecting trade are beyond either region’s control, others are linked to domestic economic or policy developments and some are particular to EU-LAC relations. The global economic slowdown and recovery phases have influenced flows, as have the emergence of China as a trade power, the devaluation of Latin American currencies and the euro’s appreciation.

Other factors are the entry of Eastern European nations to the EU, Europe’s agricultural support policies, Latin America’s increasing subregional integration and its growing trade with North America.

“The obstacles to EU-LAC trade, however, are not insurmountable,” states the study, a special issue of the Periodic Note on Integration and Trade in the Americas series produced by the IDB's Integration and Regional Programs Department. “Notwithstanding regional and global trends that will be hard to change in the short term, various mechanisms could be used to overcome the present imbalances in inter-regional commerce.”

Enhanced access to markets through further multilateral or inter-regional trade liberalization would be fundamental, although the complexity of EU-LAC trade relations would require a broad range of policy initiatives to address specific problems between the EU and each LAC country or subregion, such as export promotion and marketing activities; adaptation to each other’s norms and standards; and inter-regional business cooperation.

“By improving production capacities and technological development, and by creating new export opportunities through intra-firm trade, European FDI in Latin America and the Caribbean will play a key role in future inter-regional trade,” the study says.

The IDB report examines the main trends in EU-LAC trade at the regional, subregional and country levels; the leading determinants of inter-regional commerce; the evolution of European FDI in LAC; the main policy instruments used to promote trade and investment links; and trends in European development aid for Latin America and the Caribbean. A statistical annex provides an extensive overview of flows of trade, investment and aid over the past 10 years.

EU-LAC Trade Trends

The strong growth of inter-regional trade evident in the 1990s ended in 1999, when flows contracted by 5 percent in value terms. While there has been a modest recovery since then, EU-LAC trade in 2003 ($91.3 billion) was still below its 1998 level ($93.1 billion). In 2003, LAC exported goods worth an estimated $44.4 billion to the EU and imported $46.9 billion.  Europe's main trade partner in the region is Brazil, which accounted for 34 percent of EU-LAC trade in 2003, followed by Mexico (25.3 percent), Argentina (9.3 percent) and Chile (8.9 percent). These four countries account for nearly 80 percent of total EU-LAC trade.

The IDB study points out that, in part, the relative stagnation of EU-LAC trade reflects trends in the world economy, marked by instability in global financial markets and the general downturn in economic growth. But it also identifies factors specific to EU-LAC relations that affected commerce between these two regions, including the product composition of such flows and the instruments regulating them.

There was zero growth in EU-LAC trade between 1998 and 2003, a period when LAC's trade with the world (and with North America) grew by 3 percent a year. LAC's relative importance as an export market for Europe has been falling since the late 1990s, and the EU's importance as a market for LAC exports has been in decline for more than a decade.

Mexico's booming trade with the United States and Canada since the North American Free Trade Agreement came into force in 1994 has a somewhat distorting effect on EU-LAC figures. Nevertheless, even if Mexico is excluded, LAC exports to the EU still grew at only two thirds the rate of the region's total exports in the last five years, and LAC imports from Europe have contracted faster than its global imports.

Mercosur's trade with the EU has grown by only 2 percent a year on average in the past decade – much slower than Mercosur's total trade. There has been virtually no growth in EU-Andean Community trade over the past 10 years, while total EU-Central America trade has grown only modestly.

In contrast, trade between Europe and Chile has grown substantially, by an annual average above 5 percent in the past decade. Mexico, too, has seen a rapid increase in its trade with the EU. Interestingly, most of that growth happened before the entry into force of the EU-Mexico free trade agreement in 2000. Mexican exports to Europe have fallen significantly since then, while its imports from Europe have soared in the past three years. The disappointing export performance may be partly due to the learning curve for competing in the European market.

Investment and Aid

Investment flows from Europe to Latin America and the Caribbean boomed in the 1990s, during which the EU became the leading source of LAC investment inflows. European direct investment in the region peaked in 2000, when inflows reached almost $41 billion, but has declined sharply since then, to $11.4 billion in 2002 (preliminary projections point to a further contraction in flows in 2003).

There are signs that in 2004, after four years of contraction, investment flows to LAC will rise again. A global economic upturn and several business surveys suggest that confidence in the region has grown. However, the report notes: “LAC will continue to face serious challenges in its efforts to attract new FDI from Europe and elsewhere. The region will have to compete hard against countries in Eastern Europe and Asia to draw the attention of foreign investors.”

Most EU investments in Latin America go to Southern Cone countries. At the end of 2001, Brazil held 38 percent of total European FDI stock in the region, followed by Argentina with 26 percent. Only about 13 percent of total European FDI stock in LAC is in Mexico.

As regards official development assistance, EU member states and the European Commission contributed $16.6 billion to LAC in 1994-2002, accounting for over 40 percent of total ODA flows to that region. Annual flows, however, decreased 1.5 percent on average during that period. Nicaragua and Bolivia were the top LAC recipients of European aid, accounting for nearly 30 percent of total disbursements in the period 1994-2002.


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