Stepping into Latin America

Business Asia, Sept, 2001

Latin America is becoming an increasingly attractive target for Australian trade, but a new report warns exporters to do their homework first.

CHANGES TO investment laws and reduced trade barriers have made Latin America a key trade and investment destination for Australia, a new report by the Department of Foreign Affairs and Trade's Economic Analytical Unit (EAU) has found.

Traditionally an area of strict barriers to foreign trade and investment, Latin America has undergone change over the past few years to become a region almost completely open to foreign direct investment, with lower trade barriers.

Brazil, Mexico, Argentina and Chile have led these reforms. According to the report, Investing in Latin American Growth: Unlocking opportunities in Brazil, Mexico, Argentina and Chile, the four nations represent 83 per cent of Latin American GDP. The GDP figure is slightly less than the combined economies of four of Australia's major East Asian markets -- China, the Republic of Korea, Indonesia and Thailand.

"Latin America will never be the pre-eminent trading partner for Australia that East Asia is, but could conceivably become an important direct investment destination," the report states.

Areas of investment referred to particularly are mining and mining supplies, agribusiness such as wine and food processing, infrastructure such as telecommunications and ports, and a range of other services.

At present, most Australian investment in Latin America is in mining and is strongly export oriented.

The report says reliable, comprehensive statistics are not available, but during the 1990s Australia invested US$1.1 billion ($2 billion) in Chilean mining alone. Argentina and Brazil have also had major Australian investment.

"Significant scope exists for more mining investment, particularly when mineral prices improve," the report states. The EAU report found that Australia has direct investments in Latin America worth up to $7.4 billion (2000 figure) according to project based data. There is currently considerable potential to expand this.

The EAU recommends that Australian investors should fully investigate Brazil, Mexico, Argentina and Chile's various trade agreements in order to make sure they comply with the rules and can take full advantage of tariff free export opportunities.

Exporters also have opportunities, the best lying in elaborately transformed manufactures and the supply of inputs to export-oriented primary industries and natural resource based manufacturing.

"Those exporting to Latin America should watch out for the tariff gap between most favoured nation tariffs (which Australian companies must pay) and often zero tariffs facing Latin America's free trade agreement partners," the report states.

These gaps are a potentially major market access barrier for affected Australian exporters.

Tourism and other services have good prospects for exporters. All four countries have entered into free trade agreements as they have opened up their economies and embraced democracy.

DFAT warns such agreements as Mercosur and NAFTA, along with a future Free Trade Area of the Americas, may inhibit efficient free trade and development in the area, and Australian companies' access to Latin American markets.

Because of this, the Australian Government is actively exploring the possibility of a free trade agreement with the USA, while considering other strategies to maintain trade and investment access, according to the report.

BRAZIL

Brazil is Latin America's largest market. The country is the world's fourth largest foreign direct investment recipient, stimulated by lower trade barriers, deregulated markets, privatisation and improved economic management and performance.

The ensuing growth has made Brazil an increasingly important market for Australia. The country is Australia's largest Latin American trading partner.

Last year, Brazil imported $571 million worth of merchandise exports, up from $100 million in 1990.

The report states last year's two largest Australian exports to Brazil were coal, worth $296.7 million, and cars, worth $56.4 million.

In terms of primary exports, value grew from $83.2 million in 1990 to $346.5 million in 2000, although this was less than half the growth rate of total Australian exports to Brazil. Coal accounted for 86 per cent of primary exports last year, with BHP dominating by supplying coking coal to Brazil's steel making industry.

Statistics suggest growth is occurring in Australian investment in Brazil. Between 1995 and 2000, the number of companies investing went from only five to 25, with Australian exports associated with these investments rising from $80 million to $180 million.

The investment is largely in mining and resources, although there is also a presence in processed foods, financial services, infrastructure, construction, entertainment, education and training, and telecommunications technology and services.

The report identifies five key factors that are likely to drive medium term investment:

* Brazil's competitiveness in primary export markets, which limits Australia's primary export opportunities;