Good outlook, but marred by growing protectionism.
BY CHRISTOPH G. SCHMITT
Worldwide recession, the evolution of commodity prices and competitive Chinese industries were the prevailing factors to influence Latin American economies in 2011. Additionally, a declining internal demand in Brazil, Latin America’s biggest economy, affected the markets of the subcontinent. As a consequence, certain economies have started protecting their markets by complicating imports or rising tariffs. These factors will likely continue affecting German business in the region. In 2012 the evolution in commodity prices, external demand, inflation and exchange rates will influence Latin American markets. If these fields do not evolve in a favorable way, the region’s politicians will presumably react with even more protectionist measures. German companies are invited to observe how these fields evolve and should be prepared to cope with possible measures that hamper imports.
At the same time, due to a rising demand of an emerging middle class, Latin America holds a wide range of business opportunities to German companies. In order to achieve a higher living standard, Latin American households have been increasing their demand for high-quality products. In this regard, German high-standard products can benefit from this rising demand. Still, one has to keep in mind that this higher consumption is not necessarily the result of a higher income. It is rather often financed by credits and followed by rising inabilities to pay the debts.
Along with business opportunities that evolve from the rising middle class, there are several other fields where German companies can be successful in 2012: Especially in Argentina and Brazil, the food industry is on the rise. Brazil offers opportunities in its shipping industry and its “pre-salt” oil development. In Colombia, the petrol and carbon sector is booming, but also the tourism sector is growing at impressive rates.
Even though the Brazilian economy has suffered a setback in the second half of 2011, it is already recovering and attractive to German business in 2012. Infrastructure programs, tremendous raw material deposits combined with a growing demand of an emerging middle class, declining inequality and a rising educational level boost the economy. In this context, German high-standard products can be of particular interest to satisfy the emerging middle class. Due to its protectionist measures which include high import tariffs it is [more] favorable to start a local production. Furthermore, even though the big orders are already assigned, there are still business opportunities in the supplying industries related to the major events FIFA World Cup in 2014 and the Olympic Games in 2016.
KEY CHALLENGES IN LATIN AMERICA
As already mentioned above, protectionist measures are presumed to be further influencing German business in 2012. Especially German enterprises based in Argentina have to take into account that the Argentinean government might introduce further measures similar to the already existing one-to-one regulation that forces companies to export goods with at least the same value as their imports. Still, the protectionist policy is not present for the whole region – on the contrary, countries such as Mexico and Chile are precursors in the promotion of free trade.
Another challenge may be the global competition for economic cooperation with Latin America: Due to its [successful handling] of the global economic and financial crisis as well as its importance as a commodity supplier, business in and with the region is attractive for countries all over the world. Although “Made in Germany” still enjoys a good reputation, concrete conclusions of contracts will depend on attractive offers.
KEY CHALLENGES IN BRAZIL
This year it will be particularly challenging for German companies to cope with the protectionist measures the Brazilian government has taken to boost national economy. In order to stimulate national production and hinder foreign producers to congest the Brazilian market with low-priced goods, the government has taken measures such as rising tariffs and thereby complicating imports. This makes it particularly difficult for German exports to enter the Brazilian market. To avoid these regulations it can be advantageous to start producing locally in Brazil. Besides the protectionist measures, the prevailing complicated tax system will still be defying German business in 2012.
Christoph G. Schmitt is the General Manager of Germany-based Lateinamerika Verein (“Business Association for Latin America”. The research team at LAV also contributed to this column.
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