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Supply chains and Latin America: The billion-dollar question

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Supply chains and Latin America: The billion-dollar question

Will multinationals with a presence in China shrink their footprint in the country and transfer some of their manufacturing operations to regions like Latin America to reduce their exposure to the Asian powerhouse?

That is among the billion-dollar questions being asked by economists and others today amid the fog of uncertainty whipped up by the COVID-19 pandemic.

On the manufacturing relocation front, some say the ball is already rolling and could gather pace because of the pandemic. A chief proponent of this view is author and global strategy advisor Parag Khanna, who cites a shift toward localized production as well as labor costs, intellectual property protection issues and competition from other manufacturing nations.

ALSO READ: Dark COVID-19 clouds may hold silver lining for Latin America

Another who forecasts China will lose out is Steven Ricchiuto, chief economist of investment bank Mizuho Securities USA

Ricchiuto, downbeat on the Asian giant’s growth potential, cites fears over future pandemics as a key driver.

“China won’t have the ability to export its way to growth anymore,” Ricchiuto told a webcast hosted by the International Trade and Forfaiting Association in collaboration with US banking body the Florida International Bankers Association.  

“The Chinese miracle is over as far as I am concerned,” he said. “And I think that production pipelines are going to be completely severed over time. I think there will be a lot more regions – not just the US – but I think Europe, I think Latin America … I think a lot more regions are going to try to produce a lot more of their own products domestically to avoid having these problems in the future. 

“Yes, pandemics are going to happen again but pandemics are not something you can stop. The only way can you deal with them is make sure you have secure pipelines and secure inventories of essential products going forward and I think the world has learned a valuable lesson from this.”

But China, whose economic fortunes are closely linked to that of South American commodity exporters, should not be underestimated. As it emerges first from the crisis, Beijing could support global demand, strengthen its standing on the geopolitical stage as the US raises the drawbridge, and attract investment from companies whose operations in other countries have ground to a halt.

And even if China’s massive manufacturing sector does take a blow, the nation has reduced its reliance on exports and has other ways of asserting its influence, said Kevin Kajiwara, co-president of political risk advisory at global consulting firm Teneo. 

“As businesses around the world contemplate supply chain diversification and resiliency away from China, I think it is worth keeping in mind that China was already in the midst of transforming itself from an export-led to a more self-sufficient consumer-based economy, said Kajiwara, highlighting the importance of US-China cooperation for the world economy.

“Even if supply chains are either moved or added to with redundancy, China’s other global initiatives such as the Belt and Road Initiative, the AIIB [Asian Infrastructure Investment Bank], the bilateral credit relationships that it has and its increasing military prowess are going to ensure that China’s influence goes beyond its borders and that it is a beneficiary.”

Meanwhile, in terms of Latin America potentially gaining from any possible relocation in production, the region may need to up its game on the competitiveness front.  

Chile is the most competitive country in Latin America, according to the 2019 IMD World Competitiveness Ranking, Chile slid to 42nd place from 35th, but was still ahead of Mexico (50), Colombia (52), Peru (55), Brazil (59), Argentina (61) and Venezuela at (63). 

The ranking is compiled by IMD World Competitiveness Center, a research group at the IMD business school in Switzerland.

The solution involves, among other steps, improving infrastructure, raising levels of education and training, and supporting knowledge-transfer mechanisms to bring together the public and private sectors and university research departments.

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