South America and the post-coronavirus economy

Shifts on the global trade chessboard were already happening prior to the coronavirus crisis.

Countries had begun tightening their embrace on regionalism and firms had embarked on the path of limiting their exposure to China.

Trends like these, among others, will continue and the pandemic will only accelerate them, best-selling author and global strategy advisor Parag Khanna says.

To discuss this and some of the implications for Latin America, particularly South America, BNamericas caught up with Khanna, who is also founder and managing partner of FutureMap, a data-driven strategic advisory firm.

BNamericas first interviewed Khanna last year in Chilean capital Santiago, on the sidelines of local banking giant Bci’s annual conference, where he was keynote speaker.

BNamericas: Parag, you told BNamericas previously that Latin America should work to boost intraregional trade and that countries should also look to build trade partnerships with as many nations as possible outside the region. Is that truer than ever today?

Khanna: That’s certainly very, very true. Generally speaking, we are experiencing a trend towards more regionalization of supply chains. You can see that North American trade has intensified at the expense of China, for example. The US is trading now more with Canada and with Mexico each than it is with China. 

And so other regions, Europe and Asia as well, feature far more intraregional trade than interregional trade. So of course, Latin America, or South America in particular, and Africa need to do the same thing, to bring down internal borders to boost their complementarity, to take advantage of geography, and so forth. But as you know, my view is that we should always pursue multi-alignment, multi-directionality – that is the most important ingredient in resilience at a time when you can have pandemics, cut offs in travel and bottlenecks in supply chains. So I think it is very important.

Looking just at global agriculture, and the limitations or the choke points in global agricultural supply, there’s no question that South America has a competitive advantage given its biodiversity, given its huge agricultural potential. So this is a better time than ever for South America to be truly connected to global food markets.

BNamericas: What about China’s role in a post-coronavirus Latin America. A larger role or a smaller role?

Khanna: It really depends on the financing needs. Of course, many governments are now turning to the IMF to draw on reserves, sort of backstops for their economies. So, if countries in Latin America can survive based on the support that they are going to get from the IMF, then there is potentially less need to turn to countries like China which obviously have more onerous or opaque lending terms. 

When it comes to food or energy, there is a strong potential for exports to rebound to China but, again, to Asia as a whole, in order provide resilient supplies of commodities in particular to the broader Asian region. 

BNamericas: You say in an article that firms will reduce their exposure to China and that the new mantra is: Make where you sell. Don’t get too close, or depend too much, on China. What are the implications of this shift for the likes of Chile, Brazil and Peru, which sell a big chunk of their natural resources to China?

Khanna: The make where you sell principle is very consistent and should not change. It is a principle of resilience that all countries should really pursue in terms of having more localized production in order to, again, ensure that you can reach your customers. 

When it comes to China or other countries that are large manufacturers or suppliers, one should try as much as possible to have that production relocated to South America. This is something that happened early on, with garments, for example. Chinese garment manufacturers moving garment production to Brazil to sell them to that market. That constitutes investment and creating jobs as well as trade benefits.

Obviously, when it comes to commodities, as we have discussed before, in Santiago, it is very, very crucial to focus not only on exporting commodities just to China but looking more broadly, globally at other markets, in Asia as well.

BNamericas: Do you think the pandemic will accelerate this trend of firms reducing their exposure to China? 

Khanna: Yes, the pandemic will accelerate the trend that was already underway, with supply chains moving out of China because of the high labor costs, because of the poor protection of intellectual property, because of the competition from local players, because Southeast Asia offers competitive wages and a growing market, a more liberal political economy – all of those factors have been pushing supply chains out of China and will continue to. 

BNamericas: Finally, once we are past this crisis, do you think the world will be the same place? I mean, do you envisage any major changes in terms of trade or international relations, etc?

Khanna: I published this article recently in [global business news publication] Quartz saying that there were five things happening prior to the crisis that will continue and one of them was this regionalism that I mentioned, the backlash against China was another, labor automation that will continue in order to prevent factories from going offline when humans get sick, dependence on fiscal policy, which is obliviously now a permanent condition, and also migration. Right now, migration is zero but it will return again because people will want to leave poorly governed areas with bad healthcare and move to what I call the climate oases. 

I think supply chain competition will continue, regionalism will continue, and that really is the battlefield of geopolitics more than anything else. And again, this struggle to attract talent and people with savings to invest is going to be critical in a world where the population is starting to plateau. That also is, in a way, a strong element of what builds a capable society and an influential society in geopolitics as well.