Blog Post

The European Union with the Community of Latin America and the Caribbean: where do we stand?

Latin American and Caribbean countries have deep historical, political, cultural, and economic ties with Europe, and cooperation between the two regions has been intensifying recently. Here we report some of the main trends in trade, foreign direct investment, and agreements between the European Union and The Community of Latin American and Caribbean States, the European Union’s official counterpart in the bi-regional strategic partnership that commenced in 1999.

By: Date: December 5, 2017 Topic: European Macroeconomics & Governance

This blog post is also based on findings from the event “EU – CELAC Economic Forum – Channels for a joint future“.

The EU-LAC Foundation kindly supported the research behind these findings. The author is grateful to Inês Gonçalves Raposo and Lloyd Lyall for insightful discussions and comments.

Member countries of the Community of Latin American and Caribbean States (CELAC) constituted the fourth-largest trade partner for the European Union (EU) in 2016, combining for over 5.8% of extra-EU28 trade in goods, behind the United States (US), China, and Switzerland, albeit still representing a relatively small market, compared to the US and China. Similarly, the EU is CELAC’s third main partner and the second as an export destination. Their trade relationship has been broadly stable in terms of GDP (Figure 1) and it is inherently asymmetric, with mainly primary products flowing from CELAC to the EU, and manufactured goods going in the other direction. Historically, South America has had a more advantageous balance with the EU than Central America, Mexico, and the Caribbean. This trend has lately reversed, as the appreciation of the dollar and falling commodity prices caused a deterioration of terms of trade, especially in oil and derivatives. Overall, CELAC deficit with the EU has been increasing since 2012, driven mainly by weak export performance, even if there were signs of recovery in the first half of 2017.

Despite growing diversion towards China, the EU and CELAC’s trade flows have traditionally been very compatible, that is, products generally imported in CELAC are very similar to those generally exported by the EU, and vice versa. This could suggest large potential benefits of stronger economic ties between the two regions (Zerka et al., 2014). Nevertheless, for many CELAC countries, opening up might result in trade deficits, given relatively high import elasticity to income. In turn, those imbalances may be difficult to reverse by devaluation because of the relatively inelastic nature of CELAC exports; historically, trends have been reversed via economic contractions. Therefore, fully reaping benefits from more openness with the EU also requires diversification of CELAC’s exports (for example, by directing investment to the development of new business). Indeed, compatibility is more pronounced between EU exports and CELAC imports, rather than EU imports and CELAC exports (Figure 2), especially for South America and the Caribbean (in Central America and Mexico, the share of manufactured exports is higher than in the other regions).

In terms of trade in services, CELAC is the third largest partner for the EU, accounting for 7.3% of exported services and 12.1% of imported services, in 2015. Brazil alone accounts for 1.7% and 1.1% of those services, respectively. Overall, top EU partners were Germany, Netherlands, and France, while in the English-speaking Caribbean the UK has a major role, as well. Moreover, the EU recorded a surplus with most CELAC countries. In particular, large positive balances have been attained in commercial services other than trade and transportation, especially with South America, while deficits appear to be held with regions and countries specialized in specific sectors, like travel services in the Caribbean.

The EU accounts for more than half of foreign direct investment (FDI) investment in CELAC countries and it is particularly present in South America (Figure 3). However, in 2015 there has been a reduction of FDI inflows, possibly driven by falling commodity prices and weaker economic growth. Brazil and Mexico were the largest recipients of FDI from the EU in 2015, while the Netherlands and Spain were the largest investors in CELAC, even if values for the former might be partially driven by its intermediary role for transnational companies. Flows in the other direction have been expanding recently – a process initiated by European firms divesting assets to improve cash flows, later facilitating CELAC firms’ entry (Economic Commission for Latin America and the Caribbean – ECLAC – 2015) – but remain small by comparison. In the EU, the main recipients have been the Netherlands and Spain. In CELAC, most FDI flows to the EU originate in Brazil and Mexico.

The EU is expanding economic relations with CELAC countries and is active in negotiating a number of different agreements. According to the European Parliament’s DG-EXPO (2016), the rationale behind the EU’s engagement is support for regional integration, increasing competitiveness vis-à-vis the US and other main actors, and diffusion of its own regulations and standards, whereas the partnership with the Caribbean falls more under the scope of EU’s development policy rather than trade strategy. This is why the integration perspective was predominant over market losses to the US. However, the level of regional integration in CELAC is still not as high as for example, in the EU (Figure 4).

According to Cerra et al. (2016), a possible cause might be the relative disconnection across regions, due to geographical and infrastructural barriers (with substantial heterogeneity across countries). Gordon and Suominen (2014) argue that technical barriers and entry-trade costs are particularly binding for small firms in Latin American and Caribbean (LAC) countries. Hence, export markets are particularly concentrated, restraining development and business dynamics. Non-tariff measures are increasingly in play, mirroring global trends, especially for intermediate and capital goods, affecting the ability to enter regional value chains (IMF, 2017). According to ECLAC (2015), Central America and Mexico benefit from relative greater integration, also because of the nature of trade agreements with partners outside the region. Importantly, by allowing cumulation of origin within the region, trade in intermediates is particularly fostered, because inputs can be used in goods to export to those partners outside the region.

Currently, the oldest agreements (those with Mexico and Chile) are under a process of modernization, while negotiations between the Southern Common Market (MERCOSUR) and the EU resumed in 2016 after a few years of staleness and are currently ongoing (Figure 5). The main obstacles have been the reluctance on the EU side to open up to competing agricultural products, and on the MERCOSUR side to accept intellectual property rights. In general, the intensity and scope of the political dialogue between the EU and CELAC is subject to be affected by global factors, like the US’ withdrawal from trade agreements – which calls for new allies to be found – and the rise and increasing assertiveness of China – which is reordering global power play.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Past Event

Past Event

Past, present, and future EU trade policy: a conversation with Commissioner Malmström

What was trade policy during the last European Commission? What will be the future of European trade under the next Commission?

Speakers: Cecilia Malmström, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 13, 2019
Read article Download PDF More on this topic

Working Paper

China and the world trade organisation: towards a better fit

China’s participation in the WTO has been anything but smooth, as its self-proclaimed socialist market economy system has alienated its trading partners. The WTO needs to translate some of its implicit legal understanding into explicit treaty language, in order to retain its principles while accommodating China.

By: Petros C. Mavroidis and André Sapir Topic: Global Economics & Governance Date: June 13, 2019
Read about event More on this topic

Past Event

Past Event

EU-LAC Economic Forum 2019: New perspectives in turbulent times

The third edition of the EU-LAC Economic Forum.

Speakers: Diego Acosta Arcarazo, Ignacio Corlazzoli, Maria Demertzis, Mauricio Escanero Figueroa, Alicia García-Herrero, Carmen González Enríquez, Bert Hoffmann, Edita Hrdá, Matthias Jorgensen, Juan Jung, Tobias Lenz, Carlos Malamud, J. Scott Marcus, Elena Pisonero, Belén Romana and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 11, 2019
Read about event More on this topic

Upcoming Event

Jul
12
09:30

The 4th industrial revolution: opportunities and challenges for Europe and China

What is the current status of EU-China relations concerning innovation, and what might their future look like?

Speakers: Elżbieta Bieńkowska, Chen Dongxiao, Eric Cornuel, Ding Yuan, Jiang Jianqing, Pascal Lamy, Li Mingjun, Signe Ratso, Reinhilde Veugelers, Wang Hongjian, Guntram B. Wolff and Xu Bin Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

The 'seven' ceiling: China's yuan in trade talks

Investors and the public have been looking at the renminbi with caution after the Trump administration threatened to increase duties on countries that intervene in the markets to devalue/undervalue their currency relative to the dollar. The fear is that China could weaponise its currency following the further increase in tariffs imposed by the United States in early May. What is the likelihood of this happening and what would be the consequences for the existing tensions with the United States, as well as for the global economy?

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: June 3, 2019
Read article More on this topic More by this author

Opinion

Expect a U-shape for China’s current account

As the US aims to reduce it's bilateral trade deficit, China's current-account surplus is back in the headlines. However, in reality China’s current-account surplus has significantly dropped since the 2007-08 global financial crisis. In this opinion piece, Alicia García-Herrero discusses whether we should expect a structural deficit or a renewed surplus for China's current-account.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 28, 2019
Read article More on this topic More by this author

Blog Post

What is in store for the EU’s trade relationship with the US ?

If faced with a resurgent President Trump after the next US election, the EU will have some difficult decisions to make as it is compelled to enter a one-sided negotiation. Failure to strike a deal will imperil the world’s largest trade relationship and contribute to the progressive unravelling of the rules enshrined in the World Trade Organization – although the changes required of Europe by Trump’s demands may ultimately turn out to be in the interest of Europeans.

By: Uri Dadush Topic: Global Economics & Governance Date: May 16, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Evolution of US-China relations amid trade-tariff conflict

Bruegel director Guntram Wolff and Bruegel fellow Uri Dadush welcome William Alan Reinsch, senior adviser and Scholl chair in international business at the Center for Strategic and International Studies, for a discussion of how China-US relations are developing in the context of unfolding trade war.

By: The Sound of Economics Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic More by this author

Blog Post

Implications of the escalating China-US trade dispute

If allowed to escalate, the trade dispute between China and the United States will significantly increase the likelihood of a global protectionist surge and a collapse in the rules-based international trading system. Here the author assesses the specific impacts on the Chinese and US economies, as well as the strategic problems this dispute poses for Europe.

By: Uri Dadush Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic

Opinion

Will China’s trade war with the US end like that of Japan in the 1980s?

The outcome of the US-China trade war is anticipated to be quite different from the experience of Japan in the 1980s and 1990s, due to China’s relatively lower dependence on the US and having learned from the Japanese experience.

By: Alicia García-Herrero and Kohei Iwahara Topic: Global Economics & Governance Date: May 13, 2019
Read article More on this topic More by this author

Opinion

Trade war: Is the U.S. panicking due to China's big hedge?

U.S.-China trade war has suddenly taken centre stage following Donald Trump’s unexpected announcement to ramp up tariffs if no deal is reached. U.S. is in desperate need for a comprehensive victory, and China is ready to make concessions, but not to the extent of transforming its state-led economic model into a market-based economy.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 9, 2019
Read article More by this author

Blog Post

Spitzenkandidaten visions for the future of Europe's economy

What are the different political visions for the future of Europe’s economy? Bruegel and the Financial Times organised a debate series with lead candidates from six political parties in the run-up to the 2019 European elections.

By: Giuseppe Porcaro Topic: European Macroeconomics & Governance, Global Economics & Governance, Innovation & Competition Policy Date: May 8, 2019
Load more posts