Since the outbreak of COVID-19 in early 2020, the global supply chain has floundered on an unprecedented scale, revealing vulnerabilities in global sourcing, manufacturing, and the distribution of goods.
From factory shutdowns in Asia to port congestion in the U.S., the ripple effects have exposed the vital need to diversify and regionalize supply chains.
For Latin America specifically, the pandemic presented both a wake-up call and a unique opportunity to become a major player in the global industry and supply chain.
Pandemic effect on supply chains
The pandemic-related lockdowns revealed a number of critical geographical flows especially in Asia as it transpired that the world’s reliance on Asia-centric production, especially China, seriously affected the global supply chain.
Lockdowns, transportation bottlenecks, and workforce disruptions were some of the aspects of the period that greatly delayed shipments in this area, and raised costs worldwide.
For Latin America, these shocks — added to existing infrastructure and productivity issues — highlighted a need for deeper integration into global markets and a reduction in an overreliance on Asia-centric production.
Sectors such as agriculture and mining experienced downturns due to reduced demand and logistical challenges while others, such as the manufacturing and technology industries, struggled to adjust to shortages of critical components like semiconductors.
As global trade contracted in the post-pandemic period, many economies turned to nearshoring and diversifying suppliers, which highlighted Latin America’s strategic potential in view of its proximity to North America and Europe.
However, there remained, and indeed now continue, deeply entrenched regional issues including, but not limited to, underdeveloped infrastructure and fiscal imbalances, which have hindered the region’s ability to capitalize on the shifts in supply chains.
In addition, informal economies and inadequate healthcare and social systems have only exacerbated the socio-economic toll and limited Latin America’s ability to adapt.
At the same time, the pandemic accelerated digital transformation, which in turn spurred progress in trade facilitation, especially for small and medium enterprises. This is because the increased digitalization of customs processes and logistical networks allowed these businesses to retain trade flows and enable wider inclusion in global markets.
And yet, to fully facilitate and take advantage of this opportunity, the region must address its structural deficits and emerge as a resilient player in the post-pandemic supply chain landscape.
Post-pandemic opportunities for Latin America
However, despite these issues, Latin America finds itself uniquely positioned to capitalize on post-pandemic shifts in global supply chains, especially thanks to the nearshoring trends and increasing foreign direct investment. For example, FDI inflows to Latin America grew by 55% in 2022, with investments focusing on renewable energy, mining, and automotive industries.
The ‘Lithium Triangle’ of Argentina, Bolivia, and Chile further exemplifies this as the triangle is central to the growing electric vehicle supply chain. Investments from the U.S., the EU, and China have targeted battery production and material processing.
The region’s proximity to North America, its abundant natural resources, and its growing renewable energy sector, all offer further advantages for integration into global value chains.
It is also notable that the U.S. and EU interest in ‘departing’ from China has increasingly prompted actions such as the EU’s €45 billion investment plan to secure materials and manufacturing in the region.
Source: World Economic Forum
Barriers to strengthening Latin America supply chain resilience
Despite all its potential, Latin America does face tremendous barriers in strengthening its supply chains. One of the greatest of these is the inadequate infrastructure – outdated ports, roads, and logistics networks – that hamper the region’s ability to handle the demands of modern trade.
For instance, according to researchers, only 1.3% of Latin America’s GDP is invested in infrastructure which, in comparison to East Asia’s 3-6%, limits its capacity to attract and sustain foreign direct investment.
Further impediments include political instability and inconsistent governance, including corruption, policy uncertainty, and frequent leadership changes all of which create an unpredictable business environment that deters long-term, serious investors.
And then there are the protectionist tendencies that also threaten to restrict the trade liberalization efforts which are vital for global supply chain integration.
Furthermore, the region also suffers from labor market constraints with almost a third of companies there citing a lack of qualified workers to be a key obstacle to growth which, combined with all the other challenges, serves to highlight the lack of fulfillment of Latin America’s growth potential in global trade.
Trade policies and agreements shaping Latin America’s trade integration
- The United States-Mexico-Canada Agreement (USMCA): Since it replaced NAFTA, USMCA has helped to strengthen regional ties by incentivizing nearshoring to Mexico.
- The Pacific Alliance: This group, which includes Mexico, Colombia, Peru, and Chile, attempts to promote intra-regional trade and collaboration and seeks to integrate supply chains across member countries in the hope of reducing dependency on external markets.
Intra-regional trade, despite alliances such as these, remains underutilized accounting for only 12% of Latin America’s total trade, compared to 60% in Asia and Europe. Fragmented trade blocs, such as Mercosur and the Pacific Alliance, have limited the development of regional value chains.
In the meantime, although global tensions such as the U.S.-China trade war have created opportunities for diversification, they also create risks and Latin America must navigate competing demands.
What should regional Latin American governments do to promote trade in the post-pandemic environment?
There are several policy recommendations for Latin American governments to increase the resilience of local supply chains in the post-pandemic period:
- Infrastructure investment
Governments should try to prioritize public-private partnerships that can help to upgrade transportation networks, ports, and digital infrastructure as this would improve the region’s attractiveness to investors and lead to lower costs in the long term.
- Regulatory stability
Policymakers have to ensure that regulatory frameworks are created and remain clear and predictable so that the region becomes a magnet for long-term investment. This can be reinforced by anti-corruption measures to boost transparency.
- Education and Workforce Development
Investing in vocational training and science, technology, engineering, the arts, and maths education (STEM) is an excellent option as this would prepare workers for employment in advanced industries, pushing forward innovation and productivity.
Source: LSE
Conclusion
The pandemic represented a watershed for global supply chains and, since then, stakeholders have had to rethink traditional models of production and distribution.
Latin America, as one of the potential major players, stands at a crossroads. If the region is able to assert itself, it could become a powerful force in the evolving landscape of the global supply chain.
This can only be achieved by addressing the current issues that are hampering this evolution such as infrastructure and governance challenges, as well as by leveraging existing trade agreements and implementing strategies and policies using a long-term lens.
This next decade is a window of opportunity but the question for Latin America to answer is whether the region can capitalize on these shifts and take the path to economic growth, regional stability, and deeper global integration.
