International trade and investment

, Latin America at a crossroads: Trade opportunities in an era of global fragmentation

There is concern that greater competition from EU manufacturers will impact local industries and that EU-imposed environmental and sustainability standards could disproportionately affect Mercosur producers. However, it is not a zero-sum game, and the expansion of trade between the two blocs can also encourage Mercosur industries to pursue efficiency gains through modernisation and digitalisation to remain competitive.

Looking ahead, there are also promising deals of Mercosur with China and South Korea on the cards. These deals augur well for the expansion of trade to and from the region. But naturally, there are still some obstacles in the way of future growth.

A trading bloc’s success stems from its ability to act as a cohesive unit – but Mercosur does not have an overarching infrastructure or common political tradition as is the case of the European Union. Without this cohesion, countries can agree bilateral trade agreements outside the bloc that may weaken Mercosur’s overall ability to negotiate. Uruguay, for instance, is seeking closer ties with China despite Mercosur's efforts to reach an agreement on trade deal with the bloc.

From an economic perspective, greater collaboration, especially between the largest and most influential countries in Mercosur – Argentina and Brazil – would yield positive results. As with any large powers, perceived imbalances and competing political agendas complicate this path, and Brazil’s status as the largest economy in the bloc has in the past invited concerns from neighbours.

Ultimately, foreign investors value transparency. Disparate trade agreements among Latin American countries can cause confusion and discourage investment – greater transparency and cooperation within the bloc will help to make the region a more appealing investment destination.

But it’s not just the region’s strategic positioning and its trade deals that lends it advantages in attracting international investment. Latin America also boasts significant renewable energy capacity, which makes it an attractive target for ‘powershoring’, whereby businesses set up operations in countries with plentiful, affordable or renewable energy.

Brazil is a pioneer in the space, with 85% of energy sourced from renewables, primarily hydroelectric power but also wind, solar energy and biomass. The North East of the country, in particular, has billions of dollars in investment already announced – with a Norwegian US$1.5 billion green hydrogen and green ammonia project in Ceará one of the more prominent projects. Elsewhere in the continent, Peru is a leader in solar energy, and Chile aims to have the world’s most competitive renewable hydrogen by 2030.

Even aside from the energy sector, Latin American economies are increasingly prioritising ESG criteria in economic policies. Colombia, for instance, has embarked on an ambitious reforestation project, with the government raising its target to 1.85 million acres by 2026. This plan will restore threatened ecosystems and seek to address climate change.

Countries across the region are promoting different projects, but all of them share a common understanding about the importance of fighting the climate emergency. All Latin American countries are signatories of the Paris Agreement, and the 2021 Escazú Agreement underscored the regions commitment to environmental justice.

But these sustainable policies must also remain in balance with immediate domestic priorities. Brazil, while a renewable energy leader in the region, must reckon with the daily transportation needs across the country, where many still rely on fossil fuels for individual travel as well as for transporting goods. Similarly, despite its ambitious green hydrogen projects and commitment to a sustainable economy, Chile’s economy still relies heavily on relatively unsustainable copper exports. While there is widespread agreement about environmental principles across the region, progress towards sustainability targets will be uneven.

The other main challenge Latin America will need to address is infrastructure development. As things stand, most countries’ infrastructure capacity is tied up in meeting domestic demand, and this will not change without major improvements in ports, aviation capacity, railways and roads – all vital for the transport of goods.

And it’s not just trade – renewable energy requires infrastructure investment both for its production and distribution. For all countries, transitioning to green energy while maintaining economic growth is a difficult balancing act, especially given the challenges in transporting and scaling up renewable energy solutions. This is why investment in infrastructure is so important for unlocking these countries’ productive potential and expanding capacity to satisfy demand both within and beyond their borders.

With infrastructure investment at the top of the agenda, and against the backdrop of a still-high-interest rate environment that has somewhat dampened risk appetite, attracting investment is key.

Financial institutions will continue to be crucial in supporting the capital infusions necessary for large-scale infrastructure improvements. They facilitate cross-border transactions, mitigate risks and help navigate regulatory complexities. Bringing together manufacturers, infrastructure providers and governments, international banks act as conduits, leveraging extensive regional and global networks to enact large-scale infrastructure projects.

In the short term, correspondent banking networks provide financing, guarantees, and letters of credit to facilitate daily trade between Latin America and global markets. Looking at the longer-term horizon, Export Credit Agency (ECA) financing provides liquidity for capital-intensive projects lasting decades, which is especially important when local resources are limited. For infrastructure projects particularly, public-private partnerships are critical, and banks’ technical expertise with this kind of structure can help what can often be quite complex financial arrangements get over the line. This is especially relevant for Latin America’s rapidly expanding renewables sector.

More broadly, though, corporates need a reliable and experienced partner to help navigate the patchwork of legal, environmental and regulatory constraints that exist in the region. With local relationships built over decades of work in the region, banks are ideally placed to be this partner.

And few international banks have as much experience in this part of the world as Commerzbank. Latin American trade is a core part of our history – Commerzbank was set up in 1870 on the initiative of merchants importing coffee from Brazil. The bank continues to maintain representative offices in São Paulo, Buenos Aires and Panama City.

Pushed by various macroeconomic tailwinds, Latin America is well-positioned to play a larger role in the global economy at a time when long-standing trading relationships are more uncertain. And perhaps more than other regions, this drive towards progress will be powered by more sustainable energy sources – if adequate financing can continue to be sourced. For international businesses looking to harness the vast opportunities present in Latin America, having the right banking partners will be indispensable.