México and the US

Source: The Economist

In early February 1848, following a short and one-sided war, México agreed to cede more than half its territory to the United States. An area covering most of present-day Arizona, California, Nevada, New Mexico and Utah, plus parts of several other states, was handed over to the US. 

The rebellious state of Tejas, which had declared its independence from México in 1836, was recognised as American soil too. 

But a century and a half later, communities have proved more durable than borders. The counties with the highest concentration of Mexicans (as defined by ethnicity, rather than citizenship) overlap closely with the area that belonged to México before the great US land-grab of 1848. Some are recent arrivals; others trace their roots to long before the map was redrawn. They didn’t jump the border—it jumped them.

The Alianza del Pacífico signs a historic agreement

Alianza del Pacífico countries in blue and observer states in brown

The Alianza del Pacífico agreement signed on 10  February 2014 aims to eliminate most trade and non-trade barriers between Perú, Chile, Colombia and México and also improve the mobility of capital and people. It will also reduce members’ export dependence on single goods (in the cases of Peru, Chile and Colombia) or single markets (as in the case of Mexico), and will create economies of scale that will make it easier to compete with Asian markets.

The Landmark agreement

The landmark framework agreement covers a wide range of topics, ranging from the elimination of trade and non-trade barriers on 92pc of the goods traded within the bloc to the adoption of measures to improve the mobility of capital and people. The countries making up the trade bloc have a combined population of over 210m people, a total GDP of US$2trn (and a per-head GDP in excess of US$10,000) and account for around 40pc of all foreign trade and inward foreign investment flows to the Américas (not including the US). The Alianza del Pacífico is due to increase shortly with Costa Rica just been accepted to begin the formal membership process.In addition, the Alianza del Pacífico’s goal of strengthening ties with the Asia-Pacific region means that a broader trade bloc in the Américas will join ongoing talks to create the Trans-Pacific Partnership (a free-trade area comprising Australia, Brunei, Chile, Canada, Japan, Malaysia, México, New Zealand, Perú, Singapore, the US and Vietnam). 

A massive opportunity

The recent agreement has been welcomed in the countries of the Alianza del Pacífico, where it as seen as a massive opportunity for achieving complementarities among its members. México is set to strengthen its intra-bloc exports of value-added manufactures, such as automobiles and metal-mechanics goods. Colombia is expected to benefit from increased exports of basic manufactures, such as processed foods, clothing and leather. And Chile and Perú are likely to boost their cross-border sales of agro-industrial goods. 

Furthermore, the Alianza del Pacífico constitutes an opportunity to build strong intra-bloc competitive advantages to penetrate Asian markets. This would be achieved through the creation of productive chains that generate economies of scale. According to a study by the Inter-American Development Bank (IDB), these chains could include the production of fibres and carpets by Perú and Chile; phosphates and detergents between Mexico and Perú; wood, paper and cardboard between Chile and Colombia; and chemicals and plastics between Colombia and México. 

But there will be challenges ahead

The Alianza del Pacífco’s success also hinges on its capacity to put in place accords in other, non-trade related areas. Progress has been made on the elimination of visas, the establishment of joint embassies in many Asian countries, and the subscription of agreements to promote education, tourism, small and medium enterprises and infrastructure investment. 

However, advances have been limited in more complex areas, such as the harmonisation of customs procedures, rules of origin and tax and financial sector regulation. The lack of progress in the latter two areas, for example, is delaying the implementation of the Mercado Integrado Latinoamericano (MILA, which aims to create a single stock market between Chile, Colombia and Perú and México).

Finally, although it is clear that the Alianza del Pacífico does not have political motivations, Mercosur comprised of Argentina, Brazil, Paraguay, Uruguay and Venezuela and the Alianza Bolivariana para los Pueblos de Nuestra America (ALBA) which includes Antigua and Barbuda, Bolivia, Cuba, Dominica, Ecuador, Nicaragua, St Vincent and the Grenadines and Venezuela are likely to see the recent advances as a threat to their political ideology and existence.

APEC Indonesia 2013

APEC Family Photo of Leaders

APEC continues to go from strength to strength, with an ever-expanding agenda, and an impressive share of the world economy held by its 21 members: this year, APEC accounts for 55pc of global GDP, 44pc of trade and 40pc of the world's people which shows just how dynamic and prosperous the region is becoming.

APEC's aim was never to be a negotiating forum. Its guiding principle is “concerted unilateralism”, that is, it has no power to force its members to do anything; it merely seeks to inspire good policy by example and co-ordination. This is where APEC's real accomplishment lies within a region not accustomed to working and coordinating together in a similar way to the the EU regional supranationalism integration. Instead APEC has developed many technical committees doing useful work in areas such as trade facilitation. It helps foster habits of consultation and co-operation. And, furthermore, its Leaders’ meetings provide an opportunity for useful and sometimes informal bilateral talks.

Since the Doha round of world-trade talks more or less came to a stand still with almost no hope of moving forward in the foreseeable future, APEC’s ambitions have spread into other areas. This year its motto is “resilient Asia-Pacific: Engine of Global Growth”, and its three main themes are the Bogor goals; improving “connectivity” (infrastructure, harmonising procedures and making it easier for people to travel); and “sustainable growth with equity”.

APEC's core interest has always been trade liberalisation. Twelve of its members (including two of the three biggest economies, the US and Japan, but not China) are pursuing the Trans-Pacific Partnership (TPP), an ambitious “21st-century” free-trade pact, covering areas such as labour, government procurement, state-owned enterprises, intellectual property and e-commerce, as well as traditional merchandise trade.

Meanwhile, eight TPP members (but not the US), along with four other APEC members (including China) as well as India and three other non-APEC countries are talking about yet another regional trade group, the Regional Comprehensive Economic Partnership.

The Latin American member economies, Chile, Perú and México are also pursuing the "Alianza del Pacífico" in the hope that a stronger regional alliance will give them more bargaining power in their trade relations with China. 

All, this adds up to a very dynamic Asia Pacific region. Hence a possible further grand aim for APEC over the next decade may be to try to co-ordinate these parallel processes, in the hope of bringing them all together in a grand Free Trade Area of the Asia-Pacific eventually. This is a role that APEC is well prepared for given its twenty or more years of existence across the Asia Pacific region and its technical expertise on trade liberalisation.

The New Global Middle Class

The new global middle class in the 21st century

The New Global Middle Class

Since the beginning of the 21st century there has been a massive expansion of the new global middle class. This has not occurred in a vacuum. The BRICS and second tier countries such as Brazil and Turkey have made the headlines for their rise in income and high annual GDP growth but this is only part of the story, with increasing wealth has also come a massive rise in development. According to the OECD, Brazil's middle class has risen from 29pc of the population in the 1980s to 52pc in 2009 almost doubling. In Turkey's case, income per capita nearly tripled between 2002 and 2011 bringing more and more people into a growing middle class and increasinging the ranks of the global middle class.

According to the Brookings Institution, there are now 700 million more people with $US10-100 per day to spend than there were in 2003. Moreover, what they call the global middle class is expected to grow by another 1.3 billion over the next ten years. This new phase of creating a global middle class brings major benefits for the global economy. Instead of the somewhat one-sided trade pattern of the last two decades, it means greater well-being for households in “developing countries” and opportunities for more producers in the advanced economies.There has also been a massive re-alignment of world trade between what has been tradionally called South-South countries. Trade between South-South countries currently stands at around 30pc.

As a result there have been tectonic shifts in the rebalancing of the world in development terms. It is no longer clear which countries are “developed” and which are still “developing”. This re-alignment has in turn brought a massive expansion of human capabilities and provided choices to people entering the new global middle class that they clearly did not have in the 20th century. This point is well illustrated in the 2013 UN Human Development Report 2013. The Report highlights the fact that progress on human development has accelerated in the last decade and all of the 40 countries analysed in the Report are doing better than expected.

Why have some countries done better than others?

Interestingly several factors have influenced the overall outcomes of accerlating people's accession into the global middle class when comparing the different experiences of countries on a global level.

In countries where the State has taken a long term perspective on development, people have been accelerated in to the middle class. In some countries the state has actively promoted job creation, this has also helped to sustain the creation of the middle class. Where the state has enhanced investment in health and education – these policies have greatly helped to assist people to move into middle class. In Turkey, for example, the Government decided to provide healthcare for all and target the poor. In Brazil, the Government managed to expand education by matching the funds available across regions and municipalities. In México, the state provided cash transfers for social policy interventions.

Some countries have also taken an active role in nurturing the industrial capacities and by actively investing in people which has allowed them to make the most of trade opportunities in global markets.

What is the flipside?

Interestingly a new global middle class made up of educated, inter-connected youth will increasingly demand far greater accountability. This point has already been illustrated by large-scale demonstrations in Brazil and Turkey which are a direct result of the creation of an enhanced middle class and both countries' economic success over the last decade.

Growing middle classes are far less tolerant when it comes to governments performing inadequately. Delivery of services, such as education and health, is poor in both Brazil and Turkey. In its last scorecard on educational attainment referred to as the Program for International Student Assessment (PISA), the OECD found that Turkey and Brazil ranked especially poorly in maths and science. In maths, Turkey ranked 41st out of 62 countries, while Brazil was in 55th place. In science, Turkey was 40th and Brazil 50th. In the UNDP's 2013 Human Development Index, Brazil ranked 85th and Turkey 90th out of 186 countries. It is not clear what the implications of the current protests will be for these two countries.

Much will depend on how the democratically elected leaders of Turkey, Prime Minister Erdogan and the President of Brazil, Dilma Rousseff react to these challenges. The aspirations of the middle class are colliding with the current capacity of these countries to deliver.

Conclusion

In order for the new global middle class to be sustainable it has been shown that countries with less inequality do better and improve far more as more people are added to the middle class. Furthermore educating women to adulthood has been shown to be key to reducing fertility rates. Another key point is that in order to reap the benefits of youth bulge that exists in so many emerging economies, job creation for the young is also key.

Finally participation and inclusion is essential to stability and social cohesion – this in itself is what will ultimately sustain the new global middle class.

The Américas and China – Alianza del Pacífico

Map of Alianza del Pacífico

La Alianza del Pacífico (Pacific Alliance)

The four countries of the Alianza del Pacífico formally established in June 2011 - México, Colombia, Chile and Perú - together account for 35pc of GDP in América Latina, 50pc of exports from the continent and together their population exceeds 200 million people which gives them a similar magnitude of scale to Brazil (located on the Atlantic side). It also means a new model of regional integration focusing on strengthening institutions to create a regionally integrated trade area, oriented towards the free movement of goods, capital, services and people towards the key markets in ASEAN countries and China. México, by far the largest of the four countries sees an opportunity to diversify its exports from the US to Asia. Currently México sends around 77pc of its exports to the US. But there are considerable opportunities for México's Agricultural-food, footwear and textile sectors to export to Asia. Costa Rica attends the Alianza del Pacífico as an observer, and it is highly possible that it will seek to become a full member in the foreseeable future. Panamá too has expressed interest in joining. In the last 15 years or so in América Latina, several trading blocs have been established from MERCOSUR to ALBA, but the Alianza del Pacífico is different, it is the first to see itself as a truely regional integration project.

Xi Jin Ping's习近平 First Visit to the Américas

On his way back from a trip to the Américas, the new Chinese President Xi Jin ping 习近平 will meet US President Barack Obama, in California on 7-8 June 2013. But first President Xi Jin Ping 习近平will spend a week from 31 May to 6 June visiting México and Costa Rica. It is no coincidence that the Alianza del Pacífico decision to seek further regional integration was formally agreed ahead of Xi Jin Ping's 习近平visit. This visit will provide México's President with the possibility to begin to re-balance the trade relationship with China. Interestingly Xi Jin Ping 习近平will also visit Costa Rica (another potential member of the Alianza del Pacífico) as well as Trinidad and Tobago. The visit to Trinidad and Tobago is significant as it will be the first visit of a President of China to the English-speaking Caribbean. Costa Rica is China 's second largest trading partner in Central America while China is the second largest trading partner of Costa Rica. In recent years, bilateral trade between the two countries has grown rapidly. In June 2007, China and Costa Rica established diplomatic relations. In November 2008, Chinese President Hu Jintao visited Costa Rica and announced the launch of China-Costa Rica free trade negotiations. The China-Costa Rica free trade agreement (FTA) came into force on 1 August 2011. 

Finally, when Xi Jin Ping 习近平 meets the US President, the meeting will not take place in Washington or on the Atlantic coast, instead the symbolism of the meeting taking place in California could not be clearer, it highlights the increasing importance of the Pacific over the Atlantic.

Nicaragua's proposed new canal between the Atlantic and the Pacific

The Nicaraguan government has recently stated publicly that it would like to construct a new canal with links between the Atlantic (Caribbean coast) and the Pacific Ocean. It has already started working with a Chinese company on a canal construction project. 

Map of the Proposed Nicaragua Canal Route

The idea is that the Nicaraguan canal would not be in competition with the Panamá canal, which is currently undergoing full expansion, instead, the Nicaraguan project would be focussed on receiving vessels up to 250,000 metric tons, the locks would be 460 meters big with a capacity to take boats with a depth greater than 20 meters. 

Detailed Map of possible routes for the Nicaragua Canal

The exact route of the Nicaragua canal is still to be determined but some experts believe that the project could be developed using the recommended routes of a multidisciplinary study presented in 2006 by the then President Enrique Bolaños. This study recommended the canal be built on the Caribbean coast of Nicaragua, near Bluefields Bay City, and then go along rivers within Nicaraguan territory and then through the Great Lake of Nicaragua, over a distance of 280km.

This is a mammoth project that will require considerable investment not only to build the Canal, but also in construction of port infrastructure, railway infrastructure and potentially airport runways too. The Nicaraguan government sees the canal as a pipeline for oil crossing from the Caribbean Sea to the Pacific across to the markets in Asia but it will be used for all trade.The Geo-Trade Blog will continue to follow closely developments on the new canal. 

Most interestingly, this mega project adds more evidence that world focus is increasingly moving away from the Atlantic and the focus in the 21st Century is on building the infrastructure and diplomatic ties with the Pacific.

Geography and Demography are Destiny

Geographical view of the Américas

Geography is the backdrop of human history. The position of a country on a map is the first element that truely defines it, so much more than its government is able to. Geographical distortions can be as revealing of the long-range intentions of governments, for example, the melting of the Arctic, allows a glimpse of the possible future shipping routes between Asia and Europe and the geo-trade options that this could bring about.

Demography is destiny

The US is in the midst of a new demographic, cultural and political moment. Interestingly the extension of the US border southwards in the early 19th Century to incorporate newly won land from México into the US is now facing a seismic demographic change in the 21st century - in coming decades hispanos from the wider Américas will become more than a quarter of the US electorate. 

Hispanos currently represent 17pc of the US population, and hispanic population growth is set to turn the US into a country where fewer than half the population will be non-Hispanic whites within 20 years. This shift will create a new demographic reality in the US. This point was heavily illustrated in the messages of Obama's recent presidential inauguration speech. A Cuban-American became the first hispano to recite the official inaugural poem. Rev Luis León delivered an inaugural benediction with phrases spoken in Spanish. And Justice Sonia Sotomayor, the first hispanic on the Supreme Court, administered the oath of office to Vice President Joe Biden.

Geography and Economic Growth

The notion that Mexico offers only cheap labour no longer rings true in the 21st Century. México produces around 115,000 engineering students every year, almost three times as many as the US on an annual basis. Hence machine specialists are usually easier to find in Tijuana than in many big US cities. As are, accountants experienced in production economics and other highly skilled workers.

Today, in the 21st century, Tijuana is becoming to San Diego what Shenzhen is to Hong Kong. Travel between San Diego and Tijuana is around 20 minutes, with no passport required. Although a passport is needed to come back, but there are fast-track lanes for business people. Many employees commute across the border each day, good doctors are cheaper and easier to find in Tijuana, as are private schools. In some ways, the border feels more like the  borders between the members of the EU than a divide between two countries.

And it’s not just Tijuana. To the east, in Juárez, Dell computers are built by Foxconn, the company that manufactures more than 40pc of the world’s electronics (including Apple’s iPhone and iPad). To the south, in Querétaro, a factory builds the transmissions that General Motors installs in its Corvettes. The design of General Electric’s GEnx turbine jet engine and the production of interior elements of Boeing’s 787 Dreamliner also happen in México. In fact, manufactured goods are the country’s chief export, with private investment in this sector among the highest in the world.

Once again geography is destiny too, the shorter and more nimble a supply chain is, the better. Hence México is benefiting from its proximity to the US to feed the demand for just-in-time manufacturing. And the demographics of producing the right mix of highly-skilled workers have combined with it to create growth and prosperity in the 21st Century. 

The Rise of Las Américas in the 21st Century

Panamá City Skyline in the 21st Century

The Decade of América Latina

The market orientated reforms of the 1980s and the 1990s combined with several years of commodity-driven prosperity have been transforming América Latina into a region of wealth and prosperity over the last decade. The commodity boom together with more progressive social policies has started to create more dynamic and less unequal societies across the region.

Thanks to the commodity boom and rising revenues, governments have presided over a time of rising incomes for the new emerging middle classes in many countries in América Latina. However the increase in wealth has been occurring against a background of an ideological battle between reformers (mostly liberals and social democrat politicians) and those such as Mr Chávez (Venezuela) and potentially President Christina Kirchner (Argentina) and others of the ALBA grouping who would rather return to the authoritarian and populist past. At present the reformers appear to be winning the debate. This is illustrated below in the Economist's Latinobarómetro published in October 2011. Even so there has been a slight fall in optimism over the last year. This chart clearly shows Panamá with the most ongoing optimistic outlook. 

Latinobarómetro Source: The Economist Oct. 2011

 

What of the northern neighbours – the US

The US, América Latina's northern neighbour on the same continent has so far failed to appreciate the rising importance of América Latina with its expanding market for the north's exports, its huge investment opportunities, its enormous reserves of energy and minerals and its continuing supply of needed labour. However at the same time and despite their recent growth and globalisation, the economies of América Latina still depend on the US for capital, know-how, technology and remittances.

If geography is destiny and the US and América Latina need one another so much, the obvious question is why are the two not pursuing a more joint approach to consolidate their relations in a meaningful way? The answer to this question turns on key policy differences on three main areas. Firstly, immigration, many in América Latina find the idea of building a wall between the México and the US particularly offensive. Secondly, the war on drugs, the North's war on drug trafficking serves mainly to spread corruption, increase criminal violence and generally undermine the rule of law. Finally, the embargo on Cuba imposed by the US is seen as counter-productive and likely to have prolonged the repressive rule of the Castro brothers rather than ending it. However none of these policy issues is easily resolved due to domestic US politics and less so in an election year. Immigration has been a particularly toxic issue in the Republican primaries. To make progress in the war on drugs, the US needs to curb demand for illegal narcotics at home, but US politicians are loathe broach the the idea of decriminalisation. And the Cuba policy is held hostage by the swing state of Florida and its residents of Cuban origen.

Panamá, the Singapore of the Americas

Panamá is the success story of the first decade of the 21st century. Business of all kinds continues to grow, in a land coveted in the late 17th century by the pirate Henry Morgan and occupied since the beginning of the 20th century by the US President Roosevelt, to build the Panamá canal and link the Pacific with the Atlantic on the narrow isthmus. During many decades, the country has served as a hiding place for multiple legal and illegal dealings, from drugs to weapons and political conspiracies and money laundering.

Nevertheless the Panamá of the 21^st century has many feathers to its bow: a chanel, an international banking center, the world's first merchant fleet, a free trade area which is one of the main bases for the collection and re-export of inland freight, an interoceanic railway, seven private ports and dozens of casinos and property developments (as the above picture shows). Panama in 2011 was placed at the head of economic growth in Las Américas, an increase of 10.6pc of GDP, against 9.2pc in 2010, according to the Statistics and Census Institute (INEC) of Panamá which likely explains the optimism in the Latinobarómetro above too. 

But the Elephant in the room is still... la droga

US President Nixon declared the war on drugs 40 years ago, interestingly the front that he opened in 1971 has survived all his successors up until now.

The Presidents of Brazil, Colombia and Mexico were the first to speak out on the failure of the war on drugs, Fernando Henrique Cardoso, Cesar Gaviria and Ernesto Zedillo respectively. Recently, the current president of Guatemala, Otto Perez, and the former President of Colombia, Juan Manuel Santos, have also spoken out to demand the opening of a debate on the decriminalization of drugs using the legitimacy granted to countries suffering the most tragic consequences of victims of the war on drugs. Honduras topped the global homicide rate, with 82.1 homicides per 100,000 population, followed by El Salvador. México has also been immersed in the drug war for the last six years, with almost 50,000 people dead and the homicide rate has increased by 65% since 2005 according to UN data.
 

The legitimacy of key leaders of América Latina speaking out, coupled with the figures of the dead has forced the US president, Barack Obama, to finally address the issue. In the US in April 2012 Obama said "We recognize our responsibility in this matter and I think it is entirely legitimate to engage in a discussion about whether the laws now in force are laws that perhaps are causing more harm than good in some areas." When Obama spoke, everyone understood: it is time to talk about drugs. The issue that is a constant drag on América Latina has finally reached the international agenda, a further sign of the América Latina's rise. 

 

Markets and the Power Shift to the Emerging Economies

The weight of economic activity is shifting from the US & Europe to Asia & Iberoamérica

Energy squeeze – higher prices

The longer-term energy story is complex. The developed world is now barely increasing its use of energy and energy demand is projected to remain stable for the forseeable future, at least for the next couple of decades. Energy use in the emerging world, by contrast, continues to grow relentlessly every year.

The emerging world now uses more energy than the old developed world. This is what you would expect to happen, for as the weight of economic activity shifts from the US and Europe to Asia and Iberoamérica, so too will demand for energy. But it means the price paid by the developed world will be increasingly determined by the emerging world. The so called “West” (the US and Europe) has never been in this position since industrialisation. There is a weak parallel with the rise of Opec in the 1970s when the oil producers cut supply and quadrupled the price. At that time, the US and Europe found other sources of oil and reduced their dependence on Opec. But this time the squeeze comes from the demand side, not the supply, and there is not much the US and Europe can do about it.

And what next for the commodities markets 

The Chart below provides an overview contrasting developed countries with emerging economies' share of GDP and their world share of some of the most important commodity markets and other indicators:

Source: The Economist Daily Charts

Many analysts believe that the long-running boom in commodity prices (for some of the world's most important raw materials) has been driven up by financial speculation as much as physical need. Hence the commodities market may be heading for a massive crash on the scale of sub-prime. The commodity boom has not reached the excess so evident in the subprime era but it is pretty big nevertheless. Recently, some analysts have speculated that the gigantic merger between the mining company Xstrata and the commodity trading house Glencore is a signal of the prospect of a looming crash in the commodities markets. Just before the subprime crash, many massive subprime acquisitions came at the end of a massive boom in the securities markets and those doing the deals appeared to have sensed that the party was coming to an end and that they had to do something spectacular to be able to reap the super profits to be had in the final stages of the blowout. The Geo-Trade Blog believes it is possible that this deal may be the signal that the commodity markets are today where debt markets were on the eve of the credit crunch.

Printing Money and Bubbles in Markets

In the immediate aftermath of the subprime crash, printing money or quantitative easing (QE) as it is also known helped a wide variety of financial institutions to avoid facing up to their losses, covertly recapitalising US and European banks that were, to all intents and purposes, insolvent. Over the last few years protests from countries including Thailand, Australia, South Africa and China have been heard complaining that the US' unprecedented monetary expansion was responsible for causing dangerous bubbles in commodity markets going way beyond US equities. The US government also knows, although it denies it, that the more money it prints, the more speculative pressures push up global food prices. 

While the causes behind the Arab Spring unrest in 2011 are complex, it must be noted that it was surging food price that provided the spark. Hence the large emerging economies view "quantitative easing" as a developed country policy aberration, dressed up as a "legitimate technical solution" that they do not agree with at all. Brazil's finance minister has described it as "throwing dollars out of a helicopter and the Russian PM has described it as "economic hooliganism". The emerging economies clearly perceive the current trials and tribulations of the developed countries very differently to the conventional wisdom that underpins the policy decisions and assumptions that justify QE in the developed world. Emerging Economies are aghast that the US is now shouldering declared federal liabilities of $9,100bn - making it by a long way the world's largest debtor. Furthermore US Government debt is set to reach 42pc of GDP by 2015 according to official estimates. And more and more interest is being shown in the fact that the US' total sovereign liabilities including off-balance sheet items such as Medicare and Mediaid amount to $75,000bn - no less than five times annual GDP.