Finding Value In South America

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by | Apr 27, 2012

There’s nothing more American than thinking we’re the sun in the financial solar system.  When we say “American,” we just assume you know we’re talking about the US, not any of the other thirty-five countries in North and South America.  Oh, and if you have something to say to us, please speak English.  And convert your measurements to miles and gallons.

So, of course, I assumed that South America was just as worried about the European sovereign debt crisis as we were, and that would be the perfect subject for my upcoming speech there.  Imagine my surprise to find that Europe was, from a financial perspective, nearly irrelevant to them.  Colombia had the most exposure to Europe, 4% of their exports – to the Netherlands.  Apparently, what is important to us is not quite as important to our southern neighbors.

On a GDP-weighted basis, South America exports a little over 30% to other Latin countries and about the same to China, with 37% going to the US.  Together, neighboring South American countries and China are their financial sun.

At a recent speech in Brazil, renowned emerging market investor Dr. Mark Mobius observed that it is “a little like the US.  They can isolate themselves from crises since they have a big consumer market, they produce raw materials, and they have industry and agriculture.”

Their other major trading partner, China, is in the US financial vernacular primarily when we talk about our debt, or more specifically, to whom we owe our debt.  You’re not likely to hear either US political party discussing the fact that China’s state policy to raise wages is the reason their manufacturing is becoming more expensive, and ours is more competitive.  No one is likely to point a cause of our job growth to China, true or not.

And in this year when all is political, China is also the proverbial “golden haired boy,” steadily climbing the international finance ladder, threatening our status as financial sun.   Not so, to South America.  China is their partner, with an economic expansion that will likely continue at elevated rates.

Luckily, we have one subject of mutual interest:  Trade.  Latin America is our fastest growing trading partner (other than Africa), growing from 7.2% to 8.3% from 1996 to 2009, while trade with our other partners (except Mexico) was shrinking during to the global economic slowdown.  In his State of the Union address, even President Obama noted that “soon there will be millions of new customers for American goods in Panama and Colombia.”

Upon closer look, however, our South America trade agreements are a tangled web of bilateral and plurilateral agreements, and free trade agreement solutions have been met with their indifference.  I began to see why Warren Buffett chooses to stick with a micro approach.  Macro is messy.

Fortunately, the US has held an unchallenged level of global export superiority in one category.  We have the best institutions of higher education in the world.  And, South America has not failed to notice.  In a recent Congressional report, the reality of our trade relationship with our southern neighbors had an unmistakable ray of hope.  Trade for aid and technical assistance is a proposal wherein the US would provide our knowledge to help expand South American international trade, an idea fostered by Latin American countries.

In exchange, South America would increase their trade with us.  We would help them modernize their ports and customs operations.  We would suggest where their infrastructure investment would best expand trade.  We’d help enhance their technology and develop common trade standards.

And, they’d expand their trade with us, and ultimately with others.

In order to change the subject of my speech, it took my realization that our priorities are not always the same as everyone else’s.  And other countries are liable to have good ideas.

Maybe that in itself was a valuable piece of knowledge.

Until next time…

Mary Buffett

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