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Trade between Latin America and (East) Asia

Latin America (LatAm) and Asia are so far apart that it often takes more than 20 hours by flight to reach the other continent. One might expect that there have not been strong ties between the two continents.

The Manila Galleon

On the contrary, Latin America and Asia have a long history of trade that goes back to the 16th century. The Manila Galleon was initiated in 1565 as the world’s first major instance of transpacific trade. Under the command of the Spanish Crown, trading ships made an annual voyage from Manila, Philippines to the port city of Acapulco, Mexico.

The ships carried goods such as silk, porcelain, and spices from Asia, many of which were then transported to Europe. In return, they brought silver and other American goods such as corn, cocoa, tobacco, and cochineal back to Asia.

The voyage ended in 1815, amidst Mexico’s struggle for independence from the Spanish Crown. It lasted a total of 250 years.

Although the Manila Galleon departed from the Philippines in Southeast Asia, it has also been called “the Nao of China”. This is because most of the shipments were Chinese goods. The Manila Galleon was a milestone in the relations between not just the former Spanish colonies of Mexico and the Philippines, but also more broadly between the Americas and Asia.

Transpacific trade in modern times

Trade between the two continents remained largely low until initiatives by Japan in the 1990s, which was followed by China and South Korea in the 2000s.

The revival of relations began when Japanese companies opened manufacturing plants in Mexico to lower their operating costs and access the US market. For example, in 2005, 2 of the 6 major automobile companies operating in Mexico were Japanese: Honda and Nissan. They were followed by other Japanese car manufacturers such as Toyota and Mazda.

In more recent times, there has been a massive increase in the trade of commodities, including food products and metals. The boom has been so huge that many Latin American countries now count China as their largest trading partner.

In the following sections, we will look specifically at trade relations between Latin America and the three major East Asian economies: China, Japan, and South Korea.

Trade between LatAm and China

Source: Economic Commission for Latin America and the Caribbean

Around the 2000s, the Chinese market started importing metal commodities like copper and iron from Latin America for industrial use. This offering has diversified somewhat and now includes food products such as soybeans, frozen meat, seafood and cane sugar.

Source: Diálogo Chino

One of the region’s top exports to China is soybean for use in livestock feed. Between 2020 and 2022, Latin American countries, mostly Brazil and Argentina, exported an average of 29 billion USD worth of soy to China annually. In fact, in 2021, around 70% of Argentina’s soy went to this Asian economy.

Trade between Latin America and China grew 28-fold between 2000 and 2021, such that the trade volume between the two regions (excluding Mexico) reached $247 billion in 2021. The Atlantic Council projected that by 2035, trade between Latin America and China would altogether exceed $700 billion, and that China may even surpass the United States as the region’s biggest trading partner.

Source: McKinsey Global Institute

Presently, China has displaced the United States as the most important trading partner in many South American countries. In addition, many Central American countries now consider China to be their second biggest trading partner after the United States. It is likely that the Asian giant would continue to play a major role in Latin America’s future economic development.

Source: World Economic Forum

Of note is that China’s role varies in each Latin American country. Although a few countries such as Chile, Peru and Brazil have a trade surplus (i.e. they export more goods to China than they import), many others such as Mexico, Colombia and Paraguay have a trade deficit (i.e. they import more goods from China than they export), based on 2020 data.

While this simplistic reading does not account for the type of goods, it might influence the direction of trade for companies to plan for.

Trade between LatAm and Japan

Japan has been rooted in Latin America for more than half a century.

To cater to its rapid industrialisation in the 1960s, Japan began importing commodities from the region. Hence, Japanese conglomerates such as Mitsubishi, Mitsui and Sumitomo invested huge amounts in mining projects in Latin America, so much so that 25% of Japan’s Foreign Direct Investment in 1965 went to the region.

Learn more about Foreign Direct Investment here.

After a slump due to the economic crisis in Latin America in the 1980s, Japanese companies restarted their engagement with the region in the 1990s, connecting particularly with Brazil and Mexico.

The extent of this relationship also extends to free trade. In fact, Japan’s second-ever Free Trade Agreement (FTA, referred to locally as Economic Partnership Agreement) was signed with Mexico in September 2004. Japan has also signed FTAs with Chile and Peru.

Today, there are around 3,000 Japanese companies in Latin America. Furthermore, over 2 million people of Japanese origin live here, most notably in Brazil.

Trade between LatAm and South Korea

Despite the lack of a strong historical relationship with Latin America, South Korea has been keen to forge economic ties with the region.

In fact, Korea’s first-ever Free Trade Agreement (FTA) was with Chile in 2003. Since then, it has signed FTAs with Peru in 2011, Colombia in 2013 and was the first Asian country to have a FTA with Central America (Costa Rica, El Salvador, Honduras, Nicaragua and Panama). It also began negotiations for a FTA with the Pacific Alliance (Chile, Colombia, Mexico and Peru) in 2022.

Learn more about the Pacific Alliance here.

Source: Universidad de Navarra

The increasing role of Korea is demonstrated by the massive growth of its investment and trade with Latin America. Korean investment grew many-fold from 620 million USD in 2003 to 8.14 billion USD in 2018, while trade volume increased from 13.4 billion USD to 51.5 billion USD during the same period.

In 2019, the largest Latin American exporter to South Korea was Mexico, followed by Brazil and Chile. Meanwhile, the largest Latin American importers from South Korea that year were Mexico, Brazil and Panama.

Case of Mexico: Trade between Mexico and East Asia

Source: Santander Trade Markets

As the second largest economy in Latin America, Mexico has good trade ties with all 3 East Asian giants.

Although 78.3% of Mexico’s exports went to the United States in 2022, China was still the 3rd largest export destination, followed by Japan in the 5th place and South Korea in the 7th place. Meanwhile, 19.6% of Mexico’s imports came from China, which was the second-biggest supplier. This was followed by South Korea in 3rd place and Japan in the 5th place.

The boom in Asian investment and trade has been substantial. Between 2000 and 2021, there was a 40-fold increase in trade between Mexico and China. Since Mexico signed the North American Free Trade Agreement (NAFTA) in 1994, 23% of Japan’s total investments in the 1990s went to Mexico.

Learn more about Mexico’s trade agreements here.

On the other hand, South Korea provided 6.5 billion USD worth of Foreign Direct Investment between 1999 and June 2019, becoming one of the largest investors in Mexico. There are also more than 2,000 Korean businesses in Mexico, such as Samsung, LG, Hyundai, KIA, Korea Electric Power Corporation (KEPCO) and POSCO.

Even amid the nearshoring trends by multinational companies to access the US market, Mexico’s trade with East Asia remains an important pillar of its economy. Companies from China, Japan and Korea are also keen to locate part of their locations here.

Learn more about nearshoring here.