How might Great Britain’s decision to leave the European Union affect trade in the region?
The United Kingdom’s recent decision to leave the European Union (EU), known as “Brexit,” has triggered analyses of the possible impact this change of affairs could have on Latin America and the Caribbean, particularly in terms of trade.
Britain is the second largest economy in the EU, after Germany, and its opt-out is a serious loss for the EU. To give a sense of the effect that Brexit may have on the integration process, we should mention that it will reduce EU citizen numbers by 13% and will imply a €11.3 billion budget cut and an 18% reduction in GDP.
The referendum has implied that the EU will first have to make significant efforts to put the issues on its internal agenda in order, to the possible detriment of external issues such as trade negotiations with other countries and regions: this could slow progress in negotiations with the MERCOSUR.
What the bloc stands to lose or gain in relation to the British market should it reach a bilateral agreement with the EU (without the United Kingdom) does not seem particularly significant for the balance of trade in itself as this only represents 7% of total trade between the two blocs.
With regard to the agreement between the EU and other countries in the region (Mexico, Chile, Peru, Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama), these, of course, do include free trade agreements with the United Kingdom. Brexit means that these agreements will no longer apply to the United Kingdom, which will eventually imply the need for new negotiations.
In relation to the exchange and finance markets, one of the immediate consequences of Brexit was a slight devaluation of the region’s currencies. Furthermore, both public and private debt became relatively more expensive as a result of the flight to quality that followed the referendum.
From the trade perspective, the effects of Brexit will be felt in the medium term, but it may increase the possibilities of greater trade protectionism in Europe and other parts of the world, which will definitely impact Latin America’s regional development.
Description of Bilateral Trade
Trade in Goods
Latin America has a trade surplus with the United Kingdom that averaged US$1.9 billion between 2000 and 2012. In 2013, there was a deficit in the balance of trade (US$650 million), mainly as a result of the 45% reduction in Mexican gold exports to the British market (worth US$1.17 billion). There has also been significant growth in petroleum imports from Chile. In 2014, the region went back to having a surplus, although it has not yet managed to reach its earlier levels of trade.
Figure 1. Balance of Trade between Latin America and the United Kingdom (2000–2015, in millions of US$).
Source: Prepared in-house using data from INTRADE and DOTS (IMF).
In 2015, the balance of trade (exports + imports) stood at around US$18 billion, 20% below the 2011 peak. Latin America had a surplus of US$380 million, fundamentally due to the results of the balance of trade with Colombia, Argentina, Peru, and Brazil. In contrast, Mexico, Uruguay, and Panama had higher deficits with the United Kingdom. According to customs figures, the United Kingdom’s share in the region’s total exports and imports is very low, close to 1%. Of course, this only takes into account the specific flows that originate from or arrive at British ports—though some trade may move through other entry/exit points in Europe (which would be hard to identify).
Figure 2. Balance of Trade between Latin America and the United Kingdom (by country, 2015, in millions of US$).
The United Kingdom’s share in the region’s total exports and imports was very low in 2015, close to 1%. Likewise, over the last decade, this share has become relatively less important in comparison with Latin America’s global trade, although the levels have always been largely insignificant in recent years.
In the case of some Caribbean countries, the situation is rather different: Belize and Guyana sell 10% and 5% of their exports, respectively, to the United Kingdom. This is certainly influenced by the historic ties between their economies and that of Britain.
In this context of low levels of trade, the two largest markets in Latin America, Brazil and Mexico, account for over half of trade with the United Kingdom. However, these flows represent just 1.5% of Brazil’s total trade and 0.5% of Mexico’s.
Figure 3. Distribution of Trade between Latin America and the United Kingdom (by country, 2015, in percentages).
Figure 4. Sectoral Composition of Trade between Latin America and the United Kingdom* (2015, in percentages).
* Calculation based on mirror statistics on trade between the United Kingdom and Latin America.
It is worth noting that trade between Latin America and the United Kingdom is intra-industry, given that the former’s exports are largely products from the plant kingdom and food and beverages, while the most significant sectors that it imports are machinery and electrical and mechanical appliances, chemical products, and, to a lesser degree, transportation equipment.
When classified at the product and country level, the most noteworthy exports to the United Kingdom are raw gold from Brazil and Mexico, bananas from Colombia in the Dominican Republic, and soybean meal from Argentina. In terms of Latin America’s imports from the British market, of note are passenger vehicles in Brazil, Mexico, and Chile, and medications and alcoholic beverages in Brazil and Mexico.
Unlike the situation for trade in goods, Latin America has a deficit in trade in services with the United Kingdom which reached a total US$3 billion in 2014 as a result of exports of US$3.25 billion and imports of US$6.25 billion.
Figure 4. Sectoral Composition of Trade between Latin America and the United Kingdom* (2014, in percentages).
Source: Prepared in-house using data from EUROSTAT.
Brazil is the main destination market in Latin America for exports of British services (37%), followed by Mexico (14%). In terms of British imports of services from Latin America, this order is reversed: Mexico ranks first as a market of origin (28%) while Brazil is in second place (21%).
Brexit will certainly have a direct and varying impact on the region in terms of trade, investment, and cooperation. The indirect impacts will be related to a potential shift towards less open trade policies that will hamper access to markets and investments. This possibility needs to be carefully monitored by the countries of Latin America and the Caribbean. One task those that countries in the region with agreements with the EU must broach immediately is re-articulating a separate link with the United Kingdom.