Georgetown Americas Institute

GVCs have experienced significant disruptions over the past five years as a consequence of the COVID-19 pandemic, the U.S.-China trade war, and conflict in Europe and the Middle East. While some commentators, policymakers, and economists see opportunities arising in this context for Latin America and the Caribbean (LAC) to reinsert itself in the global market, many challenges still lie ahead for the region. Panelists discussed the current state of GVCs and what LAC can do to benefit from these circumstances. 

Global Supply Chains, Latin America, and the Looming Great Reallocation

Chor presented his work with coauthor Laura Alfaro of the Harvard Business School, which examines the major shifts in GVCs across the last two decades. He noted that in the 1990s and 2000s, many argued that global supply chains would improve efficiency by allowing businesses to conduct operations in the places where they had the most competitive advantage. In the last decade however, these views have changed as natural disasters, climate change, the COVID-19 pandemic, national security concerns, and the Russia-Ukraine war have wrought global instability. Now consensus has flipped, and the common understanding is that sprawling supply chains put businesses at a higher risk of disruption.

Chor views this as part of a larger backlash against globalization in developed countries. In their forthcoming paper, Chor and Alfaro discussed this shift in terms of trade partners, products involved, mode, value chain position, and manufacturing activity. They argued that outright deglobalization is not happening yet, but instead that there has been a reshuffling of global economic activity. Their research found that a 5% decrease in the share of imports from China in the United States is associated with a rise in the share in U.S. imports from what could be considered “friendlier” nations, such as Vietnam or Mexico. However, Chor warned that these changes have already been associated with rising consumer costs. They also found a rise in the “upstreamness” of U.S. imports, which means that the country is bringing in goods that are not ready for the final consumer. 

According to Chor, businesses are now more intentional about creating strategies and investing in the reorganization of supply chains, but that interest in “friend-,” “near-,” and “re-shoring” responds in great measure to the policies of the U.S. administration. For instance, Chor and Alfaro reported that the decline in manufacturing manufacturing sector employment in the United States has bottomed out and is slightly rebounding; however, the causes of this are not necessarily related to the trade war. 

Chor noted that Mexico overtook China in 2023 as the biggest source of U.S. imports. Thus, there are opportunities for the region to regain a slice of global manufacturing activity. At the same time, he warned that this could just be a re-routing of essentially finished Chinese goods. He also warned that these changes could put a strain on the region’s labor market and trade policy with the United States.

The New Environment for International Trade Investment and Economic Relations

Given the trends of globalization and the impact of disruptive effects like the pandemic, trade wars, and conflicts in Europe and the Middle East, Gonzalez and Eissentstat kicked off the main panel by assessing the potential reconfiguration of GVCs and explored the shocks resulting from deglobalization policies. 

Gonzalez noted three factors affecting the new global trade environment. First, the landscape of GVCs is shifting, but she stressed that there are no signs for a broad-based retreat from globalization. However, trade tensions and investment flows are indeed shifting due to heightened uncertainty and compounded crises. Second, she posited that even as external conflicts become more challenging, trade continues to be resilient, citing the COVID-19 pandemic and Russia-Ukraine war as examples of crises that failed to fully upend global trade. Finally, while the world has avoided a worst-case scenario of full decoupling of China and U.S. trade, there certainly has been some decoupling which will have unintended consequences. 

In regard to multilaterals, Gonzalez asserted that the World Trade Organization (WTO) will continue to be an important institution because rules-based trade is critical to providing greater certainty to the trade environment. The WTO has been able to facilitate plurilateral agreements on domestic regulations, increased conversations on the role of trade in environmental sustainability, and digital trade. Overall she advised that regional trade must see emphasis on greater regulatory cooperation and coordination in supply chains, in addition to addressing market access. 

Eissenstat described how external shocks such as the pandemic, drought in the Panama Canal, war in the Middle East, and other crises are affecting companies dramatically, forcing them to create contingency plans. Companies are developing new suppliers for required products. In sourcing materials, companies cannot only consider the most efficient ways to get products to the consumer, but also where the product comes from, how the product is made, and what vulnerabilities are associated with its sourcing. Some of this is driven by national security considerations. 

Eissenstat also explained that two current issues affecting the reorganization of global value chains are the rise in protectionism among nations across the hemisphere and inconsistencies between succeeding U.S. administrations. He believes protectionism on some products and sectors will decline, but it is here to stay for high-technology products. Recently there has been a shift away from integration towards national security-related agreements, which is limiting market access for many countries. Eissenstat explained that this could have negative outcomes for overall global trade, but that sometimes external market forces are necessary to discipline internal policies. He added that beyond protectionism, in the highly polarized U.S. political landscape trade policies do not have durability or sustainability, which make long-term planning and investing difficult.

Latin America’s Response

In this context, speakers agreed that there are various steps both LAC countries and the United States can take to benefit from “friend-,” “near-,” and “re-shoring.” According to Eissenstat, this moment offers both opportunities and risks. LAC can take advantage of these global dynamics by investing in human capital and creating a trained workforce. LAC countries also must be more competitive in attracting foreign direct investment that is currently flowing to Vietnam and Mexico. Other Latin American leaders must put the appropriate policies in place to be able to compete. 

Gonzalez outlined what she sees as the five most important opportunities for the region. The first is the energy transition from fossil fuels to renewable sources, which will significantly impact trade patterns. In Latin America, on average, 30% of energy comes from renewable sources, which is double the global rate. The region has 20% of the world's critical minerals and 60% of the world’s known resources of lithium, among others. These present opportunities in both the digital and energy transition. Second, Gonzalez summarized how LAC countries can use these assets to play an important role in the fight against climate change.

The third opportunity for LAC is in food security, according to Gonzalez. LAC provides 14% of the world’s food production and 45% of net international agri-food trade, producing enough food to feed 1.3 billion people. In the context of rising crises such as the effects of Russia’s invasion of Ukraine on food markets, LAC can fill an important gap in food production. 

The fourth opportunity for LAC is its ability to contribute to the resiliency of supply chains because of its geographic location. Lastly, Gonzalez mentioned the contributions that the region can make in digitally delivered services. For the past two decades on average, this sector has grown 8.1% annually. Many LAC countries are already participating in business processing and technological outsourcing, complementing countries like the United States and elsewhere. 

Overall, Gonzalez agreed that this is an exciting moment because LAC countries have many options as they seek to enhance the region’s participation in global value chains. The opportunities that lie ahead could prove to be more durable than those of the past as the world grapples with not only shifting global value chains but also the green transition, the digital transition, and an overall greater appetite for resilience.