South America: Trading through the tough times

While the opportunity is huge for the South America’s trade with the rest of the world; many factors are stifling the region’s growth; the latest being currency devaluation.

Twinkle Sahita

Trade is one of the main contributors to the economic progress of a country or region. On one hand, trade can be an engine of economic growth and on the other; it can be a vehicle that spreads economic crisis.

More than 21 million metric tonnes of fruits and vegetables were imported into the United States in 2013, according to the U.S. Department of Agriculture (USDA). Approximately 35 percent of that produce comes from Central and South America. While Latin American perishable exports have grown dramatically in recent years, some logistical shortcomings prevent maximum cold chain efficiency and profitability.

There is currency devaluation throughout Latin America. Among the region, the two currencies that really lost strength were Brazil’s and Mexico’s. This impacted their ability to buy in local currency and as a result they lost a great deal of purchasing power which in turn affects imports since they don’t have as much buying power as they once did. There is also a lot of uncertainty as to where their currencies and economies as a whole are headed. Hence, currency devaluation has affected many organisations and their logistics sector.

Eric Hartmann,, vice president, Cargo Alliance, SkyTeam Cargo , says, “The currency devaluation that Latin America has experienced over the last year is very serious. Goods that are imported have risen in price dramatically and for the same reason it has become more feasible to export goods produced in the region. All types of businesses that deal with international trade will have to modify their model of doing business as to adapt to the new current conditions and value of local currency.”

“We have seen very large drops percentage wise in the amount of imports coming into the region. Exports have not grown at the same pace to counter balance this situation. At the same time the conditions vary greatly per country and for each company.”

Echoing similar views, Matías Lagos, senior vice president, Sales, South America, LAN Cargo says, “Devaluation has greatly affected the business and has had a direct impact on revenues. Even if revenues are denominated in the local currencies of countries in which the company operates, because they are recorded in US dollars for financial reporting purposes, they have been affected by regional devaluation.
“Additionally, there has been a reduction in cargo transport demand while supply has remained steady, which puts pressure on rates and fosters competition. Imports, on the other hand, have been affected by an indirect disincentive effect, given the rise in products’ costs. This is also due to currency devaluation.”

On northbound routes, during the season, perishable products, such as salmon and other fish, asparagus, fruit, flowers and seeds are transported. In the case of southbound routes, product transport is mainly comprised of consumer electronics, mining and industrial equipment, and mining and industrial spare parts, among others.
Hartmann adds, “This is the time of the year that South America produces perishable products that are consumed in the northern hemisphere. Good news for the air market is that China is importing more and more from the region.”
Major airports act as a gateway for cargo operations such as Miami International Airport (MIA). It has cargo flights to cities throughout the America, Europe and Western Asia, as well as cargo flights to East Asia. Most of the forwarders and airlines base their operations at MIA. With 700,186 tonnes of cargo handled in 2014 by Dallas Fort Worth International Airport, it is one of the busiest international gateways. There are three main air cargo complexes at Hartsfield-Jackson: North, Midfield and South. In addition to the main cargo complexes, Hartsfield-Jackson houses a U.S. Department of Agriculture-approved Perishables Complex, the only one of its kind in the southeast United States.

Despite the cloudy situation, some airlines have increased frequency to the region. American Airlines will offer new access to Cancun, Mexico when it adds new service from four US cities in 2016. Southwest Airlines launched a new service by connecting with Volaris (Mexico’s airline). The service is available from 20 Southwest cities to five Mexican destinations (Cancun, Guadalajara, Morelia, Toluca and Zacatecas), starting 1 December. The service will connect through Los Angeles International Airport, Oakland International Airport, and San Jose International Airport.

Economic activity has slowed down sharply. It is, therefore, not surprising that policymakers across the region are eagerly searching for ways to revitalise growth.

Jose Acosta, president of operations and public affairs, UPS Americas Region says, “Legislative changes that reduce protectionism/trade barriers and facilitate trade across the region is what is needed. Trade facilitation is one of the key elements necessary for a country’s economy to function well. Ratifying and implementing the pending trade agreements (TFA and TPP) would also have a big impact on trade and the overall economy/GDP. FTAs create a framework for applying trade facilitation provisions in international trade therefore it is essential to ensure current and future international agreements (TFA, TTP) have clear provisions on trade facilitation that all countries adhere to.”

The Global Express Association (GEA) commissioned a study by Frontier Economic to determine the relationship between customs capability, trade and express delivery and they found that reducing trade barriers was more impactful than reducing tariffs. Hope in the air is that local currencies value will stabilise and allow businesses to adjust to the new conditions.

Further, to offset the decline in cargo revenue, Lagos states, “LATAM Airlines Group cargo unit’s strategy is based on three fundamental pillars - to strengthen our service’s quality and consistency, to offer our customers low cost transport alternatives within out network and to take advantage of specific streamlining and price opportunities.”
Considering the uncertain economic times, one can certainly arrive to a conclusion that South America trade hasn’t fared well in 2015 due to various economic constraints.