U.S.-Latin American trade is steadily increasing and is projected to grow significantly in the next decade. In fact, U.S. Trade Representative Mickey Kantor says that by the year 2010 the United States will export more goods to Latin America than to Japan and Europe combined. As a result, finance solutions that satisfy growing customer needs will be in greater demand.

Borrowing money in Latin American countries can be difficult to obtain and expensive. Stated by Kathy Sifer, Director of International Banking for Barnett based in Miami, Florida, "Medium and long-term financing may be difficult for small and medium-size Latin American companies to obtain." By assisting Latin American trading partners with liberal payment terms, U.S. companies can export more of their products south of the border and seize a sometimes much-needed advantage over European and Asian competitors.

Managing financial risk is becoming more important, especially to the success of U.S. small and medium-size exporters who generate a greater and greater share of their sales and profits from international trade, added Sifer. And obtaining pre- and post-export financing is not always an easy task, she says.

The Export-Import Bank (Ex-Im Bank) of the United States and private insurers, like FCIA Management and American International Underwriters, are well positioned to meet many of these challenges and those presented by the projected growth in north-south trade. Ex-Im Bank's programs are designed to enable U.S. exporters, especially small and medium-size firms, to finance their exports, offer attractive credit terms to their buyers, and insure foreign receivables. "Ex-Im bank is part of the solution," says Sifer. Their rates to exporters are very competitive, they offer many incentives to banks to work with fledgling exporters and provide very good programs like Working Capital Guarantees that are unique to Ex-Im Bank, she says.

As growth in U.S.-Latin American trade accelerates, the need for creative financing will continue to increase. Unraveling and understanding the sometimes seemingly complex set of options can be difficult, especially to those new to international trade. Those companies that can manage risks and move quickly to arrange financing at attractive rates can take advantage of new opportunities.

The Dynamics of International Trade Are Rapidly Changing

In an effort to gain secure and preferential access to foreign markets, and in turn achieve a higher degree of economic security while maneuvering into the 21st century, many countries have entered into trade agreements with one another. From 1947 through 1994, a total of 108 regional trade agreements were notified to the General Agreement on Tariff and Trade (GATT), the international body that governs approximately 90 percent of world trade (now known as the World Trade Organization). Some of these agreements are between two countries; others are among many, creating trade blocs.

Three agreements, however, have emerged to encompass countries with massive economic might to the extent that they have already come to dominate continents. These include the European Union, currently involving West European countries and likely to expand into Eastern Europe; the North American Free Trade Agreement among Canada, the United States and Mexico and likely to expand into Central and South America; and an informal bloc in East Asia dominated by Japan. Based on past trade patterns and policies, and anticipated policies, these blocs will continue to develop, gaining increased strength and influence. Within each bloc free trade has and will likely continue to become more entrenched. However, future trade among blocs is not so clear.

Fear that trade blocs will become inwardly focused and protectionist, not allowing cost-efficient, non-member producers to sell their products on the basis of competition, has promoted a race among nations to achieve the largest and most powerful trade area. Even if protectionism does not become a reality, many believe that trade diversion could have a similar effect. Trade diversion occurs when members of a trade group buy more goods from each other due to the elimination of internal trade barriers, displacing non-member goods.

It is a fact that intra-regional trade has increased. For example, in 1928, 50.7 percent of Western European trade was with Western European countries. By 1993, this increased to 70 percent. During this period, internal Latin American trade only increased from 11% to 19.4%. Due to preferential access made possible by the European Union and other regional incentives, the French are likely to buy more goods from the Germans at the expense of United States.

The Free Trade Agreement of the Americas Will Extend the Benefits of NAFTA Throughout Latin America — Increasing Hemispheric Trade

As intra-European trade increases as a result of the European Union's trade agreement, so too is intra-North American trade as a result of the North American Free Trade Agreement (NAFTA). NAFTA, which was implemented on January 1, 1994, and built on the achievements of the U.S.-Canada Free Trade Agreement, guarantees U.S. companies preferential and secure access to Mexican and Canadian markets.

One of the primary goals of NAFTA is to encourage expansion of business partnerships among North American firms, to promote greater efficiency and more successfully counter the fierce competition generated from the Far East and Europe. So far, evidence shows this strategy is bearing fruit. Since NAFTA was implemented, there has been a proliferation of joint ventures and strategic alliances between U.S., Mexican and Canadian companies. The benefits derived from this teamwork will continue to make North America more globally competitive — at a time when regional trade alliances are becoming increasingly important in the world economy.

Continuing direct investment also reflects an important trend in North American trade — the growth of production partnerships. Production sharing, also referred to as co-production — where manufacturing is divided-up to take advantage of local efficiencies — is an increasingly significant business strategy for improving global competitiveness. By establishing alliances and combining strengths and resources to a greater extent through production sharing, U.S. and Mexican firms are becoming more competitive compared to European and Japanese firms. The concept of "Team North America," a primary objective of NAFTA, has become a reality and is more vital to our economic interests in light of the rapidly changing global environment.

U.S.-Mexican co-production and other types of alliances are anticipated to increase under NAFTA. Predicted in 1992 by Bob Broadfoot, Managing Director of Political & Economic Risk Consultancy, Ltd. located in Hong Kong, unless the majority of their markets are in East Asia, many American manufacturing firms operating there are likely to relocate their plants to Mexico. He indicated that many U.S. manufacturers based in Singapore, for example, produce electronics products primarily for the U.S. market. Many of these firms, he said, will likely relocate to Mexico.

On December 9, 1994, the leaders of 34 Western Hemisphere nations met in Miami for the Summit of the Americas. The goal: to establish a free trade area of the Americas by the year 2005, further building on the achievements of NAFTA. During the Summit, Chile was invited by the United States, Canada and Mexico to begin negotiations to accede to the trade bloc. Although efforts to achieve this goal have become stalled, a revival is likely to be seen after the U.S. presidential election.

Since 1990, some 27 bilateral, trilateral and multilateral agreements have been signed in Latin America, according to the Inter-American Development Bank. These agreements are playing a more important role in providing vital foundation blocks for the building of the Free Trade Agreement of the Americas. This will make the Western Hemisphere the largest trading area in the world, with a combined gross domestic product of more than $7.7 trillion and a market of more than 745 million people. And more trade will increase exporter's needs for competitive financing.

Steve Jenner, Consulting Director for International Executive Programs at the University of California at San Diego, predicts that with the advent of the Free Trade Agreement of the Americas, U.S. manufacturing and sourcing will shift from East Asia to Latin America. "All the benefits derived from NAFTA, including the proliferation of alliances, will be extended throughout Latin America making the Western Hemisphere more competitive globally," he says. Additionally, as U.S.-Latin co-production accelerates, U.S. suppliers will export more components to Latin America where they will be assembled or incorporated in finished products. "Latin America has come a long way in their economic and political development. The region has a great deal more to offer the United States in terms of export markets, investment opportunities and a low-cost manufacturing base."

U.S.-Latin trade will increase for many reasons unrelated to preferential access. Lower wages in Latin America and the Mexican peso devaluation has made manufacturing in the region even more competitive against the Europeans and East Asians. Another advantage offered by Latin America is the proximity. Jenner says the great geographical distance between the United States and East Asia often results in control problems. "With Mexico as our neighbor and the rest of Latin America in the same time zone — and still much closer than East Asia — getting there is easy. And shipping costs are less expensive." As a result, U.S. exports to Latin America, especially of intermediate goods (those used in finished products), will increase.

A third advantage cited by Jenner is the ability of U.S. and Latin partners to work together, not engaging in competition against one another. East Asian entrepreneurs, especially the Chinese, Jenner says, are not often content in supplying a U.S. customer. They have a tendency to become direct competitors and manufacture under their own brand name. Latin Americans on the other hand do not have this same tendency, he says.

Ex-Im Bank Offers Creative Trade Finance Solutions that Satisfy Growing Demands

In order to insure that U.S. companies remain globally competitive, "Ex-Im Bank offers excellent solutions," says Denise Gaudy, Group Senior Vice President and International Sales Manager for Barnett. As trade has increased, so too has the number of its programs and transactions. The independent U.S. government agency helps finance the overseas sales of U.S. goods and services. In over 60 years, Ex-Im Bank has supported more than $300 billion in U.S. exports.

The bank's mission is to create U.S. jobs through exports. Importantly, it has undertaken a major effort to reach more small business exporters with better financing facilities. The bank provides guarantees of working capital loans for U.S. exporters, guarantees the repayment of loans, or makes loans to foreign purchasers of U.S. goods and services. It also provides credit insurance. Ex-Im Bank does not compete with commercial lenders, but assumes the risks they cannot accept.

Ex-Im Bank's Working Capital Guarantee program is particularly attractive. It covers 90 percent of the principal and interest on commercial loans to creditworthy small and medium-size companies that need funds to buy or produce U.S. goods or services for export. The agency's Export Credit Insurance policies protect against both the political and commercial risks of a foreign buyer defaulting on payment. Importantly, they encourage exporters to offer competitive terms and supports prudent penetration of higher-risk markets. And because the proceeds of the policies are assignable from the insured exporter to a financial institution, it gives exporters and their banks greater financial flexibility in handling overseas accounts receivable. Policies may be obtained for single or repetitive export sales or for leases.

The Bank's Guarantees of commercial loans to foreign buyers of U.S. goods or services cover 100 percent of principal and interest against both political and commercial risks of non-payment. Direct Loans provide buyers and/or their banks with competitive, fixed-rate financing for their purchases from the United States.

Gaudy is positive toward some Ex-Im Bank's programs that are unique to the organization, including the short-term multi-buyer, short-term single buyer, umbrella, and small business policy. She is also impressed with the agency's efforts to improve. "Ex-Im Bank is trying to be more flexible and has added another level of delegated authority to banks, and state and local agencies that assist exporters," she says. It is considering the establishment of a medium-term delegated authority program, she adds.

Ex-Im Bank's Activity in Latin America Is Increasing

According to Ex-Im Bank, there has been a significant increase in their volume of transactions in Latin America, particularly since the debt crisis of the early 1980s. In fiscal year 1994, Ex-Im Bank recorded $5.2 billion in financing and insurance shipments to support $5.7 billion in exports to Latin America.

Ex-Im Bank's increased activity in Latin America is a reflection of events there. Less than two decades ago most Latin American countries were run by military generals or dictators closely aligned to the military. For the first time, freely elected governments rule in just about every Latin American and Caribbean country. The so-called “lost decade” in Latin America is a fading memory. These once closed markets have become bustling, dynamic economies that resemble the development process encountered by the Asian tigers of the 1970s. Like the East Europeans, Latin Americans have learned that protectionist policies only result in an inevitable loss in standard of living.

Latin America’s political and economic reforms are working well. Investment is growing and the middle class is on the rise. In fact, Chile and Colombia have received investment grade credit ratings on financial risk by Moody's, a financial rating agency. The transition to open markets has not only benefited Latin companies and workers, but also U.S. companies and workers who owe much of their success to exports and investments in the region. In fact, Latin America has become the fastest-growing region in the world for U.S. exports. Last year, U.S. exports there reached $95 billion. And from 1993 to 1995, exports to Argentina more than doubled; climbed 86 percent to Brazil; were up 96 percent to Chile; rose by 137 percent to Colombia; and increased by 39 percent to Mexico, despite the economic crisis.

Ex-Im Bank's Programs May Not Be Right For Everyone

Tom Jaskolka, Regional International Trade Services Manager for Barnett Bank based in Miami, says many U.S. firms cannot take advantage of Ex-Im Bank's programs because some of Ex-Im Bank's positions are policy driven and can be too restrictive. For example, in order to utilize Ex-Im Bank finance solutions, at least 50 percent of a product's content must be of U.S. origin. This, Jaskolka says, cannot be achieved by some companies.

Ex-Im Bank follows U.S. foreign policy directives that can add an element of unpredictability making long-term planning difficult for a company if they are relying on Ex-Im Bank support, Gaudy says. For example, in April, directed by the U.S. State Department as a result of alleged violations of intellectual property protection, Ex-Im Bank terminated support for China. Within one month, a U.S. government policy reversal resulted in Ex-Im Bank re-establishing support.

Effective May 1, 1996, the agency revised its country limitation schedule. According to the schedule, Ex-Im Bank support, for example, is not available on guarantee programs, export credit insurance and loans to the Bolivian public sector exceeding seven years, to the Brazilian public sector for any length of time, or to the Venezuelan public sector exceeding seven years or the private sector for any length of time.

Private companies, such as FCIA Management Co, a subsidiary of Great American Insurance Co., American International Underwriters, a subsidiary of American International Group, and Trade Underwriters Association owned by Reliance offer competitive insurance products not subject to the origin requirements imposed by Ex-Im Bank, says Jaskolka. Additionally, he says, "they are not subject to political considerations." For example, on March 1, 1996, President Clinton decertified Colombia as a beneficiary of U.S. aid because Colombia was not found to be fully cooperative in the effort to stem the drug trade. This decision, Jaskolka says, does not affect the products or services provided by the private sector. Additionally, the private sector uses an independent criteria to determine country and corporate risk and may provide solutions where Ex-Im Bank does not.

On the downside, Gaudy says, the private firms only offer short-term multi-buyer insurance policies. They do not offer working capital guarantee programs nor medium-term policies, she says. Additionally, she adds, some of the minimum premiums can be expensive for small and medium-size companies.

If private or public insurance and guarantee programs do not meet all the exporters' needs, companies may wish to consider aval financing (the discounting of drafts bearing a guarantee from the buyer's bank). This can be obtained from banks or forfait firms.

Choose the Financial Policies and Political and Commercial Risk Insurance Programs that Are Best for You

As political - economic events and new trade agreements increase U.S.-Latin American trade, timely and attractively priced financing solutions will be essential for companies to remain competitive and win new business. Ex-Im Bank, private political and commercial risk insurers, and aval financing are some of the available solutions which should be considered.

This article appeared in Latin Finance magazine, September 1996.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author of several books, and a nationally syndicated columnist on global business, trade policy, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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