[SCMP Column] The "Good Guys"of Pacific Alliance Mean Business

December 12, 2015

Hands up if you know who Ollanta Humala is. I will lay large bets that nine out of 10 Hong Kong people don’t have a clue. And I really think this needs to change.

To avoid suspense, Ollanta Humala is the President of Peru. And it is time for us here in Asia to get to know our counterparts in those far distant South American economies.

I have been Peru’s guest in Lima this week, as Humala prepares to preside over the Asia Pacific Economic Cooperation (APEC) group: Peru takes the baton of APEC chairmanship from the Philippines at the end of the year. Since June, Peru has also been chair of the Alianza del Pacifico – the Pacific Alliance – which groups Mexico, Chile, Columbia and Peru.

It is hardly surprising that we know almost nothing about these economies. It took me a brain-numbing 30 hours to fly to Lima. The choice is to go through Paris or Amsterdam in Europe, or through the appalling Los Angeles airport in the US. Talk to most leading Hong Kong companies – even giant ones like HSBC – and they confess ignorance of the region. They have no – or skeletal – business presence there. Unless you speak Spanish, it is tough to get around.

But surely this ignorance is not acceptable or sustainable? Bundled together, the four Pacific Alliance economies would make the world’s 9th largest economy – 215 million people, and a combined GDP at US$2.12 trillion – bigger than Russia and close to Italy. ASEAN may be bigger, with 622 million people and a combined GDP of US$2.48 trillion, and it is near and familiar too, but the Pacific Alliance is too big for us to live in ignorance of it.

I must confess I have a bias, because three of the four Pacific Alliance economies are members of APEC, and I spend much of my life working on APEC stuff. But I still think I am right to chide. We in Hong Kong may be ignorant of them, but China certainly is not. Chile and Peru have become important sources of key raw materials like iron ore and copper, on the back of which China’s trade with the region has soared over the past decade. HSBC may be silent there, but the Bank of China certainly is not.

Talk to our trade and investment promoters at the Trade Development Council or InvestHK, and you see an emerging interest. But the majority of their interest sits with Mexico, Brazil or Argentina – South America’s giants. That bias is understandable – Brazil has a GDP slightly larger than the combined Pacific Alliance group, and Argentina’s economy is larger than all of the Pacific Alliance economies except Mexico. But I think this bias is misplaced. As one leading South American business friend in Hong Kong pertinently noted to me last week: “It is easy to do business in a big economy like Brazil or Argentina. But just don’t expect to be paid.”

For me, the four Pacific Alliance economies are important not just because they face the Pacific, but because they are the “good guys” of South America. Despite variously dark histories – military dictatorships, cocaine, and the craziness of the “Shining Path” – they have all, over the past decade or so, been aggressive and consistent liberalisers. We can do business there with moderate confidence in the rule of law and welcoming trade and investment regimes.

It is true that it has been moderately easy for them to be liberal: Mexico has, since it signed the North American Free Trade Agreement in 1994, experienced a marvelous boom on the back of preferential access to the US economy. Today, over 80% of its exports go to the US market. Columbia has also benefited from strong northerly trade flows into the US, which accounts for 43% of its exports. And Peru and Chile have benefited from a massive global demand surge for their natural resource exports – mainly iron ore and copper – with China the main driver for this.

This hints that their liberal credentials might be put to the test as commodity prices slump globally. The IMF is forecasting the Pacific Alliance economy will shrink by a sobering 13% this year, on the back of collapsing commodity prices, to US$1.86 trillion. But so far the four economies have retained an unwavering commitment to economic liberalism, and Peru looks likely to be welcoming host to APEC in 2016 – in spite of a rather awkward change in government in the middle of the year. If there is one key stress point in the Pacific Alliance, it is the same stress point that hovers over ASEAN: it is dominated by Mexico, just as ASEAN is dominated by Indonesia. Mexico accounts for 60% of the Pacific Alliance GDP. Indonesia might not be quite so dominant (it accounts for 36% of ASEAN’s GDP and 41% of its population) but there is a keen awareness in ASEAN (in particular just weeks away from the supposed completion of the ASEAN Economic Community) that if Indonesia does not move, then no-one moves. So too does Mexico need to tread delicately around its smaller partners.

Just as we on the Pacific’s western shores have suddenly begun to realise that we need to know more about South America’s economies, so too have the Pacific Alliance partners begun to turn attention to Asia, and the potential for a “Puente Pacifico”, or Pacific Bridge – even though so few of us speak Spanish. For Mexico and Columbia, there is the “push” factor that they are anxious to reduce their reliance on the US as the dominant export market. But for all four, even though China’s demand for raw materials may have faltered for the time being, there is a rising awareness of, and interest in, China (and ASEAN) as significant future consumer markets. We should ensure the Asian end of the “Puente Pacifico” lands here in Hong Kong. If it lands elsewhere, we will be the losers.

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