Exporting to Asia (Part 1)

One of the 21^st century’s greatest challenges to Chilean businessmen is exporting to Asia. In a three-column series, I will analyze the attractiveness of this market, its features, and the possibilities Chilean entrepreneurs have for achieving closer commercial ties with the countries that make up this fascinating region of the world.

The outlook of these columns is decidedly optimistic, while remaining realistic. This is because I have for seen for myself how the dynamic and vigorous economic processes in Asia are also keyed to the long term. Of course these processes, like all economic cycles, have their ups and downs; but the bottom line indicates consistent forward momentum.

Even more interesting is the fact that both developed and emerging Asian countries have experienced growth rates that have repeatedly outstripped the rest of the world. Thus, the major Asian economies (Japan, China, Korea and more recently India) are becoming increasingly important as major importers despite some remnants of Protectionism.  

This being said, Chilean entrepreneurs should carefully consider the trade and investment opportunities that medium and small-scale players, such as Indonesia, Singapore, etc., are offering.

The second factor that makes Asian markets especially attractive to Chilean exporters is a scenario without parallel in international relations. Chile is the only country that enjoys preferential tariff simultaneously with China, Japan and Korea (to which we may add the P4 countries: Singapore, New Zealand and Brunei). Chile also has a Partial Scope Agreement with India, which will eventually be an FTA.

This is undoubtedly a major achievement for Chile’s economic foreign policy. It is the product of an innovative outlook that has led the rest of Latin America’s joint, public-private efforts. Among the former, government officials such as Osvaldo Rosales stand out as exemplary professionals. Rosales headed the Foreign Ministry’s DIRECON (General Directorate for International Economic Affairs) negotiation team.

This compendium of agreements gives domestic exporters at a distinct competitive advantage, but not forever.  Asian FTAs are proliferating rapidly (mainly due to the lack of a WTO multilateral agreement). So, while Chile has a leg up on other countries, domestic entrepreneurs should take full advantage of these unprecedented opportunities.

Now let’s review some of the region’s factors which may affect Chile’s export opportunities.

First, the dynamic growth of the region continues thanks to the dynamism of China, which accounts for roughly a quarter of the region's economy. Chinese economists and other countries have been discussing whether 8% or 7% growth was sustainable in China. The reality of growth rates has consistently exceeded these estimates. It has grown at two-digit rates of 10% or more. When it grows at an average of 10%, the GDP doubles every 7 years: this gives us an idea of what this growth speed means in real terms. The good news is that this growth contributes to increasing private consumption, or the greater good of the people; both those emerging from poverty and the middle class move to higher levels of consumption. This includes imported products and those which have imported components. Thus, some of this consumption will necessarily include Chilean imports.

But recovery in Japan, which accounts for more than 40% of the Asian economy, has also been important; as have the dynamism of Australia and the recovery of medium-scale economies like Indonesia and Thailand. It is true that the Japanese recovery has had some setbacks in recent months, but for the moment there are no signs of recession, but rather what economists call a "soft patch" on the road to development. Australia, under its new administration, should not damper its growth rate, and other economies in the region have sound "fundamentals".

Secondly, the structure of trade is changing rapidly in a trend that Chilean exporters should explore in detail in order to be able to seize the new opportunities that this change creates. Much of the world’s final goods assembly has been shifting to China. Countries that have traditionally produced a variety of value-added manufactured goods have had to reorient themselves to producing intermediate goods (components, parts and accessories) which are then exported to China. This has formed a series of international production supply chains. Most of these intermediate suppliers are Asian (Japanese, Korean, Taiwanese and the ASEAN region). This being said, there are certainly niches of exploitable opportunity which are yet to be identified (why not?) by the exporters of the world, which necessarily includes Chilean firms.

Some are already underway: Chilean sales to China now include products such as denim and leather, which are components for finished products that are "Made in China". Who would have anticipated this type of business even just a few years ago…? This is an issue of market intelligence, in which ProChile certainly can play an important role alongside exporting SMEs seeking to enter the vast Chinese market.

Another trade trend consists of emerging and developed economies in Asia importing a larger variety of basic consumer goods.  This is due not only to greater overall prosperity, but also to new consumer preferences, related to the influence of globalization. For example, the consumption of wine, seafood and dairy products like cheese (a short time ago it was thought that no one could sell milk in Asia) are part of a new style or culture of consumption. It clearly offers interesting opportunities for Chilean exporters. The FTAs offer advantages in these respects, although the reductions are neither immediate nor total. The analysis of wines exports to dynamic markets, including Korea, shows that the benefits are obvious in terms of quantities (boxes sold) and price (best price per box). And this export sector is by no means limited to the two or three largest vineyards. It is shared by many vineyards, most of them from the SME segment.

Thirdly, the growth of Asian markets in recent years is mainly due to the sustained increase in global demand. In particular, the role of the United States as a major consumer has been very important, which explains the strength of Asian fears in the face of a possible US recession. Some speak of that country as their "consumer of last resort". This is undoubtedly an exaggeration. But the point is not trivial. In fact, the slowdown in the US (along with the devaluation of the dollar) is already decreasing the trade deficit in the US. Accordingly, and due to other factors, the commercial offensives of the Chinese and others, such as Koreans, Vietnamese and Indians, have been redirected to other parts of the world. This in turn explains, for example, the European Union’s demands (Mr. Mandelson and others) on China, arguing that China's currency is below its equilibrium value, etc.

Moreover, thanks to the relatively increased wealth and weight of Asian economies, it is estimated that these countries are more prepared than in the past to “cushion” the effects of a US recession. If they do possess this capability, it will be good news for us, because otherwise Chilean exports to Asia may suffer.

(To be continued)