Introduction

Objectives of Research Study

This study addresses Western Canada's commercial linkages with Latin America (Central and South America) and the Caribbean, otherwise referred to as the Latin American and Caribbean (LAC) region. Mexico is not included in the study because of its developed relationship with Canada and engagement in the North America Free Trade Agreement (NAFTA). The remainder of this report provides a general overview of the economic relationship between Canada (particularly Western Canada) and LAC, summarizes the current engagement activities of selected Western Canadian stakeholders, reviews challenges associated with operating in LAC, highlights markets and sectors of greatest opportunity in the region, and concludes with a list of potential options for WD on how to increase Western Canada's engagement in LAC.

The study relies on research and consultations with a sample of federal, provincial, and municipal government officials, supplemented by limited outreach to innovation clusters, universities, associations, and a small sample of companies and foreign representatives. The report is illustrative of the commercial linkages between Western Canada and the study area, but makes no claim to being comprehensive.

Canada and LAC: Natural Partners

For much of the postwar period, predominantly agricultural-based trade dominated Canada's interactions with the LAC region. More recently investment, particularly in the energy and mining industries, has driven the Canada - LAC economic relationship. This relationship has been accelerated by significant shifts in trade policy towards the aggressive negotiation of free trade arrangements (FTAs) in the region. Prime Minister Stephen Harper has emphasized that Canada's neighbourhood does not end at the 49th parallel, and neither do Canada's interests. That is why Canada is seeking to re-engage relationships throughout the Americas¹.

In recent years the relationship between Canada and LAC has been driven by the Canadian mining industry. Capital flows have been impressive and have generated both the development of recipient countries' economies and trade flows from Canada to the region. Members of the Canadian Association of Mining Equipment and Services for Export have been particularly active in efforts to follow their domestic clients overseas.

The Canadian mining industry began investing in LAC in an era of few resource shortages when resource prices were low. Capital flows are now being propelled by higher resource prices given the fundamental shift in the demand-supply equation. The needs of the mining industry and the opportunities offered should be the subject of any Latin American strategies the Government of Canada eventually adopts.

Canadian Free Trade Agreements with LAC

New Free Trade Agreements (FTA) are an important element of Canada's re-engagement efforts with LAC. Building on the success of NAFTA and Canada's mutually beneficial FTAs with Chile (1997) and Costa Rica (2002), FTA negotiations have been launched with Colombia, Peru, the Dominican Republic, the Caribbean Community (CARICOM) and with the Central America Four (CA4)-which includes the countries of El Salvador, Guatemala, Honduras and Nicaragua².

On May 29, 2008, Canada and Peru signed a FTA. This FTA will benefit Canadian exporters, service providers, and investors in several sectors including, but not limited to, mining, manufacturing, agriculture, financial services, and environmental and engineering services.

On June 7, 2008, Canada concluded FTA negotiations with Colombia, providing similar benefits, as well as negotiations for an Agreement on the Environment and a Labour Cooperation Agreement.

Canada has signed other formal agreements with various LAC countries. Foreign Investment Promotion and Protection Agreements (FIPAs) are in place with the following LAC countries (listed with longer standing agreements first): Argentina, Trinidad and Tobago, Barbados, Ecuador, Venezuela, Panama, El Salvador, Uruguay, Costa Rica, and Peru. Other agreements of note include the Andean Community Trade and Investment Cooperation Arrangement, the Southern Cone Common Market (MERCOSUR) Trade and Investment Cooperation Arrangements, the Central America Memorandum of Understanding on Trade and Investment, Science & Technology Partnerships, and Air Service Agreements³.

Macroeconomics of Latin America

The period from 2004-2006 is on record as the most vigorous three years of economic activity for the Latin America region since the 1970s. Regional Gross Domestic Product (GDP) has grown on average at a rate of 5.25% each year for Latin America since 2004. In 2006, one third of all Latin American countries experienced growth rates of 7% or higher. It is estimated that LAC comprised 6.29% of the world's total GDP for 2006. The major factors that have eliminated macroeconomic volatility and thus contributed to the growth of Latin American economies are: controlled inflation, limited debt restructuring, reduced unemployment, and social improvements to address inequality and poverty. The distribution of the GDP of Latin America in 2007 is shown in the following table:

Although the LAC region has experienced considerable economic growth in the past five years, it continues to lag behind other developing countries. In 2006, for example, growth in other developing countries averaged 8.5%, about 3% higher than that of LAC. While the region may be closing some of the gap with industrialized countries, it still lags behind other more dynamic areas of the world, including many countries that have not directly benefited from the commodities boom in the way that Latin American has.

Investment in the LAC region still only averages 20% of the GDP, which is no higher than its peak in earlier expansions. LAC is experiencing impressive economic growth and with increased development in Trade Agreements and investment incentives, the LAC region will present opportunities for further investment and trade prosperity.