The Impact of European Conflict on LATAM Supply Chains
The invasion of Ukraine by Russia and sanctions imposed on it for doing so and new pandemic-related shutdowns in China are the latest events to rock global supply chains. Combined with the China-U.S. trade war and other pandemic- and climate-related disruptions, it is certain to accelerate the movement by Western companies to reduce their dependence on China for components and finished goods and on Russia for transportation and raw materials and to lead to more localized, or regional, sourcing strategies. If China decides to back Russia in the Ukraine conflict, it would only fuel that movement.1
The supply shocks triggered by Russia’s invasion of Ukraine have opened up opportunities for Latin American countries to step in and fill in critical manufacturing and sourcing gaps. This trend of near-shoring manufacturing operations has been ongoing for the past four years, as the China-U.S. trade war and the supply chain disruptions generated by the pandemic and climate-related events have caused the pace of supply-chain localization to rise significantly.
In fact, a January 2020 survey of 3,000 firms, motivated by the China-U.S. trade war, found that companies in a variety of industries — including semiconductors, autos, and medical equipment — had shifted, or planned to shift, at least part off their supply chains from current locations. Companies in about half of all global sectors in North America declared an intent to “reshore” or “nearshore” to Latin America.2
Latin American Influence On Global Markets
While culture and geography separate Latin America from the Ukraine-Russia conflict, there are still important economic implications for the Latin America region due to its sensitivity to commodity prices. After the sanctions imposed by the United States and Europe, we can expect interruptions in global supply chains, this can translate into product shortages and price increases due to social and political instability.
Unlike other regions of the world, Latin America is characterized by large oil-producing countries coexisting with net oil importers. Oil is the main export of Colombia and Venezuela, and represents an important part of the fiscal income of Guyana, and Mexico. However, it is also the main import of Peru and Chile. The sanctions imposed on Russia – the world's third largest oil producer with a 12% market share – are expected to keep oil prices high, which could benefit oil producers and affect the fiscal balance of net importers.3
The conflict is also likely to affect the price of food and agricultural staples, as Russia is the world's largest wheat producer, while Ukraine is the third. Export restrictions due to conflict and sanctions are likely to significantly affect the prices of these commodities.
Rising Food & Energy Prices
As a result of rising food and oil prices, inflation is likely to be driven higher. It is important to consider that food prices represent around a quarter of the average consumption basket in Latin America and the Caribbean. With households still recovering from the pandemic, a rise in food prices could result in a further exacerbation of poverty and hunger.
Although Russia is not an important trading partner for the Latin America region – except for Venezuela, Nicaragua, and Cuba – Russia does represent a significant part of China's trade balance. China, for example, is the second largest importer of Russian crude oil and a major importer of aluminum, platinum, and palladium.4
With China being a critical trading partner for Latin America and the Caribbean, disruptions to China-Russia trade are also likely to be felt in the region, in the form of disruptions to supply chains, shortages of consumer products and, ultimately, increases in prices.5
1. Transportation Costs: With oil and gas prices soaring due to the war, transportation costs will follow suit. What is less obvious but equally important is that the war-imposed constraints on the ability to use Russian transportation infrastructure to support manufacturing in Asia. Indeed, many companies have been building components and finished goods in China and using the Russian railway to move these items to Eastern and Western Europe. Of course, it is possible to ship some of these items by air, but that is significantly more expensive, especially now that airlines need to bypass Russia.
2. Food & Tech Costs: Equally important, Ukraine supplies about 50% of the world’s neon gas, which is used to produce semiconductor chips. Governments and large corporations are now scrambling to obtain alternative supplies, but the supply is tightening and prices have dramatically increased. Russia and Ukraine are also big exporters of grains such as corn, barley, and wheat as well as fertilizer. While the war’s full impact on global food supplies is not yet clear, prices are already skyrocketing.
- Government Involvement: What is more, industry alone will not be able to address many of today’s supply-chain challenges. Governments will have to be involved. In the United States, federal and state governments are increasing investments in ports, airports, and other infrastructure. The U.S. CHIPS Act (which Congress has yet to fund) and the European Chips Act are examples of government efforts to reduce dependence on Taiwan and South Korea for semiconductor. The Ukraine conflict is also likely to give a boost to the European Battery Alliance, which the European Union formed in 2017 to make Europe a leader in advanced battery industry.
- Monetary Policy: Political and policy uncertainty are also leading to cautious levels of spending and investments in Latin America. For example, Chile is in the midst of drafting a new constitution, which could radically expand the government role in the economy, while Brazil and Colombia are in the midst of election years.6
Inflation rapidly increased in 2021 in some Latin American countries and central banks swiftly reacted by raising interest rates. This is pressuring FX rates and; therefore, disposable incomes and spending in some countries, given country indexation.7
Russia’s invasion of Ukraine is adding to the woes of global supply chains. It is affecting industries ranging from semiconductors to cars to food. It almost certainly will accelerate the shift from global to LATAM sourcing that had already been underway due to the China-U.S. trade war and pandemic- and climate-related events. But given China’s dominance in a lot of sectors, the shift may happen gradually and will require government assistance.
Until infrastructure investments in local regions happen, companies should stress test their supply chains and pursue strategies to make them more resilient to risks. Exporta Wholesale makes it easy to try new vendors by curating a selection of Latin American manufacturers to fulfill your company’s needs. About the only thing certain right now is the challenges to global supply chains are going to increase for the foreseeable future.
About Exporta Technologies
Exporta Wholesale is the largest marketplace connecting suppliers in Latin America with buyers in North America. Today, we have a network of over 5,000 Latin American suppliers serving a variety of consumer goods and product categories in the United States.
Exporta’s marketplace offers buyers a full service experience in the origination, sourcing and managing of products. The platform was founded on the idea that curation and service are the most important elements in the buyer’s journey. Exporta’s marketplace is building technology that addresses the pains of sourcing products internationally at attractive prices.