Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
Back when it was still an incipient trend decades ago, globalization of production sought low-cost labor as a determining factor for the localization of industrial investments. It did not take long for Asia to become the preferred host of global manufacturing. Some time later, rising labor prices and attempts to reduce dependence on Chinese supplies would come into play. These—along with geopolitical issues—elicited a growing revisionism on industrial localization.
Three new factors came into play. The first—and perhaps most important—is the environmental agenda, which seeks to reduce the carbon footprint of products. It seems reasonable to suggest that we are already witnessing the transition from the cost-of-labor globalization of production to a globalization determined by environmental impact. This issue particularly impacts China. The second factor is associated with the war in Ukraine, which raised major security fears, caused significant hikes in energy prices and volatility, fueled cost inflation and enhanced risks of energy insecurity.
Energy price and supply volatility are not expected to normalize anytime soon, which is set to have major economic repercussions globally, but especially in Europe, which is highly exposed to the geopolitical agenda and dependent on fossil energy imports from Russia. To meet its needs, Europe is reactivating dirty-energy power plants and compromising its carbon neutrality commitments. The third factor is the increasing energy consumption in industrial production due to technology advances. These factors are already impacting the rates of return and even the economic viability of industrial plants, and are already prompting multinational companies to reconsider global investment localization strategies.
An immediate reaction to this trend is the nearshoring policy, which advocates the relocation of industrial plants from China to friendly countries, with cheap labor and close to the centers of consumption in the West. But it is “powershoring” that seems to best serve the present and—in particular—future needs and interests of Western economies. Powershoring refers to the decentralization of production to countries that offer clean, safe, cheap and abundant energy, and are close to large centers of consumption, in addition to other virtues to attract industrial investment.
Latin America and the Caribbean (LAC) meets many of the requirements of the powershoring economy. After all, the region is geographically close to North America and Europe and several countries already have clean—or mostly clean—energy matrices, while others are moving along the same path. In fact, the region in general has defined sustainability as a priority source of growth, taking as a starting point its enormous potential in hydro, solar and wind energy, in addition to the enormous potential for energy production from biomass, biogas, geothermal and biofuels.
Many countries are already devising policies to encourage the production of green hydrogen, which can also benefit in the transition from the region’s generous natural gas reserves to combine the two gases, raise efficiency and reduce costs. Estimates indicate that the cost per kilogram of green hydrogen will be very competitive in LAC, a decisive factor to transform the region into a platform for industrial production in general, but of energy-intensive products in particular, such as steel, pig iron, aluminum, glass, cement and cellulose, to mention just a few sectors. In addition to green, competitive and safe energy, the region also offers a wide variety of mineral and agricultural products for industrial use. Furthermore, the region is far away from complex geopolitical issues.
There is no way for developed regions to significantly curb their CO2 emissions without slowing the growth rate of their economies, which could lead to an even slower and politically more costly energy transition. The need to prioritize energy use, Paris Agreement commitments, exposure of industrial production to geopolitical issues and rising costs seem to underline the appeal of LAC for Europe as a partner for energy security and to expedite decarbonization, as well as ensure security of industrial supply and reduce energy cost pressure. The potential entry into force of the Carbon Border Adjustment Mechanism (CBAM) will be an additional appeal for European industrial investments in LAC.
But the benefits of powershoring go both ways. Industrial investments would have significant positive repercussions in the urban areas of LAC, which concentrates the vast majority of the region’s population, informal economy and poverty. In addition, it could benefit small and medium-sized enterprises, have substantial impacts on productivity and competitiveness, generate taxes, exports, and foreign exchange, and help reduce the region’s exposure to commodity cycles that impact economic, social, and environmental indicators. It could also help boost regional integration.
To implement such a project, the region will need a roadmap that fosters foreign direct investment in powershoring. This should include consistent, coherent and sound policies and regulations for the promotion, financing and management of clean, safe and cheap energy, the development of high-quality projects, investments in physical and digital infrastructure to serve industrial zones and export logistics, promotion of investments in professional services companies, worker training, investment facilitation agreements, reduced bureaucracy, legal certainty and a great deal of institutional strength. There should also be progress of the Mercosur-EU agreement and the support of national and multilateral development banks for the financing and reduction of risks and costs of private powershoring projects.
LAC and the EU already have a long history of alliances and shared visions, which further justifies strengthening the transatlantic relationship, which could build on successful experiences, such as the large stocks of direct investment that Europe already has in the region.
Lastly, the high liquidity of the global markets and the search for new businesses and investment destinations are additional elements that suggest that powershoring will be a hot ticket in the coming years.
