Executive Summary
In the context of growing turbulence around the world, Latin America stands out as a region of low geopolitical risk, where most governments, including Brazil and Mexico, pursue a “multi-aligned strategy” that does not take sides. This helps to attract investors keen to diversify their portfolios and increase their resilience.
Brazil positions itself as a key player in the global energy transition, both as a source of critical minerals and a destination of “greenshoring” investments. However, it is also massively ramping up oil production as is set to become the world’s sixth largest producer by 2030.
Mexico gained from its long-standing open trade policy and solid manufacturing base, with the potential to hugely benefit from US nearshoring. It also made progress on reducing inequality, but faces major uncertainties from the US election, the risk of democratic backsliding, and continued domestic insecurity.
Implications for International Business
European firms have the opportunity to capitalize on both Brazil’s and Mexico’s push to diversify both their economies to retain strategic flexibility amidst the risk of a renewed trade war between the United States and China.
Brazil and Mexico are promising business hubs, especially in trade, manufacturing, and renewable energy, though a fragile security situation is unlikely to be resolved.
The ratification of the EU-Mercosur trade deal, increasingly likely by the end of 2024, would create the world’s largest free trade area of 780 million people and facilitate European investments in Brazil.
State of Play
Great power competition and global supply chains shape business opportunities in Latin America
Latin American countries have more relevant economic ties outside the region than within, each engaging with China and the United States on their own terms. As Washington becomes less open and lacks a clear strategy vis-à-vis its southern neighbors, Beijing is advancing, creating new economic dependencies but without crowding out others. European trade and investment is largely seen as less politically fraught, while more unequal trade with China tends to elicit greater fears about deindustrialization.
Nearshoring and shifts in global supply chains are set to produce expansion and a competitive environment in Latin America across sectors such as manufacturing, electronics, automotive, renewable energy, and resource extraction, especially of critical raw materials. The US Inflation Reduction Act is a source of competition for investments in green energy and electric vehicles, particularly in Mexico and in mineral-rich countries. There is nonetheless an open path for European companies for greater engagement in the region, given stable and trusted EU-Latin America relationships, the region’s needs of diversification, and the new opportunity provided by the hoped-for conclusion of the EU-Mercosur free trade agreement this year.
Key Issues Brazil: Multipolarity does not mean diversification
Brazil maintains balanced foreign and trade relations while it seeks to benefit from a more diverse world economy, aiming to become an influential voice in the Global South. While its BRICS membership serves to advance a multipolar order which includes initiatives to seek alternatives to the dollar when trading with countries like China, it also cooperates with OECD countries on numerous fronts and has recently decided not to join China’s Belt and Road Initiative. Within the BRICS grouping, Brazil is, alongside India, the moderating force that opposes the more explicitly anti-Western faction led by Russia, China and Iran.
The Brazilian economy benefits from shifting global supply chains, particularly in the manufacturing and logistics sectors. The government under President Lula actively seeks foreign investment in infrastructure, among others through the New Growth Acceleration Program. It has also pushed through a historic tax reform, though concerns about fiscal sustainability remain. As Brazil strives to lead on environmental sustainability, Europe is an important partner for technology investments and export diversification.
Amid global concerns about food security, Brazil’s agricultural sector is expected to grow, providing opportunities for sustainable agriculture and agri-tech innovations. Already well-positioned in the Chinese market, there will be more diversification efforts to reduce overreliance on China’s demand for agricultural commodities. Total investments from the United States and EU countries, respectively, are larger than Chinese investments in Brazil, but increasing trade dependence on China explain a willingness to diversify and reduce strategic vulnerabilities.
ESG initiatives can find opportunities in Brazil given its renewable energy sector and its global relevance in environmental sustainability. In tech, the country provides an increasing start-up network to be harnessed by foreign firms. Organized crime remains a continuous challenge and threatens to permeate political institutions, though murder rates have recently fallen.
Mexico: Externally driven growth, democratic backsliding and uncertainty over US policy
Amid high domestic insecurity, President Claudia Sheinbaum won a landslide victory promising to continue the previous government’s populist leftist policies. However, many of these – including unfunded social spending, weak human rights protection and the introduction of popular elections for justices – have been roundly criticized by the opposition and investors. Hailed by Scheinbaum as the possibility to build “the true rule of law”, the reforms may pose a risk to the independence of the judiciary and produce legal uncertainty for investors. A politicized judiciary that is vulnerable to criminal groups will make businesses more reliant on personal relations with the government and imply lower prospects of a fair trial, if required. The result of the first cycle of election for the Judiciary in mid-2025 may affect domestic and foreign investments, as will any other measures reflecting or deepening the executive’s uncontested power.
Still, the new government can be expected to be pragmatic, with a strong focus on bolstering Mexico’s role within the North American business sphere. This approach will be put to the test if Donald Trump returns to the White House. The softest baseline scenario includes strict national security measures permeating US economic policy, but more likely is a harsh protectionist approach including steep tariffs. At the same time, the USMCA trade agreement acts as an important constraint on Mexico building out its trade and relationships with China. This could be an incentive for the next US president to renew, possibly with some changes, the trilateral trade deal when it is up for review in 2026. While outgoing president Lopez Obrador doubled down on fossil fuels, Sheinbaum, a climate scientist, can be expected to boost investment in renewable energies and emphasize decarbonization.
As Mexico’s second-largest trading partner with an annual bilateral volume of around US$100 billion, China has an important presence as a supplier in electronics, automotive, and consumer goods. Nevertheless, Mexico offers a diversification destination for European companies, while the latter can help the country reduce its reliance on Chinese imports or investments. Shifting supply chains away from China has the potential to drive Mexico’s growth as a nearshoring hub for trade, manufacturing, and technology, with e-commerce and innovations in cross-border logistics on the rise. Prominent sectors for European firms are the automotive, electronics and aerospace, which benefit from these trends as well as cost-effective operations to serve not just the Mexican but also the US market.