Geopolitical Unrest in South America
and its Impacts on Supply Chains

Geopolitical Unrest in South America
and its Impacts on Supply Chains

Executive Summary

  • Over the past two months, a wave of massive protests has severely impacted South American nations and caused substantial supply chain disruptions across Ecuador, Bolivia, Chile and Colombia. 
  • Protesters across the region have targeted major highways, production facilities (mainly copper and oil refineries), ports, and airports to disrupt cargo transportation, halt industrial production, and force governments to respond to their concerns.
  • Although the causes of mass protests in South America are related to country specific issues, the common thread that leaders have been forced to face is the need to strike the right balance between implementing fiscal reforms and protecting social safety nets.
  • Despite efforts by South American leaders to pacify citizens’ concerns through incremental changes, it is likely that violent protests will persist into 2020.
  • In order to mitigate risks associated with the protests, customers should monitor updates on policy changes and protests, identify key locations in affected areas and anticipate alternative routes or modes of transportation. 

Background

Over the past two months, a wave of massive protests has severely impacted South American nations and caused substantial supply chain disruptions. Protesters across the region have targeted major highways, production facilities (mainly copper and oil refineries), ports, and airports to disrupt cargo transportation, halt industrial production, and force governments to respond to their concerns. Although demonstrations were contained within territorial borders, the nationwide protests occurred almost simultaneously and in close proximity to one another leading to a region wide crisis that significantly interrupted international trade and cross border ground and maritime transportation. This report will outline the recent impacts that civil unrest had on supply chains in Bolivia, Chile, Colombia, and Ecuador and whether or not these are likely to continue into 2020. The report will also look at the potential for unrest in Argentina under its newly elected president.   

Following the end of a commodities boom (from the early 2000s-2014), which saw the prices of commodities like oil and metals steadily increase thanks to growing demand from emerging economies like China and India, many South American countries experienced stagnating wages, increased poverty, and a reduction in social mobility. Gains made during the boom proved to be short lived and created an environment where any fiscal reform that even slightly impacted workers’ wallets could elicit a strong backlash. In Ecuador, the elimination of fuel subsidies sparked violent demonstrations. A few days later in Chile, students took to the streets after the government announced a 30 peso increase in metro fares and the demonstration grew into a massive movement against income inequality. After the October 30 election results gave Bolivian president Evo Morales a fourth term, citizens rioted in the streets over allegations of electoral fraud. 

In Colombia, a nationwide general strike on November 21 against the government of Ivan Duque turned violent as clashes between protesters and police erupted near the Bogota airport. The massive demonstration was initiated after the government proposed to cut pensions a few weeks prior. Elections in Argentina, the regions’ second largest economy, have the potential to reshape the continents’ trade outlook as President-elect Fernandez has expressed skepticism over Mercosur, South America’s trading bloc, and it’s free trade agreement with the European Union. 

Although the causes of mass protests in South America are related to country specific issues, the common thread that leaders in the region have been forced to face is the need to strike the right balance between implementing fiscal reforms to help the economy and protecting or enhancing social safety nets. Deals with the International Monetary Fund (IMF) have proven to be particularly unpopular and have played an important role in the persistent demonstrations in the region. The increasingly disruptive unrest in South America has stopped Brazilian president Jair Bolsonaro from implementing planned reforms out of fear that the demonstrations will spread to Brazil. Although civil unrest has nearly paralyzed the continent, maintaining a resilient supply chain in South America is achievable if organizations can implement the right strategies, which includes full visibility of your company’s supply chain and monitoring early signs of potential supply chain disruption.

Ecuador – Roadway Disruptions and Oil Production Force Government to Relocate

Beginning on October 3, thousands of protesters filled the streets in major cities throughout Ecuador to denounce newly implemented austerity measures, which included the elimination of fuel subsidies as part of a deal with the IMF. The main highway into the capital city Quito was cut, forcing the government to relocate to the coastal city of Guayaquil. Over the course of the protest, major roadblocks and demonstrations occurred in the cities of Quito, Guayaquil, Cuenca, and Santo Domingo, and the northern provinces of Esmeraldas and Carchi causing significant disruptions to cargo transportation. Retaliatory action between the police and protestors led to arrests and violent clashes throughout Quito. In response to the escalating demonstrations, President Lenin Moreno declared a nationwide state of exception on October 4. In Guayaquil, all ground transportation connections with major cities were cut as well as access roads to the Port of Guayaquil.

On October 9, state oil company Petroecuador declared force majeure on crude oil export following protests that halted operations at its Trans-Ecuadorean Pipeline System (SOTE). Petroecuador officials stated that anti-government protests had cost the company USD 3.4 million (EUR 3.05 million) per day since October 3 and from October 7 to October 13, Ecuador lost 1.5 million barrels of crude oil production. The riots finally ended on October 13 after indigenous leaders struck a deal with president Moreno to reinstate fuel subsidies. Although the protests have ended, tensions remain high in Ecuador as some austerity measures remain in place and president Moreno is still in office. Given the tension between citizens and the government and volatility in neighboring countries, there continues to be a moderate risk of widespread protests in the short to medium term. 

Chile – Strikes in the Maritime and Mining Sectors Impact International Trade

Protests in Chile erupted on October 18 after the government raised the price of metro fares by 30 pesos, reflecting Chileans’ frustration with severe inequality in one of South America’s most stable and prosperous nations. As the demonstrations intensified, the government issued a state of emergency and President Pinera pledged a state subsidy to increase the minimum wage from 301,000 to 350,000 pesos (USD 434) a month and to draft a new constitution in 2020. Despite the president’s concessions, protests continued throughout the country. Major roads and highways were impeded, port workers strikes paralyzed maritime freight handling and transportation, and the country’s copper mine workers union joined the strike, threatening the country’s crucial copper supply. 

Two nationwide port strikes were called during the general strike, one on October 23 and one on November 4. Approximately 6,000 port workers joined the national strike on October 23, including at the nation’s largest container ports, Valparaiso and San Antonio. A total of 20 ports throughout Chile stopped operations which paralyzed domestic and international ocean freight. Several vessel companies were forced to cancel Chilean port calls and redirected shipments to primarily Peru or Colombia. The disruption was exacerbated by simultaneous protests in neighboring countries, such as Bolivia, Colombia, and Ecuador, which also affected port operations and led to region-wide shipment delays, in particular affecting the country’s fruit exports at the height of the harvest season. 

The Copper Workers Federation (FTC) joined the strike on October 23 which shut down the Andina copper mine. Chile’s state miner Codelco, the world’s top copper producer, said it had maintained production despite the general strike. Several of Chile’s private mining companies, including BHP Group, Lumina, Anglo American and Teck Resources were also forced to halt production during the strike. Production resumed on October 24, however, further disruption to production may occur on short notice given the volatility of the protests.

As of this writing, protests in Chile are ongoing and continue to erupt spontaneously throughout the country. Further domestic and regional supply chain disruptions should be expected going into 2020, especially if port workers were to organize another strike. 

Bolivia – President’s Resignation Leads to Persistent Disruptions

Bolivia held elections on October 20 which resulted in President Evo Morales winning a fourth term. Allegations of electoral fraud quickly followed after the Organization of American States (OAS) raised questions over the integrity of the results. Citizens protested to demand Morales resign and to call new elections. The first round of demonstrations reached its peak when workers from the International Heavy Transport sector joined the protest and closed all the country’s borders. Cargo trucks carrying export products were not able to cross borders leading to an approximate USD 12 million loss per day. 95 cargo trucks were held in Santa Cruz during the blockade. Morales agreed to hold new elections, however, the military forced him to resign and flee to Mexico where he was given asylum. The Senate’s second vice president, opposition politician Jeanine Anez, called a legislative session on November 12 to formally accept Mr. Morales’ resignation and choose an interim replacement. Under the plan, she would take temporary control of the Senate, making her next in line for the presidency. This sparked a second round of protests, this time made up of indigenous Morales supporters who demanded his return and the resignation on Jeanine Anez. 

Morales supporters blocked the major Senkata petroleum plant for several days until the military used forced to gain access to the plant on November 20. Reports indicated that at least five people were killed during the confrontation and thirty more were injured. Central Obrera of Bolivia (COB) union workers, and its influential affiliate, the Federation of Bolivian Mine Workers, joined the strike in La Paz and warned they will continue the demonstration until a solution to the political uncertainty was resolved. Shipments to neighboring countries have been impacted, with roadblocks across the country having been strengthened. The situation has been compounded by continued closures of borders with Brazil and Paraguay, as well as port disruptions due to protests in neighboring Chile.

Further protests and violent clashes are likely to occur, and continue to pose a threat to ground and air freight movements. Shippers with cargo in Bolivia are advised to stay abreast of the latest developments near at-risk areas, including El Alto, Sucre, Santa Cruz and Cochabamba, and be mindful of the possibility of escalating protests in connection to the upcoming elections.

Colombia – Highway Blockades, Aviation Strike, and Border Closures Cripple the Country

On November 21, a nationwide general strike began in Colombia where students, unions, and indigenous groups filled the streets of major cities including Bogota, Barranquilla, Cartagena, Medellin, and Cali. The protesters halted traffic on major highways and interrupted trade. Most notably, the Civil Aviation Workers Union participated in the strike which reduced services by 50 percent. Approximately half of the union’s 3,000 members, including air traffic personnel, technicians, aeronautical information and administrative personnel took part in the protest. The general strike was organized to protest against a slew of economic reforms that the president has implemented including eliminating the state pension fund, increasing the retirement age, and refusing to raise the minimum wage. Other groups joined to pressure the government to commit to the peace agreement with the FARC.

Indigenous groups joined the protests over concerns of oil exploration and extraction between the Andes Mountains and the Amazon Basin in the country’s south. The groups blocked the highway that connects Colombia’s main port with the rest of the country for 12 days. In an effort to mitigate the impact of the demonstrations, President Duque closed all land and river border crossings that separate Colombia from Ecuador, Peru, Brazil, and Venezuela from November 19 to November 22. Once the borders reopened, the crossings, which include 12 points, were reinforced with migration officers to avoid congestion. The Duque administration also wanted to prevent foreigners from entering the country with the intention of disrupting public order and security during the nationwide general strike, which was a concern in Bolivia. The combination of major highway blockages, an aviation worker strike, and the closing of all borders paralyzed Colombia’s domestic and international supply chains.

Protesters have promised that they will continue to demonstrate into 2020 if their demands are not met. Supply chain disruptions are therefore likely to continue, with potential targets including ports, airports, highways, and oil production.

Argentina- Future of Mercosur Remains Uncertain as Peronism Returns

In addition to the ongoing civil unrest in the region, the recent elections in Argentina also have the potential to complicate the flow of goods throughout South America. As Alberto Fernandez and his running mate, former president Cristina Fernandez de Kirchner, defeated incumbent president Mauricio Macri, many fear that the Peronist victory will bring back the isolationist policies that characterized Cristina Fernandez de Kirchner’s presidency. The duo are now responsible for negotiating the terms of the IMF bailout, maintaining the Mercosur-EU trade deal, and mending the fractured relationship between Argentina and its main trading partner, Brazil. Mercosur is South America’s main trading bloc with the purpose to promote free trade and the fluid movement of goods, people, and currency.

South American manufacturers, especially in the automotive sector, are wary of the Mercosur-EU trade deal as they have historically been protected from European competition by high tariffs. The future of Mercosur and more generally the EU-Mercosur agreement largely depends on decisions made by Argentina and Brazil. While Fernandez has not explicitly condemned the deal, he expressed skepticism that the accord would benefit Argentina’s national interest. The deal can only come into force with the consent of the constituent’s legislatures. With the recent election results, the fate of the accord in Argentina is yet to be determined.

The Peronist victory marks a shift away from austerity measures implemented by Macri which failed to reduce unemployment and stabilize inflation rates. Economic distress paired with an unpopular USD 56.3 billion (EUR 51.05 billion) IMF deal and accompanying austerity measures sparked several protests and demonstrations, particularly in the cargo transportation sector. Dozens of strikes have been recorded at ports, airports and on highways since former President Mauricio Macri’s election in 2015 and have had a considerable impact on the country’s flow of goods and supply chains. Civil unrest in Argentina will largely depend on how the new administration negotiates the terms of the IMF deal and if Fernandez fulfills his promises to protect social safety nets. Customers are advised to monitoring the situation in Argentina, especially during the renegotiations of the IMF package which is expected in 2020. 

Recommendations

Political upheaval in South America will likely continue into the new year, especially in Bolivia, Colombia, and Chile. The 2019 protests in the region have shown to have a contagion effect as one nationwide protest in Ecuador spread rapidly to neighboring countries causing severe supply chain disruptions throughout the continent. 

Despite efforts by South American leaders to pacify citizens’ concerns through incremental changes, it is likely that violent protests will persist into 2020. Chilean President Pinera has replaced a third of his cabinet in an attempt to appease protesters but demonstrations continued. Similarly, following the removal of Bolivian President Morales, nationwide protests continued as his supporters demanded his return. There is a region wide sentiment of distrust towards political leaders stemming from increasing inequality and corruption within governments and discontentment with fiscal reforms, especially those tied to IMF stimulus packages.

The major risks that customers should consider during the regional unrest are disruptions to key supply chain locations such as ports, airports and border crossings as well as production at oil or mining facilities. In order to mitigate risks associated with the protests, customers are advised to: 

  • Monitor updates on policy changes and protests: Often related to budget cuts to social programs or price increases on services, the majority of protests in South American countries are unplanned and tend to spread to neighboring countries rapidly. Receiving near real-time alerts can reduce organizations’ response time to critical situations and provide a competitive advantage. 
  • Identify key locations in affected areas: As part of a proactive approach, customers should know which links in their supply chain might be most exposed to civil unrest events in South America. This will help prioritize when planning mitigation efforts, such as diversifying supplier, manufacturing, and distribution locations. 
  • Anticipate alternative routes or modes of transportation: Companies should identify alternative routes into or out of key markets in case of disruptions. Identifying alternative ports of entry such as container terminals or border crossings will mitigate the risk of shipment delays and potential demurrage or detention costs. Having back-up capacity for emergency air freight shipments in place can be critical to avoid potential production downtime or unmet customer deliveries. 

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