On June 27th, Chinese Premier Wen Jiabao arrived in Santiago for his first official visit to Chile. The stop was the last of his recent, four-country South American tour, which also took him to Argentina, Brazil and Uruguay, and another indicator of deepening economic and political ties between China and Latin America. Upon his arrival in Chile, Wen said “China treats its relationship with Chile from a strategic perspective and will work with Chile to bolster exchanges and cooperation.” The trip was concluded with Wen pledging $10 billion in credit towards infrastructure projects and for a joint initiative to combat trade protectionism between the two countries.
What is China doing in Latin America? This is a big question, and one that is proving to be increasingly important for policymakers and analysts around the world. After all, China’s interest in the world across the Atlantic is barely a decade old – for years if it did have any involvement in the Americas and the Caribbean, it was only to lure its nations away from supporting Taiwan.
This has changed in recent years. Since President Jiang Zemin’s two-week visit to Latin America in 2001, and subsequent trips by Hu Jintao in 2004 and 2011, China’s presence in the region has become a firm reality. In 2003, the year before Hu’s first stopover, China’s annual investments in all of Latin America totaled just over a billion. Today, China is the top trade partner of Brazil and Chile, and the second largest export destination of Argentina, Cuba and Peru. According to China’s National Development and Reform Commission, China had invested almost $45 billion in Latin America by 2010. It is currently the third-largest investor in the region, with 9% of FDI (foreign direct investment); the US is still on top with 17%. Between 2000 and 2008, trade between China and the Latin American region grew at an average annual rate of 31%.
The political forces underlying China’s recent bids are by now fairly clear. In order to maintain the economic supremacy that is has enjoyed for the past three decades – average GDP growth of 9.8% annually from 1979-2009 and a strong showing in 2009 despite global economic collapse – China has undertaken a global search for the natural resources that it needs to ensure sustained growth. By the end of 2011, more than $3 trillion in foreign exchange reserves had been set aside by China’s leaders to assure its continued acquisition of primary commodities around the world. This search has extended from South-East Asia to Africa, Latin America and even Iceland (Wen Jiabao met his Artic counterpart, Johanna Sigurdardottir in April of 2012). Efforts to ‘purchase’ political stability at home through foreign investment will likely become even more frequent as China approaches its next leadership transition in the fall.
Nevertheless, unlike China-Africa relations, which have raised more than a few questions from concerned countries in the West, Asia-Pacific (AP)-Latin America (LAC) trade may actually result in a win-win situation for both regions. In May of 2012, Fitch Ratings released a special report stating that Latin America has generally benefitted from China’s economic rise through increased bilateral trade, FDI and commodity-backed loans (Close-Up Media, Inc., 2012). China’s growing trade and investment with Latin America have also helped cushion the latter against weaker export markets in both Europe and the US as a result of the recent global recession. Seeing as how both the AP and LAC regions stand to lose from a disorderly sovereign debt default in Europe and rising oil prices (a report released by the UN Economic and Social Commission for Asia and the Pacific (ESCAP) in May of 2012 held that a $25 hike in international oil prices would reduce growth in AP by at least 0.8% that year) improved bi-lateral relations will be crucial for their continued growth.
As China continues what has become the largest urbanization drive in history, it will only need more food to satisfy the appetites of a population that its scarce resources already fail to fully nourish. The emergence of a burgeoning middle class in China will only exacerbate this food demand, as increased wealth traditionally leads to demands for food in wider varieties. Queue in Latin America’s clean water and arable land, and we have a match made in heaven. For its part in helping to satisfy China’s insatiable appetite for raw materials and commodities, Latin America is paid handsomely: FDI, loans and endowments for infrastructure building flow freely into the region from the East. Although 85% of Chinese FDI and 60% of its loans are funneled into extractive industries, the money has nevertheless allowed finance-constrained firms in LAC to undertake large energy and infrastructure projects that would not have been possible otherwise. Furthermore, we really cannot stress enough the importance of China’s role in shielding LAC from Europe’s renewed austerity. In addition to weakened demand for exports, many of Europe’s top banks have reduced lending to Latin America as part of their attempts to weather contractions back home. For example, Spain’s Santander bank has large operations in Brazil, and is the #1 bank in Chile. Barring stimulus from AP, sizable credit cuts could seriously hamper growth initiatives in the region.
The key challenges that China and Latin America face now lie in increasing the scope of their co-operation without LAC countries perceiving themselves merely as food for the hungry Dragon. Those countries that do have an abundance of natural resources would like to escape the China-trap of commodities-for-manufacturing goods trading, either by producing their own manufacturing exports or by expanding into more diverse industry. For those countries not in the Southern Cone (i.e. Mexico, Central America), which supplies approximately 90% of LAC’s exports to China, the issue is more one-sided. Without any commodities to offer China, they gain little and lose much by having to compete with low-priced Chinese imports. These have triggered both resentment from the local populations, and calls for protectionist measures to be introduced. In order to find a healthy medium, efforts must furthermore be undertaken to diversify composition of trade. Although LAC imports a wide range of manufacturing goods from China, almost 80% of exports heading East account for only 10 different products: Soya beans, copper and alloys, iron ore and concentrates, petroleum and oils, crude oil, paper pulp, flours, meals and fish, iron ore, copper waste and lead ore (IDB 2010).
In addition to diversifying trade, efforts must also be made to reduce trade costs between AP-LAC, which are currently much higher than OECD norms. Although average tariffs on exports were reduced from 40-50% in 1980 to just under 10% in 2010, most exporters in LAC and China still face double-digit tariffs on virtually all of their goods. Particularly high tariffs on manufacturing goods and agriculture will further hinder attempts by LAC to expand beyond commodities-based trading. Elevated trade costs are also influenced by the presence of Non-Tariff Barriers on both sides, which, although they are not ‘official’ tariffs, have similar effects once enacted. Typical examples include anti-dumping measures (predatory pricing policies where a country charges less for a good in foreign markets than it would in its home country) and countervailing duties (when an exporting country is found to subsidize its goods at the expense of the importer’s domestic producers). Even though China has made significant efforts to remove NTBs since its WTO entry in 2001, it still levies sizable quotas on LAC’s agricultural exports (of which the money is sent to state companies). On LAC’s part, the goodwill that accompanied China’s WTO entry has actually deteriorated in recent years: rather than afford China market economy status, many countries have begun to rely upon the WTO’s China-specific antidumping and safeguard provisions, which are generally more severe. To address these concerns, China must continue to improve bilateral relations with the countries of the LAC region by signing Free Trade Agreements (FTAs) such as the ones with Chile, Peru and Costa Rica (2005-2010). Efforts should center around countries like Brazil, Argentina, Colombia and Mexico – those that stand to lose most from aforementioned competitive Chinese manufacturing imports.
Finally, China-LAC’s weakest area of cooperation seems to be investment, on both sides. Although Chinese investment in LAC has been steadily rising since 2001, it only represented 0.3% of worldwide Chinese FDI on average between 2005-2010. Like trade, investment is heavily concentrated in Brazil (41%), Argentina (11%), Peru (12%) and Chile (2%), in order to extract resources more efficiently from mines and agricultural land (IDB 2010). Despite signs of increased outwards investment beginning in 2010 (China announced initial investment projections of US $15.6 billion in the LAC region), new stimuli have not been accompanied by major sectoral shifts. Burgeoned by Mexico and Brazil, LAC’s FDI abroad still surpassed that of China as of 2010. Nevertheless, its FDI in China is still modest, irregular, and accounts for less than 1% of investments abroad. Furthermore, nearly 40% originates solely from Brazil.
Ultimately, China and Latin America must overcome certain, key challenges, as they move forward with what appears to be the framework for a long-term relationship. This relationship extends beyond mere economics: Latin Americans have begun attending Chinese language classes in droves, and Confucius Institutes throughout the region are fast becoming a normal sight. More bilateral trade agreements must be signed, cooperation must extend beyond the realm of commodities vs. manufactured goods, LAC firms should establish a larger presence within China, and likewise a larger, more diverse portfolio of Chinese investment in the LAC region should be created as well. Although bringing down the costs of trade is important, it is equally important to remember that trade costs will not be the end-all, be-all of this complex regional partnership. Nevertheless, both parties have demonstrated a willfulness to cement future agreements, and recent policy initiatives hint at a bright future for China-Latin America relations.