China Power

China and Latin America: Big Business and Big Competition

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China Power

China and Latin America: Big Business and Big Competition

China is becoming a major player in Latin American and Caribbean economies.

Despite a slowdown in China’s impressive economic growth, the People’s Republic of China (PRC) now ranks as the world’s second largest economy.  A byproduct of this rapid expansion has been China’s search for new markets and resources to sustain its economic growth. While there has been much analysis of its activity in Africa and Central Asia, another region of growing importance for China is Latin America.    

It is not without serious challenges or difficulties that Latin America and the Caribbean (LAC) are gradually emerging as a region of stable economic development. Although LAC is not a single country, many of its independent states have an abundance of natural resources and emerging manufacturing and service sectors that are projected to achieve solid growth  in the coming years.

Latin America’s prospects have attracted serious attention, especially from Chinese firms and policymakers keen to benefit from growing opportunities and access to raw materials in LAC. Under President Hu Jintao China deepened its ties with Latin American countries through initiatives like the 2008 Asia-Pacific Economic Cooperation (APEC) summit in Lima, Peru. China’s new President, Xi Jinping, is also no stranger to the region after having made several state visits there as vice president.

According to Barbara Stallings, Chinese exports to Latin America grew substantially from U.S. $6.9 billion in 2000 to U.S. $69.7 billion in 2008; while LAC exports to China increased from U.S. $5.3 billion in 2000 to U.S. $70.3 billion in 2008. However, despite these dramatic increases of 910 percent and 1,226 percent, the United States and the EU are still ahead of China in terms of trade flows with Latin America.

China is quickly catching up to many of LAC’s traditional trading partners, however. Already China’s trade numbers with LAC have surpassed those of Japan, the previously dominant Asian trading partner for Latin America. What is most significant about these developments overall is how rapidly Chinese businesses and organizations have expanded their activity in the region – a trend that continues to grow.

In terms of foreign direct investment (FDI), a study by Enrique Dussel Peters found that Latin America received 11.41 percent of total Chinese FDI from 2000-2011 – making the region the second largest recipient of Chinese FDI behind only Hong Kong. Echoing the speed of the trade increases above, Chinese investment in Latin America jumped from 1 to 9 percent of total FDI in LAC from 2008 to 2010; thus making the PRC the third largest investor in Latin America behind only the Netherlands and the United States that year. These investments come in addition to massive loan credits which, according to a report by researchers at Tufts University, have topped U.S. $75 billion since 2005 and may account for approximately half of the PRC’s lending abroad from 2009-2010.

The results of this expanded Sino-Latin American economic relationship have been mixed. Much of the trade, investment, and loans from the PRC have been focused on the countries, companies, and infrastructure that underpin the extraction of natural resources and other commodities in the region. This has been good news for the large agricultural, mining, and energy industries of Latin America, as well as for countries like Chile and Venezuela. On the negative side, however, this has raised questions about Latin American dependence on resource exports and the specter of Dutch disease.

Another adverse effect is the growing resentment among some Latin Americans in some sectors that have been increasingly displaced by China’s industrial or manufacturing exports to LAC. Mexico has been among the hardest hit among countries in the Western hemisphere as its large industrial base has struggled to compete with Chinese manufacturing in a diminished, post-financial crisis U.S. market. Chinese exports to Mexico have also undercut indigenous industry and resulted in a substantial trade deficit.  

China’s competitiveness has complicated the Sino-LAC honeymoon period in recent years. Most notably, Brazil’s government has been forced to manage a sensitive balancing act, fostering lucrative relations with China while addressing the frustration of Brazilian manufacturing industries that struggle against cheaper Chinese goods. Labor movements and environmental groups have also begun to take a stand against the extractive industries of countries like Peru and Chile, whose exports and growth are tied closely to the PRC’s demand for resources.

Despite these issues, recent external and internal developments may be creating an opportunity for the region to balance its growing economic relations with China. Notably, China’s comparative advantage may be eroding due to increased production costs and Beijing’s desire to lead its economy toward higher-end manufacturing and domestic consumption. If this trend continues, it would help beleaguered Mexico, whose security and political problems may finally start to improve and give Mexican industries a chance to compete on the global stage. Using targeted policies, other countries with manufacturing sectors may benefit from China’s economic restructuring.

In terms of development overall, alarmism about China keeping LAC economies dependent on natural resources is overblown. As Latin America continues to grapple with deficits in infrastructure, education, and social mobility, the question about whether growing economic ties with the PRC will be a burden or a key opportunity lies in the actions of Latin America, not China. The central issue is about governance: those countries that benefit over the long term from the current commodity boom will be the ones most judicious when it comes to future investments and industrial policy. Fighting corruption is difficult anywhere, and Latin America is no exception. As democracy deepens and middle classes emerge in the region, new stakeholders will hold governments accountable. 

As Latin America continues to develop, China will undoubtedly play a significant role in its progress and advancement. There will continue to be cases of cooperation and competition between LAC countries and the PRC as their relations mature – but as long each side has much to offer the other, the people of both Latin America and China have a lot to look forward to in the evolution of their “South-South relations.”

Sebastian Sarmiento-Saher is an editorial assistant for The Diplomat.