Enter the Dragon – the Rise of China in Latin America

July 30, 2014

What’s happened?

China has dramatically increased its presence and influence in Latin America. Since the turn of the millennium Chinese investment and bilateral trade – and to a lesser extent its political influence – in Latin America has grown massively. From 2000 Latin American exports to China have grown by an average of 23% per year – hitting $130billion in 2013. The return trade has also rocketed with Chinese exports to Latin America and the Caribbean worth $140billion in 2013. As a result China has now overtaken the US as the main trading partner for many Latin American countries, including Brazil. Chinese foreign direct investment (FDI) to Latin America has also grown rapidly to $9.2billion. Meanwhile Chinese government loans provide crucial support for governments, such as Venezuela or Ecuador, that have more difficulty raising money from Western institutions or international capital markets.

Why is this happening?

The driving force behind Latin America’s exports to China is – unsurprisingly – commodities. China’s economic growth has been sustained by remarkably high levels of investment on fixed assets such as roads, airports and housing.

China wants Latin America's natural resources That has required enormous amounts of copper, oil and iron ore, which Latin America has in abundance. Rising living standards and the subsequent growing bellies of China’s emerging classes is another theme, with soy beans another of Latin America’s top exports to China. Meanwhile Latin America’s decade of prosperity made it an increasingly important market for Chinese manufactures – especially when the Financial Crisis hit demand in the developed world. As for the rising FDI and government loans, that is part of a wider trend where a richer China is looking to make strategic investments outside its borders. Unsurprisingly the majority of Chinese FDI in China is concentrated on agriculture, mining and energy products.

Is there a geo-political angle?

While most of the relationship is driven by economic necessity there are some political elements to it. China’s decision to fund an ambitious $40billion inter-oceanic canal in Nicaragua, would appear a direct challenge to America’s long-established hegemony in Central America. At the very least it’s an attempt by China, which is now the world’s number one trading nation, to control some of the international shipping infrastructure on which it depends. Its offer of military expertise and exchanges with Colombia, Chile, Mexico and Brazil can also be seen as a counter measure to the US policy in Asia where it has strengthened military ties with Japan, Thailand, South Korea, Australia and Vietnam. Likewise China’s support of embattled anti-Western regimes, such as Venezuela, show that it’s willing to offer an alternative to the ‘Washington Consensus’ in the region. Less dramatic, but just as telling, has been the projection of Chinese soft power in Latin America. It has opened 32 Confucius Institutes in Latin America and created Spanish language versions of its state-controlled TV, news websites and even soap operas.

Are there any potential problems to this new relationship?

There could be. For starters it’s worth noting that the trading partnership is not an equal one. China exports more to Latin America and the Caribbean than it receives in imports, with the region running a trading deficit of around $10billion a year. Another problem is that Latin America’s exports to China are concentrated in raw materials – copper, oil, soy and iron ore – while in return China sells it manufactured goods. This is an age-old challenge for Latin America but what’s striking is that this situation is most extreme when it trades with China. Around 40% of Latin America’s total exports are manufactured goods, but when it comes to trade with China that figure drops to just 13%. Given that most Latin American policymakers are trying to diversify their economies away from commodities it would seem that increasing trade with China is counter productive.

Latin America has recieved an influx of Chinese investment

Latin America has recieved an influx of Chinese investment

Another worry is that while Latin America’s exports to China are concentrated around a few products, China sells it a wide range of goods from various sectors. This makes it an unequal relationship, says Professor Kevin Gallagher from BostonUniversity, because “while LAC exporters are dependent on a few commodities prone to large price swings, Chinese exporters do not have that same vulnerability in their relationship  with Latin America and the Caribbean.” This has been borne out in recent years as falling commodity prices have hit Latin American economic growth and created a trade deficit with China.

Moreover, having an unequal economic relationship can lead to an unequal political one, says Professor Gian Luca. Gardini, University Erlangen-Nürnberg, Germany. “In 2010 Argentina discovered the downside of depending so heavily on China. Imports of cheap Chinese shoes were decimating the Argentine shoe industry but when Buenos Aires tried to restrict their entry Beijing was quick to warn that it would retaliate in the soy sector. Given that the Chinese trade is far more important to Argentina than vice versa, it had to back down. This is just one small example but it may prove a warning for the future.” Finally it’s worth noting that the relationship with China differs within the region. For example, for Mexico and the Central American countries, which are more dependent on manufactured exports, China is a natural competitor.

But surely all this extra trade and investment is a good thing?

On the whole yes. Despite the issues mentioned above, the rise of China has helped fuel a decade of outstanding growth in Latin America. Many of the criticisms or inequalities that exist with China just mirror earlier problems with Europe or the US and ultimately having one more trading partner should allow Latin America to diversify its markets. Latin American countries and economies now have a healthy choice of financing options, trade partners and export markets. On the political side China has been noticeably less interfering than Europe in its pomp or America in the 20th Century. In fact given the appalling record of the last two in financing wars and supporting dictatorships in Latin America, the rise of China has been remarkably peaceful. It has also gone out of its way to make overtures to Mexico and Central America – the Latin American countries that might have most to fear from its rise. The key for Latin America will be if it can diversify its exports to China and begin sending manufactured goods.