Will China’s New Silk Road Reach Latin America?

June 6, 2017

Chile and Argentina have had their fair share of spats but both countries clearly agree that China’s new ‘One Belt, One Road’ initiative is important for Latin America. The presidents of the two southern cone neighbours were present as China launched the infrastructure and trade programme with great fanfare in Beijing in May. The real focus of the scheme, which is also known as the Silk Road Economic Belt, is improving transport links between Asia, Africa and Europe. However, many analysts believe that if it succeeds in redrawing the global trade map it will create opportunities for Latin American exports to find new markets in Asia. There is also talk of a trans-pacific fibre-optic cable to link the two regions, while China is keen to finance tunnels, roads and railways that will help bring goods from countries on Latin America’s Atlantic Coast to China. It might seem a long way off now but it is worth noting that China has already made significant inroads into the region.

The start of the 21st century was good for Latin America. In a period that analysts now refer to as ‘Latin America’s golden decade’ most countries in the region enjoyed strong GDP growth and a massive reduction of poverty from between 2003 to 2013. Less widely observed was that this was also the start of an unprecedented close relationship between Latin America and China. And while the golden decade may have ground to a halt, China’s presence Latin America continues to grow.

China’s trade and investment with Latin America grew exponentially from the year 2000. Latin America’s exports to China reached a peak of more than $120billion by 2012 from less than $5billion in 2000. The region’s imports from China followed a similar trajectory, meaning that the total balance of trade is now worth around $230billion a year. For several major Latin American economies, such as Brazil, Argentina, Chile and Peru, China has now replaced the US as the main trading partner. This represents a significant challenge to the economic hegemony that the US has enjoyed in Latin America since the decline of the British Empire in the Second World War.

More than just a trading relationship

Latin American commodity exports to China are nothing new. Indeed China was so dependent on Mexican and Peruvian silver for its currency that rising Latin American production in the early 17th century caused an inflationary spiral that contributed to the eventual overthrow of the Ming dynasty. However, the key difference this time around is that the Latin American exports have been matched by a similar level of Chinese imports.

Another difference, and a vital element of the expanding relationship, has been the growing significance of Chinese investments in Latin America. China’s stock of foreign direct investment (FDI) in Latin America jumped from less than $1billion in 2005 to almost $13billion today. Much like Latin America’s exports, these investments are heavily linked to the commodities business, which explains why the FDI stock has levelled off since 2013. At a recent Canning House event on China, Rhys Jenkins, professor at the University of East Anglia School’s of International Development, noted that while there are discrepancies between different information sources for the FDI statistics, so the exact numbers should be treated with caution, however, the overall trend is clear to see.

China’s stock of FDI in Latin America jumped from less than $1billion in 2005 to almost $13billion today…

The final strand of China’s increased presence in Latin America is the massive uptick in its loans to the region.  There is no doubt that there has been a huge increase although again the exact numbers must be handled with caution as many loans are opaque deals with governments, such as Venezuela, that have poor financial transparency standards. Another useful measure, says Prof Jenkins, is to track the value of engineering and construction deals completed by Chinese firms in Latin America. On one hand it gives a sense of China’s ‘boots on the ground’ and physical presence in the region but it also alludes to closer forms of financial cooperation as most of the construction projects built by Chinese firms are the result of some type of bilateral deal that has been financed by the Chinese state.

In total China is responsible for 16% of Latin America’s imports, 10% of its exports and just 5% of its FDI, says Professor Jenkins. So the relationship is still dominated by trade. However, the FDI and loan elements are growing.

Is this good for Latin America?

Falling commodity prices may have caused trade and investment values to level off in the short term, but China’s presence in the region is set to grow. Frequent visits from the Chinese government to Latin America, such as Xi Jinping’s recent tour of Chile, Ecuador and Peru, show that the region is a priority for the world’s second-largest economy. The direction of the latest China-CELAC Cooperation Plan for 2015 to 2019 is also a clear indicator of China’s Latin American ambitions, says Professor Jenkins. It calls for an increase trade to $500billion over the next ten years and for investment to rise by $250billion over the same period.

China’s Latin America focus makes perfect sense. After all the region is a major exporter of the natural resources that the world’s most populous nation will need to feed its people and supply its industry in the coming century. China’s political culture, where the lack of elections allows leaders to have a more long-term vision of national interest, means that its leaders understand the long-term strategic value of Latin America’s resources. Likewise the region offers plenty of geopolitical advantages. Recent deals, such as China’s new satellite tracking station in Argentina, demonstrate that Latin America gives China a chance to retaliate to the string of US military bases in Asia that encircle China. The region is also home to 12 of Taiwan’s 22 diplomatic supporters, which means that having Latin American friends can help China chip away at the island’s sovereignty.

The challenge for Latin American policymakers and businesses is to handle the entry of China with care….

For Latin America the increased Chinese interest is definitely a positive trend albeit with some important caveats. One problem for Latin America is that the trade relationship isn’t equal. The region currently has a trade deficit of around $20billion with China. That weakness is structural because Latin American exports are concentrated around a few raw materials – oil, minerals and soybean – while China has a much more diversified export basket that is less vulnerable to price falls in a particular sector. The huge influx of cheap Chinese manufactured goods is also a mixed blessing. On one hand the proliferation of low price Chinese-made motorbikes or air conditioning units, for example, allows poorer Latin Americans to enjoy material benefits that were hitherto unattainable. However, there are also signs that these imports are hollowing out Latin America’s industrial production. A study by Boston University found that trade with China generated 17% fewer jobs per dollar’s-worth of exports than did trade with other countries.

The challenge for Latin American policymakers and businesses is to handle the entry of China with care. For example, there is a certain irony that the stridently ‘anti-imperialist’ Venezuelan government has rejected the US only to end up in hock to the world’s other superpower. Nonetheless China’s increased presence in the region is a huge opportunity. On a geopolitical level it gives governments more options than when the US was the sole power in the region. While on a business level the flood of Chinese cash, companies and export opportunities will drive economic growth. For UK investors and businesses in the region, China’s entry is also broadly positive. Of course Chinese firms represent added competition but this is outweighed by the fact that China’s increased presence will create more options for UK companies looking to finance, partner or exit deals in the region and, over the long-term, it should help to boost Latin American asset values.