China’s Evolving Relationship with Latin America

Global Centre Stage

The China-Latin America relationship has grown more complex in recent years. In addition to China’s search for markets, and its energy and food security calculations, the relationship is increasingly being shaped by the country’s political and geo strategic objectives and progress toward implementing critical economic reforms, writes Margaret Myers

The Chinese government first implemented its ‘going-out’ strategy in 1999. The policy encouraged firms to go abroad in an effort to promote the export of goods and services, supplement China’s supply of natural resources, and foster the development of China’s multinational companies. The China-Latin America relationship has grown more complex in recent years as an increasingly diverse group of Chinese firms, lenders, and investors engages the region. For the most part, however, Chinese entities are still operating according to the country’s ‘going-out’ objectives and what has, until now, been a limited set of foreign policy interests, including Taiwan-related political competition and support for China’s interests in international organisations.

Economic Dimension

More than a decade after the ‘going-out’ strategy was first promoted; Latin America continues to be a growing market for Chinese exports. The region was a critical destination for Chinese exports following the 2008 global financial crisis and resulting decrease in demand from Europe and the United States. Chinese exports to Europe fell 9 percent in 2011 in comparison with export levels in 2010, and exports to the United States fell 5 percent.

Seven years after the crisis, Chinese trade and investment in Latin America and the Caribbean (LAC) is still booming, despite slowing economic growth in both China and Latin America. Chinese President Xi Jinping announced at the January 2015 China-CELAC (Community of Latin American and Caribbean States) Forum that he expects to scale up China-LAC trade to $500 billion by the end of the decade. China also expects to accumulate about $250 billion in investment stock in the region in the coming years. Both goals are thought to be achievable, especially if we are counting Chinese finance to LAC countries and firms – which has totalled approximately $19 billion since 2005 – and China’s continued focus on high-tech exports and large mergers and acquisitions in the extractive and agricultural sectors.

Though a critical economic partner for many LAC nations, China has been an especially important source of financial support to Venezuela and Ecuador. These two countries are among the top recipients of Chinese finance, with Venezuela having received more than $50 billion in loans from China’s state banks since 2005. China’s partnerships with these countries are motivated not by ideology, but the prospect of securing access to the region’s oil and a broader interest in diversifying oil supply to China away from the Middle East. China’s leadership and its national oil companies are most certainly looking to establish themselves in these countries far after (or even despite) the Maduro and Correa presidencies.

The proposed transfer of hundreds of millions of Chinese from rural to urban areas over the next three decades will ensure sustained raw materials trade with Latin America, despite slowing growth in China and Latin America in recent years. China’s imports of iron ore, crude oil, and copper already account for more than 20 percent of its total imports. In 2011, China’s petroleum and iron ore imports were as high as 63.14 million tons and 177.17 million tons, respectively – an increase of 11.4 percent and 14.3 percent over the previous year. In 2012, China imported over 80 percent of soybeans consumption.

In addition to China’s search for markets and its energy and food security calculations, the relationship will also be increasingly shaped by the country’s progress toward implementing critical economic reforms. LAC is an important destination as China attempts to invest and diversify existing reserves. Recent reform-minded changes to overseas investment policy are already opening the door for more in the way of overseas deal-making. And plans to support the country’s private enterprises (as opposed to large, state-owned ones) could change somewhat the makeup of Chinese investors in the region.

Also supportive of China’s proposed economic reforms are its financing arrangements in LAC, which not only secure resource supply in some cases, but also promote Chinese exports, put China’s surplus dollar reserves to productive use, provide employment for excess national oil company service teams, access advanced technology, and even promote Chinese currency internationalisation. China Development Bank’s $1 billion oil-backed loan to Ecuador in 2010 required 20 percent Chinese purchases, for example. In Venezuela and elsewhere, Chinese exporters and construction companies have benefited considerably from contracts awarded in association with Chinese energy loans.

Beyond Trade and Investment

China’s engagement in Latin America is also seen as supporting some political objectives. China continues to seek support in the region for what David Shambaugh calls its ‘narrow self-interests.’ Taiwan-related concerns rank high among these, like the policy on Tibet. A history of diplomatic competition between China and Taiwan has meant that Caribbean countries, in particular, continue to receive significant and disproportionate attention from China. Aid, trade and lending are offered to those nations that recognise the People’s Republic as the sole legitimate representative of China. A patron-client dynamic is evident in Costa Rica, China’s only affiliate in Central America. Costa Rica received a stadium, infrastructure deals, and a free trade agreement in exchange for diplomatic recognition of the PRC.

There is growing concern in LAC and the United States, however, that China is increasingly pursuing geostrategic and security-related interests in the region. China’s supposed affiliation with the Nicaragua canal project is a common example. Work on the Nicaragua canal – a ‘Panama Canal alternative’ – officially began in December 2014. The project is headed by Wang Jing, a Chinese telecommunications mogul, and his Hong Kong-based firm, HKND, which is currently seeking financing in the amount of $50 billion for canal construction.

Wang’s supposed affiliation with the Chinese leadership – and the on-going lack of transparency surrounding the project – has led many to assume that it is being backed by Beijing, although there is very little evidence to support this claim. China has nonetheless sought to establish major Atlantic–Pacific corridors elsewhere in Latin America. It most recently proposed a railway running from the Peruvian coast across Brazil.

Pursuit of Geo Strategic Ambitions: China-CELAC Forum

The recently established China-CELAC Forum is also largely seen as an effort to challenge US influence in Latin America, especially considering that the US and Canada are not members of CELAC. At this point, though, the Forum is still rather symbolic. It demonstrates China’s growing importance in the region and its commitment to a sustained presence in Latin America. While the Forum might result in some effective technical exchange and some sub-regional infrastructure arrangements, it will not fundamentally change the China-LAC dynamic – or US-LAC relations, for that matter.

Lessons for India

Chinese and Indian economic relations with LAC are similar in that the engagement is largely trade-based, and to a lesser extent, investment-driven. China has nearly seven times more trade with Latin America than India, however, and invests in the region more than India, although the two are fairly equal in terms of greenfield investment.

But unlike China, which focuses nearly exclusively on extractive, agricultural, and infrastructure-related trade and investment, Indian companies have been active in the region’s information technology, manufacturing, and pharmaceuticals sectors, in addition to agrochemicals, mining and energy. Since 2000, Indian companies have made considerable investments in the region’s services and manufacturing sectors.

In Argentina, according to Jorge Heine and R. Viswanathan, Indian firms are focussed on both manufacturing and IT-enabled services. Major Indian firms operating in Latin America include Tata Motors Ltd (automobiles), Tata Consulting Services Ltd (IT), Dr. Reddy’s Laboratories Ltd (pharmaceuticals), United Phosphorus Limited (agrochemicals), and others.

India has a smaller footprint in Latin America, but Indian investments would seem more closely aligned than China’s with LAC’s long term growth objectives. LAC’s trade imbalance with China has been addressed extensively in the press and in academic and policy pieces; with the general conclusion that the region’s model of exporting commodities to China while importing manufactured goods will not promote long-term economic growth. China’s trade with Latin America is also highly concentrated in specific countries and sectors. The vast majority of Chinese imports originate from the region’s major agricultural, hydrocarbons, and minerals producers.

In addition, whereas Latin America and the Caribbean are seen as lagging behind in terms of industrial upgrading, China is increasingly exporting higher-tech goods to the region, and is marketing a wider variety of Chinese brands. Chinese cars are being sold in several Latin American countries, including Brazil, Peru, Venezuela and Colombia. Chinese cell phones and computers are increasingly popular options for Latin American consumers.

As a Chinese Academy of Social Sciences scholar suggested in a 2012 article, China could possibly learn from India’s more cautious and strategic investment in LAC, which involves successful risk assessment and responsible examination of country-specific investment opportunities. When operating in Latin America, he argues, Chinese companies should consider not only China’s needs and their own international operational interests, but also regional politics, specific policy changes, regional economic conditions, and other diverse factors. Though less striking in scale, the Indian model of overseas engagement seems a favourable one, not only for LAC, but also in the eyes of some Chinese observers.

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