China’s Economic Role in Latin America

By Shannon K. O'Neil

Council on Foreign Relations
October 26, 2012

There is much talk of China’s escalating economic influence in Latin America. But it’s worth looking at what has (and hasn’t) actually happened in the three main ways that China interacts with the region’s economies: trade, foreign direct investment (FDI), and loans (from state-owned banks).

Trade is the most visible and important connection. Over the last several years, goods flowing back and forth have increased some 30 percent per year, bringing today’s total to roughly US$250 billion. This trade leans in China’s favor, with a deficit (nearly all with Mexico) of nearly US$100 billion. While sizable numbers, this is still just a quarter of Latin America’s trade with the United States. And it appears to be leveling off, suggesting that China won’t overtake the United States as the region’s primary trading partner anytime soon.

This trade is also quite concentrated. Exports to China come primarily from Brazil, Chile, Peru, and Argentina, and are mainly raw materials (copper, iron ore, lead, tin, soya, and sugar). Of the goods China sends east nearly half go to Mexico—a mix of consumer goods and capital goods (equipment for production). Trade with China has expanded dramatically over the past decade. But it is worth remembering that it both started from a low base and is unevenly distributed—affecting a few countries significantly and others very little.

Chinese foreign direct investment has been the focus of numerous high-level state visits and has been much touted in the press. Money flowing from China to Latin America has increased—totaling some $10 billion in 2011. Still, this continues to be less than the US$15 billion coming  from the United States or the US$35 billion from European countries, and is roughly equal to US$10 billion heading from Latin American countries into their neighbors. The vast majority of Chinese funds head to the Cayman Islands and the British Virgin Islands—suggesting tax considerations instead of productive investments. The money that is invested remains heavily concentrated on raw materials and energy—mostly in Brazil, and some in Peru. Though promises continue, so far Chinese FDI has yet to make a serious regional mark.

Finally loans are a means of engaging Latin American nations. These have increased to countries such as Venezuela, Brazil, and Ecuador, nearly all in exchange for oil. These tens of billions of dollars comprise a decent portion of China’s development loans abroad, and outpace Latin American resources from the World Bank, Inter-American Development Bank, and the United States Export-Import Bank. Still, since most countries have easy access to world financial markets, most financing comes through non-governmental sources.

Overall economic ties are indeed increasing. But these trade, FDI, and loan numbers suggest the rise is slower than either the cheerleaders or naysayers might suggest. The next question is whether these links are good or bad for the region.

On the good side, trade with China has helped spur Latin America’s economic growth. Increased ties with China have played a big part of the strong (by Latin American standards) GDP growth of last decade. Especially for Brazil, Argentina, and Peru, connections to the world’s economic engine were important in wake of the world financial crisis. Comparing Brazil’s and Mexico’s growth rates in 2010 tells that story—and the positive role that China can and does play.

China’s trade has also benefited Latin America’s consumers. The big story of the last two decades is the rise of a middle class in many Latin American countries. Achieving a middle class lifestyle relies in part on higher incomes, but also on greater purchasing power. Access to more goods of better quality and at lower prices, has changed the lives of many. China’s sales of clothing, electronics, and even cars have benefited those in the middle and lower middle ranks.

The downsides also exist. These same imports that make consumers happy hit the economy at large. They directly compete with Latin American producers, both in home markets as well as abroad in the United States and the European Union. Anecdotal evidence points to factories closing, and aggregate trade data shows Latin American producers losing world market share to China. Still, estimates suggest this head to head competition occurs in roughly 12 percent of exports from Latin America’s biggest economies—significant, but not everywhere.

The indirect effects of China’s rise have also caused problems—especially through the “Dutch disease.” This occurs when the success of commodity exports raises the currency, making it harder for manufacturing companies to compete internationally. Many argue that this has occurred in Brazil (and helps account for the decline in manufacturing production as a percent of exports) it may also be happening in Venezuela, Argentina, and Peru.

The bigger worry for Latin American countries is that they are losing their hard fought gains. Over the last few decades many both successfully opened their economies and diversified their production. Looking at the breakdown of exports, one can see a manufacturing surge in Mexico, Brazil, and Colombia since the 1980s. But China’s pressure on its trading partners threatens to undo these gains.

Whether or not Latin America can continue to climb the economic value-added chain matters for the long term. Commodity dependency leaves countries more vulnerable to global commodity price swings, and makes it harder to plan and implement long-term policies as a result.  It also limits the job opportunities for the growing number of educated, urban, and ambitious people—the new middle class.

China’s presence in Latin America, as in many places, holds both promises and perils. But it is a reality. The challenge for Latin American countries will be to harness these ties for bigger gains for their own economies and people.

http://blogs.cfr.org/oneil/2012/10/26/chinas-economic-role-in-latin-america

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