China’s growing footprint in Latin America

By Rohan Chatterjee @RohanChatterje1

China’s exponential growth has brought it to the doorsteps of geographically separated and historically disconnected, Latin America and is fast on way to becoming a key trade partner and surpassing the United States as the continent’s most important economic partner.

The key driver behind China’s expansion into Latin America is relatively simple: its growing demand for raw materials. Latin America not only offers the desired resources but also a potential market of 500 million people to help maintain China as the world’s largest trading nation. In turn, China has come to Latin America as a new cash rich trade partner and an increasingly important investor.

Despite President Yang Shangkun’s visit in 1990, where Latin America’s potential for Chinese interests was first touched upon, China’s presence throughout the 1990’s was largely marginal, offering little in the way of trade and less still in DFI (Direct Foreign Investment). However, subsequent presidential visits have underlined Beijing’s intentions for more favourable relations through promised investments and bilateral trade agreements.

The first significant steps came in 2004 when the then Chinese President, Hu Jintao, promised $100 billion in investments over a 10-year period with hopes of two-way trade reaching $100 billion by the close of 2010. This milestone was surpassed well ahead of schedule by 2007, with bilateral trade reaching $140 billion in 2008 and $261.6 billion by 2013.

Since 2000, Latin America has seen its exports sustain annual growth of around 23 percent and China, in turn, has become the leading trade partner for Brazil and Colombia and second largest for Argentina, Chile and Peru.

The vast majority of exports have been in three sectors: soy, metal ores and oil. Currently, China accounts for around 40 percent of the world’s soy trade and has found a suitable partner in Latin America’s extensive agricultural sector. In this sector alone, profits for Latin American ventures have soared from $10 billion in the 1990’s to around $35 billion at present.

Driven by continued industrialisation, China has also turned to Latin America in search of metal ores, with Brazil becoming China’s third largest iron ore importer, while Chile and Peru now supply 50 percent of all Chinese copper imports.

Beijing has also brokered deals with leading Latin oil-producing nations of Venezuela, Brazil and Ecuador. A   $4-billion credit line was established with Venezuela in return for some 100,000 barrels of crude oil per day. Similarly, both Brazil and China’s former heads of state, Lula de Silva and Hu Jintao respectively, signed an agreement for the China Development Bank and Sinopec to loan Brazil’s state-controlled oil company Petrobras $10 billion for 200,000 barrels a day over a 10-year period.

In return for increasing trade, Chinese DFI,which totalled $44 billion by 2010 (particularly remarkable considering that as late as 2003 Chinese DFI only totalled around $1 billion), has been used to develop sectors heavily linked to growing export demands.

The current Chinese President Xi Jinping’s most recent visit to the continent this July saw further investments being planned. Initially, at the sixth BRICS (Brazil, Russia, India, China, South Africa) summit in Forteleza, Brazil, this July, the five nations agreed to launch the New Development Bank and reserve fund with a $100 billion which will be an important driver for the region’s development.

Xi went on to announce a further $35-billion fund for the region in Brasilia in front of CELAC leaders (Community of Latin American and Caribbean States), which will include a $20-billion fund for infrastructure projects and a preferential $10-billion credit line with a further $5 billion fund for specific projects.

The Latin American transportation sector, in particular, has benefited from heavy Chinese investments, especially rail networks which historically have been severely underdeveloped. Colombia, with Chinese funds, is developing its rail network connecting Cartagena with the Northern Atlantic coast to improve goods transhipments to the Asian giant.

A $10-billion agreement with Argentina was signed in July 2010 to refurbish two major rail lines aimed at cutting transportation time and making the agricultural regions more economically viable. China also holds a 40% stake in a Venezuelan rail project worth $7.5 billion that will connect Caracas to the country’s western oil-producing states.

More diversified investment has looked to develop the key supply sectors critical to China’s continued growth. The Brazilian mining industry is set to receive $5 billion over three years and Argentina signed an agreement in 2007 for $4.4 billion to develop two hydroelectric dams. Venezuela also agreed a $6-billion joint investment fund for infrastructure projects in addition to a $16-billion investment deal with CNPC (Chinese National Petroleum Corporation) for oil exploration in the Orinoco River.

With such rapid growth by the Asian super-economy in the Americas, where does this leave the United States? Despite the unprecedented development of Sino-Latin relations, it remains the region’s dominant economic figure by a large margin, its trade with the region still totalling $560 billion compared to China’s $140 billion.

Although this seems a sizeable gap, it is worth considering that in 2000 Chinese-Latin trade was only around $13 billion.

This eastwards shift has drawn its own criticisms and poses different challenges. Analysts warn of price volatility of the commodity market and current Chinese economic deceleration against getting too dependent on China.

That said, others argue that growth in Chinese trade has allowed Latin America to weather the current global economic downturn, when the continent sustained steady growth even as many first world economies became stagnant or entered into recession.

Realistically it is not a matter of if but how much and where the US stands to lose influence south of the border. Economically speaking, it is unlikely the US and China will enter into a zero-sum game as trade demands from both countries do not conflict. US trade relationships are much more diverse but they are beginning to lose their monopoly on the regional economy.

The real losses for Washington have been, and will be, felt politically. Latin America’s recent, and somewhat dramatic shift to the Left has seen countries like Venezuela, Argentina, Ecuador and, to a certain extent, Brazil actively distance their ties with the US. This is in no large part down to political insensitivities and a US history of interventionism. This is where China offers a new outlet, and, importantly for Latin countries, one with minimal political costs for the continent.

Chinese trade and investment have helped maintain economic growth, improve industrial productivity and aid the independence of a fast developing continent. The Sino-Latin trade relations seem set to become increasingly important for both sides.

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