CHRONICLE SPECIALand is predicted to reach $100 billion per year by 2010. The trade and investment relationships have been complemented by other contacts, including high-level delegations of political, cultural, trade, and military officials. China now has a tangible, albeit modest, presence in Latin America that spans politics, economics, and regions.
Center for Hemispheric Policy
The relationship between China and Latin America has expanded significantly over the past several years. According to the Chinese Ministry of Commerce, bilateral trade between China and Latin America expanded from $200 million per year in 1975 to $70.2 billion per year in 2006
China’s presence includes ownership of mines in Peru and holdings in the Panama Canal business zone, as well as port operations and pipeline assets in Ecuador and joint ventures with petroleum companies such as PdVSA and Petrobras. China has observer status in the Organization of American States and a mission of Chinese peacekeepers in Haiti. A growing number of Chinese businessmen and tourists complements the small but longstanding presence of ethnic-Chinese communities in places such as Lima and Carabobo state in Venezuela. Visits by key political figures to China, such as Venezuela’s Hugo Chávez, Bolivia’s Evo Morales and Colombia’s Alvaro Uribe, reflect the increasing importance that Latin America’s political leadership is giving to China, while the proliferation of Chinese language programs, chambers of commerce and university courses indicate that the prospect of doing business with China is capturing the imagination of the people of the region.
The relationship between the People’s Republic of China (PRC) and Latin America is characterized more by dramatically expanding trade flows and business relationships than by the establishment of traditional military or political ties. China’s focus in Central America and the Caribbean differs from that in South America. In South America, the PRC has primarily focused on securing access to primary products that it needs for its economic growth, while also courting Latin America’s largest economies as purchasers of its manufactured goods. In Central America and the Caribbean, the PRC has focused more on using economic and diplomatic levers to secure diplomatic recognition from those countries still recognizing Taiwan as the government of China.
The PRC has pursued a cautious and nuanced policy toward the region. It has effectively leveraged the prospect of PRC investment and sales to the vast potential Chinese market to secure concessions for its own businesses and exports. It has used a combination of institutional mechanisms in order to strengthen relationships with countries in the region that it regards as particularly important because of their resources, market potential or strategic position. These include not only economic mechanisms such as free-trade agreements, but also technology, political and cultural exchanges.
Although Chinese trade with Latin America has fueled a boom in the region’s commodity-export sectors in countries such as Brazil, Chile, Peru and Venezuela, Latin American manufacturing sectors have been badly damaged by expanded competition from Chinese goods. On balance, countries and regions with large manufacturing sectors and limited primary-product export sectors such as Mexico and Central America have viewed the relationship much less positively than their neighbors to the south.
The expanding relationship with China is transforming Latin America. Major infrastructure projects, including contemplated rail, road and pipeline projects, are focused on getting goods to and from Pacific ports. Growing trade with China is increasing the significance of Latin American cities on or near the Pacific Ocean, from Guayaquil to Valparaíso. A new generation of Latin American students is studying Mandarin Chinese and the mechanics of doing business with China. In broader terms, Latin America is increasingly attracted to the Chinese economic model, which suggests that rapid growth can be achieved in an authoritarian political system pursuing mercantilist trade policies. By presenting an alternative political and economic model, and an alternative to the United States as a trade partner, the PRC is significantly undermining the U.S. agenda to advance political reform, human rights and free trade in Latin America. (...)
CHARACTER OF INVESTMENT AND COMMERCIAL ACTIVITIES
In general, PRC investment and commercial activities in Latin America have been oriented toward securing access to products that China has needed for its economic growth. While it is fair to say that China has sought to position itself strategically with specific Latin American countries, it has generally not sought to use its economic or other ties to explicitly change the character of a government or overthrow regimes.
Indeed, it has demonstrated flexibility in relationships with Latin American regimes on both the right and left of the political spectrum. In addition, the PRC has sought to maintain a low profile in Latin America that avoids provoking the United States. Even the use of the term “peaceful rising” as a description of China’s emergence as an economic power has been debated within China as potentially too provocative.
On the other hand, the Chinese posture in Latin America must also be understood as an artifact of the current relative power and global position of the PRC. The fact that China is not currently seeking to place military forces in Latin America, or change regimes not to its liking, does not mean that a more powerful and assertive China will not do so in the future if it believes that, on balance, its interests would be served by doing so.
With respect to the quantity of Chinese trade flows, it is important to note that Chinese trade volumes with Latin America are still relatively low when compared to U.S. trade with the region. (...) representing only slightly more than 1 percent of the nonfinancial FDI going into Latin America. Moreover, according to figures from China’s Ministry of Commerce, two of the top three destinations of Chinese FDI, the British Virgin Islands, and the Cayman Islands, are well-known tax shelters. For all these reasons, Chinese investment hoped for by Latin America probably is not going to come.
With respect to Chinese investment in Latin America, it is important to point out that despite certain rhetoric from the Chinese side and hopes in many quarters of Latin America, the actual quantity of investment has been low and variable. In 2004, although the PRC put 49 percent of all of its non-financial FDI into Latin America, the actual quantity of investment, $882 million, represented only about 2 percent of the $41 billion of investment that went into the region that year. In the following year, the quantity actually fell to $651 million,
As one member of the task force noted, “Latin America has to recognize that the source of its economic prosperity is found in the Western Hemisphere and not in China.”
VARIES BY COUNTRY
Although the China-Latin America relationship can be characterized in general terms, it is also important to examine the trade, investment and strategic dynamics between China and specific countries in Latin America, because the relationships are so varied. (...)
Venezuela. China’s relationship with Venezuela has expanded significantly under the populist regime of Venezuelan president Hugo Chávez. China’s interest in Venezuela is primarily driven by petroleum, reflecting the fact that Venezuela has, by certain measures, the largest hydrocarbon reserves in the world.
Venezuela, along with Cuba, also has the most extensive military cooperation with the Chinese. In addition to various types of logistical equipment, the PRC sold Venezuela three JYL-1 mobile air defense radars in 2004, and has discussed the sale of FC-1 and J-10 fighter aircraft. To some extent, China is reluctantly filling a gap created by the deterioration of Venezuela’s political and military relationship with the United States.
Despite growing economic and other ties, China has arguably been a reluctant partner for Venezuela. On one hand, it is concerned that perceived Chinese support for Chávez could undermine the Chinese-U.S. relationship — which is much more important strategically and economically for China than its Venezuelan relationship. The relationship is also undermined by Chinese frustrations with the treatment received by Chinese corporations, such as CNPC, at the hands of the Venezuelan government.
Brazil. Brazil is important to China as the largest economy in Latin America, both as a market for Chinese goods and as a source of raw materials. As with many other nations in South America, Brazilian exports to China are mainly primary products. China is particularly interested in Brazil’s soy and other agricultural products, with Brazil supplying some 45 percent of all PRC soybean imports. China also imports significant quantities of Brazilian iron and petroleum, and has launched several major collaborative projects with Brazil in these sectors, such as the Petrobras-Sinopec collaboration on Brazil’s Gasene pipeline, or the $1.5 billion proposed Baosteel-CVRD joint venture to build a steel mill in Maranhão.
On the other hand, Brazil’s status as a large middle-income country also makes it important as a market for Chinese goods, including electronics, machinery and laborintensive manufactured goods, such as footwear and toys. Furthermore, the degree of development of the Brazilian economy introduces a number of unique dimensions into its relationship with China. Brazil possesses a nuclear industry and uranium resources — important to China as it expands its own nuclear industry to meet its energy needs. Similarly, the Brazilian aerospace industry has created multiple opportunities for collaboration with China, including technology transfer worrisome to the United States.
Finally, the regional leadership role that Brazil has historically exercised in the region makes China’s relationship with the country strategically important. To illustrate, the United Nations force in Haiti, which features the first deployment of Chinese soldiers to Latin American soil, is under Brazilian leadership.
Peru. Peru is of importance to China due to its mining, fishing and agricultural exports, and its strategic position on the Pacific coast. In addition, although the Peruvian commercial port infrastructure is not as developed as that of Chile, it is a logical point of departure for products coming overland from Bolivia, Brazil and elsewhere in South America. The PRC also has a stake in the Camisea gas fields, which are of growing importance for the region’s energy supply.
Chile. Chile is currently positioned to play the leading role in the expansion of Latin America’s trade relationship with China. The nation recently finalized its free trade agreement with China, complementing its efficient high-volume deepwater ports to make the country the logical point of entry for products coming into the hemisphere in the near term. The number of Chilean businessmen in China (approximately 5,000), the number of Chinese businessmen in Chile, and the number of Mandarin language schools and China-oriented business classes in Chile, positions Chile as an intellectual center of gravity for Chinese businesses seeking to expand their presence in Chile and vice-versa.
Bolivia. Although PRC economic and strategic relations have been relatively limited, China has an interest in Bolivian gas and iron resources, among other commodities. Bolivia has the second largest natural gas reserves in South America, behind only Venezuela. Refining technologies, such as the liquefaction of gas or its use in producing other fuels, increase the feasibility of exporting Bolivian gas to China if the issues of Bolivian gas exports and Bolivia’s access to the sea, in general, can be resolved. The Morales regime has opened up a number of possibilities for an expanded Chinese presence in that country, including granting a concession to the Chinese conglomerate Shandong Llueng to develop all or part of the iron deposits at El Mutún, and a potential role by Chinese oil companies to help the Bolivian national oil company to overcome problems with capital and experience in nationalizing the country’s oil industry. Similarly, the outcome of Bolivia’s Constituent Assembly may also open up new opportunities for the Bolivian state to partner with Chinese companies — if only by re-affirming the state’s stewardship over natural resources and giving it new policy authority to move forward in contractual relationships.
Ecuador. The nation’s position on the Pacific and its oil resources make Ecuador of interest to China. In 2005, China National Petroleum Company invested $1.42 billion to acquire a significant portion of all petroleum assets in Ecuador not owned by the state. Chinese companies are also currently operating oilfields previously owned by Occidental Petroleum (Oxy), which was forced to leave the country by the previous administration of Alfredo Palacio. The populist ideology and technical needs of the new Ecuadoran president Rafael Correa positions China to significantly expand is position in this sector, although current CNPC operations in the country have been marred by problems with the indigenous population in Tarapoa and Succumbios, as well as disputes with the Ecuadoran government over assets inherited from Oxy and changes in concession terms.
Argentina. Argentina, like Brazil, is important to China as a major agricultural product exporter, supplying the PRC with 23 percent of all of its soy product imports. China has also demonstrated interest in Argentina’s mining sector. The PRC has also repeatedly raised the prospect of major initiatives in Argentina’s petroleum sector, including investment from the Chinese-Angolan company Sonogol, a possible CNPC purchase of $5 billion in assets of the Argentine firm Bridas, and rumored talks between the Spanish firm Repsol YPF and China National Offshore Oil Corporation (CNOOC) regarding Repsol YPF’s Argentine holdings --although none of the possibilities raised has yet materialized.
Like Brazil, Argentina has collaborated with China in space projects, such as a satellite laser ranging project in Argentina’s San Juan University, and has discussed collaboration in designing a new-generation nuclear reactor.
Colombia. Colombia occupies a complex position in its relationship with China. On one hand, the country is the flagship example of U.S. military, political and developmental partnerships in the region. Nonetheless, the country has potentially significant but unexplored petroleum reserves, as well as Pacific ports, allowing the petroleum to be exported to the PRC and other Asian markets. In September 2006, the Chinese oil company Sinopec announced that it would join with the Indian firm ONGC Videsh to collectively invest $800 million to purchase a 50 percent stake in the Colombian oil firm Omnimex. Colombia may also construct a petroleum pipeline that would ship Venezuelan oil across Colombia, eliminating the delay of loading at Atlantic ports and transiting the Panama Canal.
In addition to its primary products, Colombia, like Brazil, is a middle-income country offering a significant market for Chinese manufactured goods. An enormous variety of PRC goods, including multiple brands of Chinese cars, have begun to enter Colombia. At the same time, the penetration of Colombian internal markets and the displacement of Colombian exports by PRC goods have generated tensions among Colombian manufacturers — particularly those in the textile industry.
Panama. The strategic position of this isthmus nation as owner of the Panama Canal is arguably of greater strategic value to China than Panama’s primary-product exports or potential as an import market. The PRC firm Hutchison-Whampoa, with alleged connections to the Chinese People’s Liberation Army (PLA), owns property on either end of the Panama Canal, giving it visibility over military and commercial traffic transiting the canal, and potentially serving as a staging area for future operations to deny transit through this strategic chokepoint. The PRC firm Cosco Pacific is currently a key bidder for the development of a new mega-port on the Pacific side of the Canal, in competition with the Taiwanese firm Evergreen Marine. In addition, the Chinese have discussed possible participation in the estimated $5.25 billion 8-year Panamanian government project to widen the canal to allow the transit of larger cargo ships and higher shipping volumes. Panama also hosts a pipeline that may be used in the future to move petroleum overland from the Atlantic to the Pacific coast, facilitating the export of petroleum from Venezuela and Brazil to China and other Asian markets.
Central America. Chinese interest in Central America is dominated by its efforts to convince those Central American nations that still diplomatically recognize Taiwan to withdraw that recognition and diplomatically recognize the PRC. The most realistic prospect for such a shift in the near term is in Nicaragua, given the victory of Sandinista candidate Daniel Ortega in recent presidential elections. Although Central American nations have some potential to export agricultural products to China, those nations that continue to diplomatically recognize Taiwan have had very little success in selling goods to the Chinese domestic market. Of all the nations in Central America, only Costa Rica has a positive balance of trade with China, and only Costa Rica improved its net trade position with China during 2006.
Cuba. The nation’s proximity to the United States gives it particular strategic value to China. This value includes a Chinese presence at Cuban facilities at Bejucal and Santiago, potentially used to collect intelligence data on the United States. China played a key role in upgrading the Cuban Air Defense System, and has frequently exchanged high-ranking Chinese military delegations.
Continuing Chinese sponsorship of the Cuban regime also helps the PRC to maintain its branding as a champion of third-world causes — an image with real commercial and strategic value when the PRC positions itself to do business with new leftist regimes in the hemisphere.
Cuba also has secondary value to the PRC as a supplier of strategic materials and agricultural products. In addition to making sugar one of Latin America’s major exports to China, Cuba also has both offshore petroleum and the world’s largest proven nickel reserves. In February 2007, however, a $500 million arrangement between Cubaniquel and the Chinese firm MinMetals to develop Cuban nickel capacity was abruptly canceled, and the concession was given, instead, to Venezuela.
Caribbean. The strategic importance of the Caribbean for China arises from the continuing recognition of Taiwan by four Caribbean nations: the Dominican Republic, Haiti, St. Kitts & Nevis, and St. Vincent. The nations of the Caribbean have relatively small economies and populations, making them relatively susceptible to changing their diplomatic recognition from Taiwan to China in exchange for economic aid.
Mexico. Mexico’s relationship with China is arguably limited by the Mexican perception that China is predominantly a commercial competitor in light manufactures, rather than a market for Mexican primary products or other goods. Meanwhile, Mexican primary products, such as petroleum, are tied up in existing commitments and domestic and foreign consumption, while opportunities to partner with state organizations such as PEMEX are severely restricted by longstanding, politically-charged statutes.
Beyond strictly economic interests, Mexico, as a large and established Latin American power, is an important player for China’s overall relationship with the region. Mexico’s rivalry with Brazil for regional leadership, for example, means that China risks offending one of these regional powers if it comes to be perceived as developing a geopolitical role that is too close to the other.ECONOMIC AND SOCIAL IMPLICATIONS FOR LATIN AMERICA
Chinese initiatives in Latin America are generating powerful economic, political, and social dynamics in the region, both positive and negative. According to statistics from the Economic Commission for Latin America and the Caribbean, in 2003 Latin America had a $3.8 billion surplus with China in primary-product trade, but a $9.9 billion deficit in the trade of manufactured goods. Whether a specific Latin American country is a net winner or loser in its relationship with China depends greatly on whether its economy is based on primary products or manufactures.
Chinese trade with, and investment in, the region have generated a boom in commodity export sectors in select countries. Not only have direct orders from China increased overall export sales, but Chinese demand has helped to sustain high international commodity prices, increasing overall export revenues. The increasing revenues have been particularly evident in sectors such as metals and petroleum, resulting in record earnings for both private and state-owned enterprises such as CODELCO in Chile, CVRD in Brazil, and PdVSA in Venezuela. The agricultural industries of Brazil, Argentina, Chile and Peru have similarly benefited.
On the other hand, regional manufacturing has been adversely impacted by competition from China. On average, PRC light-manufactured goods, such as textiles and footwear, are three times cheaper than those produced in Latin America. Depending on the sector, China also arguably enjoys other cost advantages stemming from the avoidance of certain costs. These include access to very cheap capital, with little pressure to show returns, due to the nature of the Chinese financial system. Some analysts also argue that they include “unfair practices,” such as not having to pay for pollution avoidance or environmental clean-up, using pirated software, and otherwise illicitly obtaining intellectual property.
As a consequence, with the expansion of free trade, Latin American light manufacturing has been displaced from its traditional export markets. Within seven months of the 2005 expiration of the Multi-Fiber Agreement governing quotas in the textile industry, the share of the U.S. market held by Latin American manufacturers fell from 25 percent to 8 percent, while the PRC share jumped from 26 percent to 56 percent. Similarly, in Mexico and Central America, a significant number of maquiladora (assembly) jobs have been lost or moved to China.
At the same time, Latin American manufacturers have partially succeeded in adapting to Chinese competition. Latin American producers often, for example, retain important advantages involving shipping time, relationships with local suppliers and the reputation of China for failing to protect intellectual property. Moreover, Latin America retains a competitive edge in products where transportation costs or response times are important. Some companies in Latin America have capitalized on these advantages to survive, doing final assembly of Chinese goods for sale into the U.S. market.
The combination of significant economic rewards to Latin American agriculture and extractive sectors led a number of members of the China-Latin America Task Force to conclude that while Chinese trade with Latin America was selectively benefiting certain countries and sectors, it was impeding the long-term economic diversification and development of the region by buoying low-value-added, low-tech sectors and undercutting those sectors that traditionally served as the base for middle-class jobs.
In the political arena, the gap between expectations for, and the reality of, trade and investment with China has begun to generate a significant political backlash. In countries such as Brazil and Argentina, promised investment has been slow in coming and tied to the use of Chinese workers or companies — although problems could be attributed to the Latin American side as well. In Brazil, Foreign Minister Celso Amorim told the Financial Times in October 2005 that Brazil had been “deceived,” recognizing China as a “market economy” and opening up the Brazilian market to greater penetration by Chinese imports in exchange for Chinese investments and prospects of greater exports to the PRC that never materialized. Several Center for Hemispheric Affairs Task Force members argued that the $100 billion investment promise reportedly made by Hu Jintao in November 2004 could be interpreted as a public relations campaign to get the largest Latin American economies to grant concrete and irreversible near-term trade concessions in exchange for hard-to-pin-down promises of future Chinese investment.
Although certain elements within Latin American society may look to China with unrealistic hopes that the nation will serve as an engine of development that will enable the region to escape its problems, China is also regarded in Latin America with an element of fear that is arguably distinct from attitudes toward a previous generation of Japanese and European investors. Both the “fear of China” as well as the “dream of China,” are probably rooted in the degree of cultural differences that exist between China and Latin America and will likely continue to influence the dynamics of engagement.
Despite the short-term political and economic frictions, the long-term economic, cultural and political implications of PRC engagement with China include a growing familiarity with, and orientation towards, China. Chile, for example, since signing a free trade agreement with China, has experienced a proliferation of Mandarin language programs, as well as China-related business classes. Over time, this China focus could change the business mix and trade orientation of the entire region. As part of this trend, Pacific coast ports such as Valparaiso and Iquique in Chile, as well as Callao, Tacna and Ilo in Peru, and Manta in Ecuador, will take on new significance in regional logistics flows. Correspondingly, major commercial centers near the Pacific will take on new importance as hubs for Chinese companies doing business in Latin America, Latin American companies dealing with China, and a raft of logistics and service sector companies servicing the new international trade patterns. The transformation of Latin American urban centers will ultimately depend on the opportunities and policies presented by each country and the skill of particular cities in marketing themselves, but may create opportunities for cities such as Santiago, Chile; Lima, Peru; and Guayaquil, Ecuador.
MILITARY AND STRATEGIC IMPLICATIONS
(...) The principal challenge presented by China in Latin America comes from the way in which the Chinese presence changes the strategic landscape of the region in ways that may generate problems or complicating factors for future operations.
A number of members of the task force noted that Chinese engagement with Latin America is undermining the spread of democracy and the U.S. agenda in the region. The Chinese model suggests that a society can lift itself out of poverty using a model of growth that is not necessarily democratic. (...)
Chinese communities and Chinese capital will become increasingly significant in regional politics. The activities of the Chinese firm Andes Petroleum became the focus of violence by indigenous activists in Tarapoa, just as the management practices of Shougang Hierro Peru became a major political issue for the Peruvian government. Potential collaboration between existing criminal organizations may emerge, such as those between pandillas or narco-traffickers. In Bolivia, for example, a human trafficking operation run by the Chinese organization “Red Dragon” came to taint legislators and others at the highest levels of government. Such collaboration, in the context of the language differences between Spanish-speaking police and local security forces, and the new Chinese communities in the region, can create new challenges, as can the emergence of any “turf wars” associated with the introduction of new Chinese criminal organizations into territory previously occupied by Latin American groups.
The Chinese presence in Latin America will create increasing constraints to U.S. operations in the region. The April 2006 visit of Assistant Secretary of State Thomas Shannon to Beijing to talk about Latin America implicitly recognized that China now has a “seat at the table” in Latin American affairs that the United States must take into account.
The physical Chinese presence will also give China new opportunities to collect intelligence data against U.S. forces operating in the region, which could provide value to China should the current benign nature of the U.S.-China relationship change. Such collection opportunities include Chinese access to the Cuban listening post at Bejucal, as well as the Chinese commercial presence at both ends of the strategically important Panama Canal and in the large container port in Freeport, Bahamas. It also includes the concession granted to Hutchison Whampoa to run the Ecuadorian port of Manta, where an important U.S. Forward Operating Location (FOL) is located. In each of these cases, the Chinese presence is commercial, but could be used in the future by the Chinese state for intelligence collection or other activities. (...)
In the end, although the Chinese presence greatly complicates the picture for U.S. military planners, it also creates important opportunities for the United States and China to work together to resolve crises and advance the long-term development of the region. Both have an interest in economic, financial and political stability. In the near term, for example, although Hugo Chávez may appear to have ideological affinity for China, to the extent that his brand of populism spreads political instability throughout the region and disrupts trade flows, Chinese interests will be significantly impaired. Similarly, Ecuador’s increase in taxes on petroleum concessions in 2005 impacted the Chinese holdings of the Chinese National Petroleum Company-led Andean Petroleum consortium as much as it hurt Western multinationals. The Chinese may in the future be able to use the nominal influence they have with emergent leftist and marginalized movements to help the United States avoid a situation which would harm both China and the United States.
This column is based on an excerpt from the final report of the China-Latin America Task Force of the Center for Hemispheric Policy at the University of Miami. Republished with permission.