US & China: trade symbiosis in Latin America, Could political rivalry be next?

By: | at 12:00 AM | Channel(s): International Trade  

Latin American countries hosted a flurry of official visits by United States and Chinese leaders in recent months and the U.S. and China have reciprocated. President Barack Obama visited the region in May while Vice President Joe Biden and Chinese President Xi Jinping made the rounds in June. Obama hosted the leaders of Chile and Peru in June and will host Brazilian President Dilma Rousseff in October. Mexican President Enrique Pena Nieto visited Beijing in April.

These multiple trips could be viewed as a symbol of U.S.-Chinese dueling for influence and for trade partners in the region. Besides diplomacy and politics, the U.S. ratio of trade with Latin America is in decline while that of the Chinese has increased in recent years.

Thus far, however, the U.S. and China have not come to loggerheads in Latin America. As the region’s economies grow, there is more room for trade with multiple partners. The fact that the proportion of Latin American imports originating in the U.S. declined from 55 percent in 2001 to 33 percent in 2012, nor that China’s imports from Latin America have grown from $3.9 billion in 2000 to $86 billion in 2011, doesn’t mean that U.S. trade is not robust, even growing, in the region.

Another way to look at the relative U.S. and Chinese trading positions in Latin America is that the region’s growth is good for both of the larger powers. And the fact that both the U.S. and China are major players in Latin America is good for Latin Americans. The International Monetary Fund forecasts the region’s economies will expand 3.4 percent this year, three times the pace of growth in the developed world.

In addition, U.S. and Chinese trade patterns in Latin America are more complementary than they are competitive. The Chinese see Latin America as a source of commodities and as a market for manufactured goods. The U.S. is increasingly a customer of Latin American countries for value-added products while it seeks to sell capital goods to its southern neighbors.

“Latin America was not the subject of much attention at the recent U.S.-China summit meeting in California,” said Peter Hakim, senior fellow of the Inter-American Dialogue, a Washington-based think tank. “No serious disputes relating to Latin America have so far emerged between China and the US. There is no evidence that the U.S. is particularly troubled by China’s rapidly escalating presence, or that the two countries regard themselves as adversaries or rivals, contending for power, resources, and allies in the region.”

Chinese President Xi was quoted as saying, during his Latin America visit, that “the more Latin America develops, the better it is for China.” Obama and Biden expressed similar sentiments in published op-ed pieces, that the U.S. benefits from a prosperous Latin America. It appears, then, that both the U.S. and China welcome each other’s commercial engagement with Latin America.

According to the World Bank and the International Monetary Fund, Chinese imports, as well as its investment and loans in the region, have propelled much of Latin America’s economic performance over the past decade. From $15 billion in 2000, Chinese trade with Latin America grew to $200 billion last year. A slowdown in China’s purchases would hurt Latin American economies.

“China is well aware of how much Latin America’s prosperity depends on the region’s access to U.S. markets, investment capital, technology, and remittances,” said Hakim. “China’s leaders knows that any slackening of the U.S. economic role in Latin America would shrink China’s exports to the region, and make the region far less attractive for new Chinese investments.” Eleven of the region’s eighteen countries have signed free trade agreements with the U.S., while China has three such agreements, with Chile, Peru, and Costa Rica.

Although the proportion of Latin American trade with the U.S. is shrinking—and China’s share of trade in Brazil, Chile, and Peru has surpassed that of the U.S.—the proportion of U.S. trade with Latin America is growing as is its dollar value. The region last year bought 26 percent of U.S. exports, an increase from 22 percent in 2000. U.S. exports to Latin America have more than doubled since 2000 to $400 billion last year.

Biden’s stop in Rio de Janeiro capsulized one aspect of the emerging U.S. trade relationship with Brazil. Biden toured a research facility operated by the state-run oil company Petroleo Brasileiro SA. U.S. exports of capital goods helped Brazil develop some large oil discoveries. The U.S. began posting a trade surplus with Brazil, the region’s biggest economy, in 2009, for the first time in a decade.

Meanwhile, the U.S. is purchasing Brazil’s high-value manufacturing goods. The aircraft manufacturer Embraer recently announced a $4 billion deal to sell regional jets to United Continental Holdings Inc. and a U.S. military contract to provide 20 Super Tucano turboprops to Afghanistan.

At the same time, 90 percent of the $41 billion Brazil exported to China last year came from commodities. In fact, the decade-long surge of exports from Latin America to China has concentrated on a few raw materials. While this makes South America more vulnerable to a slowdown in China, it has also provided those countries with the cash to buy U.S. exports.

“The fact is that China’s enormous commodity purchases from Latin America are making the region a bigger and better customer for U.S. goods,” said Hakim.

Chinese foreign direct investment in South America is growing rapidly but these investments are directed toward the extraction and transportation of the natural resource and agricultural commodities being imported by the Chinese.

“Almost all of China’s FDI is related to natural resource extraction, with oil and gas being the largest sectors,” said Richard Weitz, a senior fellow at the Hudson Institute. “In the coming years, China’s FDI will likely diversify and Chinese investors will expand into other sectors such as transportation, manufacturing, and new areas such as green technology and renewable energy.”

A few key countries, Venezuela, Brazil, Argentina, and Ecuador, together have received more than 90 per cent of Chinese loans since 2005. “Two-thirds of these loans are to be repaid in oil, ensuring large foreign oil shipments to China for years without the risks associated with more traditional loans,” said Weitz.

Another key area of investment has been in transportation, with an eye toward making resource deliveries more efficient. China is partnering with Brazil to improve Brazil’s railways and establish a rail link to the Pacific to cut transportation costs of iron ore and soybeans. China is also proposing to build a rail link in Colombia to connect Cartagena, on the northern Atlantic coast of Colombia, with its Pacific coast, making it easier for China to pass goods through Latin America and import raw materials.

China has also secured an option on land in Nicaragua and plans on studying options for building a canal, to rival, or complement, the Panama Canal. Such a project, if it comes to fruition, is estimated to cost $40 billion.

In addition, China signed a $10 billion agreement with Argentina in 2010 to refurbish two rail lines. China took a 40 percent stake in a Venezuelan rail project worth $7.5 billion. This project is also designed to help China maintain a steady energy supply from Venezuela.

With both the U.S. and China making gains in the region in different sectors, there is seemingly room for each side to grow. This implies that trade with Latin America is not a zero-sum game. China presents an alternative to the United States, but that is not necessarily a bad thing.

“So far, Latin America has proven to be a win-win situation for both China and the U.S., and it should remain that way for some time,” said Hakim.

Xi’s visit to Latin America appeared to be all about economics. But some observers have suggested that his visits to Mexico, Costa Rica, and Trinidad and Tobago was an intrusion on U.S. turf and should be understood as a political challenge to Washington, perhaps even signal China’s concern about the Obama administration’s decision last year to raise the U.S. profile in Asia.

“But all three of Xi’s ports of call are important partners for China too,” said Hakim. “If China decides to finance the multi-billion development of a new canal through Nicaragua, U.S. banks and companies will rush to be involved as well, and there will be plenty of benefits to go around. To date, China has been content to focus mainly on economic goals and has shown little interest in political or security objectives.”

But that position may not prevail forever. On the political level, China could provide Latin America with a quasi-world power as an alternative to the U.S. Since the Monroe Doctrine, Latin America has been considered a secure sphere of influence for the U.S. The fact that China presents a less democratic alternative to the U.S. could make Latin America a flashpoint for U.S.-Chinese rivalry down the road.

American Journal of Transportation