Energy & Environment, Investment

China in Latin America – a new force for the EU to reckon with

Entre la boca del dragón - 2

 

 

China has understood the strategic importance of Latin America and made it part of its current ‘One Belt One Road’ strategy aimed at increasing China’s connectivity with the emerging world. As Chinese investors play an increasing role in the Latin American economies, what role will there be for Europeans in future? Any Freitas sheds light on current China-related dynamics in Latin America and what they mean for the EU and its investors.

 

The United States has integrated Latin America in its ‘pivot to Asia’ via its Transpacific Partnership (TPP). But while the EU too increasingly looks to Asia, it seems to be losing touch with the Western Hemisphere at the same time. This trend is notable despite the wide range of policy dialogues and cooperation structures it put in place on issues as diverse as drug trafficking, migration, research and innovation, and sustainable development. And despite its free trade agreements with Chile, Mexico, Central America and Peru, Colombia & Ecuador.

 

Secular retreat

 

During the 1980s, the EU definitely lost to the United States its number one position as a destination for Latin American exports, and as a source of imports. Over the last five years both the EU and the US have been challenged by a newcomer: China.

 

Hardly noticeable in previous decades, China has become, in the space of half a decade, the first trading partner of many Latin American and Caribbean (LAC) countries, such as Brazil, Argentina, Uruguay, Chile and Peru. The value of China-LAC trade in 2013 was nearly 20 times greater than in 2000 – increasing from US $ 12.6 bn in 2000 to US $ 261.6 bn. In Brazil, numbers speak for themselves: between 2005 and 2013 bilateral trade between the two BRIC partners grew 583 percent, nearly sixfold.

 

Chinese presence in Latin America has been a decisive factor in securing economic stability and growth in the region after the 2008 world financial crisis. As trade with the EU plunged, China’s increasing commodities demand stimulated LAC exports. In a context of high international commodity prices, many countries in the region have seen their economies boosted by China’s emergence.

 

At the same time, bilateral trade between LAC and the EU has never resumed to pre-crisis levels. Latin America’s share of EU imports remained stable: 2.2% in 2000 & 2.3% in 2010. The region’s share in EU exports rose from 2% to 2.4% over the same period.

 

China is expected to overtake the EU and become Latin America’s second largest trading partner by 2016. The intensification of trade relations with China comes at the price of dependence. In 2012, 1 percent increase in Chinese GDP entailed 0.4% growth in Latin America. For every 10 percent of growth in China, Latin American exports increased by 25 percent. China’s expected slower growth rate in future will negatively affect economic prospects of the region.

 

China has been primarily interested in Latin America’s raw materials, especially soybeans, copper and oil. China’s exports to LAC countries have been dominated by (high valued-added) industrial goods, such as electronic devices and mobile phones. The imbalance in the composition of LAC-China trade has been negatively perceived by important regional players. Brazilian and Argentinean manufacture producers, for instance, have expressed their fears of having losing market share domestically, regionally and internationally because of Chinese competition.

 

This imbalance is not, per se, new, nor exclusive to China. Apart from a few exceptions (like Mexico and Costa Rica), Latin American exports to the EU have also been concentrated in a few commodities, such as bananas, beef, coal, coffee, copper, iron and steel, natural gas, oil and soybeans. EU exports to LAC countries have also been dominated by industrial goods, such as road vehicles, and industrial machinery, as well as by pharmaceutical products.

 

One area where EU presence has been – qualitatively and quantitatively – crucial to LAC countries is foreign investment (FDI). Since the early 2000s the EU is LAC countries’ main source of FDI, accounting for around for 40% of cumulative flows. Investments have been concentrated in a small number of countries, notably the Central American and Caribbean financial centres, Brazil, Mexico, Argentina and Chile. European companies which mostly originate from Spain, the UK, France, Germany, or the Netherlands have considerably invested in areas such as telecommunications, oil, finance and infrastructure.

 

Chinese investment

 

China has recently disclosed its intention to intensify its investments in the region too. In 2012, China’s FDI in Latin America reached US $ 68.2 bn. After a considerable drop in 2013 (15.16 billion us dollars), FDI flows rose by 71% again in 2014, reaching 22 billion. China is currently LAC third largest source of investment. At current rates it could rapidly outpace the EU (and the US).

 

A particularly notable fact is that Chinese investments seem to focus on the areas which are dear to European investors, such as infrastructure, energy, oil & gas, but also agriculture and finance. One example is telling: it is a Chinese company that is involved in a project to build a canal in Nicaragua linking the Atlantic and Pacific oceans to rival the legendary Panama Canal.

 

China’s strategic positioning on the Atlantic-Pacific trade route reveals how much more than the EU China has understood the strategic importance of LAC countries in the South Pacific. This stands in contrast to the increased interest in Europe and the US towards the Asia-pacific region. Their “strategic pivot to Asia” has been driving political and economic attention away from the Atlantic’s Latin American shores.

 

In Asia, though, and particularly in China, LAC countries play a more prominent role in facilitating trade and boosting political relations within and beyond the Pacific. The Trans-Pacific Partnership (TPP), which includes Chile, Peru and Mexico; or the Pacific Alliance, by composed of Mexico, Chile, Colombia, Peru and Costa Rica, are a case in point.

 

China only has three free-trade agreements in the region, with Chile, Costa Rica, and Peru.  Yet formalised economic ties are on the rise. Early this year, Chinese President Xi Jinping announced China’s intention to invest US $ 250 bn in the region over the next decade – of which US $ 20 bn in Venezuela alone.

 

Xi Jinping chose a highly symbolic occasion to make his announcement: the first China-CELAC ministerial forum which took place early January 2015. This forum is intended to be a “new cooperative mechanism” between China and LAC countries and signals the integration of LAC into the “One Belt, One Road” (OBOR) strategy, which currently shapes Chinese cooperation with developing regions and institutions, such as Africa, the Arab League, the Gulf Cooperation Council, and ASEAN.

 

OBOR is also a reflection of China’s new approach to international politics and diplomacy, which seems to be marked by a more assertive engagement in a number of issues and/or regions in a break to past Chinese governments’ low profile attitude.

 

During the 2014 China-CELAC leaders’ meeting in Brasília, President Xi declared, for instance, that the forum was “a common wish shared by both sides”, as way to “carry out comprehensive cooperation. It follows the trend of the times featuring cross-regional cooperation in a multi-polar world”. Among other things, the forum was intended to send a “strong signal” of the Chinese commitment “to strengthening unity and coordination and promoting South-South cooperation”.

 

Although Latin American countries will likely remain culturally linked to Europe, their economies are increasingly connected to China. As Europeans prepare for a new EU Latin America summit in June and mull reviving trade negotiations with Mexico or Brazil, this new fact on the ground should focus minds and put Latin America squarely in the picture of the new EU trade and security policy strategies currently under preparation in Brussels.

 

Any Freitas is a Brussels-based political risk analyst and a Visiting Fellow at the Brazil Institute at King’s College in London

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