Can Latin America’s Engagement with China Deepen?

In November 2016, China’s Ministry of Foreign Affairs released a white paper to guide its relationship with Latin America and the Caribbean through the end of 2019. The paper, encompassing the full spectrum of relationships between the two regions, emphasized that China had entered a “new phase of comprehensive collaboration” with Latin America and the Caribbean and sought to deepen its involvement there in energy and natural resource extraction.

That relationship already is very deep. In the 2000s, when it emerged as the world’s second largest economy, the Asian superpower began to purchase South American commodities, including minerals, soy and oil, on a massive scale. By the middle of the decade, it was providing huge amounts of financing for South American development projects, including oil pipelines and refineries, transport, and hydroelectric power, peaking in 2010 with a yearly investment of $35.6 billion. By 2016, it had supplanted the United States as the number one export destination for South America. It also occupied the No. 2 spot, behind the United States, as the export destination for the region as a whole. Could its penetration in the region get much deeper?

In some respects, it seems unlikely at least in the short- to medium term. Because of the slowing of the Chinese economy, Latin American and Caribbean exports to China have barely grown over the last five years, rising merely 0.1 percentage point of regional GDP. Meanwhile, Chinese loans and investment have fallen, in part because of its growing appreciation of the political risks attached to overseas commitments.

It’s role as the region’s energy purchaser also could decline. This is in part because China’s discoveries of shale gas in the Sichuan basin, near Tibet, and the province of Guizhou mean that the country is now dedicating significant amounts of its resources to domestic gas production and may no longer need as much oil from abroad.

All this has important implications. The commodity boom from 2004-2012, fed in large part by Chinese demand, brought many benefits. It boosted economic growth, funded social services and infrastructure, and reduced inequality, especially in South America.

But it reinforced an already existing dependency on exports of agricultural products, minerals and fuels, making big producers of those products, like Brazil, Argentina, Ecuador and Venezuela even more vulnerable to fluctuations in commodity prices.

It also undercut local manufacturers with cheap imports. In Brazil, for example, the flooding of the Brazilian market with Chinese computers discouraged domestic development of computer technology, one of many instances where imports contributed to a reduction in manufacturing’s share of GDP, or deindustrialization. The region’s heavy dependence on commodity exports may thus have reduced incentives for greater economic diversification. And that diversification might have led the region to produce more processed, higher-value-added products and embark on a path aimed at eventually manufacturing cutting-edge technologies.

Today, however, there are positive signs that China’s involvement with the region is evolving in ways that will contribute to more sustainable development. For example, in the last five years, China’s foreign direct investment in the region has moved from an overwhelming focus on raw materials and energy to one that also includes manufacturing, real estate, and utilities. If it continues, this shift could help buffer the region from the dangers of commodity-export dependence and contribute to economic stability.

Latin America and the Caribbean needs, of course, to do its share. It must improve policies related to those sectors so as to further attract both Chinese and other foreign direct investment to them. A key element is physical infrastructure. But moving up the value-added ladder also requires better skills, and the region is still lagging behind on this front, as revealed in the IDB’s soon-to-be-released flagship publication, Learning Better: Public Policy for Skills Development.

China, which has played a huge role in the trade, investment and development of the region, will, of course, remain a key player. And the opportunities are there for engagement and collaboration between China and the region in a whole host of areas. Latin America and the Caribbean just needs to be ready to maximize the potential benefits from that relationship. If well-managed, it seems destined to grow, evolve and be of mutual benefit to both parties far into the future.

 

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The Author

Yanan Zhao

Yanan Zhao

Yanan Zhao is an information systems consultant in the Research Department of the Inter-American Development Bank. Her research interests are trade and investment between Latin America and Asia. Prior to joining the Research Department, she worked in various China-related organizations, especially in Argentina and Colombia. She is a former President of the U.S. Branch of The Community of Chinese and Latin American Studies (CECLA), a Beijing-based think tank which works to foster dialogue among young scholars on relationships between China and Latin American and the Caribbean. Yanan holds an M.A. in international economics and international relations from the Paul H. Nitze School of Advanced International Studies (SAIS) at Johns Hopkins University and a B.A. in Economics and Mathematics from Smith College.

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