During the past two decades, China’s rapid economic growth and pressing need for commodities has resulted in increased trade and investment in Latin America, along with expanded lending operations to fund important infrastructural projects. Meanwhile, the U.S. administration has largely neglected the region and at times shown outright disdain. Amid the current Chinese/American trade spat, President Donald Trump is visiting a South American country (Peru) for the first time this week where he is expected to warn Latin Americans against continued close trade ties with China. The question is: what does U.S. Chinese rivalry mean for Latin America? Under the current circumstances: perhaps some short-term gains for some countries, but in the longer-term, Latin America needs to find its own development path, one that is as independent as possible from both the ideologies and interests of these two powers.
China in Latin America: Understandable, but not Always a Good Thing
Chinese interests are deeply enmeshed in the economies of Latin American countries—and not always in ways that support their long-term interests. Aside from China’s insatiable need for natural resource commodities, Chinese involvement was spurred by the encouragement of the left regimes that came to power during the 1990s and 2000s. These leaderships opposed U.S.-sponsored neoliberal capitalist globalization given the sharp rises in inequality and social hardship that had occurred in the wake of the neoliberal reforms of the 1980s and 1990s. Most Latin American governments concluded that the market was not going to reduce poverty and inequality, and therefore sought to increase the role of the state in economic development and social progress. Some (particularly Venezuela) had scant regard for the procedures of liberal democracy. China’s authoritarian capitalist model, involving a central role for the state, represented a counter-balance to the U.S. free market approach. Moreover, unlike the U.S. and the Washington-based institutions like the World Bank, which have imposed market-orientated conditions on loans, China has not imposed policy conditions.
Hence, China afforded Latin American countries an effective way to stimulate economic growth and avoid policies that governments believed had not worked well in the past. Argentina, Brazil, Chile, and Peru now count China as their largest trading partner. Chinese foreign direct investment in the region, which has increased by $70bn since 2012, has been geared largely toward infrastructural projects linked to commodity exports. Lending from Chinese state-run banks, for the same purpose, exceeded $20bn in 2015 and 2016. Increasing trade and investment dependence on China has meant that the increase in commodity exports was the driver of economic growth; it also meant sharp economic downturns when Chinese demand for these commodities declined as it did after 2011—with the attendant political turmoil. Brazil, which has faced an ongoing political crisis, is a notable case in point.
For smaller countries, Chinese economic involvement has presented some serious challenges. Faced with limited financial options, from 2008 Ecuador took out eleven loans from various Chinese state development banks for energy, infrastructure, and transportation projects. In 2017, the country faced $6 billion debt, mostly to China. Ecuador’s debt to China now represents 38.7 percent of GDP. Much of the debt is to be paid back by oil shipments with the result that Ecuador has been forced to ship oil at below cost to make shipment deadlines. In addition, the need to extract more oil has produced ever deeper incursions into the Amazon and growing conflict with Indigenous groups. Under current president Lenín Moreno, Ecuador is now seeking to re-negotiate these oil deals. This will not be easy.
Latin America and the U.S.: American First and More Commodity Dependence
The U.S. has always pursued an “America First” policy in the region, but now this pursuit is tinged with contempt. In addition to its ongoing blame of Mexico for raising the crime rate in the U.S. and for its trade deficit, President Trump has kept the tension high by recently sending the national guard to the Mexican/US border to beef up security and by accusing Mexico of failing to stem the flow of migrants from Central America. His comments have alienated all Latin Americans. The Trump administration is currently in a dispute with Argentina over biodiesel production, prompting Argentina to threaten to take Washington to the World Trade Organization over biodiesel import tariffs. Although later exempted, the U.S. also threatened tariffs on imports of steel from Brazil. The Trump administration is, nevertheless, concerned about China’s involvement in the region and has characterized China as attempting to “pull Latin America into its orbit” through state-led investments, loans and through the support of expanded military arms sales across the region. The U.S. wants trade agreements (presumably bilateral ones that benefit the U.S.) and more market reforms in the region. This position will not sit well with Latin American governments, including the more centre/right ones that have come to power more recently. In the current tense context, most governments will want to be seen by their publics as standing up to the U.S.
In the latest escalation of trade recriminations, the Trump administration proposed 25 per cent tariffs on some 1,300 Chinese industrial, technology, transport and medical products. China responded with a list of similar duties on American imports including soybeans, planes, cars, beef and chemicals. Chinese tariffs against U.S. products offer benefits to some Latin American countries. A Chinese tariff on U.S. soybeans would mean more demand for Brazilian soybeans (already the world’s biggest producer and China’s top supplier) and would also increase Chinese purchase of soybeans from Argentina (the world’s third largest producer). Smaller soybean producers like Uruguay and Paraguay might also benefit. However, this scenario, should it come to pass, means greater market and commodity dependence on China.
Reliance on Commodity Exports is no Panacea
In the wake of the debt crises of the early 1980s, Latin American countries, under pressure from the U.S. and the International Financial Institutions carried out market liberalizing reforms (trade liberalization, privatization and de-regulation). The rising tide of opposition to the poverty and inequality that emerged produced left governments that became dependent on commodity export driven growth arising from Chinese demand. While this new entanglement brought some benefits--access to revenues generated from this growth provided increased social spending and poverty reduction--it has presented countries with an ongoing growth and development challenge arising from the failure diversify economies and export profiles. Neither more U.S. supported market liberalization, nor Chinese state sponsored investment in commodity exports, can address this challenge. Latin American countries will need to define their own economic strategies in the pursuit of less export dependence on commodities and healthy economic growth rates. They will need to put Latin America first.