Trade between Latin America and the Caribbean and China have continued to develop since the beginning of the 21st century and, even more so, since the launch by Xi Jinping, in 2013, of the New Silk Roads project, or Belt Road Initiative (BRI).
The aim of this mammoth program is to promote Chinese development goals by internationalizing investment and lending, while guaranteeing the PRC long-term access to the energy and raw materials it imports.
To globalize its industrial policy and support its businesses around the world, China has implemented a strategy between the banks, the Ministry of Finance and the Ministry of Commerce. This is how the China National Petroleum Corporation, Huawei and many other Chinese multinationals have gone “global” and are increasingly present not only in Asia but also in Europe, Africa and the American continent, an area that was long considered the “backyard” of Washington.
The commercial exchanges
While trade between China and the Latin America-Caribbean (LAC) region dates back to the Manila galleons which, from 1565, circulated between the ports of Acapulco and Manila, they have considerably accelerated during the last twenty years. One of the key moments in this regard was the BRI forum held in Beijing in 2017 : Following informal talks between President Xi Jinping and then Argentine President Mauricio Macri, the LAC is incorporated into the sphere of the BRI.
A formal process, put in place during the meeting of the Community of Latin American and Caribbean Nations (CELAC) in January 2018 in Santiago de Chile, formalized China’s invitation to the 33 LAC countries to participate in the BRI initiative. Panama had become, in 2017, the first country to sign a memorandum of understanding to that effectdespite objections and criticism from the United States.
Since then, most other countries have followed. Today, twenty countries in the zone have joined the BRI, leaving Brazil and Mexico as the only two major economies in the region without a formal memorandum of understanding. As a result, in recent years some Latin American countries have severed diplomatic ties with Taiwan in order to attract investment from Beijing.
The Latin America and Caribbean region is an attractive area for investment due to its abundance of natural resources and raw materials (crude oil, iron and copper) as well as agricultural products (soya and oilseeds). Compared to Africa, Latin America can also offer a more stable investment environment, a more reliable judicial system and a large market for Chinese products.
Trade relations with China date back to the 1960s, when Argentina and Mexico sold wheat to China, which was then facing a great famine. In the 1970s and 1980s, Latin American and Caribbean countries had a trade surplus with China. But the situation changed profoundly with China’s economic changes at the end of the 1980s and its accession to the WTO in 2001.
Since then, trade relations have been multiplied by 18 between 2000 and 2016, thanks in particular to the boom in raw materials. During this period, Chinese state-owned banks such as China Development Bank (CDB) and Export-Import Bank of China (ExImBank) signed new agreements with LAC countries. However, trade with China remains for the time being less important than those with the United States.
Comparison of trade between Latin America and the United States with that between Latin America and China. Stéphane Aymard/La Rochelle University, Provided by the author
Direct investments
The growing economic relations between China and LAC are not limited to trade. The second aspect of these relations is foreign direct investment (FDI).
Between 2000 and 2020, Chinese companies invested around $160 billion in 480 deals, mostly through mergers and acquisitions but also through new ventures. For example, China Yangtze Power International (CYPI) recently bought shares of Sempra’s Peruvian) for $3.6 billion.
The following chart shows a spike after the 2008 financial crisis due to the withdrawal of Western investment from the region and a lack of investment funds for local country governments.
China’s direct investment in Latin America in millions of dollars. Stéphane Aymard/La Rochelle University, Provided by the author
The loans
The third strand of this relationship is lending, which started at the turn of the century but also spiked during the crisis.
Since 2005, China’s two major banks (China Development Bank and China Export-Import Bank) have granted over $141 billion in loans to Latin American countries and public enterprises, more than the World Bank, the Inter-American Development Bank or the Latin American Development Bank.
There is a concentration of Chinese LAC loans in four countries: Venezuela, Ecuador, Argentina and Brazil, which received around 93% of the loans. Furthermore, loans are concentrated in the energy (69%) and infrastructure (19%).
China’s banking policy according to Latin American countries. Click to zoom. Stéphane Aymard/La Rochelle University, Provided by the author
Venezuela, the main borrower on the continent, is the country whose debt vis-à-vis Beijing is the largest. Even though China did not grant new loans to Latin American countries in 2020 and 2021, it renegotiated Venezuela’s debt in 2018 and that of Ecuador. Venezuelan debt has taught China to be more cautious in lending to Latin America. Loans to Venezuela have shown Beijing that a country’s oil production capacity is not sufficient guarantee for future repayment.
In addition, Brazil experienced a trade growth, investments and loans, but, as we have said, without officially joining the BRI. Despite a recent downturn in investment due to strained relations with the Bolsonaro government (it remains to be seen what will happen now, with Lula seemingly keen to establish a “constructive dialogue” with Beijing), projects, such as the mega-port in Sao Luiscapable of handling the export of 10 million tons of grain per year, the railway in the state of Para connecting iron ore extraction in the Amazon to the main ports in Brazil and a 12 kilometer bridge between Salvador and Itaparica, which will be the largest construction project on water in Latin America, are developing in Brazil. Even though the country is China’s second largest debtor in Latin America, its companies, such as state oil company Petrobras, manage to repay most of their loans.
The case of Peru is also particular. Peru and China have maintained diplomatic relations for more than 50 years. Along with Costa Rica, it is the only country to have concluded a free trade agreement with both the United States and China. Beijing’s investments in Peru relate to heavy investments in the mining sector ($15 billion according to the Peruvian Ministry of Energy and Mines). There is also a diversification in other sectors such as energy, electricity, fishing… A typical example is the mega-port of Chancay, built by a consortium led by Chinese state-owned Cosco Shipping Ports with significant participation from Swiss company Glencore. The project, with an investment of $3 billion, is expected to become China’s largest commercial terminal in South America when completed in 2024.
A growing partnership
As in other regions of the world, China finances infrastructure investments in LAC, particularly in the mining and energy sectors, which can have positive effects on the economic growth of LAC countries. (). This system responds to China’s desire to become a major player in the energy markets by bringing investments into these countries (private capital not being sufficient due to the financial crisis or corruption-related scandals , as the Lava Jato operation in Brazilwhich discouraged foreign investment).
China is now betting on new infrastructures: 5G, electricity transmission, high-speed rail, electric vehicles, data centers and artificial intelligence… Prospects are emerging for the development of additional links with exchanges of students, tourism, cooperation in the fields of health, science and technology. Thus, the relationship could also become truly a win-win strategy on sectors other than resources.
If the governments of LAC countries manage to meet the challenges and develop the opportunities that arise, the LAC-China relationship will become more beneficial for the LAC region. However, the latter must take heed of the “debt trap” (China, for example, holds 11% of Ecuador’s total external debt).
______
Par Professor of Economics, State of New York University Cortland, Visiting Professor at La Rochelle University, La Rochelle University
The version originale of this article was published on The Conversation.
