China’s Maturing Relationship with Latin America

Publication: China Brief Volume: 9 Issue: 6

The five-nation visit by Chinese President Hu Jintao to Latin America in conjunction with the November 2004 Asia-Pacific Economic Cooperation Forum (APEC) summit in Santiago, Chile, marked the beginning of a fundamental transformation in China’s relationship with Latin America. Prior to that trip, the People’s Republic of China (PRC) had almost no presence in the mainstream Latin American political, business and social discourse.  The message sent by President Hu and his delegation during that trip was the Chinese intent to promote and accelerate a nascent partnership with the region.  

Following Santiago, four years elapsed before the site of the annual APEC summit returned to Latin America.  When President Hu traveled to the region in November 2008 to attend the APEC summit in Lima, Peru, the trip highlighted how far China’s relationship with Latin America had evolved in only four years.

President Hu’s trip came just weeks after the PRC’s induction as a voting member of the Inter-American Development Bank.  It also coincided with the release of China’s first policy paper on the region, "China’s Policy Paper on Latin American and the Caribbean." The paper confirms Beijing’s intention to expand its engagement with Latin America on multiple fronts, from investment to technology partnerships to military exchanges [1].  En route to Lima, President Hu stopped in Costa Rica, which in June 2007 became the first Central American nation in the post-Cold War era to switch its diplomatic recognition from Taiwan to mainland China. In Cuba, Hu signed 37 agreements and had a photo op with an ailing Fidel Castro, which reinforced China’s role as Cuba’s principal extra-hemispheric patron [2].  In addition, the APEC summit highlighted the efforts of Peru and Chile to position themselves as commercial hubs in the developing trade between China and South America.

The Maturation of the Trade Relationship

Since 2004, China’s relationship with Latin America has not only expanded quantitatively, but has also matured qualitatively in terms of both transactions and knowledge.  

The growth of China-Latin America bilateral trade from $10 billion in 2000 to $102.6 billion by the end of 2007 [3] reflects two reinforcing phenomena: 1) the expansion of commodity exports to China by a small set of southern cone countries, and 2) a broad-based penetration by China into Latin American product markets.

The primary products purchased by China from Latin America have been commodities such as iron, copper, soy and fishmeal that do not require complex transactions or an extensive local presence.  As PRC experience with the region has grown, however, it has cautiously established an investment presence in key commodity sectors.  In Venezuela, it moved from modest oilfield operations in the Lake Maracaibo area to a more important and potentially riskier presence as a minority partner in developing the massive heavy oil reserves in the Orinoco river basin. In Peru, China Aluminum Corporation committed to invest up to 2.2 billion over the next 30 years for the rights to operate a mine at Toromocho [4].  In February 2009, during an official visit to Brazil, Chinese Vice-President Xi Jinping signed a preliminary accord for a $10 billion loan to the Brazilian national oil company Petrobras, providing it with capital for developing new deepwater oil reserves, which could ultimately be exported to the PRC [5].

In some cases, these investments have proven problematic for the PRC.  Two years after a Chinese consortium invested $1.42 billion to purchase the Ecuadoran assets of the Canadian oil firm EnCana in 2006.  The Ecuadoran government forced the Chinese to give up property rights in oil fields that had been part of the purchase and sign a new contract in which they simply extracted oil from the territory under a service contract with Ecuador [6].  Hutchison Whampoa Limited was forced to withdraw from a concession to operate the port of Manta when it could not resolve a dispute with the Ecuadoran government concerning the contractual obligations for investment in the port [7].  In Chile, China Minmetals invested $550 million in a copper advance purchase agreement with the state mining company COLDELCO, only to discover in 2009 that the agreement did not give it the expected right to acquire a 49 percent stake in the new Chilean mine “Gabriel Mistral” [8].  In Venezuela, a 2006 decision by PdVSA to stop producing the heavy petroleum product ormulsion left in the lurch a power plant built by the Chinese to use it [9].

Beyond commodities, select Latin American companies such as Grupo Modelo, FEMSA and GRUMA have made some progress building markets in the PRC, selling recognized brand name products to the growing Chinese middle class.  Latin American governments have also improved their ability to support their nationals seeking to do business in China, opening commercial attaché offices in secondary locations such as Shanghai and Guangzhou, in addition to their embassies in Beijing. They are also expanding and refining the capabilities of trade promotion organizations tied to the government such as ProChile, APEX, Fundacion Exportar, PROCOMER, and CORPEI.  Additionally, they have created technical frameworks to support trade and investment including bilateral free trade agreements with China, such as those of  Chile (2006), Peru (2009), and Costa Rica (initiated November 2008), as well as reciprocal investment protection agreements (Colombia, November 2008) and individual phytosanitary agreements.  Nonetheless, those governments and producers have discovered that despite such efforts, traditional products such as coffee and fruits have not sold well in the PRC.  In addition to issues of Chinese tastes, these perishable products and the labor required to harvest them makes them uncompetitive against closer, lower-cost producers such as the Philippines.  

With respect to Chinese exports to Latin America, the PRC has not only increased its market share, but also the sophistication of its product offering in Latin American consumer markets.  As factories in the PRC produced more items and Latin American traders  became more sophisticated in dealing with those factories, China has complimented its offering of labor-intensive manufactured goods such as clothing, toys and footwear with a broad selection of Chinese motorcycles, cars, heavy machinery, appliances, and consumer electronics.  The PRC has also launched projects to build assembly facilities in the region itself, leveraging the access to third-country markets afforded by regional free trade agreements. Chinese auto companies DongFeng, Geeley, and FAW [10], for example, have announced plans to create assembly plants in the Mexican maquiladora sector, in order to achieve duty-free access to the U.S. car market under provisions of the North American Free Trade Agreement.   

Finally, China or Hong Kong-based companies with a more multinational character have expanded their physical presence in the region to service clients.  These companies include the logistics company Hutchison-Whampoa, China Overseas Shipping Company (COSCO), the telecommunications companies ZTE and Huawei, and Hong Kong Shanghai Bank of China (HSBC).

The Expanding Influence of China

Although the expanding volume of trade and investment between the PRC and Latin America is impressive, perhaps the most significant transformation has been the expanding weight of the PRC in the calculations of political leaders, businesspeople, and others in the region.

The perception that China is emerging as a key economic and political player has been a powerful motivator for leaders to invest time and resources to leverage, accommodate, or defend against such a future. The decision by Costa Rican President Oscar Arias to diplomatically recognize the PRC in June 2007 was motivated, in part, by his conviction that positioning his country in line with China’s rise was necessary for it to play a leading role in the Americas.  The investment of time by Latin American leaders to promote their countries’ commercial and political relationship with the PRC through official visits to China has been similarly impressive. During 2008, for instance, four Latin American heads-of-state made high-level visits to China accompanied by trade and investment-oriented delegations: Peruvian President Alan Garcia (February), Chilean President Michele Bachelet (April), Mexican President Felipe Calderon (July), and Venezuelan President Hugo Chavez (September).

In the private sector, the calculation of businesspeople that the PRC will be among the most important markets of the future has motivated a wide range of corporate leaders to dedicate significant time and capital to position themselves in China, even when those companies do not expect to generate a profit from their China operations for years.  

In the academic world, Chinese language programs and China studies programs in Latin American universities have proliferated since 2004.  While the United States remains a dominant cultural and economic reference, a growing mass of Latin American students are investing their futures in the expectations of China’s future importance.

The Impact of the Global Recession
 
The transformation of China’s relationship with Latin America during the past four years is an inadequate measure of the rate of change to come. In particular, the deepening global recession, which may bring about financial and political upheaval, can fundamentally transform the roles of actors such as the PRC in the international system.  

In the short to medium term, the recession is likely to severely strain China’s relationship with Latin America.  The PRC is likely to reduce its purchase of primary products from Latin America, while simultaneously seeking to boost its sale of goods there to compensate for lost sales to its traditional customers in the United States and Europe. This will exacerbate the existing trade deficit.  The diminishing benefits of the PRC as a customer of Latin American goods, in combination with heightened competition from China as a major seller—as Latin American producers teeter on the edge of solvency—is likely to strengthen political forces with the social constituency in the region critical of trade with China  This could fuel local resentment against Chinese companies’ actions such as the 2006 takeover of an Andes petroleum oil field in Tarapoa, Ecuador [12], or the 2007 violence against the Chinese company Petroriental in Orellana [13].  It could also foment violence against ethnic Chinese in the region, as demonstrated by the incidents in 2004 against Chinese shopkeepers in the Venezuelan communities of Maracay and Valencia [14]. Such events may also motivate the PRC to work with governments in the region in new ways to protect PRC businesses and the Chinese Diaspora in ways that it did not do during the previous century when the PRC was weaker.

At the same time, if the PRC is able to effectively manage the tensions generated by economic conditions, both at home and in Latin America, it may emerge from the crisis with a dramatically stronger position in the region.  The evaporation of Western capital from the region has increased the region’s leaders’ focus on the PRC and its $2 trillion in foreign currency reserves as a potential new source of global liquidity and investment.  The steep decline in global commodity prices and asset values provide an opportunity for the PRC to acquire more assets in Latin America at bargain prices, while also winning influence and goodwill for investing in the region at a time in which Western investors are not.  

As the global recession deepened in February 2009, for the first time ever, two senior Chinese officials made simultaneous multi-country trips to the region.  Chinese Vice-President Xi Jinping, mentioned as a likely successor to Hu Jintao, paid visits to Jamaica, Colombia, Venezuela, Brazil and Mexico, while Hui Liangyu, the Chinese vice-premier, made trips to Argentina, Barbados, Ecuador, and the Bahamas.  Other factors must be considered as well, such as how the crisis affects the competitive position between China and other outside players in Latin America, such as India.  While it is difficult to determine the outcome of such interactions, it is likely that the next time that APEC hosts its annual summit in Latin America, the region’s relationship with China will have evolved as much, if not more, than the change witnessed from the 2004 Santiago summit to the 2008 summit in Lima.

Notes

1. “Full text: China’s Policy Paper on Latin America and the Caribbean.”  China View.  Beijing, China.  http://news.xinhuanet.com/english/2008-11/05/content_10351493.htm.  November 5, 2008.
2.  “Cuba propuso a China 37 proyectos por $1,500 millones.” El NuevoHerald. Miami, Florida. http://elnuevoherald.com. November 23, 2008.
3.  “Total Import and Export Value by Country (Region) (2007/01-12)”.  Ministry of Commerce of the People’s Republic of China..  Http://english.mofcom.gov.cn.aarticle/statistic/ie/200802/20080205371690.html.  February 4, 2008.
4.  “Proyecto Toromocho generará 5,000 empleos durante su construcción, señala presidente García (ampliación).”  Andina. Lima, Peru. http://www.andina.com.pe.  May 5, 2008.
5.  “China considera millonaria financiación de Petrobras.”  La Nacion.  Buenos Aires, Argentina.  http://www.la-nacion.com.ar.  February 20, 2009.
6. “La Andes Petroleum y Repsol logran un acuerdo.”  El Universo.  Guayaquil, Ecuador.  http://www.eluniverso.com.  August 9, 2008.
7.  “Hutchison ya no seguirá en el puerto del Manta” El Universo.  Guayaquil, Ecuador.  http://www.eluniverso.com.  8 February 2009.
8.  “Codelco y Minmetals podrían acudir a arbitraje por Gaby.” Diario Financiero. Santiago, Chile. http://www.df.cl. July 16, 2008.
9.  “China sólo se quedará con dos tercerios de la ormulsión del segundo módulo.” El Universal. Caracas, Venezuela. http://www.eluniversal.
com. April 11, 2006.
10.  “Chinese cars coming to Mexico.”  BusinessWeek.  http://www.businessweek.com.  November 23, 2007.
11. Eight Confucius institutes have been established in South America alone, none of which existed in 2004.  See “Worldwide Confucius Institutes.”  Official website. http://www.linese.com/confucius_institutes/search. Accessed 1 March 2009.  New or significantly expanded Asia studies program in Universidad EAFIT in Medellin, Colombia Universidad San Fransisco in Quito, Ecuador, the Escuela Polyechnica del littoral (ESPOL) in Guayaquil, Ecuador and the Universidad de Manta, among others.
12.  “Petrolera china dice que incidentes en Amazonia no afectarán sus intereses en Latinoamérica.”  El Comercio.  Quito, Ecuador.  http://www.elcomercio.com.  November 14, 2006.  
13.  “Protestas contra Petrooriental dejan 31 heridas en ocho dias.”  El Comercio.  Quito, Ecuador.  http://www.elcomercio.com.  July 4, 2007.
14. Yolanda Ojeda Reyes, “Ciudanos Chinos Reciben Protección”  El Universal.  Caracas, Venezuela.  http://www.eluniversal.com.  November 11, 2004.