Strategic Implications of Chinese Aid and Investment in Latin America

Since 2008, the People’s Republic of China (PRC) has moved forward with a series of large aid and investment deals, indicating that the PRC is raising its stake in Latin America to a new level [1]. The impact of China’s expanding commitment in Latin America extends far beyond the PRC’s immediate goals of securing access to Latin American markets and reliable sources of primary products at favorable prices. The implications of this trend can be understood in terms of four overlapping effects: (1) the interaction is transforming the physical, economic, educational and social structure of the region; (2) it is enabling the survival and spread of regimes oriented against the United States, Western-style democracy and economic models; (3) it is enabling the emergence of Brazil as a regional powerbroker; and (4) it is undermining the United States as a source of political and economic influence in the region, as well as U.S. options for regional engagement. While China is transforming Latin America through such effects, however, this does not imply that they are deliberate, primary objectives of Chinese foreign policy toward the region.

The mechanism by which Latin America’s expanding relationship with the PRC is transforming the region has as much to do with expectations by Latin American investors of future business with China. Inspired by expectations of selling to, or importing from China, Latin Americans are investing to improve their infrastructure, including the expansion and modernization of Pacific ports such as Ensenada, Buenaventura, Manta, Callao and Iquique, among others. The desire to facilitate commerce with China has also breathed new life into contemplated but long unfunded infrastructure projects, connecting the continent to its Pacific coast, including the Manta-Manaus corridor, inter-oceanic corridors to Paita and Ilo in Peru, and the bi-oceanic corridor connecting São Paolo in southern Brazil with the Chilean port of Iquique.  

Beyond physical infrastructure, the belief held by students in the region that China is the wave of the future has driven the establishment of China-oriented programs throughout Latin American universities, as well as a wealth of offerings for learning Mandarin, from private institutes to university language programs, including the establishment of 18 officially sanctioned Confucius Institutes in the region.

Chinese engagement is also shaping the politics of the region. One such impact is the contribution of Chinese aid and investment in the survival of the “caudillo socialist block” (Venezuela, Ecuador and Bolivia). The PRC has been extremely cautious to avoid associating itself with the anti-U.S. proclamations of leaders such as Hugo Chavez in Venezuela. Nonetheless, the PRC benefits from the policies of these regimes insofar as their disruption of relationships with Western companies, and the personalistic character of their regimes creates opportunities for Chinese companies to gain access to their resources and deepen penetration of their markets.

The principal example of how China has enabled “caudillo socialism” in the region is its relationship with the Hugo Chavez regime in Venezuela. As Chavez has consolidated control of the petroleum industry and other sectors of the Venezuelan economy, China has played an increasingly important role in buying Venezuelan oil, working the oilfields and loaning money to the Chavez regime. Over the past two years, China Development Bank has loaned $8 billion to Venezuela, to be repaid in future oil deliveries, and is currently negotiating an additional loan of up to $4 billion. Although initially intended for Venezuelan infrastructure projects, these funds arguably helped the Chavez regime to meet its internal and external commitments when oil prices fell from $140 per barrel to less than $40. China National Petroleum Company (CNPC) has expanded its Venezuelan oil operations while Western companies have pulled out, and in September 2009 announced its intention to invest an additional $16 billion (El Universal [Venezuela], September 17).  

In Ecuador, like Venezuela, China has helped to maintain the solvency of that country’s anti-U.S. regime, issuing a $1 billion loan, which helped the government of Rafael Correa to manage a liquidity crisis associated with the repayment of foreign debt obligations (El Universo [Ecuador], July 23), as well as a $2 billion 1.5 Gigawatt hydroelectric plant, 90 percent self-financed by the Chinese company that performs the work (El Universo, September 12). The Chinese consortium Andes Petroleum is a key investor in Ecuador’s oil sector, and has become increasingly important as other companies have pulled out in response to the Correa regime’s move to force them to re-negotiate the terms of their concessions. Even in Bolivia, where the Chinese have proceeded cautiously, the state petroleum company YPFB is pursuing a strategic partnership with CNPC for the investment and technical expertise that it requires to maintain Bolivian gas production (La Razon [Bolivia], November 5, 2008).  

In addition to contributions as a resource provider and customer, China is also playing an expanding role as an alternative provider of technology and military goods. China has helped Venezuela to create a factory to assemble drilling rigs to develop its oil, as well as other joint ventures for producing cars and cell phones. The PRC has also launched a telecommunication satellite for Venezuela in 2008, and has become an important telecom infrastructure provider. In addition, the PRC sells the country increasingly sophisticated military end items, including air surveillance radars and military aircraft [2].

Ecuador and Bolivia have followed Venezuela’s lead with respect to military purchases from the PRC. Ecuador, which had previously leased two MA-60 transport aircraft from the Chinese in 2007, is negotiating to purchase four more (El Universo, August 23), as well as taking delivery of two Chinese radars for evaluation, and purchasing  four more, to be delivered by the first quarter of 2011 (El Universo, August 23). Bolivia, which previously received trucks, small boats and night vision goggles from the PRC, is now working with them to launch a satellite (Los Tiempos [Bolivia], July 22) and purchasing six K-8 aircraft for counter-narcotics missions after being denied access to U.S. and European planes (El Universo, October 2).

In addition to providing resources, technical support and military goods that have contributed to the survival of the “caudillo socialist block,” the PRC has also been contributing to Brazil’s ascendancy as a regional power broker. Brazilian economic performance has been driven, in part, by its export-oriented iron and soy industries, for which China is a key customer. Indeed, the global recession emphasized and magnified the importance of China to Brazil. While Brazilian exports to the United States fell 37.8 percent in the first quarter of 2009, exports to the PRC increased by 62.7 percent (La Jornada [Nicaragua], May 4) thanks in part to a Chinese stimulus package that included $740 billion in infrastructure projects (Brazzil Magazine [Brazil], January 15), thus maintaining high levels of Chinese demand for factor inputs such as iron, purchased from Brazilian suppliers such as CVRD. Consequently, in the first half of 2009, China became Brazil’s number one export destination (Xinhua News Agency [China], April 3). China has also emerged as a key financier as Brazil reaches out for the $174 billion that it requires to develop newly discovered deepwater oil reserves in the Campos and Santos basins. In discussing a $10 billion loan from China Development Bank to Brazil (La Nacion [Argentina], May 28), the president of Petrobras, Sergio Gabrielli, noted, “There isn’t [sic] someone in the U.S. government that we can sit down with and have the kinds of discussions we’re having with the Chinese” (The Wall Street Journal, May 18).  

The PRC is also an increasingly important partner in technology transfer for Brazil. The two nations are pursuing a range of important joint ventures, including joint production of mid-sized business jets, the China-Brazil Earth Research Satellite (CBERS) program and other space cooperation programs (Xinhua News Agency, May 19).

Brazil’s expanding trade with China is also giving Brasilia reasons to become more interested in the affairs of its neighbors. In cities such as Manaus in the interior of Brazil, the economics of importing factory inputs from the PRC is greatly facilitated by routes linking the Brazilian Amazon to Pacific ports. Projects currently underway include highway corridors from the Amazon River over the Andes Mountains to the Peruvian ports of Paita and Ilo, as well as a possible multimodal corridor linking the Brazilian city of Manus, with its free trade zone, to the Ecuadorian port of Manta. In a similar fashion, Brazil’s growing commerce with China also heightens its stake in the trade policy and political stability of its pacific neighbors, as well as major infrastructure projects affecting the economics of that trade such as the expansion of the Panama Canal.

In addition to sustaining the caudillo socialist block and contributing to the rise of Brazil, in a broader sense, Chinese investment and aid in Latin America is undermining the primacy of the United States’ role as an economic and social actor in the region. This can be seen in the re-orientation of Latin America’s trade structure away from the United States, Latin American efforts to either please or avoid offending China, and in the declining power of the United States as a “reference model” for economic development and democracy.

With respect to trade structure, PRC financial deals to facilitate commerce, such as the $10.2 billion debt swap with Argentina in March 2009 (La Nacion, March 31), represent an expanding challenge to the primacy of the dollar as an international reserve currency (Nacion [Costa Rica], March 31). Brazilian President Lula explicitly argued for working with China to move away from the dollar during his trip to China in May 2009 (Xinhua News Agency, May 22).  

Even before such challenges to the primacy of the dollar, however, the lure of China as a market was arguably one factor that helped to permanently derail the proposed “Free Trade Area of the Americas.” Chinese bilateral free trade agreements (FTAs) with Chile and Peru, and FTA negotiations with Costa Rica can have the effect of moving the region away from a structure of trade relationships and incentives focusing the region on the United States, to a world in which Latin American states are more independent global actors. At the individual country level, such influence can be seen in Chile, the foreign economic policy of which focuses on positioning the country as a gateway between Asia and Latin America. A similar enthusiasm can be seen in Peru, which hosted the 2008 Asia-Pacific Economic Cooperation (APEC) summit, and in which the PRC has made important investment commitments in the oil and gas sector, purchases of fishing fleets and fishmeal processing facilities, and mines in Toromocho, Rio Blanco and Maracona. It is also evidenced in the desire of countries such as Colombia and Costa Rica to tie themselves more closely to the Pacific economic community by joining APEC.

In the realm of what has been called “soft power,” the United States is also losing influence in the region where U.S. initiatives conflict with Latin America’s desires to maintain a positive relationship with the PRC for economic reasons. The decision by the Ecuadorian regime of Rafael Correa not to renew the agreement giving the U.S. access to Manta was a necessary step in inviting the Chinese to develop the airport into a hub for trans-pacific flights, even though the two were probably never explicitly connected by the Chinese. In the future, as Latin American regimes contemplate whether to allow potentially intrusive cooperation with U.S. law enforcement in areas such as counternarcotics, telecommunications, or banking, the impact of such cooperation on attracting investment from partners such as the Chinese will cast a growing shadow over their decisions.

The desire of Latin American leaders to court, please, or avoid offending the PRC, is becoming increasingly evident. When Costa Rican President Oscar Arias switched his country’s diplomatic recognition from Taiwan to the PRC in May 2007, a key factor was his belief that the emergence of the PRC as a global power made being on the “right side” of the China/Taiwan issue in Costa Rica’s interest [3]. The importance that Latin American leaders place on China can be discerned by the number of its presidents who have led delegations to the PRC in recent years: in addition to the six trips to China by Hugo Chavez (La Estrella [Panama], April 6) and multiple trips by Rafael Correa and Evo Morales, virtually all the rest, including President Lula of Brazil, Alvaro Uribe, Felipe Calderon, Tabaré Vásquez, and Oscar Arias.   

To date, the PRC has limited its attempts to exert influence over its Latin American partners to areas tied to core Chinese interests, such as their recognition of Taiwan or Tibet, the opening of their markets to Chinese goods, and favorable or neutral positions with respect to China in forums such as the Inter-American Development Bank and the World Trade Organization. As China sinks more investment in Latin America, and becomes more dependent on the region as a market and a source of supply, it is logical that China would seek to motivate Latin American leaders to protect these interests. Although it is difficult to imagine the PRC demanding that a Latin American state not cooperate with the United States on police and security matters, it is increasingly easy to imagine that such a state might think twice, if it believes that a U.S. presence could jeopardize a major PRC purchase or investment in the country.

Finally, in the world of ideas in Latin America, the rise of China can become a powerful force in derailing the U.S. political, economic, and human rights agenda in the region. The ability demonstrated by the PRC to sustain growth rates in excess of 10 percent and recover rapidly from the global recession, by contrast to the United States, which precipitated the financial crisis and continues to contract, sends a powerful message to Latin American states that U.S.-style political pluralism may not be necessary for development, and in some circumstances, may be detrimental to it.

Notes

1. Analysts have generally acknowledged that Chinese aid and investment in Latin America is relatively small, compared to comparable investments by the United States and the European Union. Cumulative aid from China to Latin America from 2002 thrugh 2007 was less than $25 billion, comparred to $620 billion from the European Union and $340 billion from the United States over the same period. Thomas Lum, et. al. China’s Foreign Aid Activities in Africa, Latin America, and Southeast Asia. Congressional Research Service. Doc. No. 7-5700. R40361. www.crs.gov. February 25, 2009. Nonetheless, such figures overlook both the order-of-magnitude increase in Chinese aid to Latin America that occurred in 2008, as well as the disproportionate impact that Chinese aid has on the region because of the hopes of attacting even more such aid from the PRC as an emerging market and rising power.
2. China has sold Venezuela 18 K-8 aircraft, which are designated as trainers, but which can be given combat capability by outfitting them with missiles and other munitions. Venezuela is also exploring the purchase of a more advanced type of trainer from the PRC, the L-15.
3. Based on a series of interviews with Costa Rican government leaders in January 2008. See R. Evan Ellis China in Latin America: The What’s and Wherefores. Lynne Rienner Publishers, 1989.