In the past ten years, the world has taken notice in China’s growing interest for trade and investment in Latin America.
As a major import country for consumer food products, such as cereals, legumes, cattle and processed foods, as well as mineral raw materials and energy, it’s inevitable for China to focus on resource-rich Latin America. This comes with multiple facets of how each will benefit from building a relationship.
Take note: With China having a GDP value of over 18 percent of the world’s economy, and a 6.9 percent growth in Q1 and Q2 2017, it is without question how great the Chinese economy impacts global markets. In addition, China’s population is over 1.38 billion, which makes it the most populous country in the world – its more than double the total population of all Latin America and more than four times the population of the United States.
On the other hand, Latin America has half the GDP and nearly half the population as China. China is also the third largest exporter and second largest import partner for Latin American goods, including commodities due to the regions arable, agricultural, and resource rich lands. While it is a supplier of raw materials, it’s lack of industrial manufacturing makes it a prime buyer for China’s products, such as toys, household goods, clothing, appliances, technologies and more.
Given this information, and since China’s arable land is less than 13 percent, in the context of a desertification process that has not proved possible to stop, the country has understandably very high levels of demand, and thereby has become a major importer, for raw materials and food, and exporter for consumer products.
In the 2000s, this demand has contributed to growth and economic resilience in Latin America, but the region’s slight deceleration due to global economic trends and political transitions in recent years has had a very negative impact on the region and its economic projections.
Furthermore, given its energy needs, China is convinced that it must innovate and lead the way in the search for alternatives to oil. However, since China will continue to rely on oil and raw energy resources until alternatives have been fully developed, it’s investment in the industry and relationship with Latin America has not faltered, despite losses for Latin American exporters due to a decline in crude oil and iron ore prices. For example, China has committed $65 billion USD for 500,000 barrels of oil per day from the reduced production capacity of PDVSA, a Venezuelan state oil company – this is in addition to a number of infrastructure investment projects and a greater quantity of exports to the South American country.
As an exporter for consumer products, China’s labor force has seen a major influx in industrial jobs. This has caused nearly 400 million Chinese citizens to move from rural areas to urban centers since the end of the 1970s. However, given that supply has not been able to keep up with demand, many of these factory jobs were met with inhumane conditions and dismal wages between 15 and 20 times lower than international averages since inception (aka labor slavery). Currently, although the wage differential gap has lessened, China continues to produce goods at costs well below those of other countries. From this perspective, China’s huge industrial base, supported by an exploited labor has allowed for the industrial powerhouse to monopolize the market and expand globally, even when the quality of its products is constantly subject to criticism. This issue of labor and humane standards has been the source of endless disputes and negotiations within the World Trade Organization (WTO). Under pressure from their trade unions, several G8 countries have demanded wage homologation to ensure fair trade terms.
In the container import sector, the U.S. reigns with receiving over 20 percent of its goods from China, amounting to 4 percent of the U.S. GDP. This has caused a domino effect for the U.S. originated, number one retail giant in the world, Walmart, to import nearly 80 percent of its consumer goods from China. As low-cost manufacturing and middle-class wealth has expanded in the country, China has also become an important market for many North American companies.
However, as previously noted, inhumane treatment and internal labor pressures is among the most controversial issues for electoral debate in the U.S. and G8 partners.
The rise of China as a great importer and exporter adds to its financial power. To fully convey the tenacious and tremendous climb of their economy to become a main rival of U.S. trade and financial markets, it would take more than the limited space that this article allows. Furthermore, China’s capacity for buying, selling and financial investment resources has permitted the country to become a systemic and significant player in the Latin American marketplace.
Due to their growing trade relations, Chinese President Xi Jinping developed an ambitious five-year plan from 2015-2019 for exchange with Latin America that includes: $500 billion USD in trade and $250 billion USD in foreign direct investment over its course. This has been more than fulfilled already and China is gaining greater economic influence in the region than the U.S. on a daily basis.
The Chinese model is clearly mercantilist, not political – a B2B, you-do-you, I-do-me approach. For example, the Sino-Venezuelan cooperation model previously described has provided the Chávez and Maduro governments with weapons and financial aid, and in turn with a pragmatic silence regarding violations of human rights, political freedoms, and the prevalent hunger and disease that exists in the country. The two countries offer each other mutual voting support in the various multilateral global organizations every time the community of democratic nations tries to demand compliance with international law or human rights.
The big question is how are the benefits of closer relations with China shared? The answer, in most cases, is that the big beneficiary has been China. In Latin America, it has found a secure flow of raw materials, fundamental for its expansion, at prices below the world average. In the case of Mexico, some of the products that it exports to the North American market have been affected by unfair Chinese competition in the form of goods produced with very low-cost workers.
Furthermore, many economists argue that trade with China hinders the process of regional industrialization. This is due to when demand for raw materials increases in price and in effect strengthens local currencies, importing products finished or manufactured from China as opposed to manufacturing it in the home region is economically more attractive. Consequently, another question is if building China relations are perpetuating a dependence on exporting raw materials making Latin American economies more reliant and vulnerable?
As a larger trading partner with China in Latin America, the case of Venezuela is most eloquent in this regard: it shows that China is a ferocious negotiator, especially if it meets with an interlocutor like the governments of Chavez and Maduro, who have sold oil at giveaway prices in exchange for receiving loan payments in advance. In fact, the terms of successive agreements between the two governments, which total almost 500 from 1999 to date, are not publicly known. Diplomats and experts have pointed out that the commitments made by Venezuela violate its own laws, including the authorization of Chinese companies to ignore the Labor Law that prevails for other companies in their relations with Venezuelan workers.
Finally, another issue where China works without limitations is that of corruption. Unlike the U.S., European Union and the United Kingdom, where laws prohibit and penalize companies and citizens for corrupt practices when conducting business in foreign countries, Chinese businesses are able to execute their plans in America Latina free from any oversight in the matter of corruption. It is precisely these aspects of relations with China that are causing alarm, inside and outside Latin America.
Growing relations between Latin America and China is multifaceted. Beyond the short- and medium-term benefits that can be generated by building economic relationship with the Asian giant, commitments and dependencies are being created. In many ways, these are contrary to human rights, labor rights and, finally, the institutional and economic development of our countries. Above all, China-Latin America relations are not projected to change in the coming years despite political transitions and economic changes. Business is business.
In light of this increasing Chinese presence in Latin America, with the issues associated to the same, one question emerges for United States policy makers and business leaders: Shouldn't we strategically increase and prioritize our engagement and partnerships with our neighbors in the Western hemisphere? The answer is obviously yes, but there has been little action. Plus, it might be too late when we start.
Leopoldo Martínez Nucete tweets @lecumberry.