China’s recently declared support for globalisation has given fresh hope to Latin America, which could benefit from its established trade links with the eastern giant in the form of greater investment in infrastructure, lower tariffs and higher value exports. Silvia Pavoni reports.

China Latam relations

As the US appears to be abandoning its global leadership role and turning its back on international trade, China is positioning itself to fill the gap. While Beijing’s statements in support of globalisation might be surprising, the world is paying attention – especially Latin America.

China has become a solid buyer of Latin American commodities, and as its consumers become wealthier, Latin America hopes to include higher added-value goods to its sales in the region – such as Chilean wine, for example, in addition to the country’s traditional copper exports.

There may also be opportunities to modernise and expand Latin America’s infrastructure as China seeks to internationalise its companies, which would benefit from a better connected Latin America. The Beijing-backed railway project linking soya-producing Brazil to Pacific-adjacent Peru, announced in 2015 at an estimated $10bn cost, is widely considered to be China’s most ambitious infrastructure venture in the region to date. If built, the rail line will form the main artery in Latin America’s much-needed regional network and provide a faster route for China’s imports.  

Opportunities and threats

But these exciting new opportunities are accompanied by worrying new threats. Political turmoil and recession in parts of Latin America have hindered China’s appetite for investment, and its reduced requirements for raw materials, coupled with lower commodity prices, have dented Latin America’s trade volumes.

Indeed, according to new research by the Inter-American Development Bank (IDB), trade between China and Latin America and the Caribbean totalled $241.3bn in 2016 – a large figure in absolute terms, signalling how far the trade relation has come over the past few decades, but a contraction of nearly 11% on the previous year.

Latam trade with China

The figure had been steadily declining since 2013. The IDB traces the growth of trade between the region and China since 1960, when this value was merely $30m. Although it had not always been rising, 2016’s drop was the sharpest on record in absolute terms and the largest in percentage terms over the past three decades.

On top of this, loans by China’s policy banks (the Agricultural Development Bank of China, China Development Bank, and the Export-Import Bank of China) to Latin America also shrank by nearly 14% in 2016 compared to the previous year, according to think tank Inter-American Dialogue. And after the 2015 announcement, the Brazil-Peru rail project is now on hold because of political and economic concerns over Brazil and reduced political support in Peru, according to Margaret Myers, director of the Inter-American Dialogue’s Latin America and the world programme.

Overall, Latin America did not anticipate this shift. “During the [commodity] boom years, Latin American countries were very passive. They just sort of expected Chinese demand to continue endlessly and didn’t do much to diversify exports, with [only few] exceptions,” says Carlos Casanova, a Hong Kong-based economist at BBVA. 

“You keep on hearing ‘la fiesta se acabo’ [the party is over]. I think Latin America is coming to grips with the fact that the Chinese economy is rebalancing and that they need to diversify the export basket and shift away from just trade to trade and investment.” 

Where next?

So what is next for Latin America’s relationship with China? Ms Myers is optimistic. She offers an alternative reading to the Dialogue’s loans data research, which she co-leads, and which looks at Chinese policy banks’ loans to Latin American governments or state-owned enterprises.

“If anything, it is an indication of China’s continued interest in Latin America. We measure finance between policy banks and governments and state-owned enterprises – a very specific subset of various economic activity that is actually taking place – and looking at that [2016 figure], I’d have expected this to decrease considerably more considering the level of risk of the region,” she says.

Ms Myers highlights the various lending and investment initiatives laid out by China as it seeks to diversify its activity in Latin America, focusing not only on traditional sectors of interest such as mining and agriculture, but also on hi-tech sectors – such as high-speed trains, for example, which could be used in a regional rail network.

“Beyond this, China [recently] announced new funds that are managed by China Development Bank and China Exim Bank but which we don’t record as loans to individual countries,” she adds. “It seems as if Chinese companies approach these funds and say ‘I have this great idea for this facility in Guyana, can you finance it?’. This is just starting; it may be a total of $30bn to $40bn in potential finance allocated on a case-by-case basis.”

Latam trade loans

Financing on increase

Looking at trade finance data, Chinese lenders have also begun to feature in the top financiers league table . According to Dealogic, China Development Bank is now the second most influential lender in Latin America, having acted as mandated lead arranger on nearly $7.76bn-worth of deals between the beginning of 2012 and March 2017. Bank of China and Industrial and Commercial Bank of China follow in 13th and 14th places, respectively, with Export-Import Bank of China in 28th place.

Erik Hoffmann, global head of export and agency finance at Santander, has noted Chinese policy banks’ large support for trade in recent years. As he talked to The Banker, Santander was accompanying China’s export credit agency on a Latin American roadshow fostering trade relations and financing channels to help sell Chinese higher added-value goods to the region.

Despite Brazil’s ongoing and widespread corruption investigations – and it being stuck in the traditional commodity export formula with China, according to experts – the region’s biggest economy is also providing some encouraging signs.

“For the first time in a decade and a half I have something in common with the Brazilian government,” says Mauricio Mesquita Moreira, principal economic adviser at the IDB’s integration and trade sector division. “I went to Brasilia to present a China [trade] barriers study and they were very interested. They were much more pragmatic and data-driven than before.”

In 2016, Brazil exported a total of $152.4bn-worth of goods, of which about one-third went to Asia and one-fifth went to mainland China alone, according to the IDB. Similarly, imports from mainland China were nearly 17% of the total. Brazil’s relationship with China has become crucial – exports to the country in 2016 were more than one-and-a-half times those to the US – and smoother trade conditions are an important goal.

According to Mr Mesquita Moreira’s report, China imposes particularly high import tariffs on certain Latin American sectors. In agriculture, these are 17.3% for Argentine imports, 17% for Brazil and 16.1% for Mexico, while China’s average in the sector is of 13.4%, according to the IDB analysis of 2013 data by the World Trade Organisation and the UN Comtrade.

On the other hand, tariffs on mining are below China’s 3.2% average: 1.7% for Argentina, 0.8% for Brazil and 0.7% for Mexico. Chinese manufacturers are also confronted by high import tariffs in Latin America, particularly in Brazil and Argentina.

Regional bloc

A conversion to the much lower Organisation for Economic Co-operation and Development tariff levels would benefit all, according to Mr Mesquita Moreira, as would the creation of a region-wide trade bloc, which the IDB will be formally encouraging with a paper to be presented at its annual meeting in Paraguay, between March 29 and April 2.

Mr Casanova agrees, saying: “The problem is that [Latin American countries] have no multilateral platform they can use to promote a [new trade] approach towards China or even just to benefit from strength in numbers. Right now, most of the efforts are happening on a bilateral basis and in some cases some countries compete with each other to gain Chinese clout.”

Furthermore, from Beijing’s perspective, a reduction in trade barriers, including heavy non-tariff ones, would go a long way in substantiating China’s public support of global trade and fill the role the US is vacating. As Ms Myers says: “China’s [new role as] promoter of globalisation is very ironic considering how very difficult it is to enter the Chinese market. However, now China is in a place where it can legitimately do this.”

As global powers and trade impetus are shifting, Latin America as a whole should reinvigorate its efforts towards regional integration and focus on redefining its role in its all-important trade and investment relationship with China.

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