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AmericasMay 1 2018

The US, China and the battle for Latin America

Though it may not be evident from Donald Trump's Twitter feed, the US is attempting to wrestle back the trade initiative from China in Latin America. Silvia Pavoni speaks to senior Washington officials responsible for taking on this task.
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US officials are becoming increasingly restless about China’s growing presence in Latin America, and are attempting to persuade the countries of the region that Washington is better for its long-term future than Beijing. However, such messages do not always match the words of US president Donald Trump.

Mr Trump was scheduled to attend the Summit of the Americas in Peru in April, but cancelled at short notice, citing concerns over the deteriorating situation in Syria. Instead, US secretary of commerce Wilbur Ross bluntly informed the heads of state and corporate leaders in attendance that the US “will not cede leadership in our hemisphere to authoritarian countries that wantonly exploit the region’s rich natural resources”, and proceeded to list the benefits of dealing with the US.

Meanwhile, a few weeks earlier at the G20 meeting of the Institute of International Finance in Buenos Aires, US Treasury undersecretary for international affairs David Malpass warned about China’s lack of transparency when financing state-sponsored projects. In an interview with The Banker, he said: “My concern about China is that as it moves away from market orientation, [its relationships] end up not working for the people that [the country is] lending to.” When it comes to improving income and jobs “the US would provide that better than China”, he added.

Mixed messages

Privately, some observers say Latin American governments prefer the more orthodox framework of US investments, and others – such as Brazil’s far-right presidential hopeful Jair Bolsonaro – have gone public about their dislike of China’s growing interest in key industries in their countries.

But many more struggle to reconcile the US’s keenness for business with the language that Mr Trump has used about the region. Mexico provides a notable example: some of its people are “bad hombres” and “rapists” in the words of Mr Trump.

When it comes to trade and investment, “the US would clearly offer a model the region could rely on; but, right now, it’s not clear where the US is going”, says one Latin American economist. “The treatment it is giving to Mexico goes well beyond economics,” he adds.

Furthermore, the framework within which the US would be engaging with Latin America remains puzzling, given that the North American Free Trade Agreement renegotiations with Mexico and Canada have been adversarial and are still not complete. Mr Trump also quickly U-turned on his recent U-turn on the new Trans-Pacific Partnership (TPP), which also includes Mexico, Peru and Chile. Bilateral negotiations would give the US the upper hand as the largest economy, say experts. Added to this, Mr Trump does not seem averse to a trade war.

China has gradually been gaining financial influence in Latin America and it is a key trade partner for the region. Its policy banks have lent a total of $150bn since 2005, according to think-tank Inter-American Dialogue, and Beijing is now offering its Latin peers the prospect of joining its $900bn Belt and Road Initiative. Panama is already officially a member, the only one in Latin America, while China is the second largest user of the Panama Canal, after the US.

A growing influence

China’s growing presence is its 'backyard' is worrying the US – backyard being a term some US officials still let slip, only to be corrected by more diplomatic colleagues who offer 'neighbour' as a less patronising alternative.

We’re working hard to make clear to the people of Latin America that it is in US interests for Latin America to do well

David Malpass

Trust in the US throughout Latin America has taken a drastic dive, however, according to the Pew Research Center. Yet asked about the mismatch between the lack of confidence in the current leadership and its new apparent impetus in the region, Mr Malpass insists that the US is engaging with Latin America through a series of initiatives and official visits.

Meanwhile, in an interview with The Banker in Lima, Mr Ross highlighted the benefits of dealing with the US – a country that buys higher value-added products rather than simply raw materials, and with which Latin America has a trade surplus, as opposed to China. “It’s both what the region sells us [as opposed to what it sells China], and that the region has a favourable trade balance with us,” he said. According to US data, Latin America had a $67bn trade deficit with China in 2017 and a $117bn trade surplus with the US. “We’re making [Latin America's] trade deficit with China affordable,” added Mr Ross. Those numbers mirror similar estimates by the Inter-American Development Bank (IDB), which, however, notes that including services the US had a $415m trade surplus with Latin America in 2017. 

While preoccupation with trade deficits might not get much traction throughout Latin America – “everyone knows that a trade surplus is not necessarily a way to get rich”, says the Latin American economist – meaning China’s abundant financial offers have been hard to resist. But concerns over its trade policy and lack of transparency are surfacing in the region too.

Mutual beneficiaries

In a research paper, Uncovering the Barriers of the China-Latin America and Caribbean Trade, the IDB details tariffs and other “discriminatory” policies afflicting the relationship between Latin America and China, with Latam farmers particularly hard hit.

Furthermore, experts have accused China of often channelling funds to countries that can simply match its demands for natural resources, or where it can make financing conditional on the involvement of Chinese companies and workers in the development of infrastructure and other projects.

The most obvious and painful case is Venezuela, where China has become the main investor, fuelling an administration that has driven the oil-rich country into economic and humanitarian crises. “Who knows what would have happened without Chinese finance?” says Margaret Myers, Latin America and the world programme director at the Inter-American Dialogue.

As US officials note, a lack of transparency can quickly lead to corruption. And Latin America’s new impetus to fight corruption – spurred by the region-wide ramification of the Odebrecht scandal, which originated in Brazil – should encourage local governments and businesses to gravitate towards US partners, according to Mr Malpass. Latin America's plans to fight graft have in turn reinvigorated the US’s interest, adds Mr Ross.

He also warns that Latin America should pay attention to the type of trade on offer: the US is largely a buyer of manufactured goods while China chiefly wants raw materials. Also, the type of investment stemming from the US is different: rather than mergers or acquisitions, the US looks more at greenfield investments that create new opportunities.

Still interested

The Overseas Private Investment Corporation (Opic), a US development finance institution, has refocused its efforts on the region to do just that, according to chief executive Ray Washburne. The government body typically offers loans to US businesses investing in emerging markets and has a portfolio of about $30bn.

Its efforts have been welcome despite the US's diminished popularity in Latin America, according to Ryan Brennan, Opic’s vice-president for the office of investment policy. “I had not felt that tension; frankly I expected it. From governments and businesses there is really no [resentment] despite what happens at headline level. [Everyone is] there to talk about deals. I don’t think we have people saying ‘we don’t want to deal with you, we would be interested if you weren’t the US’,” he says.

Mr Malpass adds: “We’re working hard to make clear to the people of Latin America that it is in US interests for Latin America to do well.”

While this may be encouraging, even more effective would be a cohesive and predictable international trade and investment policy from the US – and a commitment to the region from the very top. Mr Trump’s visit to Latin America has yet to be rescheduled.

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Read more about:  Americas , Americas , US
Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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