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China’s Growing Presence in Latin America: Implications for U.S. and Chinese Presence in the Region

Post Series: 2011: Volume 10, Number 1
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China's Growing Presence in Latin America: Implications for U.S. and Chinese Presence in the RegionIntroduction

A major talking point in the U.S. media today is the alleged weakening of American influence in the world. The common perception is that power is shifting to East Asia, and particularly to China, with ramifications globally and especially close to home in Latin America. China’s economic emergence over the last decade has sent shockwaves through the region, causing economic policy shifts and realignment of markets toward the reawakened dragon. While the U.S. has a strong history of moving to block outside political influence in Latin America, its attention of late has been focused on Iraq and Afghanistan, and the region has gradually fallen lower and lower on America’s list of priorities. China has been all too willing to fill any void. However, the numbers show that, despite the rapid growth of the Chinese economy, the U.S. remains the central figure in economic relations with Latin America by an enormous margin. Yet, there are trends that should at least concern the United States. Exactly how worried should the U.S. be about China’s growing influence in Latin America? Is China on its way to overtaking the U.S. as the region’s primary trade partner? Are China’s motivations strictly economic or is there an underlying political driver behind China’s actions that should warrant concern from the U.S.? Perhaps most important, is trade with Latin America a zero-sum game, or is it possible for both China and the United States to benefit from Latin America’s growth? These are the questions that this article will attempt to answer.

Historical Roots

In March 2011, U.S. President Barack Obama met with leaders and officials in Brazil, Chile and El Salvador. Mr. Obama made this visit amid growing Chinese power in the region. The trip marked the first time President Obama had visited Latin America since becoming President. By comparison, at this point in Hu Jintao’s presidency, the Chinese president already had visited four countries, including Brazil, where he signed 39 bilateral agreements and announced $100 billion in investments. While Mr. Obama was well-received during his trip, the most common response in those countries was that the trip was symbolic but not very substantive. Obama’s visit did not reflect any shift in policy. Many of the major statements these countries hoped for (such as a call for Brazil’s permanent place on the U.N. Security Council), in fact, were not made. Mr. Obama admitted on his trip: “There have been times when the United States took this region for granted,” according to the Latin American Herald Tribune. Those times are not yet in the distant past and there are fears this administration is making mistakes similar to ones in the past. After promising during his 2000 election campaign to correct Washington’s indifference to Latin America, George W. Bush was accused of turning his back on the region in favor of more pressing issues in the wake of the September 11 attacks. The President showed no concern for a growing Chinese influence in the hemisphere, and China put both feet inside before anyone in Washington seemed to realize the door was open. This was a move China had planned during the administration of George H.W. Bush.

In 1990, only a year after China gunned down protesters in the Tiananmen Square demonstrations, President Yang Shangkun visited five countries in Latin America. His trip was the first of an increasing number of high-level missions that laid the foundation for what he described as “a new international political and economic order” (McCarthy, 2008). However, the depth to which China would be involved with the region did not expose itself for almost a decade. In 2001, then-Chinese President Jiang Zemin completed a 12-day mission to cement economic ties with Latin America. Key countries on his itinerary included Brazil Argentina, and Venezuela. Li Peng, Chairman of the Standing Committee of the People’s National Congress, followed up with more visits in November 2001. Then in November 2004, in what may one day be considered the turning point of Latin America’s shift away from U.S. relations, President Hu Jintao flew to Argentina, Brazil, Chile and Cuba, where he announced the aforementioned $100 billion in investments over the next 10 years (Painter, 2008). His goal was that by 2010 the amount of two-way trade between with the region would equal $100 billion. Yet not even China could have expected such incredible results.

By 2007 two-way trade between China and Latin America had already eclipsed $100 billion, almost 50% more than the previous year and three years ahead of schedule. In 2008, two-way trade and investment reached $140 billion, with approximately $120 billion devoted to bilateral trade (Miller, 2009). China appears to be slowly closing the gap on the U.S. In 2009, Latin American exports to China jumped nine times, reaching $41.3 billion, almost 7% of all Latin American exports, according to Kevin Gallagher of The Guardian. U.S. exports and imports with the entire region are still vastly greater than China’s, but year by year, China is catching up and in some countries, surpassing the U.S.

Even though China has become a major player over the past decade, trade between the China and Latin America still pales in comparison to Latin American-U.S. trade. Regional trade with the U.S. totals $560 billion compared to just over $140 billion in trade with China. But the trend is significant when looking at where China was in 2000 ($13 billion) (Painter, 2008). When we look at Latin American trade over the past decade with both the U.S. and China, one would find that the percentage of trade is slightly shifting. At the beginning of the 2000s the U.S. had more than half of the trade with the region; China had less than 10% for China. Now the U.S. has roughly the same amount of total trade, but China is now nearing 12%. Going back a little further, total U.S. trade in Latin America increased from 7.2% in 1996 to 8.3% in 2009 (Hornbeck, 2011). However, Mexico is the largest trading partner of the U.S., which brings that number up significantly. If trade with Mexico through NAFTA is taken away, U.S. trade growth with Latin America is even less impressive. Meanwhile, Sino-Latin American trade increased tenfold over the last decade and investment has also increased.

China’s search for commodities

China’s thirst for natural resources has sent the country in search of sustainable supplies of oil, soy and iron ore. In South America, China has found some of the most well-endowed partners in the world. China is devouring Latin American commodities and eyeing a market of 500 million people. “Countries in South America have arable land and need our technology and investment, and they welcome our companies. It’s a win-win solution,” said Wang Yunkun, deputy director of the Agriculture and Rural Affairs Committee of the National People’s Congress, as reported by MercoPress. In 2006, more than 36% of Chile’s total exports were directed toward Asia, with China taking 12% of the total. Chile was the first Latin American country to complete a major bilateral trade agreement with China (Santiso, 2007). Since then China has looked beyond Chile, also targeting Brazil, Venezuela, Ecuador, Argentina and Peru.

In 2009, China became Brazil’s largest single export market, eclipsing the U.S. for the first time in history. Later, Brazil’s then-president, Luiz Inacio Lula da Silva, and his Chinese counterpart, Hu Jintao, signed an agreement that allowed the China Development Bank and Sinopec to loan Brazil’s state-controlled oil company, Petrobras, $10 billion in return for as many as 200,000 barrels a day of crude oil for ten years (Economist, 2009). This is but one example of how China is seizing lending opportunities in Latin America when traditional lenders such as the Inter-American Development Bank are being pushed to their limits. “Just one of China’s loans, the $10 billion for Brazil’s national oil company, is almost as much as the $11.2 billion in all approved financing by the Inter-American Bank in 2008,” according to The New York Times.

It was not only in Brazil that China went after oil. In order to meet rising industrial needs and consumer demand, China has pursued investments and agreements with a variety of Latin American oil producers. In 2007 Venezuela agreed to a $6 billion joint investment fund for infrastructure projects at home and for oil refineries in China able to process Venezuelan heavy crude oil (Santiso, 2007). Venezuela planned to increase oil exports to China by 300,000 barrels per day. Then in 2009, Venezuela announced a $16 billion investment deal with the Chinese National Petroleum Corporation (CNPC) for oil exploration in the Orinoco River to develop heavy crude oil resources (Economist, 2009). Meanwhile, the CNPC has invested $300 million in technology to use Venezuela’s Orimulsion fuel in Chinese power plants. This exemplifies Venezuela’s desire to break away from the U.S. During a visit to China in 2004, President Chavez said shifting exports to China would help end dependency on sales to the United States (Johnson, 2005).

In 2003, China bid on rights to Ecuador’s major oil fields. Also in 2003, the China’s CNPC acquired a stake in the Argentine oil and gas firm Pluspetrol, which operates in northern Argentina and Peru. In August of 2009, the CNPC bid at least $17 million for 84% stake in YPF, Argentina’s largest oil company (Economist, 2009).

China is interested in more than just oil. Deutsche Bank researcher Tamara Trinh states that as China’s agricultural demands have risen sharply in the last decade, soy has been a major export to China from Argentina and Brazil. China accounts for almost 40% of the world’s soybean imports and Latin America’s vast agricultural sector is a perfect match for China’s needs.

There is no denying that there are some positive effects for both sides that pave the way for increasing relations. Trinh reports that profits based on soy have grown from around $10 billion in the early 1990s to more than $35 billion today for Latin America. Brazil and Argentina have benefitted most from China’s growing hunger for soy, with exports growing from around 25 million tons in 2000 to almost 40 million tons in 2005 – which accounts for more than half of China’s total soybean imports.

China is also the world’s leading importer of metal ores, a large percentage of which comes from South America. Brazil is China’s third largest supplier of iron ore and largest exporter of iron ore in the world, accounting for billions of dollars in profit for Brazil. As China’s need increases, so will Brazil’s exports to China. Chile and Peru, the largest producers of copper in the world, account for more than 50% of China’s copper imports, according to Trinh.

China’s investments have been in the area of transportation, with an eye toward making resource deliveries more efficient. China is partnering with Brazil to improve Brazil’s railways and establish a rail link to the Pacific to cut transportation costs of iron ore and soybeans. Other countries also are benefitting from Chinese investment. China is proposing to build a rail link in Colombia to rival the Panama Canal. The 220- kilometer line would connect Cartagena, on the northern Atlantic coast of Colombia, with its Pacific coast, making it easier for China to pass goods through Latin America and import raw materials. China is currently Colombia’s second-largest trade partner after the U.S., with bilateral trade rising from $10 million in 1980 to more than $5 billion in 2010, according to The Guardian’s Tania Branigan. At the same time, a consortium of three companies from China, (as well as companies from Japan and South Korea) are bidding on a high speed rail project in Brazil to connect Rio, Sao Paulo and Campinas, which shows that China’s focus goes beyond the coastal countries.

In addition, China signed a $10 billion agreement with Argentina in July 2010 to refurbish two major rail lines, according to Global Intelligence Report. China signed an agreement to take a 40% stake in a Venezuelan rail project worth $7.5 billion in 2009. This project to connect oil-producing regions in Venezuela to the capital will assist China in maintaining a steady energy supply from Venezuela. There are also opportunities not paid for by China, but beneficial to the Asian country nonetheless. In January 2011, Peru completed work on a road that connects the mountainous country to Brazil. This has the potential to boost Peruvian and Brazilian trade with Asia. Peru itself has had a free trade agreement with China since 2008.

The Latin America Perspective

The expanding relationship with China is transforming Latin America. The Chinese are pursuing neighborhood relations with vigor. Thus far the idea is that China’s expansive growth is both an opportunity and a threat to Latin markets. While the Chinese boom brings a positive windfall, boosting exports of Latin American countries whose endowments are commodity related, the sheer size of the growing demand presents a real challenge to Latin America. Brazil’s view of China is a proper litmus test for the region as a whole. Since Brazil represents a full 50% of South American trade, it will set the standard that the region as a whole abides by when looking to China as a viable alternative to U.S. influence.

During Luiz Inacio Lula da Silva’s presidency, Brazil vigorously pursued a deeper relationship with China. After the financial crisis of 2002, in which Brazil became dependent on the IMF to recover from an economic downturn, Sino-Brazilian relations became a priority for the South American nation. As this relationship blossomed, so did Chinese relations with the rest of Latin America. Now, as China becomes more deeply tied to Brazil and Latin America as a whole (Chinese FDI being greater in Latin America than any other region outside of Asia), some Brazilian officials worry that Brazil’s relationship with China is presenting a large trade imbalance that could negatively affect Brazil’s industries outside of agriculture and mining.

“We seek to expand the share of manufactures in exports to China,” said Maria Edileuza Fontenele Reis, ambassador and Deputy Permanent Secretary for Asia at the Foreign Ministry, according to the People’s Daily Online. “We seek a better position to expand our investments in China, and our interest is that China diversifies its investments in Brazil, so as to avoid excessive polarization in mining and agriculture.” The ambassador made this statement before President Dilma Rousseff’s first trip to China in April 2011, which focused on improving the China-Brazil bilateral relationship at the third BRICS summit.

Many in Brazil are concerned that the country’s trade surplus with China masks greater problems. The concentration on commodities in Brazil’s exports raises the risk of the country’s agricultural growth pushing the real exchange rate and redirecting capital and labor toward the agriculture/natural resources sector at the expense of manufacturing. This is part of the reason that Brazil’s currency looks so overvalued while its manufacturers are struggling to compete. This has pushed Brazil to pressure China to stop undervaluing the Yuan. China’s excessive protectionism and undervalued currency has made it difficult for Brazilian companies to compete. In fact, this was one of the priorities on President Rousseff’s agenda during her inaugural visit.

While these issues were not solved on the first meeting, there were steps taken to diversify China’s investment in Brazil as well as Brazilian investments in China. Twenty bilateral agreements were signed between the two countries, with the largest deals coming in the areas of telecommunication, aircraft and energy, according to Latin Trade. Brazil promised to give China its long sought-after market-economy status recognition. Both sides pledged to expand and diversify investments through company partnerships. Overall, President Rousseff was pleased with the trip.

“We reached our main goals, which were to open the doors for our more sophisticated products to enter China and for working together in important fields such as science and technology,” President Rousseff said upon her return to Brazil as reported by the People’s Daily Online. She continued: “There’s a delicate balance between ‘cooperation’ and ‘competition’ between the two sides.” These concerns also are shared by the rest of the region, in order to prevent China from overwhelming local industries.

While China’s commodity-based trade structure is currently lucrative, it does not encourage diversification of Latin America’s exports into more value-added goods, manufactured products, and modern services. Economic relations are dependent on often unstable commodity market demands. U.S. investment in the region is far more diversified and spans a range of value-added activities, including manufacturing, finance, telecom, retail and other services. Going back to a comparison with the United States, while China accounts for 6.7% of the region’s total exports, the United States continues to be the largest buyer, with a 40% share. Latin America’s exports to the U.S. are more diversified and remain fairly balanced so it is better suited to survive a possible commodity cut-off in Latin America. Roughly 24% of the region’s exports are raw materials, another 12% consists of resource-based goods and 60% is manufactured products. Karen Poniachik of Latin Trade also sees enormous risks for the region: “The steep overvaluation of the region’s currencies—due in part to the flood of investment flows and export proceeds—is eroding the competitiveness of its higher-value added goods and services. This could in turn fuel its already high level of overdependence on commodities.”

Future Implications

With both the U.S. and China making gains in the region in different sectors, there is seemingly room for each side to grow; which implies that, in fact, trade with Latin America is not a zero-sum game. China presents an alternative to the United States, but that is not necessarily a bad thing. The U.S. is much more diversified than China at the moment and therefore does not need to enter into direct competition. However, as China responds to calls from Brazil and diversifies its investments, there is increasing worry that China is going to outmatch U.S. trade in the region. These fears may be economically based, but there are potentially harmful political consequences – primarily, providing Latin America with a quasi-world power as an alternative to the U.S. Since the Monroe Doctrine, Latin America has been considered a secure sphere of influence for the U.S. The fact that China presents a less democratic alternative to U.S. influence presents a major problem.

The third BRICS summit in April provided more insight into the potential consequences of China’s growing place in Latin America via its relations with Brazil. One proposal to emerge from the summit of the five nations (Brazil, India, China, Russia and South Africa) was a broad-based international reserve currency system providing stability and certainty. The idea was to set up a new exchange rate mechanism that would bypass the U.S. dollar as the reserve currency of the world. In addition, banks of the five BRICS nations agreed to establish mutual credit lines in their local currencies, not in U.S. currency. While the chances of such a proposal gaining support are debatable, it sets a clear example of a possible shift in power away from the U.S. and toward a more global organization, one that is arguably anchored by China. If China becomes a preferred partner in Latin America, it will show that U.S. dominance around the globe also is at risk.

Conclusion

So what does China’s growing place in the region mean for the future? Depending on whom this question is posed to, there are two probable answers. The first is that China’s intensifying relations with Latin America offer a clear sign of the end of U.S. dominance in the region, and in a greater sense, the entire world. There is enough evidence to show that the tides have changed in favor of China. The other answer is that it means nothing. The U.S. is obviously still the more dominant power in the region, and Chinese presence will eventually subside, again leaving the United States as the region’s premier partner. The real answer probably falls somewhere in the middle.

Is China the preferred partner for Latin America? At this point, the definitive answer is no. However, the United States should not take its place in the region for granted. There is clear evidence of an increasingly symbiotic relationship with China throughout Latin America. While the U.S. is the most dominant trade partner to the region as a whole, it is losing ground in key countries, namely Brazil, which is blossoming on the world stage and is emerging as the clear leader in the region. Increasing trade and investment can be beneficial for all, but the power that China can derive from its growing economic influence could bring increased political and ideological influence that the U.S. might find unnerving. China already has replaced the U.S. as the largest trading partner for Brazil and Chile, and is on pace to do the same in Peru and Venezuela. At the very least, this should cause the U.S. to pay more attention to its southern neighbors and take steps to make sure that China only benefits economically and not politically at the expense of the U.S. The world will be watching.

As it stands, the Chinese are not broadening their relations with the region in a way that directly competes with the United States. China is strictly concerned with commodities, including oil. U.S. President Barack Obama recently signed an agreement with Brazil’s Petrobras that will allow the oil company to drill in the Gulf of Mexico. This symbolic move could cause tensions to increase as the world’s two largest oil consumers battle over rights to Brazilian oil. In that regard, the competition may go beyond a race to Latin commodities and move into the realm of fighting for political influence. It is odd to think that the United States would need to compete for hemispheric dominance with a country on the other side of the globe, but China’s actions and increasing integration into the region tell us that such a scenario may one day arise. Given the proximity and importance of Latin America to the United States, this region could be the symbolic battle that best measures the continued hegemony of the U.S. versus China.

With both the U.S. and China jockeying for influence in a world where political power relations are changing, Latin America has the most to gain. The primary concern for the region is that it does not become a battle ground for a neo-Cold War between China and the U.S. Brazil already has clearly stated its concerns regarding Chinese influence. Yet, despite this tension, Brazil is now too reliant on China to turn away from the path on which Lula set the country. Agricultural exports to China are crucial to Brazil’s economy. Lula’s Brazil supported China politically and made clear moves away from the United States. Now Rouseff’s administration has welcomed Barack Obama with open arms. With all three major actors going through stages that could influence the global economic and political landscape – China implementing its 12th five-year plan, Brazil cementing itself as a prominent world player and the U.S. still recovering from a terrible financial crisis – this dynamic relationship is one that deserves close attention from all those concerned with the future of China-U.S. relations. Where Brazil and the rest of Latin America were once looking for an alternative to U.S. influence and found China, the region may now be looking to the U.S. to strike a balance with growing Chinese influence. With the global ambitions of Latin America, namely Brazil, it is essential to maintain close ties with both the United States and China. The world will be watching.

References

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