Latin America's Chinese wake-up
call By Jose Orozco
CARACAS - As China's economy expands
rapidly, the emerging powerhouse is aggressively
going out to search for energy resources and raw
materials to keep its economic engine going. While
China keeps its eye on the huge US market for its
manufactured goods, it also increases its interest
in raw materials from Uncle Sam's back yard, Latin
America.
With so much foreign direct
investment going to China and India, the glitter
of Chinese investment in Latin America cheers
many. China needs oil and raw materials and Latin
America has them. It
seems a match made in trade
heaven. So like a young couple in love, China and
Latin America have showered each other with visits
and words of praise, leading the partners to think
that nothing could ever go wrong between them.
But now some quarreling between the two
suggests the honeymoon may be over. Thanks in part
to its friends in Latin America, China entered the
World Trade Organization in 2001 and quickly
flooded the region with cheap manufactured
products. At the start, few Latin Americans knew
what all this meant to them.
But as China
gobbles up Chilean copper, Brazilian iron ore, and
Argentine soybeans, manufacturing industries in
some Latin American countries are beginning to
feel the pain.
Analysts suggest this may
be a good thing in the long run. Now that the
honeymoon is over, Latin America and China can
conduct their relationship on a more realistic
basis. Latin America, for its part, is learning
some hard lessons.
China's trade with
Latin America has been growing rapidly in recent
years. Chinese President Hu Jintao signed 39
agreements with five Latin American nations when
he visited in November 2004, which underscored the
long-term strategic value of this relationship for
both China and Latin America.
In exchange
for its access to raw materials and new markets,
China's promise of providing US$100 billion in
investments in the region during the following
decade have boosted hopes for the region's
development. From 1994 to 2004, trade between
China and Latin America grew fivefold, reaching an
annual $40 billion.
The free-trade
agreement between China and Chile, which is
expected eventually to exempt 97% of trade goods
from import tariffs, went into effect on October
1. China will lift tariffs on 2,834 products
imported from Chile, including copper. Chile gives
duty-free status to 5,891 commodities from China,
including vegetables, fruits, and mechanical and
electrical equipment.
Even before the
agreement, Chilean exports to China - mainly
minerals, fish meal and wood - had increased 42%
from 2000 to 2004. China's exports to Chile grew
22% in the same period. Chile ran a trade surplus
with China of $1.9 billion in 2005.
Along
with Chile, Argentina has received substantial
Chinese investment. On Hu's 2004 visit, China
agreed to invest a total $20 billion in Argentina.
As Latin America's emerging power, Brazil
has attracted special attention from China. The
two have teamed up in trade talks to demand better
terms for developing countries. In 2004, Brazil's
exports to China totaled $5.4 billion, up from
$676 million in 1999. Its trade surplus with China
that year stood at $1.4 billion.
With
these figures, who could complain?
"The
problem here," explained Roger Tissot, director
for Latin America at PFC Energy in Washington, "is
China sending manufactured goods, threatening
local industries."
Non-finished goods,
mainly soybeans and iron ore, make up close to 60%
of Brazil's exports to China. President Luiz
Inacio Lula da Silva's dreams of boosting
Brazilian technology exports have gone
unfulfilled.
Brazilian aircraft maker
Embraer's joint venture to build short-haul jets
in Harbin, the capital of Heilongjiang province,
has underperformed, and the Brazilian companies
working on the Three Gorges Dam in Hubei province are only
minor players.
But at least Brazil
benefits from its geographic location. It is far
enough away from China to make shipping of Chinese
goods to Brazil expensive, while its distance from
the United States also makes it less dependent
than Mexico on the world's largest economy.
In 2004, Mexican exports to China came to
$1.9 billion, while Chinese exports to Mexico
reached $9.1 billion. Cheap Chinese goods have
severely impacted Mexican manufacturers. China's
share of US imports is now greater than Mexico's.
"Mexico can't compete with Chinese
government subsidies and cheap labor," said Carlos
Rovelo, an international-business professor at
Eastfield College in Dallas and a consultant.
The outlook isn't good. Anti-dumping
penalties for Chinese imports to Mexico will be
gone in 2008, ringing the death knell for Mexican
manufacturers of textiles, toys and the like.
After riding the NAFTA (North American
Free Trade Agreement) wave to steady growth rates,
Mexico has had to rethink its strategy in light of
cheap Chinese imports. But these kinds of
adjustments have become de rigueur in
today's fast-moving global economy. So instead of
signifying economic collapse, the "China threat"
may be the wake-up call Latin America needed.
For many in Latin America, China still
seems to represent the greatest exponent of the
"Asian model". By following China's example, so
goes the reasoning, Latin American nations can
also develop.
But the very fact that
they're complementing each other's economies shows
how Latin America can't imitate China. Latin
America sells natural resources, as it always has,
and China buys them and sells back value-added
goods that are more labor-intensive and thus
create more jobs.
With the strengthened
currency that the commodities boom brings, prices
for Latin American manufactured goods rise, making
them even less competitive. Local factories close
down, some moving to China. The vicious historical
cycle repeats itself.
But the "China
threat" may be just the challenge countries such
as Mexico and Brazil need to stay competitive.
Mexico, for one, has a lot going for it.
"The key to creating competitive
industries lies in qualified and bilingual labor
that knows how to handle technology, and Mexico
has that," said Rovelo.
Its proximity to
the US, though a popular complaint, gives Mexico a
competitive advantage over China and many other
countries. Goods shipped across the Rio Grande
reach their destinations much more quickly than
the three weeks Chinese shipments need to reach
California. "And that's money," said Rovelo.
Not all Chinese goods compete with equal
success, either. Shipping toys and textiles from
China is easy. But shipping electric/electronic
home-appliance products or cars on a three-week
sea trip costs much more.
"Mexico should
reorganize its export strategy by focusing on
manufacturing hard-to-ship goods like cars and
appliances," said Tissot.
Mexico's
economic and political stability also entices
investors, and a World Bank study named it the top
reformer in Latin America when it comes to doing
business.
For Brazil, the challenge is to
break out of the colonial model of exporting raw
materials and buying consumer goods by producing
value-added goods out of its raw materials. The
Brazilians might look to oil-rich Trinidad and
Tobago, which has already begun producing
petrochemicals.
"There's no contradiction
in going from a natural-commodity exporter to a
high-tech industrialized economy," said Tissot.
"Asia and Australia did it."
So perhaps
the Asia model, if not China itself, does have
something to teach Latin America.
Jose Orozco is a freelance
journalist based in Caracas, Venezuela.
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