China and Latin America: Relations Under Strain?

Lei Han / Flickr / CC BY-NC-ND 2.0

This article is also available in Chinese

During the first dozen years of this century, China and Latin America established an exceptionally strong commercial relationship that has paid huge dividends to both. Starting from a very modest base, China has managed to establish a major presence throughout Latin America. While some concerns have been expressed about the expanding Chinese footprint across the region, most serious analysts and government authorities view the deepening economic relationship as a largely positive development for both China and Latin America.

During most of this period, both China and Latin America were enjoying robust economic and social progress. Many Latin American nations were benefitting from the exceptionally rapid expansion of Chinese demand for foodstuffs, minerals, and oil, which was accompanied by sharply rising prices. The region was also profiting from increasing Chinese investments and financing—much of it designed to facilitate the production and transport of Latin American commodities, and foster the sale of Chinese goods in Latin American markets.  

The economic integration of China and Latin America proceeded at an extremely rapid pace. By 2012, China had replaced the United States as South America’s largest export destination and became the leading trade partner for Brazil, Chile, and Peru. China also developed solid diplomatic ties with most of Latin America. Both the president and prime minister of China today make regular visits to the region, and a constant flow of Latin American leaders travel to China each year. Moreover, the expansion of relations with Latin America has been largely welcomed by the US, which has rarely expressed any concerns about the rising Chinese profile in the region.  

The burgeoning commercial ties with China were a key component of Latin America’s economic boom, and helped to protect the region’s economies from the effects of the global financial crisis in 2008 and 2009. The slowing of Chinese growth in 2012 and subsequent years was a sharp blow for many Latin American economies. Aside perhaps for Chile, Latin America was largely unprepared for the sudden worldwide drop in demand and prices of commodities.  In addition, the policy response of most of the region’s governments was poorly designed and managed.

The worst performers were the largest economies of South America—Brazil, Argentina, and Venezuela, but others like Ecuador and Colombia were also badly bruised.  Chile, Peru, and Mexico were able to maintain reasonable growth rates, but considerably smaller than the rates of a few years before.  And the economic shortfalls have roiled politics in many countries and created governance crises in a few. Aside from two recently elected presidents in Argentina and Peru (whose predecessors were widely disliked), the approval ratings of presidents in all of China’s main commercial partners—including Brazil, Mexico, Venezuela, and Chile—are all at or close to historical low points.  

The weak performance in recent years of Latin America’s economies, coupled with the political disarray in many of them, presents Chinese decision makers with several important questions.

The first is whether China should reconsider, and perhaps reduce, its increasingly heavy involvement in Latin America. Is Latin America too volatile or too unreliable for China to count on the region for essential commodities? Is it too subject to wide economic and political swings for China to maintain high levels of investment and financing in the region?

It is hard at this point to be optimistic that Latin America’s economies—aside perhaps for Chile and Peru—will fully recover any time soon and be able to produce another period of steady, solid growth and social advance. Venezuela today is a barely functioning society. Nearing collapse and possible chaos, its economy and political order will take years to repair, even if oil prices rise sharply.  Brazil’s economy, currently in deep recession, is likely to remain feeble for another year or more, and its government will likely be shaky for the next two years, at least until elections in 2018. Argentina appears to be on the right economic track and the new government has enjoys continued public support, but its fiscal reforms face judicial and political hurdles, and the country is not yet attracting the investment needed for recovery. Mexico is muddling through economically, and continues to suffering political and security setbacks.

Still, regardless of Latin America’s current mediocre growth trajectory and its governance challenges, there remain strong reasons for China to maintain and expand its strategic partnership with Latin America. Given the nature of their resources and natural endowments, their economies are highly complementary. Their partnership should not only be sustained, it should be expanded and deepened. China’s relationships in Latin America should have a long term perspective and not be dependent on particular leaders or governments. The Chinese government and corporations should be building bonds with the nations of Latin American and their institutions. Both China and Latin America need to be far sighted and invest for many years into the future  

A second question is whether, there is anything fundamentally wrong with China’s approach to developing economic partnerships with Latin America, to engaging the region generally?

Most analysts seem to agree that China has, by and large, effectively managed its economic and diplomatic engagement with Latin America. China has recognized the importance of having its government agencies, banks, and corporations involved in Latin American in many different ways. Trade is a fundamental building-block of the relationship, but investment, lending, and project financing are also essential elements. China and Latin America are making good use of a range of economic instruments to exploit their comparative advantages.

To be sure, China is today facing a number of difficult tests in a number of countries, like Venezuela, Brazil, and Argentina, where its corporate and consumer markets are shrinking, investments are souring, payments are regularly delayed, and contract terms cannot be met. But the US, European Union countries, and other of Latin America’s economic partners are facing similar problems in the region. These are all challenges that need to be dealt with, but within the context of sustaining a longer term relationship.  They are not unique to Latin America—or even developing countries. They are, by and large, linked to normal economic and political cycles, compounded by policy and management failures.

Many observers believe that China should be using its economic leverage to press Latin American nations toward greater financial discipline and broader policy reform. Others suggest that China encourage attention to a range of public concerns beyond economic management—environmental protection, safety and security matters, and the rights of workers and indigenous people, for instance. These are all important priorities, which China should not ignore. Although is policy of non-interference appears to have served China well, the various Chinese institutions engaged with Latin America have useful advice and guidance to offer the region’s governments and corporations. China is right, however, in making sure that leadership on these issues comes from Latin America.

The multiplicity of institutions involved in China’s overseas economic activities is a valuable asset. It provides China with a wide range of approaches and experiences, and offers China varied points of access to Latin America’s economic, trade, and foreign policy sectors. It also means that China comes to the region with varied approaches, not a single rigid, pre-determined strategy. This gives China a greater capacity to adapt to different Latin American countries and their divergent economic sectors.

A third question is whether China has selected the right set of countries with which to work in Latin America. Why are so many of China’s partners in such precarious economic and political straits?

China today is engaged with all of Latin America’s most important economies. Almost any European or US commercial initiative in the region would assign priority to the same group of countries.

At the outset of China’s engagement in Latin America, some analysts interpreted the Chinese initiative as ideologically and geopolitically motivated. They saw China turning mainly toward Venezuela’s socialist government, led by Hugo Chavez, and its allies in the anti-American ALBA group.  It was not too long, however, that it became clear that  China was, instead, following its economic interests in seeking out Latin America’s leading oil, grain, and mineral producers—and its largest markets for Chinese manufactured goods. Virtually no one today expects China to curb its economic ties with Argentina, Peru, or Brazil because conservative governments have assumed power in the three countries.

China’s emphasis on creating a broader regional bond with the nations of Latin America through the recently established CELAC (the Community of Latin American and Caribbean Nations) suggested the importance to China of the region as political and economic entity, not merely a geographic collection of countries.  A few analysts have pointed with concern to the fact that CELAC excludes the US and Canada from its membership US and could become a vehicle for China to replace US influence in the region. But that is hardly likely. China has so far carefully avoided any clashes with the US in Latin America. Moreover, China participates actively as an observer and supporter in the two major hemispheric organizations that do include the US—the Organization of American States (OAS) and the Inter-American Development Bank (IDB). China’s connection to CELAC is not viewed as either challenge to or a snubbing of the US.

For China, as for the US, relations with Latin America cannot effectively be managed region wide. They need to be cultivated country by country. Latin America is neither an economic or political entity. Not much can be accomplished at the regional level.  

In the 16 years since the turn of the century, China has succeeded in building strong, robust economic relationships with all of the major countries of Latin America and with many others as well. Those relationships have come under strain as China adjusts to a slower rate of growth and many Latin American states struggle economically and face complex governance challenges. But, both China and Latin America should recognize how vital their economic ties have become. It is widely expected that relations on many fronts, economic and other, will endure and grow stronger, despite recent setbacks. While much still needs to be done, the essential foundations for a longer-term continuing relationship are in place.