Opportunity or Dependency? Rethinking China in Latin America

After the market downturn in China this summer, the region of the world perhaps reeling the most from the uncertainty hanging over China is Latin America.  A commodities boom of the previous two decades seems to have come to a halt as a slew of commodity-hungry Chinese manufacturers face the looming prospect of defaulting on their debts.

Much of the media reporting surrounding Latin America and China revolves around sensational stories like the dubious Nicaraguan Atlantic-Pacific canal and the crowding out of U.S. and World Bank investment by China.  Within Latin America, there is a growing perception that the Chinese are ‘land grabbing’ and using loan-for-oil deals to capture a vast supply of oil at low prices while Chinese companies mindlessly exploit Latin America’s resources and workers.  Latin America has a long history of material-dependency relationships with foreign powers.  China in its Latin American dealings is certainly no angel, but a deeper look into Latin America-China relations shows that China is offering an economic relationship different from that of Latin America’s past and contemporary Western trading partners, with consequences and opportunities for Latin America.

Peeling away the media’s China fearmongering, China indeed has burst onto the Latin American commercial and financial landscape.  In 1993, it accounted for 2% of Latin America’s export market, but by 2013 was 9%.  China’s imports from Latin America are heavily concentrated in extractives and agricultural products, particularly oil, copper, iron, and soy while China’s share of Latin American manufactured exports has hovered at around 2%. At the same time, China has risen to become the preeminent creditor in the region, loaning over $119 billion in the 2005-2010, an amount exceeding the World Bank, Inter-American Development Bank, and U.S. Export-Import Bank combined. Xi Jingping on his recent Latin American tour pledged an additional $250 billion dollars of investment over the next decade.

So is China replacing the United States as the big shaker in the Western hemisphere?  Not exactly.

Despite talk of a pushing out by Chinese creditors of Western loans, The China Development Bank and Import-Export Bank operate in largely different countries and sectors.  Whereas Western loans primarily go to countries like Mexico which have historically been able to comply with Western financial austerity and transparency regulations, China in contrast give loans primarily to countries deemed too high risk to have access to Western financing like Venezuela and Argentina.  Brazil stands out as a major acceptor of loans from both blocs.  Beyond country-preferences, Chinese aid is almost purely in “energy, transportation, telecommunication projects, and high-efficiency sectors such as manufacturing, processing, and agriculture in the borrowing country” (EMITH) whereas much of Western aid focuses on social programs.  In fact, the percentage of EMITH loans from Western financiers has declined precipitously since the 60’s. China’s loans, which naturally require the purchase of Chinese goods and expertise to execute these projects are nevertheless financing important infrastructure projects for Latin American countries (quixotic Nicaraguan canal aside).

However,  this financing does not carry the scrutiny of equivalent Western loans. For projects that involve some of the most ecologically sensitive and politically scarred regions of the Earth, there is little environmental and fiscal oversight, reflecting the Chinese domestic regulatory environment.  China uses the non-interference clause of its Five Principles to excuse this issue, but it is slowly improving supervision and assessment of foreign projects as domestic environmental and political concerns arise.  For countries both corrupt and financially irresponsible like Venezuela and Argentina, rather than requiring the transparency and reporting of a World Bank loan, China uses guaranteed purchase of Chinese goods and the threat of cutting off the Chinese market to mitigate risk. In its loan-for-oil schemes, China uses the model of its own similar loans from Japan in the 1970s, buying oil always at market price at time of purchase.  These tactics put up Latin American governments as equal partners rather than treating them as incompetent inferiors through the humiliation of fiscal transparency requirements, but with little regard for environmental or political concerns within the countries to which they are giving loans.

On the side of direct Chinese involvement, despite the widespread belief of a Chinese land grab take-over, few actual large scale land deals have been made with Chinese companies, and many confirmed deals have either stalled or have not been acted upon.  Indeed, the revival of foreign-land ownership restrictions in Brazil, Argentina, and Uruguay revealed that the largest foreign land-owners in Uruguay were its neighbors Argentina and Brazil.  Chinese companies instead are largely addressing China’s hunger for Latin America’s agricultural and mineral bounty through mergers, acquisitions, and deals with intermediary suppliers.  Chinese companies, like those of every other foreign actor in Latin America, have mixed records when its comes to pollution, labor issues, and indigenous rights.  However, a study of Chinese monopolist Sinopec in its operations in Mexico, Ecuador, and Peru show that Sinopec largely obeyed the different regulations of each respective country.  If Latin American countries can enact and enforce legislation to protect its interests in dealing with the Chinese, Chinese firms have shown the ability to adapt.  Sadly, the commodities boom has led to the empowerment of hydrocarbons ministers and of a Brazilian rural landowning lobby which has stymied protective legislation in many areas.

Overall, China brings to Latin America many opportunities and challenges.  Since exports to China generate 20% fewer jobs per $1 million worth exported than Latin America’s exports overall, produce 12% more net greenhouse gases, and use up to three times more water, Latin American countries must find ways to turn commodities into economic drivers elsewhere.  Currently, few visible connections have been made between the profits of these exports and the development of the largely underdeveloped rural regions where they originate.  China’s loan and firm regulations, while not up to Western standards, are quite stringent compared to those of other middle income countries and are improving.  Chinese companies have proven that given the right incentives and regulations, they can mitigate political and labor conflict from extractive industries.  With the summer shock showing the exposure of Latin American nations to the Chinese economy, Latin America must finds ways to turn its natural bounty into real social and economic change and become an assertive partner in this trans-Pacific relationship, or face the consequences of unmitigated environmental degradation and possibly returnless financial instability in the face of Chinese market uncertainty.