As is by now well known, China has become an increasingly important actor on the global economic stage since the end of the Cold War. It is today the world’s second-largest economy when measured according to gross domestic product. India has also emerged as a key player in the global economy, now ranking ninth in GDP size worldwide, and is on its way to becoming a major exporter of manufactured goods. In services, it is already a leading world exporter. Together, China and India account for 12% of world nominal GDP.1 With a combined population that accounts for nearly two-fifths of humanity, these two countries are embarking on a road of fast industrialization, creating unprecedented demand for energy. Both countries neither produce enough energy to satisfy their own needs nor have sufficient agricultural production and arable land to produce enough food for their new urban industrial working classes.
It is thus natural that Beijing and New Delhi have made securing energy, raw materials, and foodstuffs a priority. And it is Latin America that has largely come to play the role of supplying those crucial inputs. Latin America’s global trade and investment patterns have radically shifted over the past decade, as the region has dramatically expanded its economic relations with the Asia-Pacific countries, particularly China and India. During the first decade of the 21st century, bilateral trade between China and Latin America expanded 18 times, from about $10 billion in 2001 to $180.2 billion in 2010.2 India’s trade with Latin America remains modest compared with China’s, but that gap is likely to narrow, having grown eightfold from 2000 to 2009.3
Trade between the two regions appears to be following a classic development pattern: Latin America is a net exporter of natural resources to the Asia-Pacific region and a net importer of Asian-Pacific manufactured goods, services, and investment. At present, China is the largest importer of goods and services from Brazil and Chile, and the second largest from Peru, Argentina, and Cuba; it has also signed free trade agreements with Chile, Peru, and Costa Rica. On China’s export side, Latin America’s 500 million people and $3 trillion market represent an important opportunity as China seeks to expand its footprint in a range of strategically important sectors, such as automobile and aircraft production, electronics, telecommunications, and satellites. For similar reasons, Latin America is also an important market for India in selected sectors, such as high-end manufactures and technology-intensive goods, laying the basis for emerging competition in this area.
In terms of investment, China in 2010 became the third-largest foreign investor in Latin America after the United States and the Netherlands. According to a 2012 report from the Inter-American Dialogue, China has provided $75 billion in loans and credit lines to Latin American countries since 2005. In 2010, Chinese funding exceeded the region’s combined financing from the World Bank, Inter-American Development Bank (IDB), and U.S. Export-Import Bank.4 China generally provides loans to projects that correspond to its interest in energy production and raw materials—infrastructure development, oil extraction, mining, and agricultural production. In many cases loans are secured against revenues from future sales to Chinese companies or granted at rates subsidized by the state-controlled China Development Bank (CDB). To date, most Chinese investments in Latin America have involved either acquiring assets in primary production, such as mines and oilfields, or funding infrastructure projects, including ports and docks, railway lines, and roads.
The global financial crisis has drawn Latin America and the two Asian economies even closer to each other. As the world balance of power changes, the prospects of many Latin American countries are intimately tied to the dynamics of China and India. It’s not the first time that Latin America and the Caribbean have witnessed such a shift, and it won’t be the last. A major challenge for the region in the 21st century is how to manage these new international economic dynamics and their concomitant political relations.
At first glance, India, China, and Latin America wouldn’t seem like natural trading partners. Placed on opposite sides of the globe, they have few cultural and historical ties and little mutual understanding. For most of their history, these Asian countries and Latin America have been on the periphery of each other’s foreign policy. But modern technology’s ability to shrink time and space has overcome the real obstacles of geographic and cultural distance. And there is a political factor as well: Beijing and New Delhi’s approach to trade and investment in the region is pragmatic—economically rather than ideologically driven. They typically stay out of politics in those countries where they trade and invest, and have shown little interest in trying to impose their political systems on them.
This stands in sharp contrast to the practices of the World Bank and many Western countries, which often provide aid as an instrument for imposing economic—and sometimes political—policy conditionality. In contrast, Beijing advocates South-South cooperation and considers conditionality imposed by the World Bank and the International Monetary Fund (IMF) on developing countries a form of interference in the domestic affairs of borrowing countries. Though Latin American countries actually pay higher interest rates for Chinese loans, these loans don’t come with political strings attached. Nonetheless, loans are not altruistic; as noted above, they correspond to China’s interest in the region.
Some economists—such as the late Staffan Linder—suggest that comparable levels of per capita income can be a powerful incentive to trade.5 Others argue that similar stages of development provide opportunities for a mutually beneficial exchange of knowledge and policy experiences in key developmental areas. Beijing certainly takes this view, describing its engagement with Latin America as mutually beneficial.6 India, for its part, can provide Latin America valuable lessons based on its successes in elite college education, aerospace, microfinance, and pharmaceuticals. In return, Latin America can offer extensive experience in agriculture, mining, aeronautics, biofuels, private pension plans, and poverty-alleviation programs, which in the view of some could take India a long way in addressing some of its growth constraints.7
Some Latin American analysts see the rise of China and India as a positive development because the demand those two countries generated for Latin America’s primary goods exports has increased the price of commodities, which has yielded better returns to Latin America. Trade and investment from Asia has been a major driver of growth in the region. Large numbers of Latin American states enjoy a trade surplus with Beijing and see great potential in expanding into the huge Asian market.
Others admire the sustained economic development India and China have achieved, which is far superior to the Washington Consensus route taken by most Latin American nations. Populist leaders like Venezuelan president Hugo Chávez have advocated closer ties with China as a part of their efforts to diversify their economies and move away from dependence on the U.S. market.
The close economic ties between Latin America and China and India have in some cases been reflected in the political arena. They have taken up similar diplomatic and political positions in international forums like the United Nations, the World Trade Organization (WTO), and the BRICS association composed of Brazil, Russia, India, China, and South Africa. This was the case during negotiations involving the generalized system of preferences (GSP), the latest round of international negotiations on multilateral trade liberalization, and during recent climate change negotiations and discussions involving the Group of Twenty (G-20) finance ministers and Central Bank governors.
Latin American countries (Brazil and Mexico in particular) and China hold similar positions on the issue of reforming the international financial system (such as the IMF and the World Bank). The BRICS nations’ demand for changing the quotas that represent member countries’ voting weight in the World Bank and the IMF is part of a push for broader reform of the global financial system to reflect emerging nations’ growing economic heft. The group has demanded that the heads of the IMF and the World Bank be chosen through an open, merit-based process and that a new global bank be established as the emerging economies seek to convert their growing economic might into collective diplomatic influence. Their collective strength at all-important G-20 meetings could also bring the concerns of developing nations to the top of the global agenda.
Despite these collaborations in the international sphere, Latin America’s economic reorientation toward the Asia-Pacific region is not without its tensions. China has become a main competitor for Mexico and Central American countries, and a growing number of South American countries as well, in selling manufactured goods, moving from low-value-added goods like toys, textiles, and footwear to motorcycles, cars, electronics, and even aircraft. The emerging competition is thus in the higher-value-added segment of the market. Indian motorcycle brands like Bajaj and Mahindra have begun to enter Latin America, and the Indian firm Tata introduced its Nano car into Latin America in 2010, competing against Chinese brands such as Chery, Jialing, Geeley, FAW, Wuling, and Dongfeng, which had previously been the low-end option.8 In the service sector, India has outperformed Latin America since the mid-1990s.
These countries’ exports of manufactured goods directly compete with often cheaper Chinese products in Latin America’s other external markets, such as the United States and the European Union, and in the domestic markets of Latin American countries as well. In many of those countries, national manufacturing sectors are already starting to suffer because of imports from China. Some Latin American countries such as Mexico have asked Beijing to import not only primary goods but also value-added products. China and India have become major global suppliers of manufactured goods and services, while most Latin American countries remain suppliers of raw materials. In resource-rich regions such as Argentina, Brazil, Chile, and Peru, the concern is that Chinese imports and investment in natural resources may not build sustainable economic development and that Latin America may be moving to a new form of dependence on China. At the 2012 BRICS summit, the leaders of BRICS countries agreed to expand trading relations among themselves, including of higher-value-added manufactured products, to support industrialization and employment in member countries.
In virtually all of the projects in Latin America directly funded by Chinese investors (not considering those funded by loans from Chinese banks), Chinese companies have been selected to do the work, bringing in a significant number of Chinese workers, as well as managers and technical personnel, albeit only on a temporary basis. The majority of these projects fall into two categories: tourist resorts in the Caribbean and infrastructure supporting Chinese projects in primary-product industries in the region. Chinese construction work associated with primary product industries typically involves roads and rail lines to extract the materials, or facilities to process them.
Elizabeth Economy notes that while the benefits of Chinese overseas investment are visible in thriving mining industries, new highways and active ports across the globe, the challenges that these investments pose have also become evident. Chinese investment has been associated with environmental, labor, and safety violations, corruption, and a lack of socially inclusive growth.9 For example, Shougang Hierro Peru, China’s first major investment in Peruvian mining, brought in Chinese laborers and reduced the workforce from 3,000 to 1,700. Shougang has been fined repeatedly for breaches of health, safety, and environmental practices. Miners complain that wages at Shougang are among the lowest in Peru’s multibillion-dollar mining industry, at an average $14 a day; the average miner’s salary in Peru is $33 a day. Shougang has received four fines for environmental infractions.10
In 2007, a strike in Ecuador against the Chinese oil company Petroriental in the province of Orellana turned violent, forcing the declaration of a state of emergency and ultimately resulting in the death of over 24 police and soldiers. Protesters blocked road access to the Petroriental facility to call attention to complaints that the oil company had not hired the promised number of workers from the local population. When Petroriental vehicles escorted by Ecuadoran security forces attempted to break the blockade, violence ensued.11
On the surface, India’s current share of world manufacturing exports does not pose a major challenge to Latin American and Caribbean manufacturers. However a careful look at that country’s recent export trends, factor endowments, and political-economy constraints reveals a huge potential and political imperative to be a major exporter of manufactured goods. India is likely to play a more important role in the so-called medium-technology industries, particularly in the automobile sector. As such, India will be a force to reckon with in the near future.12
The emergence of China and India as major new external actors in Latin America represents a new paradigm for the region, what some see as part of the expansion of South-South cooperation.13 The current Asian–Latin American partnership is much more pragmatic and results-oriented than the South-South cooperation advocated in the early 1970s, when a New International Economic Order was on the international political agenda. Chinese and Indian involvement in the region remains on an ascendant course and will continue that path in the foreseeable future. With the growing presence from the Asian emerging powers, the dynamics of Latin American development will be immensely different from that of the past 500 years, when the region was dominated by the U.S. and European powers.
Although the rising importance of the two Asian economies, especially China, offers growing opportunities in terms of trade, foreign direct investment, and financial flow for Latin America, it is by no means an absolute win-win situation. The burgeoning economic relationship between the two regions proves to be both complementary and competitive. The “commodity boom” is unlikely to last forever. The “manufacturing road” to modernity has become highly congested and particularly challenging for a number of Latin American countries that cannot count on a large and increasingly skilled, but low-cost, labor pool. In short, China, India, and Latin America need to explore a new model of development to sustain the momentum of their economic cooperation.
He Li is professor of political science at Merrimack College, North Andover, Massachusetts. His books include From Revolution to Reform: A Comparative Study of China and Mexico (University Press of America, 2004) and Sino–Latin American Economic Relations (Praeger Publishers, 1991).
1. International Monetary Fund, World Economic Outlook, 2011.
2. International Monetary Fund, Direction of Trade Statistics Yearbook, 2011.
3. Jorge Heine and R. Viswanathan, “The Other BRIC in Latin America: India,” Americas Quarterly (spring 2011).
4. Kevin P. Gallagher, Amos Irwin, and Katherine Koleski, The New Banks in Town: Chinese Finance in Latin America, Inter-American Dialogue, 2012.
5. Ernst Verwaal, and Frank Wijen, International Investment and Trade (McGraw Hill, 2009), 64.
6. Jiang Shixue, “Ten Key Points,” in Adrian H. Hearn and José Luis León-Manríquez, eds., China Engages Latin America: Tracing the Trajectory (Lynne Rienner, 2011), 62–3.
7. The Inter-American Development Bank (IDB), India: Latin America’s Next Big Things? 2010.
8. Evan Ellis, “Emerging Multi-Power Competitions in Latin America,” Air & Space Power Journal 22, no. 4 (winter 2011).
9. Elizabeth Economy, “Time for a Strategic Reset,” Americas Quarterly (spring 2011).
10. Barbara Kotschwar, Theodore H. Moran, and Julia Muir, Chinese Investment in Latin American Resources: The Good, the Bad, and the Ugly, Peterson Institute for International Economics, Working Paper No. 12–3, 2012, p. 16.
11. Evan Ellis, “The Expanding Chinese Footprint in Latin America: New Challenges for China, and Dilemmas for the US,” Visions 49 (February 2012): 28.
12. IDB, India: Latin America’s Next Big Thing?
13. Surya Narain Yadav and Junanada Prakashan, India, China and Latin America: Strategic, Economic and Political Perspectives (India: Jnanada Prakashan, 2010).
Read the rest of NACLA’s Summer 2012 issue: “Latin America and the Global Economy.”