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In: Economics

Since joining the World Trade Organization (WTO) in 2001 China’s trade ties with Latin America have...

Since joining the World Trade Organization (WTO) in 2001 China’s trade ties with Latin America have expanded rapidly. However, China’s relationship with specific Latin American sub-regions varies greatly. Describe the nature of China’s ties with Latin America and analyze the differences, for example, between comparative advantage in China-South American ties and competitive disadvantage in China-North and Central American ties.

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Expert Solution

Since the start of the new millennium, China has become one of Latin America’s key trading partners. In fact, it is the most important partner for Brazil, Chile and Peru. Trade between China and Latin America has multiplied 22 times since 2000, a stark contrast to Latin American trade with the United States and Europe, which merely doubled in the same time period.

Today, the China-Latin America relationship is taking on new dimensions, well beyond trade. It now encompasses finance (foreign direct investment and loans) and political co-operation. In 2016 alone, governments from the region received $21 billion in loans from Chinese policy banks.

Still, trade links between Latin America and China will continue to be a defining feature of their relationship in the medium and long term. Where are the business opportunities? And how should they be seized?

In search of new trade

No doubt, China’s structural transformation means traditional commodity exports will decline significantly, as shown in the Latin American Economic Outlook 2016.Mining exporters such as Chile and Peru will be hit the hardest, with annual export growth slowing from the astonishing highs of 16% in the early 2000s to probably somewhere around 4% by 2030. Fossil fuel exporters (Venezuela, Ecuador, Colombia, Bolivia) and agricultural-based economies (Nicaragua, Guatemala, Uruguay, Brazil, Honduras, Paraguay, Argentina) will experience similar declines.

By contrast, manufacturing and service-based economies (Mexico, Dominican Republic, El Salvador, Costa Rica) will weather the storm a bit better, with much lower slowdowns (from 5% export growth in the 2000s to 2% in the future).

China’s rebalancing is also creating opportunities for Latin American exports in certain agro-food sectors. China covers significantly less than 10% of the world’s arable land and water resources, yet it is home to close to 20% of the world’s population.

On top of this, thanks to urbanization and the growing middle class, China’s food consumption patterns are changing. Per-capita consumption of sugar, poultry and sheep meat will boom in this decade (over 20% growth), while products such as fish, vegetable oils, fruits, vegetables, milk and beef will increase at double digit rates. Argentina, Brazil, El Salvador and Guatemala seem particularly well positioned, given their product specialization and export basket, to make the most of these trends.

Not a done deal

Taking advantage of this opportunity, however, requires action.

Catering to China’s growing demand for food, for example, will require effective productive development policies in these sectors and horizontal policies more broadly.

Latin America’s governments will need to support firms to help them reach higher value-added stages of the production chain. Electronic traceability in the meat industry in Uruguay or the creation of soy seeds in Argentina are good examples. Value can be increased through marketing and logistics, particularly in agriculture. To reach the Chinese consumer, Latin American firms will need to create awareness as well as country- and brand-recognition.

Mining firms in Latin America also need to expand their activities beyond extraction to include logistics, infrastructure and other services. Promoting the local industry’s capabilities and encouraging upgrading activities between Chinese and local firms could prove useful. Projects – such as Mirador in Ecuador or Minas Gerais in Brazil – that invest in mining-related services and industries are examples of this strategy in action.

Latin American sectors could expand their range of services to include back-office and telecommunications for the global networks of Chinese multinational companies. Brazil and Costa Rica have made strides in this area. Stefanini, a leading Brazilian IT services firm providing outsourcing and systems support, and now established in China, provides services to Chinese clients in the automobile industry. Tourism also shows potential for further development, since only 1 out of 100 Chinese tourists visit the region. Latin America’s visa restrictions and complex migratory procedures could be revisited to allow for more fluid regional exchanges.

The ‘how’ matters: towards a multilateral approach

Seizing these opportunities demands a stronger regional co-ordination mechanism for dialogue and negotiations. Bilateral agreements, while beneficial for some, could impact others negatively. The use of regional platforms and the development of regional trade agreements should increase the region’s competitiveness and strengthen its bargaining power in negotiations with China. Existing platforms, such as CARICOM, the Central American Common Market, Mercosur and the Pacific Alliance, can contribute to building co-ordination mechanisms and designing a strategy vis-à-vis China, while also consolidating a more attractive market for China. Within this dialogue with China, Latin American regional trade agreements should go beyond tariff policies and include non-tariff measures and disciplines in services, investment, government procurement, intellectual property rights, competition policy and regulatory transparency.

Now’s the time

The time is now for a new China-Latin America association. This partnership is already poised to go beyond trade. But it is also about trade. A new wave of productive development policies, including policies focusing on skills to facilitate upgrading and diversification, and on regional integration, is vital. While all this is easier said than done, action is essential if we are serious about seizing the business and trade opportunities of a promising China-Latin America relationship.


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