China and Latin America vie for competitive status

Authors

In Brief

Since the 1960s China’s relationship with Latin American countries has experienced both continuity and change.

Chile, with its socialist government under Allende, was the first in Latin America to recognise China in 1970, although trade between the two countries began as early as 1961.

Fast-forward through the 21st century, and trade between China and Latin American countries has been growing rapidly. Although Sino–Latin American trade continues to represent a relatively small share of their respective global trade volumes, growth has exceeded many predictions. From 2000 to 2009, annual trade between China and Latin American countries grew more than 1,200 per cent, from US$10 billion to US$130 billion, according to UN statistics.

China is now the largest export destination for Brazil, Chile and Peru, and the second-largest export destination for Argentina. Agricultural and mining goods accounted for 83 per cent of Latin American exports to China between 2008 and 2009. China’s growing demand for South America’s leading exports — copper, iron ore, oil and soybeans — has had a strong positive impact on the region’s export growth, such that the Andean and Southern Cone nations reported increases ranging from 9 to 14 per cent of their total exports, respectively.

Economic ties between these countries and China have grown stronger since the latter became Chile’s largest export consumer in 2007 and Brazil’s largest trading partner in 2009. Argentina, for example, which maintains a trade surplus with China, exported a total value of US$5.15 billion to China in 2009. The surplus is mainly driven by its heavy export of soy products. Between 2000 and 2009, 55 per cent of Argentina’s exports to China were soybeans, and another 23 per cent soy oil. Other examples of increasing cooperation between the countries include the establishment of the Argentina–China debt swap in 2009 worth US$10.2 billion and China National Offshore Oil Corporation’s purchase of a US$3.1 billion interest in Argentina’s Bridas.

But while trade has increased, not everyone is pleased with the direction of economic activity. In 2009, 77 per cent of Brazil’s exports to China consisted of iron ore, soybeans and soy oil, while industrial products made up only 23 per cent. In 2011 Brazilian president Dilma Rousseff remarked: ‘there is a misbalance in our relations with China. Brazil exports commodities and imports too many knick-knacks … I’m told that 80 per cent of this year’s Carnival costumes came from China’. China’s stronger economic ties with the region are also generating some concern among Latin American countries that the Asian superpower is threatening their economic competitiveness. But is this concern justified?

Mexico until recently saw China as an unmatchable competitor when it comes to producing the same kinds of cheap manufactured goods at a lower cost. Now, however, Chrysler is using Mexico as a base to supply some of its Fiat 500s to the Chinese market. A major explanation for Mexico’s increasingly competitive status is China’s rising labour costs. Wages in southern China have grown by 20 per cent per annum over the last four years, while Mexico experienced an increase of only 1 per cent. As a result, Mexican wages, which were 2.4 times those of China in 2002, are now 14 per cent higher. Mexico is clearly back in the game of competing against China in labour-intensive exports.

China also lacks Mexico’s unique geographic advantage as the United States’ next-door neighbour. It takes between 20 days and two months to ship goods from China to the United States, whereas Mexican goods can reach their cross-border destinations between two and seven days. Still, Mexico’s geographic advantage may not be sufficient to offset China’s ability to produce larger volumes of exports and the depth of its global supply chains.

Jiang Shixue, an influential Chinese scholar on Latin America, has portrayed the Sino–Latin American relationship as South–South cooperation. One could also point to the generally favourable terms of trade for both sides and the absence of Chinese political intervention in Latin America as evidence of this theory. In future, slower economic growth will weaken China’s demand for commodities from Latin America. Higher levels of domestic consumption in China will lighten its burden and desire to compete with Mexico for manufactured exports. These shifting conditions could herald a win–win scenario for the Sino–Latin American relationship.

Xiangming Chen is the founding Dean and Director of the Center for Urban and Global Studies and Paul Raether Distinguished Professor of Global Urban Studies and Sociology at Trinity College, Connecticut. He is also a Distinguished Guest Professor at Fudan University, Shanghai.

Kayla Chen, a graduate of Colby College, advises international students at the Massachusetts International Academy. Previously, she worked at the Embassy of the United States in Argentina and then at VOX Global in Washington, DC.

A version of this article was first published here in The European Financial Review.