China in Latin America: Should we be worried?
Brazilian president Dilma Rouseff has recently taken steps to protect the Brazilian manufacturers from Chinese competition (Photo: www.pulsamerica.co.uk)
They used to say that when the United States sneezed, the rest of the world would catch a cold. This was especially true of Latin America which felt the impact of U.S. recessions in the 1980s and 90s harder than the U.S. did. Fortunately for Latin America, this is no longer the case.
During the Great Recession of 2007-09, Latin American economies held up surprisingly well. A study by the Inter-American Development Bank shows that the long-term impact of a U.S. GDP shock on the typical Latin American economy has halved since the mid-1990s. One of the main reasons is China.
China’s voracious and persisting demand for natural resources has helped Latin American economies continue growing during a period of global weakness. Revenues from exports of oil and minerals have supported government accounts and helped keep a lid on public debt.
In order to extract natural resources more efficiently China has also invested billions in Latin America’s infrastructure. According to a study by the UN Economic Commission for Latin America and the Caribbean (ECLAC) China invested $15.3 billion in the region during 2010. Americas Quarterly points out that China’s investment to Latin America has increased by 400% during the past decade.
Most countries in Latin America are now less reliant on the U.S. economy and the financial health of U.S. businesses and consumers. Economic diversity is a good thing, but the new reliance on Chinese commodity demand and China’s state-run companies is worrisome.
This week I got a sneak peak at a special issue of Americas Quarterly, which highlights some of the pitfalls of being buddies with China.
First of all, China’s impact is disproportionate. Chinese demand mainly benefits commodity producers in South America like Brazil, Chile, Peru, Colombia, Ecuador, and Venezuela. Smaller countries which do not produce commodities, like those in Central America and the Caribbean, often lose out. They get the high fuel prices without the export or investment benefits.
Chinese demand is also not a big job creator. China is buying things like oil, gas, soya, copper, and coal, which do not require much labor to produce. Additionally, an influx of China’s cheap manufacturing exports is destroying local manufacturing jobs. The Economist points out that:
Across Latin America, trade with China is growing but partly at the expense of intra-regional trade in manufactures. Most Latin American manufacturers cannot compete with their Chinese counterparts which benefit from government support and an advantageous exchange rate policy.
Brazil, whose top export market is now China, is the lead example. Brazil still has a trade surplus with China, but it is basically exchanging its natural resources for Chinese manufacturing products. It is not necessarily functioning on a level playing field. While China is investing in Brazilian natural resource production and local industry, Brazil has not found the same openness in the Chinese market. This is not the “win-win” situation that the Chinese like to promote, and now the Brazilians are trying to protect themselves. It may be too late.
The Chinese also bring baggage. Ariel Armony in Americas Quarterly suggests that:
The real risk from China may not be its manufacturing exports but that traditional business practices of informality and closed-door deal-making will find a welcome environment in Latin America and undermine the rule of law and democracy.
Armony points out that informality is high in both China and Latin America and that this feeds general corruption and increases the likelihood of graft, smuggling, and poor environmental practices. Chinese companies do not have to follow the same rules as those from the U.S., Europe, or even Latin America. This was highlighted this past week in a New York Times article which paints a pretty desolate picture of life working for FoxConn, a major supplier for Apple and other large tech companies like Dell, Microsoft, IBM, and Intel. According to the Times piece:
Two years ago, 137 workers at an Apple supplier in eastern China were injured after they were ordered to use a poisonous chemical to clean iPhone screens. Within seven months last year, two explosions at iPad factories, including in Chengdu, killed four people and injured 77. Before those blasts, Apple had been alerted to hazardous conditions inside the Chengdu plant, according to a Chinese group that published that warning.
On closer inspection, the impact of Chinese economic involvement in Latin America is not as positive as some of the region’s leaders like to suggest. Yes, high commodity export prices and revenues are helping to fuel short term economic growth and bolster fiscal accounts. But what will be the long-term story? The commodity boom won’t last forever, and when the bubble bursts, many of Latin America’s commodity producers will be out of luck.