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An Overview of Chinese Economic Engagement with Latin America

Updated: Mar 11, 2018

China’s engagement with the countries of Latin America has been viewed with suspicion – if not outright accusation of undermining the United States’ national security interests – in the eyes of Washington. However, China’s engagement in Latin America has remained nearly exclusively in the economic sphere and can be characterized by increased trade and foreign direct investment (FDI.) Latin America’s exports to China were estimated at $2.4 billion in 1995. Twenty years later in 2015, the region’s exports to exports were estimated at $76.4 billion, while the total trade volume was over $240 billion. China has already become the first or second most important trading partner for all three of its free trade agreement (FTA) partner countries in Latin America – Chile, Costa Rica, and Peru – as well as for Argentina and Brazil. In 2010, Chinese FDI in Latin America was estimated at $13 billion, yet it only represented 1% of total FDI into the region. This statistic indicates that there could be much potential for increased economic engagement between China and Latin America.

The current economic reality of Latin America has been plagued by its economic history. The countries of Latin America developed as colonial economies under Spain and Portugal, which as Celso Futado noted, sought to extract a profit from its colonies in order to develop their respective domestic economies. Even after gaining independence, this economic model plagued the vast majority of Latin America, with the period between 1880-1930 being termed the “neocolonial” period by many economists. The economic growth categorized during this period was predominantly driven by export growth of primary resources. This in turn contributed to resource curses in many of these countries, making it difficult for sustainable economic development. In recent history, the United States has dominated the majority of Latin America’s economic engagement with the outside world. This economic engagement has predominately followed in the footsteps of the colonial and neocolonial model.

China’s entrance as a global economic power led many Latin American countries to anticipate a new form of economic engagement that might lead to higher levels of development. There are many unique characteristics of Chinese engagement with Latin America, especially in comparison with United States engagement. One major difference has been the trade deficit. While Latin America’s trade deficit with the United States has hovered around zero, there is an increasing trade deficit with China. This trade deficit has created considerable political mistrust among Latin American leaders, as the trade deficit with China is often used as a rallying cry for fringe political movements in Latin America.

Another difference is that Chinese economic engagement has taken a strongly bilateral approach, providing Latin America with trade and investment treaties which meet the individual needs of each Latin American partner. In contrast, the United States has preferred to engage with the Latin American region in multilateral agreements, such as NAFTA (North American Free Trade Agreement) and DR-CAFTA (Central American and Dominican Republican Free Trade Agreement.) In the Chinese case, Chile’s FTA negotiated 152 exclusions for Chinese imports into the country in order to protect local industry. Likewise, during the negotiations for China’s FTA with Peru, the Peruvian government was able to negotiate exclusions for 592 sensitive products for which the government was trying to incubate production facilities, including textiles, garments, shoes, and metal mechanics. Costa Rica’s FTA not only included exclusions, but also an additional protective clause which provided Costa Rican officials to levy taxes at will on Chinese manufactured goods which may compete with Costa Rica’s small – but growing – local manufactured goods.

It is important, however, to put China’s economic engagement with Latin America into perspective, especially in comparison to the regional hegemon of the United States. The United States still remains the most important trading partner with the region – both in regard to imports and exports. Although the United States has seen its role decrease in power relatively to China, by absolute terms, it retains supremacy. As seen in Figure 2, exports to the United States from Latin America has increased relatively by almost 10 percentage points since 2013, while exports to China stagnated at about 10% overall. In contrast, imports from China are growing at a rapid pace, so much so that nearly 20% of Latin America’s imports come from China. In contrast, the United States percentage of imports in Latin America has decreased from 46% in 2001 to 32% in 2015.

Government officials from Latin America initially believed that increased economic engagement with China would increase the quality of their economies and break the neo-colonial natural resource curses that have plagued the region over the course of its history. This, unfortunately, has not yet occurred. In contrast, as noted by Julie Klinger in “China and Latin America: Problems or Possibilities:”

“Although these… are technically classified as South-South agreements, they follow the trade patterns of North-South agreements with Latin American exporting primary commodities to China, and China exporting industrial goods to Latin America. This dynamic is not at all what Latin American countries were expecting when they entered into these agreements. Both Chile and Peru were hoping to diversify their exports and attract investment in non-mining sectors.”

In the Chilean case, the nature of economic engagement has been exacerbated by China’s recent slowdown, which has decreased demand for Chilean copper. (79% of Chile’s copper exports are bound for China.) This fall in demand coupled with a 51% percent decrease in the price of copper have left Chile in a difficult situation. In the Peruvian case, Chinese mining ventures in the country have been criticized internationally for reports of corruption, lack of transparency, and violations of labor and environmental regulations. Chinese investments in Peru gained major international coverage in 2015 when Peruvian police killed labor organizer Bato Chuhuayllo during a protest, in which residents expressed their worries about chemicals from the Chinese-owned Shougang Marcona mine seeping into the surrounding rivers.

We can particularly see the resource curse in the case of Costa Rica. When China signed its FTA the country, Costa Rica boasted a large Intel plant, which accounted for 76% of the country’s exports to China, equal to some $3 billion from 2006 to 2010. In 2015, Intel left the country to produce processors in cheaper locations. Subsequently, the level of exports from Costa Rica to China fell from $337 million in 2014 to $81 million in 2015, creating a large and politically problematic trade imbalance. Without the Intel processors, Costa Rica was left exporting predominantly raw materials to China instead of manufactured goods, as Costa Rican officials had previously hoped. This scenario opened up large questions in regard to Costa Rica’s future with China among domestic government officials. On a regional scale, the case of Costa Rica opened up the debate whether or not economic engagement with China is positive for the economies of Latin American countries.