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An Open Door for Mr Xi in the Americas

Dec 17 , 2018

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With each visit that President Xi Jinping makes to Latin America, China reinforces its economic bonds to the region, but the visits also raise questions about a shifting dynamic in economic relations and the role of extra-regional actors.

In the midst of what has been described as an economic cold war between the US and China, President Xi Jinping’s presence at the recent G-20 Summit in Buenos Aires, Argentina reaffirmed that China is leading the way in nurturing bilateral trade and investment deals in Latin America.

China now hopes to extend its signature Belt and Road Initiative to the Americas with new investments in Chile, Brazil, and elsewhere, complementing the steady increase in trade throughout past decades. The impact of China’s presence was underlined in a remarkable statement by Argentina’s President Mauricio Macri. During a state visit with Xi following the G-20 Summit, Macri declared: “the better China develops, the better it goes for China, the better it will go for Argentina and the world.” Macri, a center-right democrat who vowed to end the leftist policies of his predecessor Cristina Fernández de Kirchner, reaffirmed that China “shows itself as the great economic motor of the global economy’s development.” The statement highlights that China is here to stay in the Americas and that it will continue to play a role in continental development.

The degree to which Latin American countries trade with and allow investments from China marks a shift in the United States’ role in the Western Hemisphere, and as the United States talks protection and tariffs, it has also ironically allowed China to pick up the flag of free trade. As if to underscore the trend, during his visit to Argentina, President Xi signed 30 agreements on trade and cooperation with Macri.

China is now the largest trading partner of Chile, which is also Latin America’s most market friendly nation. In 2005, Chile became the first country to sign a free trade agreement with the People’s Republic of China (PRC). Today, Chile is China’s second trade partner in Latin America after Brazil. Significantly, Chile is the third largest recipient of Chinese foreign direct investment after Brazil and Mexico.

The emergence of China as a major manufacturing and exporting power, combined with its increasing demand for raw materials and commodities, created the conditions for a new model of development which has yet to prove its sustainability.

There are significant issues and challenges in Chinese-Latin American trade relations. China typically works bilaterally, which means that it always has greater economic clout vis-à-vis the Latin American nations. Latin American countries have yet to form the kind of trade pacts that might balance such a dynamic. More significantly, while China’s demand for agricultural, mining, and fuel resources has raised prices for Latin American commodities, the volume of Chinese manufactured and, in some cases, subsidized goods finding a market in the Americas has negatively affected opportunities and market share for domestic industries such as Brazil’s steel and automotive manufacturers. Even the generously financed Chinese infrastructure projects tend to focus on China’s need to access resources and markets for finished goods. There are also concerns that while the initial financial inflows are welcome they will lead to indebtedness as economies struggle to pay back credit and loans.

In short, it still remains to be seen if Chinese penetration of Latin American economies will promote or restrict development for the partner country. On one hand, Chinese engagement could promote sustainable development driven by the needs of the partner nations. On the other, China could reinforce traditional patterns of intercontinental resource flows, where the less developed nation provides low-value commodities in exchange for high-value manufactured goods, without a chance to generate industrial and other productive capacities of their own.

Nonetheless, the volume and scope of Chinese trade and investment is viewed positively as a dynamic commitment to economic development by most of the region’s governments and key commercial sectors. While American trade and investments might be more impactful in Latin America, many in the region see the rise of China as overshadowing the US. And Chinese economic clout translates to political influence as more countries recognize Beijing and break diplomatic relations with Taiwan. After leaving Argentina, on his way home to Beijing, President Xi visited Panama, a country that recently established relations with the PRC.

President Donald Trump’s administration, in part due to his political rhetoric about migration and calls for walls and tariffs, seems to have doubled-down on withdrawing from the hemisphere. The absence of any American initiatives at events like the recent G-20 Summit contrasted with China’s open checkbook diplomacy. This is viewed in the region as a real shift away from a traditional relationship and, some would argue, a decline in US prowess. The fact that the US faces budget woes and is currently paying $1.4 billion per day to service its debt constrains its largess. In contrast, like the rich uncle who comes bearing gifts for the holidays, China is garnering a string of markets and allies while expanding its influence in the region.

How this plays out in countries like Argentina is instructive. The Kirchner government also counted on trade, investments, and loans from China. But like others in the region, most remarkably Venezuela, the loans and investments were squandered and used by the local government to buy political support. Growing debt followed indiscriminate spending. Macri defeated Kirchner’s dedicated successor and promised to fix the economy by reining in excessive spending. The task has proven a difficult one. Nevertheless, China’s willingness to continue to invest in Argentina is good news for its economy. Soybean, meat, and fuel exports mean income for Argentinians. It shows that the country is progressing through more Chinese trade and the future looks brighter.

For the past several decades, many countries in the Americas and the world have been working to enter global markets with their resources and commodities. The most successful, like Chile, have built strong market institutions and tied their future development to exports and expanded trade. Previously, Washington encouraged this movement towards free trade and a global market. Now, however, the predominant message is to throw the banner of free trade overboard. In today’s world, as seen from Latin American capitals and other developing nations, China has picked up the banner of free trade and is carrying it forward. So far, the response of leaders like Macri is to announce that Argentina, like others in the region, will maintain “an open door for the Chinese.”

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