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Foreign Policy

Chinese-S. American Economic Ties Good for US with Caveats

Sep 12 , 2012

Despite the prominence given China’s recent billions of dollar of loans to Venezuela, Beijing’s South America policy is consistent with its overall strategy of focusing for now on China’s economic development while maintaining a low profile regarding controversial diplomatic and military issues.

Beijing calibrates all activities in South America to avoid alarming the United States, its main economic partner and strategic threat. China walks a fine line with countries like Venezuela and the other left-leaning anti-American governments in the region, trying to develop enough political good will to facilitate further trade and investment without appearing to support the anti-U.S. rhetoric often heard from their governments.

China is seeking to import South America’s natural resources and find opportunities for Chinese business to sell goods and invest in regional markets. It is not (yet) seeking to compete militarily with the United States in this region. Furthermore, “China” is far from a unitary actor China’s policies are determined by a diverse array of government, state-owned companies, and private companies’ policies.

China’s economic involvement in South America has increased rapidly in the past decade. Trade has grown rapidly in both directions: Chinese exports grew at a rate of 26.8% from 2000-2005 and 31.0% from 2005-2010, while imports grew at a rate of 37.6% from 2000-2005 and 27.7% from 2005-2010. The stagnating growth in other regions of the world has contributed to this rapid growth, which has propelled China to the position of South America’s second largest trading partner by some estimates.

Official trade flows are roughly balanced overall, though not by country or commodity. Chinese-South American economic ties are heavily concentrated in a few sectors and countries. The overwhelming majority of China’s imports from South America are raw materials, including soy, oil, and metals. One or two countries tend to dominate each of these sectors. In addition, China’s trade with South America is also concentrated with a few countries, especially Brazil, Chile, and Argentina.

Chinese foreign direct investment (FDI) in South America is also rapidly growing. Almost all of China’s FDI is related to natural resource extraction, with oil and gas being the largest sectors. In the coming years, China’s FDI will likely diversify and Chinese investors will expand into other sectors such as transportation, manufacturing, and new areas such as green technology and renewable energy.

Loans from Chinese policy banks helped fuel this investment by financing South America’s energy, mining, infrastructure, transportation, and housing sectors. As with trade and investment, Chinese loans are concentrated in a few key countries, namely Venezuela, Brazil, Argentina, and Ecuador, which together have received more than 90 per cent of Chinese loans since 2005. A significant portion (about two thirds) of these loans are to be repaid in oil, ensuring large foreign oil shipments to China for years without the risks associated with more traditional loans.

Chinese representatives insist that these loans are made without conditions. This is not entirely true. In many cases, Chinese lenders do apply economic criteria to decide whether to lend money for specific projects, tough China is willing to loan money for infrastructure projects that are not typically supported by other foreign sources. Loans are often tied to purchasing Chinese goods and services.

Abstaining from official relations with Taiwan used to be a prerequisite to receive Chinese loans and investment, but now Beijing allows recipients some leeway. Beijing and Taiwan have maintained a truce on seeking to bribe governments to switch their allegiances. Beijing still tries to secure the support of even South America’s smallest governments in international organizations like the United Nations, where each country has one vote regardless of size. Claims of southern solidarity are often less effective in winning votes than Chinese loans and investment.

None of these activities present much of a threat to U.S. interests. Some can even strengthen regional stability and generate opportunities for American businesses. A few South American countries fear their economies are too dependent on exporting natural resources, which leaves them vulnerable to commodity price fluctuations and corruption. But U.S. officials are not complaining about Chinese imperialism in South America like they are about the predations of Chinese companies in Africa. China has refrained from exporting many weapons or any nuclear technologies to South America, the most sensitive sectors from Washington’s perspective.

In coming year, China’s trade and investment will likely diversify as its firms become more familiar with Latin America. Yet, the focus will remain on securing valuable natural resources and developing the infrastructure to support such trade and investment. China’s continued urbanization and increasing energy demand along with domestic infrastructure development will keep demand for products like oil, iron ore, and copper high. Rising Chinese living standards will intensify demands for food products from Latin America, but also from the United States.

It is important to keep China’s presence in Latin America in perspective. Though growing quickly, it still lags behind other regions in terms of economic importance for China. Although China is the lead trading partner for several key Latin American countries, it is far from the only international actor in the region. The United States, European countries, Russia, and even India are all important economic players in South America. And Brazil and other local countries are now exerting considerable influence within their own region.

Richard Weitz is a Senior Fellow and Director of the Center for Political-Military Analysis at the Hudson Institute. His current research includes regional security developments relating to Europe, Eurasia, and East Asia as well as U.S. foreign, defense, homeland security, and WMD nonproliferation policies.

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