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Foreign Policy

The Counterbalance in America’s Backyard

May 28 , 2013

In the early 15th century, Admiral Zheng He sailed the Indian Ocean as far as east Africa in ships said to dwarf those of Europe at the time. The voyages were meant to make the world aware of China’s greatness, superiority and presence. Likewise, China’s current expanding economic presence in Latin America is raising awareness of its potential role as a counter-weight in a region long designated as America’s backyard. At least four critical factors are discernable in analyzing China’s rise in Latin America since 2000.

First, China’s expanding economy, averaging ten percent growth per year, has created enormous worldwide demand for natural resources and commodities. The countries of Latin America, long enjoying comparative advantages in commodity exports, have reaped benefits from the high prices China pays for soybeans, cooper, iron ore, petroleum and other products.

Second, as China’s global trade expanded, its bilateral trade with the region exploded at an annual rate of 40 percent since 2003. According to a Latin Business Chronicle analysis of data from the International Monetary Fund (IMF), Chinese exports to Latin America surged to $88.3 billion in 2010, by 62 percent, while imports increased to $90.3 billion, tracking a 42 percent gain. Last year, China began supplanting the U.S. as top trading partner of several countries in the region. In contrast, U.S. exports to Latin America have dropped from 55 percent of the region’s total imports in 2000 to 32 percent in 2009, according to United Nations figures. By 2014 it is estimated that China will overtake the European Union as the second largest trade partner in the Americas.

Third, China’s vast financial resources have allowed it to provide loans for infrastructure projects guaranteeing the flow of commodities. According to journalists Henry Sanderson and Michael Forsythe, in their new book China’s Superbank, China Development Bank (CDB) commands nearly a trillion dollars in assets and its total loans reach $876 billion. Increasing amounts of those loans are being allocated overseas, mainly to help develop infrastructure in Africa and Latin America. Bridges, ports, airports, roads and railroads are being constructed to insure the flow of vital resources fueling the vibrant Chinese economy.

Finally, as China spreads its cash around the region, its firms are making headway into Latin American markets. CDB loans are often tied to contracts with Chinese companies. For instance, China’s largest power supplier, State Grid Corp., has contracted to build power transmission facilities in Caracas, Venezuela, and ZTE, a telecommunications firm, is building an offshore underwater cable. In Venezuela, Chinese companies represent fully one fourth of CDB’s lending to that country or about $11.6 billion.

Despite mutually beneficial economic links since President’s Hu Jintao’s first visit in 2000, the new China-Latin American relationship also has its potential risks. Latin American countries continue to sell raw materials and import manufactured goods from China, reproducing an old relationship. Present-day exhaustion of resources needed for future industrialization raises some concerns. A decline in Chinese imports could also stall economic growth in the Americas. The greatest contrast, however, is between China’s well-thought out strategic approach and a Latin America fragmented between the various nations, poorly informed about China and essentially taking a pragmatic, day-by-day approach.

The Counterbalance

Since the Monroe Doctrine, United States power has been an existential fact-of-life in the Americas. Mexico’s former dictator Porfirio Díaz even quipped: “Poor Mexico, so far from God; so close to the United States.” Accordingly, anti-Americanism and a desire to break with the tutelage of American mandarins have long dominated political narratives in the Americas. For many in the Americas, China’s rise portends a change in the status quo.

Maintained in power by Venezuela’s vast oil wealth, Venezuelan President Hugo Chávez benefitted greatly from the growing worldwide and Chinese demand for petroleum. In a loan-for-oil scheme guaranteeing China a steady flow of oil for ten years, CDB placed a third of its overseas loans – an astounding $40 billion – in Venezuela. The scheme commits Venezuela to supplying 419,000 barrels of oil a day to China (or about $15.3 billion a year in revenue at $100 a barrel.) CDB’s loans amount to an estimated $1,400 for every Venezuelan. Given the instability of the Venezuelan regime, the loan is considered by many experts as high risk.

A similar $10 billion loan to Brazil’s state-owned oil company, Petrobras, is developing offshore oil deposits in exchange for oil shipments of 150,000-200,000 barrels per day. Most recently, Brazil and China signed an agreed to conduct $30 billion in trade in local currency. The deal drops the U.S. dollar as a medium of exchange allowing Brazil to keep its reserves of greenbacks for other purposes. Some analysts see this as a first step to a future renminbi trading bloc.

The rising prices, loans and other benefits of Chinese wealth have also brightened prospects for the emergence of trade and other pacts characterized by the lack of a U.S. presence. Mercosur (or the Southern Common Market), CAN (the Andean Community of Nations), the Chávez-created radical ALBA (Bolivarian Alliance of the Americas), and CELAC (the Community of Latin American and Caribbean Nations), a sort of alternative to the Organization of American States (OAS), this year presided over by Cuba, are all alternative venues absent the United States and Canada.

From the perspective of Latin America’s foreign policy makers, China is undeniably a welcome economic, and potentially political, counterbalance to the U.S., especially given the objectives of some Latin American countries. Writing in the Guardian on October 2, 2012, journalist Raúl Zibecki cites one of Brazil’s top diplomats, Samuel Pinheiro Guimares, explaining:

“… Brazil’s strategy sought to prevent the ‘removal’ of Chávez through a coup, to block the reincorporation of Venezuela into the North American economy, to extend Mercosur with the inclusion of Bolivia and Ecuador and to hinder the U.S. project to consolidate the Pacific Alliance, which includes Chile, Colombia, Mexico and Peru.” 

Despite its preoccupation with the Middle East and its recent economic troubles, the U.S. remains a predominant actor in the region, and only the presence of a country capable of projecting superior economic and political power could significantly shift the balance of forces away from the current hegemon. Moreover, unlike the former Soviet Union – once described as a third world country with nuclear weapons – China has the economic resources to create an alternative locus of financing, trade and development.

China’s foreign policy has long sought stable and positive relations with the U.S. in order to ensure optimal conditions for domestic economic growth. Economic considerations often proved paramount to its foreign policy, avoiding tensions where possible. Nevertheless, as China projects itself in the Americas, conflicts with the United States are likely. As the U.S. loses market share, faces higher costs for raw materials, as American investors find fewer opportunities, and especially if Latin American nations try to entangle China in regional tensions, U.S. political and military moves in East Asia may raise China’s cost of doing business in the Americas. Similarly, perceived or actual ties between some Chinese companies and the People’s Liberation Army (PLA) will undoubtedly raise concerns from America’s national security apparatus.

So far the rise of China and its growing stature in Latin America has not upset the prevailing paradigm in the continent. China still has a long way to go to displace U.S. power and influence. Nevertheless, the speed and enormity of China’s entry suggests a period of profound change and uncertainty. It must have seemed that way to those who first saw Admiral Zheng’s fleet off the coastline.

Fernando Menéndez is an economist and principal of Cordoba Group International LLC, a strategic consulting firm providing economic and political analysis to clients.

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