By Ángel Alonso Arroba, Rolando Avendaño and Arturo Franco Hernández

Adapting to the Rise of China II: Securing Business Success in Critical Times

World Economic Forum91-93 route de la CapiteCH-1223 Cologny/GenevaSwitzerlandTel.: +41 (0)22 869 1212Fax: +41 (0)22 786 2744E-mail: contact@weforum.orgwww.weforum.org

OECD Development Centre2, rue André-Pascal75775 Paris Cedex 16FranceTel.: +33 (0)1 45 24 82 89Fax: +33 (0)1 44 30 61 49www.oecd.org/dev

The views expressed in this publication do not necessarily reflect those of the World Economic Forum

or the OECD Development Centre.

REF: 180310

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World Economic Forum91-93 route de la CapiteCH-1223 Cologny/GenevaSwitzerlandTel.: +41 (0)22 869 1212Fax: +41 (0)22 786 2744E-mail: contact@weforum.orgwww.weforum.org

OECD Development Centre2, rue André-Pascal75775 Paris Cedex 16FranceTel.: +33 (0)1 45 24 82 89Fax: +33 (0)1 44 30 61 49www.oecd.org/dev

The views expressed in this publication do not necessarily reflect those of the World Economic Forum

or the OECD Development Centre.

1. Introduction: China and Latin America 5

1.1. A resilient relation

1.2. Political developments and trade

1.3. Insider views from China

2. A Shifting Context for Latin America 8

2.1. Emerging countries in perspective

2.2. New trends in Latin America’s trade

2.3. China and Latin America: A mutual dependence

2.4. China, Latin America and the Global Crisis

3. Brazil: Feeding the Dragon 13

3a. Macro Overview: A Growing Partnership

3b. Brazil and China’s relationship

4. Mexico: Strengthening Ties with China 15

4a. Macro Overview: A time for Repositioning

4b. Mexico and China’s relationship

5. Final Recommendations 17

6. References 18

Contents

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1.1. A resilient relation

The global economic crisis has given a new dimension to Latin America’s commercial and business relations with China. Trade and investment flows between both partners increased considerably since the 1990s and boomed spectacularly during the six years before 2009, as Latin America enjoyed sustained annual growth rates of around 5% and China contributed over one fourth of total global GDP growth. But as the financial crisis dried up international investment and hit the real economy in both continents, a big question was raised: To what extent would Latin America – China economic and business relations be affected negatively by an adverse economic context?

The Chinese-Latin American relation is a resilient one. While last year’s economic crisis certainly put a burden on commercial exchanges and cross-border financial activities as the global economic activity slowed down, and even despite the drop in absolute figures, economic engagement between China and Latin America has definitely continued to gain importance in relative terms: in its quest for growth and development China still needs Latin America’s copper, zinc and iron ore, just the same way Latin America will continue importing manufactures and will find in China one of the few global creditors ready to fund the exploitation of many of the region’s untapped natural resources.

More than ever before, as both Latin American and China have successfully weathered the current economic downturn, each partner constitutes for the other a potential source of exchange and stability not directly related to the crisis’ epicentre. The sound macroeconomic and fiscal management in the recent times of bonanza seems to have paid off now that the tide has turned.

1.2. Political developments and trade

At the political level, not only are diplomatic relations between China and Latin America far from frozen, but stronger than ever in these critical times. Nothing symbolizes better this approach than Beijing’s 2008 White Book on Latin America, a blueprint outlining priorities and policy goals similar to the one China published on Africa two years earlier. Beyond cooperation on political and military issues, where both actors share common traditional and

non-traditional threats, issues on trade, investment, energy security and mineral supply will articulate China’s strategic economic approach to the continent in the years to come.

President Hu Jintao’s Latin American tour in November 2008, coinciding with the Asian-Pacific Economic Council (APEC) summit in Lima, signalled this growing commitment to reinforce his country’s political and diplomatic presence in the region: not only did he visit Cuba, Costa Rica and Peru, but he also travelled with an entourage of 12 Ministers and 600 business leaders. During 2009, up to three senior officials from the Chinese government have visited the region, including Vice-President Xi Jinping, who closed down trade deals with Mexico, Jamaica, Colombia, Venezuela and Brazil. China’s mounting engagement with Latin America has also materialized at the institutional level over the past couple of years, in spite of ongoing trouble in

1. Introduction: China and Latin America

Timeline of Strategic Cooperation between China and Latin America

1990s• strategic partnership with Brazil (1993)

2000-2005• strategic partnership of common development

with Venezuela (2001)• partnership of friendly cooperation with long-

term stability and mutual benefit with Uruguay (2001)

• comprehensive cooperation partnership with Chile (2004)

• partnership of traditional friendship with Cuba (2004)

• strategic partnership with Mexico (2003), Argentina (2004) and Peru (2005)

2006-2010• Free Trade Agreements with Chile and Peru

(2008)• China becomes IDB’s non-borrowing member

(2008)• FTA with Costa Rica is being negotiated (2010)• China has established political dialogue

mechanism with Mercosur, the Rio Group, the Andean Community and some individual countries

Source: Jiang Shixue (2009)

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the global financial markets. A permanent observer at the Organization of American States since 2004, China recently became the 48th member to join the Inter-American Development Bank (IDB), contributing US$ 125 million to the Fund for Special Operations which provides soft loans, US$ 75 million to strengthen institutional capacity throughout the continent, US$ 75 million to the Inter-American Investment Corporation (IIC), and US$ 75 million to IDB’s Multilateral Investment Fund, focusing on microenterprises.

Nevertheless, trade is the dimension of China – Latin America relations that undoubtedly epitomizes this ascendant partnership. Commercial exchange between the two regions jumped almost 17-fold between 1995 and 2008, from US$ 8.4 billion to more than US$ 140 billion. China is already Latin America’s third largest trade partner, a weight likely to grow as a result of the signature of free trade agreements throughout the region. In Chile, where a free trade agreement with Beijing is in place since 2005, China is already the number one trading partners after supplanting the United States. The result could be similar in Peru, where Presidents Hu Jintao and Alan García concluded a free trade agreement in November 2008. Trade and investment accords with Cuba and ongoing negotiations with Costa Rica – that only re-established diplomatic relations with China in 2007, but where China is already the second largest trading partner – also exemplify this growing commercial presence.

1.3. Insider views from China

Indeed, China’s improved relations with Latin America are also perceived by Chinese themselves as a step in the right direction. Even though relations with the United States are clearly the priority of China’s foreign diplomacy, and one of its biggest concerns, building a strategic and increased relationship with Latin America serves an important economic purpose.

According to Jiang Shixue, a leading academic who specializes on Latin America, China’s economy is resource-intensive and relatively inefficient, two factors that lie at the heart of its commercial interest towards Latin America. Based on his and other economists’ predictions, by the year 2020 of the 19 major types of metal minerals, China will only be self-sufficient in five, and fourteen will need to rely on imports. In his words, “in order to maintain rapid growth so as to create employment and ease social tensions, China will continue to import resources and raw materials from abroad.”

Apart from the need of commodities and natural resources, China-Latin American relations exemplify a growing trend of South-South cooperation and investment. China’s stock of direct investment in Latin America and the Caribbean peaked at US$ 32 billion by the end of 2008, with the following composition:

China’s FDI Abroad, 2008 (Total Stock)

• Total: US$ 184 billion• Asia: 131• Africa: 8• Europe: 5• Oceania: 4• North America: 4• Latin America: 32(17.5%)

Source: Chinese Ministry of Commerce, 2007 Statistical Bulletin of China’s Outward Foreign Direct Investment http://hzs2.

mofcom.gov.cn/accessory/20080928/1222502733006.pdf

77

“Cooperation in the fields of science and technology has been spectacular” says Jiang Shixue. In 1999, 2003 and 2007, respectively, China and Brazil jointly launched three remote sensing satellites. This cooperation has been highly recognized as a best example of South-South cooperation in the high-tech field. In October 2008 China successfully sent a Venezuelan telecommunication satellite into space. The satellite, produced by China Aerospace Science and Technology Corporation with a designed longevity of 15 years, is the first telecom satellite of Venezuela used in broadcasting, tele-education and medical services.

However, according to Zhu Hongbo, another local expert on Latin America, while thirteen Latin

American countries have granted market-economy status to China, trade relationships are not always smooth. Hongbo states that many Latin American countries still rely on anti-dumping practices to protect their markets: “of the 28 countries utilizing anti-dumping against China from 1995-2007, 9 countries are Latin American, and of the 551 anti-dumping cases, 26% were from Latin America.”

Chinese investors, on the other hand, have stated that improving the business environment in Latin America is necessary and frequently complain about some of the same ailments that local business faces: bureaucracy, corruption, crime, labour rigidities, political uncertainty, and lack of infrastructure.

Chinese Business Perspectives on Latin America

Just as lack of knowledge about China is a problem on the Latin America side, so it is on the Chinese side, despite their clear interest in the Region. This was the conclusion of a study published by the Latin American Institute of the Chinese Academy of Social Sciences (CASS), which sought to measure not only how much the Chinese business community knows about Latin America but how much interest they display in the region. From 2007 through 2008, the Latin American Institute conducted a series of interviews with the Chinese private sector, with the intent of mapping their perceptions of Latin America and individual countries. The survey, “How much do the Chinese know about Latin America?” was comprised of simple questions and indicates that indeed the Chinese knowledge base on the region is poor and complicates the development of economic relations with Latin American countries.

Initially, the researchers posed general questions, such as “what is the predominant language in Latin America? And “what image do you associate with Latin America?” Following that, they asked more specific questions about the political and economic relations between these countries and China. Respondents were asked to identify which countries still maintained diplomatic relations with Taiwan, which countries had entered into free trade agreements with China and what natural resources were common in the region. Finally, the survey sought to ascertain what was the respondents level of interest in Latin America, mainly how much they wanted to get more information on the region and to increase ties with Latin American countries.

The study concluded that the level of interest shown by Chinese businessmen was significantly high, but their knowledge of the region, of how its economy and China’s complement each other, and, consequently, of increasing trade and investment opportunities, was found wanting. According to their findings, 75% of respondents consider economic cooperation between China and Latin America important for mutual economic growth. Moreover, an expressive amount of businessmen is satisfied with the somewhat rapid strengthening of ties between the region and China, but complains about the lack of information that limits their more active participation in this process.

Source: Rodrigo Maciel (2009), Review of the Results of CASS Survey

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2.1. Emerging countries in perspective

Not surprisingly, emerging markets’ contribution to world growth has been a major change for the world economy in the last decade. The current crisis has nothing but reinforced the crucial role that a number of emerging countries were already playing. Today, in a context of low or inexistent economic growth, China positions itself as an important contributor of economic dynamism, with growth rates well above the average. Most likely, 2009 will be remembered as a year of economic crisis worldwide: mortgage crises, instability in commodity markets, and a weakening dollar. The effects for the emerging world, now that decoupling from industrialized countries is improbable, are far from negligible. The reverting evolution of food and oil prices has affected commodity-dependent regions like Latin America and Africa. Despite their comfortable surpluses, they have now come back to traditional external positions. In addition, the external sector will not

be a dynamic contributor to economic growth in the coming years. Latin America, in particular, will have to deal with different factors of the crisis: lack of capital, decline of external flows (i.e. foreign investment, remittances), decline in exports, inflationary pressures, and in general, financial instability.

2.2. New trends in Latin America’s trade

The consolidation of China, India and other emerging economies has reshaped trade relationships with the emerging world at the national and regional level. Latin America has faced for some years now a strong demand for raw materials from these countries. The expansion of the Asia-Pacific Economic Region (APEC) is only an example of the importance that Asia represents for this part of the continent1. As shown in figure 1, between 2000 and 2009 the share of exports to China from both Latin America and Asia has significantly increased.

1 The Asia-Pacific region is playing a major role in world trade, representing about 28% of world merchandise exports and 23% of commercial service exports (ECLAC, 2008)

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Source: OECD Development Centre, based on WITS Comtrade, 2010

At the same time, the danger of excessive complementarity of goods trade is persistent. Despite increasing exports (both in volume and value), inter-industry trade seems to be the common denominator in this alliance, undermining the full benefits of commercial expansion between the two regions (ECLAC 2008). Whereas integration in Asia has intensified through intra-industry and intra-firm trade, these modalities of exchange, which would be the natural step towards higher trade integration, are still absent in Latin America.

Trade patterns across Asia have also transformed in recent years. China’s neighbours play now the role of suppliers in the global value chain, and their role in Chinese value chains has intensified (Figure 1). Different

2. A Shifting Context for Latin America

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trade agreements2 have strengthened the position of Vietnam, Cambodia, Laos and others as key providers for Chinese exports in different sectors (e.g. high-tech, textiles and others). Latin America’s integration landscape, conversely, is much less optimistic. While trade in goods has consolidated for some specific sectors, it still goes hand in hand with high specialization patterns (Figure 2).

Demand for Latin American goods has also evolved in recent years. In contrast to the first period of commodity boom (2004-06), 2007 (and probably 2008) were years of tightening in terms of goods exports growth for the region. United States, hitherto the main importer for Latin American goods, reduced its demand ostensibly. Furthermore, given that 75% of the rise in export proceeds is explained by higher prices shows the moderate increase in export volumes (ECLAC 2008).

To respond to these unfavourable conditions, Latin American governments have been looking for a stronger position on existing and new trade agreements. Latin America has sealed important agreements targeting

Figure 1b. Chinese Imports from the Emerging World

Source: OECD Development Centre, based on Comtrade, 2009

Figure 2. Net Trade Balance of Latin America and China – 2009

-3.00E+07 -2.00E+07 -1.00E+07 0.00E+00 1.00E+07 2.00E+07 3.00E+07

Agricultural materials

Chemicals

Food

Fuels

Manufactures

Ores and metals

Textiles

Machinery and Transport

Trade Value ($ '000)

Exports China to LAC

Exports LAC to China

Source: OECD Development Centre, based on Comtrade, 2010

2 e.g. ASEAN+3, ASEAN+6

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higher trade integration. In the same spirit of NAFTA, increasing economic ties with Asia have converged to pursue bilateral free-trade agreements: Chile with China, Japan and Korea, Mexico with Japan or Peru with China are a few examples. These agreements should envisage facilitating the entry of Latin American exporters to global manufacturing production networks. To the extent that trade agreements are proven useful for domestic industries, they can also dissuade protectionist measures towards Asian imports.

2.3. China and Latin America: A mutual dependence

What is the extent of Latin America’s complementarity with Asian goods, particularly China? Comparing world trade structures between two countries is a helpful approach to respond to the question. The OECD Development Centre calculates two indicators of product segmentation for the region, which give an idea on the overlap (and competition) between Latin American and Chinese exports to the rest of the world.

China has been seen as a problem for light manufacturing exporters while it benefits raw commodity producers. High commodity prices, partly motivated by China’s and India’s growing demand for oil, minerals and raw materials, certainly benefit the trade balance of many Latin American countries, although the export bonanza in commodities is not risk free. Looking more closely at trade structures and competition between China and Latin America’s economies, it appears that the Asian giant is not that big a commercial threat for most countries in the region. Except in some cases where there is a clear overlap of exported goods (e.g. Mexico), the trade structures of most Latin American countries show a pattern of complementarity with China, rather than one of fierce competition (Figure 3).

A less explored question regards the competition that Latin American and Chinese firms face in local markets. Particularly with economies like Mexico, where trade structures are more similar to China, it

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Source: OECD Development Centre, based on Comtrade, 2009

is worth looking at the competition pattern within the region. Figure 4a depicts the coefficient of specialization for Mexico and China on a third market, Central America. When comparing with world competition, instead of local competition, for these two countries, the conclusion is that the competition for the Central American market is stronger, but heterogeneous, in the region. A similar comparison could be made between Brazil and China, where trade overlapping is still marked for some sectors. When comparing with South America, an important third market for Brazil, it is remarkable that the level of competition with Sino-industries can be relatively high.

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In sum, Chinese trade competition with Latin American countries, even those with strong commodity-based economies, is not clear-cut. Many countries, particularly in South America, present trade structures that suggest complementarity rather than anything else, in particular due to China’s growing demand for

Figure 4a. Trade Competition in Central America: Mexico vs China

Source: OECD Development Centre, based on Comtrade, 2009

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commodities. Also, there is evidence showing that competition with China in Latin American markets can be somehow higher, but given the importance of other third markets (e.g. EU, United States) the prevalence of complementarity between both regions is more important.

2.4. China, Latin America and the Global Crisis

The global crisis in 2008-09 certainly had an impact on the commercial flows between China and Latin America. Nevertheless, early estimations seem to have underestimated the recovering capacity of the Asian giant: more than any other emerging economy, China’s industrial production has increased by above 20% between the first and the last quarter of 2009. In February 2010, China’s exports experienced their fastest growth in the last three years .3

To keep the pace with this trend, the demand of commodities and other goods from Latin America should be sustained, as some forecasts for total Latin American exports suggest (see Figure 5). To give some examples,

Figure 4b. Trade Competition in Central America: Brazil vs China

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3 Chinese exports experienced a 45.7% increase with respect to 2009

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between 2008 and 2009 Brazil’s share of exports towards China increased from 8.5% to 13.5% of total exports, whereas for some countries the total level of exports remained stable (Colombia kept a 12% export share to China) or slightly decreased (Ecuador experienced a 1% fall in their Chinese’s export share)4 . All in all, although Chinese import shares from other countries fell during 2008, Asian in particular, in the case of Latin America the plunge was not as considerable. Moreover, as some of the trade agreements signed by Latin American countries and China still need to be ratified and implemented, they should offer a more optimistic scenario in the next few years. The recent upsurge in commodity may also reinforce export proceeds from China’s raw material imports.

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Source: Economist Intelligence Unit, 2010

If the crisis did not bring to an end China’s appetite for Latin America exports, its interest for the region’s natural resources is confirmed by the recent series of deals and direct investment. The entrance of China in Chile’s copper industry (through Quadra Mining Ltd) in March 2010 is only one example of the country’s strategy to tackle natural resource firms in Latin America and other emerging regions. As observed for other deals from Chinese investors in the emerging world, Latin America should expect other major capital inflows from the Asian giant5.

4 Latest data from WITS-Comtrade for selected countries (March 2010)5 The interest of China for “emerging” investments is remarkable. China Investment Corporation, the country’s sovereign wealth fund, expanded activities in Central and South East Asia, more recently in energy-related firms (e.g. Kazakhstan Gas company Astana). Their pursuit for resources is also exposed in recent acquisitions in Indonesia (PT Bumi Resources, the country’s largest coal producer), Russia (Noble Oil group, commodity supplier), Mongolia (Iron Mining International, mining producer) or Canada (Teck Resources Ltd, Canada’s largest diversified mining company).

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3a. Macro Overview: A Growing Partnership

The Brazilian economy has shown relatively high resilience to the global crisis when compared with other turmoil episodes. Besides the expected macroeconomic stability that the country needs to develop its potential, Brazil’s industrial policy has cautiously avoided the risks of an overspecialized economy, unlike other countries in the region. With a large trade basket going from sugar to aerospace equipment, the country managed to respond better to the global turndown of recent months.

Brazil is expected to grow between 3% and 4% up to 2025, but this growth is conditioned by a number of factors. The country has certainly shown important improvements: A stable macroeconomic management based on inflation control, restructuring of public finances and debt, and favourable real interest rates. The improvement of terms of trade, has allowed the country to become more resilient to external shocks. In addition, the demographic landscape for Brazil is highly optimistic: the active population will increase around 20% between 2010 and 2025.

Brazil’s agro-industrial and energy sectors display also good perspectives for future development. Agriculture productivity (with a 3% annual increase), together with extended land availability (80 to 140 millions Ha without affecting the Amazon reserve) should allow Brazil to take advantage of these opportunities and consolidate as a world leader in the agro-industrial sector. Moreover, Brazil should become a net oil exporter in few years time, and the potential for renewable energies is important. In contrast to the mere 2% of today, Brazil will be able to allocate in the next two decades 5-6% of its GDP to infrastructure investment (China allocates 8%), which should benefit a number of regions, particularly for improving transport facilities. The Brazilian economy is, however, not exempt of risks: First, low growth coupled with high interest rates have been the common denominator of the last decades, and this is why the macroeconomic prudence needs to be preserved at all times. Productivity growth in some sectors may have proven difficult, especially those associated to favourable terms of trade, and where productivity gains are modest.

3b. Brazil and China’s relationship

The relation between China and Brazil is at the core of Chinese-Latin American relations: Brazil is China’s largest trading partner in the region, and China is Brazil’s largest Asian market. In just two years, China has become Brazil’s second largest trading partner, overtaking Germany in 2007 and Argentina in 2008. Both countries are also developing a closer strategic relation coinciding with the 35th anniversary of the establishment of diplomatic relations, particularly as they consolidate their leaderships in their respective regions and their weight at the internal stage grows, most recently through G-20’s strengthened role. Brazil is also emerging as the leading force behind the complex web of political and economic integration processes in Latin America, hence the special interest the bilateral relation has for China.

After the signing of a strategic partnership in 1993, trade and economic relations between both countries intensified since 2001. In the last eight years, bilateral trade grew at an average annual rate of 30%, reaching US$ 36.4 billion in 2008. Soybean and iron ore alone total more than 67% of Brazilian exports to China, with crude oil and its by-products coming at a distant third. Cheaper commodity prices and the large infrastructure projects outlined in the recent stimulus package indicate that Chinese demand for Brazilian products will stay strong in the short and medium term.

During last year’s trip to Brazil, Chinese Vice-President Xi Jinping signed down important agreements including an increase in Petrobras’ sales of oil to CNPC and Sinope to up to 160,000 barrels a day, in exchange of loans of up to US$ 10bn to help develop the newly discovered “pre-salt” deposits. Further deals made during Xi’s trip in areas such as electricity and gas are likely to be enhanced during President Lula’s scheduled visit to China in May.

Business relations between both countries go beyond raw materials and agricultural products, however. A good example is Brazilian aircraft manufacturer Embraer, who has a joint venture with the Aviation Industries of China and a production line in that country, as explained in the next section. Both states also operate three earth-imaging satellites under the China-Brazil Earth Resources Satellite programme (CBERS), and plan to launch two new

3. Brazil: Feeding the Dragon

14

ones in coming years. Chinese producers of electrical appliances and telecommunication devices like Juawi, ZTE and Gree are also succeeding in the Brazilian market. The recent opening by the Bank of China of its first office in Brazil signals the increasing financial activity between the two countries.

China and Brazil have embarked in a path of increasing economic correlation. This presents important business opportunities even beyond the commodities sector that companies such as Vale, Gerdau and soybean producers have taken advantage of. Over the past decade, Brazilian companies that have invested in China have secured a competitive edge which is not only based on cheap labour, but on high-productivity growth and an abundance of capital, the biggest in the world within two decades. A few of the cases that that have leveraged on these opportunities and secured business success are:

Bematech

The Group’s principal activity is to provide integrated solutions for the commercial automation of the retail industry. It provides hardware, software and services to automate commercial processes and support the management of commercial retailers. It also offers technical support, implementation and maintenance services. Bematech has over 1,200 employees in over 20 offices, manufacturing facilities and warehouses located throughout the world. The case of Bematech still illustrates the potential for closer integration with China to benefit from lower production costs in the product development process while keeping the most valuable segments of the value chain under tight control.

Embraer

Embraer (Empresa Brasileira de Aeronautica S.A.), was founded in 1969. It manufactures commercial jets with up to 120 seats and is one of Brazil’s biggest exporters. The Group’s principal activities are to design, produce and sale aircraft and aerospace materials for civil and defence purpose. The Group also provides technical activities related to the production and maintenance of aerospace materials and technical training to personnel from the aerospace industry. Since 2002, Embraer has had a joint venture to manufacture aircraft with China’s AVIC II in Harbin. The investment in China also includes increasing the stock of spare parts in China. This market accounts for 15% of Embraer’s total turnover, making it the company’s third largest market, after the United States and the European Union. The Chinese-Brazilian partnership has already manufactured and delivered 20 aircraft in China and has a portfolio of orders for 46 airplanes.

“China’s regional aviation market has fantastic growth potential and Embraer has the right products to be a strong player, considering competition from existing manufacturers as well as new entrants. To be a strong player in the Chinese market, Embraer has positioned itself as a strategic partner in the development China’s aerospace segment. Embraer intends to continue playing a leading role in years to come to guarantee the longevity and strengthening of Brazil’s and China’s aerospace ties.”Frederico Fleury Curado, Chief Executive Officer, Embraer

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4a. Macro Overview: A time for Re-positioning

The Mexican economy, until recently, benefited from the favourable conditions for the United States, and growth rates were very much dependent on the North-American cycle. The free trade agreement with the US and Canada had formally established this reliance. After the political reforms in the 1990s, Mexico attained a certain level of democratic and institutional solidity. There are, however, political risks linked to the slow progress of structural reforms, particularly social reforms, and this could be matter for instability.

Mexico’s demographic context seems less propitious for growth than the Brazilian one. The active population in Mexico has increased significantly (estimated growth of 27% between 2000 and 2015), but it is expected to fall to 3.8% after 2015. Finally, Mexico’s dependence on oil revenues could be a distressing factor in the future. At similar extraction rates to the ones observed today, Mexican oil reserves will be exhausted in ten years, which could have important consequences for government revenues. These factors will be important in determining the future prospects for the Mexican economy.

4b. Mexico and China’s relationship

China-Mexico contemporary relations date back to 1972, when diplomatic ties were first established. Following a bilateral agreement on China’s accession to the World Trade Organization (WTO) in 2001, bilateral trade and capital flows have greatly expanded, especially after a 2003 strategic partnership that strengthened cooperation between both countries. Nevertheless, trade relations have not been exempted from tensions, particularly as a result of direct competition in many sectors and Mexico’s anti-dumping measures on many Chinese products like clothing, shoes, chemical and toys. Mexico has also complained to the WTO on alleged payment of illegal subsidies to manufacturers by the Chinese government, and the trade deficit with Beijing – which increased tenfold between 2000 and 2007, bypassing US$ 20 billion – has created further friction. Both countries are also fierce competitors in Mexico’s main export market, the United States.

The year 2008 was, however, a turning point in Sino-Mexican relations as both countries agreed to advance in the elimination of anti-dumping measures, which in any case have not prevented Chinese imports to Mexico from growing at an annual rate of 38% since 2001. Some analysts even expect that by 2012 nearly 44% of Mexico’s imports could come from China. Mexico is currently China’s second largest trading partner in Latin America, after Brazil, and the main market for Chinese exports in the region, particularly textiles, household appliances, electromechanical equipment and chemical and high-tech products.

Leaders from both countries have multiplied their meetings in recent years, as illustrated by President Felipe Calderón’s trip to China in July 2008, followed by the most recent visit by Chinese Vice-President Xi Jinping to Mexico. This renewed partnership has translated into specific agreements such as a recent deal to reciprocally promote mutual investments and provide a juridical framework to favour and protect them.

China is indeed beginning to see Mexico as a key investment destination: producing in the country offers a back door to Chinese manufacturers to enter the American market. A good illustration of this is the car industry, with three Chinese automakers planning to build factories in Mexico with an eye on the United States: Changan Auto, Geely Holding Group and China FAW Group. Mexican investments in China could also benefit from this new context, as it is the case of a few, but notable examples that already very present in the Asian country.

Most established Mexican companies have made the most of their comparative advantages, including the proximity to such key markets as the US and the maximization of close cultural ties, in order to withstand China’s competitive threat, and have found ways to enter the Asian giant’s market. Some interesting cases are:

4. Mexico: Strengthening Ties with China

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Nemak, founded in Nuevo León, México, and part of the larger Grupo ALFA, is the world’s leading producer of aluminium cylinder heads, engine blocks and other aluminium components for automotive applications. Nemak has close to 15,000 employees in 13 different countries, including China. The company is the world leader in its sector of activity and has rapidly expanded across the globe to achieve economies of scale and solidify its technological edge. Its production facilities in China do not represent a large portion of the company’s operations, but the presence is important to keep the development of other potential, more sophisticated players at bay.

Gruma SAB de CV, formerly Gruma, SA de CV, is a corn flour and tortilla producer and distributor. The Company conducts its United States and European operations principally through its subsidiary, Gruma Corporation, which manufactures and distributes corn and flour, packaged tortillas, corn chips and related products.Through its subsidiary company, Grupo Maseca, the largest tortilla maker in the world, Gruma has a presence in the United States, Europe and Asia. Gruma opened its first plant in China in 2006 and invested an additional US$ 7 MM in the country in 2007. Located in Shanghai, China this is the company’s 89th facility in the world. Gruma recently saw its finances hurt by big losses in currency derivatives as the global market rout knocked the Mexican peso in recent weeks.

“China sails today with great success in the global economy. The competitive challenge of GRUMA is very great, due to the commercial relation and of investment that took shape based on clear, efficient and reciprocal rules, with a long term attitude and vision.”Roberto Gonzalez Barrera, Chief Executive Officer, Gruma

Grupo Bimbo SAB de CV, formerly known as Grupo Bimbo SA DE CV. The Group’s principal activities are producing, distributing and selling bread, buns, cookies, snack cakes, pre-packaged food, tortillas, salted snacks and confectionery products. The 63-year-old Bimbo Bakery, a household bakery brand in Mexico, North America and Europe, is keen to expand in Asia. It entered China in 2005, its first Asian presence, with its own cutting-edge factory and production line in Beijing. Today, it is Mexico’s largest baking company and is the fourth largest food company in the world, behind Unilever, Sara Lee and Nestlé. The company plans to climb to first place by 2010, following its expansion into China in March of 2005. Grupo Bimbo’s operations in China have more than doubled since, according to its latest Annual Report, and a spectacular effort has been made to introduce the brand and image of the Group, with remarkable results. In 2008, Grupo Bimbo net sales amounted US$ 7,424 million dollars.

“Our operations in China have more than doubled, and a spectacular effort has been made to introduce the brand and image of the group, with remarkable results.”Daniel Servitje, Chief Executive Officer, Bimbo

Nemak

Gruma: Tortillas and the Iron Rice Bowl

Bimbo: Baking a new Market

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The relationship between China and Latin America is starting to evolve well beyond the commodity/manufacturer’s paradigm that prevailed during the first part of the decade.

As agreements continue to be signed, and there is a clear political will for continuing on this trend, two-sided investments are taking place in less-traditional sectors for the Sino-Latin economic landscape. Even if the fears of specialization in natural resources is still present in the Latin American debate, more often than not governments acknowledge the dynamic role that China is playing in their own economies, and the importance to respond to this trend. In the coming years, Latin America will need to define a more unified and clearer strategy to respond, not only to Chinese demand, but also to the significant, and often critical, Chinese investments in specific sectors.

Both Brazilian and Mexican industries have shown strategies for adapting to the Chinese dragon in critical times. On the one hand, Brazil has known to take advantage of the optimistic macroeconomic context and a relatively diversified exports basket to build ties with China. The examples of Brazilian firms show the flexibility to use the Chinese market for deliver new products (Bematech), to develop partnerships in technology (Embraer), or to explore new markets. Mexico, in the other hand, has been more exposed to Chinese competition, but the response is clear-cut: to access Chinese consumption market. With a clear vision on the Asian market, Nemak, Gruma and Bimbo are sharing a strategy to enlarge their participation in the dynamic Chinese domestic market.

Naturally, governments need to take into account big challenges for Latin America’s competitiveness: infrastructure, innovation, and integration. These are now well-acknowledged axes for the region’s development. Further than that, Latin American firms need to explore the potential partnerships that could be built with Chinese counterparts, either for product development, innovation, distribution, or market expansion. These complementarities are perhaps not obvious (as in Embraer’s case), but suggest that the marge de maneouvre is vast and will continue to be in the future.

5. Final Recommendations

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Alonso, A. Avendano, R. and J. Estrada. “Adapting to the Rise of China: How Can Latin American Companies Succeed?” World Economic Forum-OECD Working Paper, 2008.

Arruda, C. “FDCCPII 2007 Ranking of Brazilian Multinational Enterprises”. Fundaçao Dom Cabral. The Columbia Program on International Investment. Press Release, December 3, 2007.

Clark, X., D. Dollar and A. Micco. (2004), “Port Efficiency, Maritime Transport Costs and Bilateral Trade”. Journal of Development Economics, Vol. 75, No. 2, pp. 417-450.

ECLAC (2008), Latin America and the Caribbean in the World Economy: 2008 Trends

Farrel, Diana et al. “Beyond Cheap Labour: Lessons from Developing Economies”. The McKinsey Quarterly2005, Number 1. Fay, M. and M. Morrison. (2006), “Infrastructure in Latin America and the Caribbean: Recent Developments and Key Challenges”. World Bank, Washington, DC.

Goldstein, A. (2008), “A Latin American global player goes to Asia: Embraer in China”, International Journal of Technology & Globalization, vol. 4, no. 1.

Jenkins, R., Peters, E.D. & Moreira, M.M. 2008, “The Impact of China on Latin America and the Caribbean”, World Development, vol. 36, no. 2, pp. 235-253.

Lederman, D., M. Olaerraga and G. Perry. (2009), “China and India’s Threat to Latin America”. World Bank, Washington D.C.

Lopez-Córdova, E. Micco, A. D. Molina (2008), “How Sensitive Are Latin American Exports to Chinese Competition in the US Market?” Economia, vol. 8, no. 2, pp. 117-153.

Luhnow, D. (2004), “Challenges from China Spur Mexican Factories to Elevate Aspirations”. Asian WallStreet Journal.

Maddison, A. (2008), Chinese Economic Performance in the Long Run – Second Edition, Revised and Updated: 960 2030 AD, OECD Development Centre, Paris.

Maddison, A. (2006), The World Economy: Historical Statistics, OECD Development Centre, Paris.

Mesquita M., “Fear of China: Is There a Future for Manufacturing in Latin America?” Inter-AmericanDevelopment Bank, Occasional Paper 36.

OECD (2007). Latin American Economic Outlook 2008. OECD Development Centre, Paris.

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OECD (2009). Latin American Economic Outlook 2010. OECD Development Centre, Paris.

Perrotini, I.O., Vasquez, J.A. & Avendano, B.L. (2008), “Toward a New Developmental Paradigm for Latin America”, International Journal of Political Economy, vol. 37, no. 3, pp. 54-81.

Promexico (2008), “Sintesis de la Relación Comercial México-China”, Unidad de Inteligencia y Negocios.

Santiso, J. (ed.) The Visible Hand of China in Latin America, OECD Development Centre, Paris.

Thomson Financial, Datastream and I/B/E/S Databases. Paris, 2009.

6. References

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Ángel Alonso Arroba is a Policy Analyst and Outreach Coordinator for the OECD Development Centre’s activities on Latin America. Prior to joining the Development Centre, he was a program associate for the Democracy Coalition Project (Washington DC). He also worked in Malawi as a consultant for the World Bank and as a researcher at Georgetown University’s Center for Peace and Security Studies.

Rolando Avendano is a Research Associate at the OECD Development Centre, working with the Director’s Office and the Americas Desk. His research focuses on areas of macroeconomics, international finance and growth, and is currently working on Asia’s impact on emerging economies, sovereign wealth funds and commodity markets. Prior to joining the Centre, he worked with the OECD Economics Department on macroeconomic policy in Latin America.

Arturo Franco Hernandez is Regional Manager for Latin America and a Global Leadership Fellow at the World Economic Forum. Prior to joining the Forum, he held management positions as a global adviser in business strategy, CSR, and sustainability for CEMEX, a Fortune 500 corporation. He previously acquired relevant public policy and international development experience consulting for the World Bank and national governments.

Special Acknowledgements

Zhu Hongbo is Researcher and Director, Office for Latin American Studies, Fudan University, People’s Republic of China. He is an Executive Member of the Board and Deputy Secretary-General of the Chinese Association of Latin American Studies and Chinese Association of Latin American History Studies.

Rodrigo Tavares Maciel is the Manager Partner of Strategus Consult and Executive Secretary of China-Brazil Business Council, representing the 75 largest Brazilian and Chinese companies and institutions at the governments of Brazil and China. Maciel was responsible for setting the strategy for institutional development of Sino-Brazilian political and economic relations.

Jiang Shixue is the Deputy Director of the Institute of European Studies at the Chinese Academy of Social Sciences (CASS) and Chair of the Department of European Studies at the CASS Graduation School. Concurrently, he is Vice-President of the Chinese Association of Latin American Studies and Deputy Director-General of the Chinese Center for Third World Studies.

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