DOES CHINA’S STATE-LED CAPITALISM POSE A “NEOCOLONIAL” THREAT TO LATIN AMERICA, OR ARE CHINESE INVESTORS A BOON TO LATIN AMERICA’S ECONOMY?

Larissa Paschyn

CHINA’S ECONOMIC FOREIGN STRATEGYRESOURCE DRIVEN - BUILDING SIMPLE COMMERCIAL AGREEMENTS - ECONOMIC ASSISTANCE, DIRECT INVESTMENT, JOINT VENTURES, AND MILITARY TIES.

When Argentina's financial collapse rippled through SA’s Southern Cone, China increased its stake in Argentina and Brazil, while U.S. investment declined by half.Great Dragon Telecom

- Cuba. Brazil - rail link to the

Pacific

To meet domestic industrial &consumer demand: CNPC invested $300 mil. in

technology for Orimulsion fuel in Chinese power plants.

2003 - bid on concessions to Ecuador's major oil fields.

CNPC acquired stake in Argentine oil & gas firm Pluspetrol.

Mexico's Pemex - boost in petroleum exports to address trade gap with the PRC.

Joint Ventures Oil

CHINA’S MOTIVESNational ‘go-out’ strategy …Deploy investments & capital in rich resource

countries/regions with booming trade & commercial activities by Chinese enterprises.

• - Zhang Yidong, Shanghai-based analyst- Industrial Securities

TH

E F

OR

ES

EE

AB

LE

FO

RE

IGN

P

OL

ICY

Military Training

LA military

personnel, due to a three-year old U.S. law surrounding International Criminal Court that has led to a sharp decline in U.S.-run training programs for the region.

China, Brazil's largest trading partner, 09. Presidents & media consider China:"Brazil’s most promising business

partner and a strategic ally" due to China's "rapidly rising demand for raw materials and agricultural produce”.

Bilateral trade grew from US$ 6.7 billion in 2003 to US$ 36.7 billion in 2009.

Cuba is turning to Chinese companies rather than Western ones to modernize its crippled transportation system at a cost of more than US$1 billion.

Partnering w/ BRIC & LA’s on int. issues like Climate Change, IMFO, Welfare.

ICBC opening banks in Brazil, buy Argentina Standard Bank Group

CLOSER TIES: BOON?From Latin America's perspective, expanding relations with China might seem like a good idea. It offers the following advantages:

Prestige: Elevates a small country into the ‘big leagues’ of global actors. Supplies respect for those in shadow of U.S. colossus.

Deals with few requirements: China’s transactions simple exchanges. Leaders have broad authority to negotiate deals w/out legislative oversight. PRC State monopolies mesh with Latin American government management.

No need to build up Latin American trade capacity to deal with diverse businesses.

CLOSER TIES: BANE?Closer ties to China have significant disadvantages for LA as China is driven by need to export low-cost production.

• 2005 - Mexican President Fox: dumping electronics and clothing unacceptable

•For every dollar that Mexico makes from exports to China, the PRC makes $31 from exports to Mexico

Growing trade deficits: China's exports more affordable than LA goods = trade deficits. Chinese

laborers work for 1/3 of wages of LAs. Argentina, Brazil, & Mexico have signaled unease about trade

with such a hot competitor.

•Income may widen.

•Narrow economies vulnerable to downturns in commodity prices.

•44% live below poverty line. If fail to adopt reforms, social inequality & political instability could depress U.S. exports to the region, increase migration problems.

Disinterest in economic reform: Commodities-based

trade model of China will undermine progress that LA

has made toward industrialization. Those with

ruling oligarchies may be tempted to fall back on plantation economics.

CA

SE

EX

AM

PL

E B

RA

ZIL

China the Bread Basket of Capital to Brazil

China is Capital based while Brazil is Resource endowed.

Brazil imported $25billion worth from China; China invested $20billion last

year into Brazil.Trade jumped 53%; $51 billion in 2010. Exports paid off Brazil’s foreign

debt.Brazil now has reserve:

$52 billion; trade w/ China helped Brazil exit

Financial Crisis early.BUT as Brazil’s capital industry grows, will it

come into direct competition with China?

CASE EXAMPLE - BRAZIL Commodity-driven currency

appreciation that undermines manufacturing.

The bulk of Brazil’s exports to China consist of commodities; by contrast, manufactures constitute more than half of Brazil’s exports to the US and Europe.

China’s cheap manufactures are hurting Brazilian industry in home and third markets.

Fear of the “Dutch disease”

WHAT THIS MEANS FOR THE USA

To obtain commodities, China offers investments in infrastructure. US cannot offer direct ties to

state industries; only development aid.

Chinese competition may make MCA money less effective incentive to democratize governments, liberalize markets.

1-2 year lead time from to disbursement of MCA aid gives volatile governments time to drop market performance requirements.

China flexibility v. rigid U.S. Obtaining assistance from

US requires restrictions: promising not to send U.S. military personnel to the ICC, not assisting terrorists, not using U.S. provided equipment for other than its stated purpose.

US commitments depend on legislative approval; can be reversed if mood in the U.S. Congress shifts.

Scramble for resourcesEvasion of American-style bottleneck diplomacy

RISK TO CHINA’S INFLUENCE ON LATIN AMERICA

China encounters problems:

Argentina, Brazil complain lopsided trading practices; have lost market share in its own

markets to China.

WHAT COMES AROUND, GOES AROUND

Just as China was

seen as an

alternative to

the US in

previous years, so now Latin

America sees the US

as a useful

BALANCE to rising

Chinese influence on the contine

nt…

Will China lose its influence?

WHAT SHOULD CHINA’S POLICY BE?

China wants Market Status but LA’s blocking ambitions

• Anti-dumping measures would be more difficult to implement• Latin American countries not supporting Market Status b/c of growing

trade deficit.

New Domestic Export Subsidies?

• Risk since RMB undervalued; appreciation impact China's trade balance = slowdown exports; increase unemployment.

• Are these costs less than eventual welfare and capital losses from slowly adjusting the RMB exchange rates?

Float freely the RMB or Slowly adjust exchange rate? 

Find Common Ground – Partner with Brazil on new technological programs (Ex. Sino-Brazil Satellite Program).

REACHING OUT

Pres. Dilma Rousseff, Brazil – Deeper cooperation in management

service and creative industries.

• Investment –logistics• Boost Brazil’s competitiveness.

• High speed rail between Rio de Janiero and San Paulo

Alexander Teixerio – President Brazil Trade & Investment

Promotion Agency – welcomes Chinese companies for stadium construction investment for ‘14

World Cup, ‘16 Olympics.

• China Development Bank - 14.1 Bill RMB in loans to Brazil.

• Promote cooperation and joint efforts in infrastructure: ports railways, power stations, sewage dispensers.

VALUING BRAZIL’S EXPORTSDiversify trade

patterns to deepen Brazil’s

influence in Chinese markets.

Improve trade

structure, add value to

Brazil’s exports.

Upgrade technology

in new sectors (not just energy, iron ore, soy

beans).

Ex.: Hu Junlie, CEO Chongwing Food Corp. signed 5 bill. RMB deal with Governor of Brazil’s Bahia province to build soybean industrial park and plant base.

BRICS FOR CLOUT

Use BRICs to gain clout in

G20, the maker of economic

policy.

Reach out to developing

countries as focus in G20 shifts to

developing world.

CHINA’S FOREIGN STRATEGY = MAO’S WORLD REVOLUTION?

Marshal Lin Biao

• Long Live the Victory of the People’ War!

Mao’s goal was for world revolution; Lin

showed how….

• North America & Western Europe – world cities; world revolution can be achieved through encirclement of cities by rural areas (Asia, Africa, Latin America)

Examples of China and LA with emphasis on Peru

Carlos Pando, executive director of the Peruvian Agency for International Cooperation, and Chinese Ambassador to Peru Zhao Wuyi after signing an agreement on bilateral economic and technical cooperation, in Lima, Peru, last month. (Xinhua)

CHINA AND LA In November 2004, Chinese President Hu Jintao flew to Argentina, Brazil,

Chile, and Cuba, where he signed a total of 39 bilateral agreements with these countries in the areas of trade, investment, aviation, space flight, tourism and education.

The President also pledged that China would invest over $100 billion in Latin America during the next decade.

By the end of 2009, China's investment in Latin America had risen to $30.6 billion, accounting for 12.5 percent of China's total outbound direct investment

Latin America is the second-largest destination for Chinese outbound direct investment, following the Asia-Pacific region.

In Latin America, most goes to Brazil, Peru, Venezuela, Mexico and

Argentina.

Chinese companies have invested heavily in Latin America's energy and mining industries and more business opportunities are arising.

CHINA IN LA By 2007 China and Latin America two-way trade totaled $102.6 billion and

numbers continued to increase in years to follow. China mainly exports electronic goods, machinery, garments and shoes to

Latin America. China is the largest importer of goods and services from Brazil and Chile, and

the second-largest from Peru, Argentina and Cuba China imports large amounts of Brazilian iron ore, soybeans, sugar and

aircraft. China mainly imports soy from Argentina. Bolivia, Venezuela, and Mexico are cooperating with China in the energy

sector.

PERU’S TURBULENT PAST

In the early 1980’s, the Peruvian situation was taking a downturn as the country was impacted by international oil crises, natural disasters, a decrease in exports, and excessive international borrowing and economic stability was in question.

By 1985, Peru was facing financial collapse.

In the 1980’s, Peru was suffering from a rise in violence from guerilla groups and an increase in criminal activity. One source estimates that over 20,000 people died as a result of political violence during the decade

In 1992, Fujimori suspended Peru’s constitution. Peru's foreign relations were dominated by the nation's debt and need for foreign aid and capital.

In the new constitution, the importance of foreign investment in the country for continued economic growth was emphasized.

PERU’S TURBULENT PAST Fujimori opened all sectors of the Peruvian economy to foreign direct

investment (FDI) and lifted restrictions on remittances of profits, dividends, royalties. The government also offered tax-stability packages for foreign investors

the new constitution adjusted land-tenure rights to encourage private ownership and foreign investment.

FDI flows increased dramatically and, between 1994 and 2001 the mining sector was the second-largest recipient of FDI totaling US $10.7 billion

The mining and mineral sectors are key players in FDI, but have little impact on the Peruvian economy.

PERU The budget balance in 1989 as percent of GDP was -7,234.7. Then in

1999 the current budget balance as percent of GDP was -.011999 and further improved to 4.4 in 2008 (World Bank).

Much of the sector, which was previously dominated by state-enterprises, has been sold off to private firms.

In 1990 private operations accounted for 55% of mineral production throughout the country and in 1999, private operations accounted for 95% of mineral production

CHINA AND PERUChina-Peru relations have strengthened in recent years with smooth development in the friendly cooperation in politics, economy, trade and culture, and even military relations.

Bilateral relations entered a new phase in 2008, when President Hu Jintao and Alan Garcia exchanged visits further establishing a partnership between the two countries.

The two sides have also met and exchanged views on further advancing bilateral defense cooperation.

“The military relations form an important part of the China-Peru relationship and have made great contribution to the comprehensive development of bilateral relations”

“China hopes the two countries could make joint efforts to advance the friendly cooperation between the two militaries to a new level”

Xu Caihou, Vice Chairman of China’s Central Military Commission

CHINA’S ROLE IN PERU Chinese President Hu Jintao visited Peru for

the first time and signed his country's second free trade agreement with a Latin American country, after Chile in 2005.

He has also promised to invest a further $6bn in Peru's mining sector over the next three years - a welcome move for Peru as commodity prices plunge.

China-Peru cooperation continued to increased over the 2006-2010 period, during which Peru received aid worth 120 million yuan (18.5 million dollars) from China.

Hu Jintao and Alan Garcia met in 2008 to discuss and agree upon the FTA

CHINA IN PERU

Zhou Zhongshu, president of Minmetals

The major players are the four Chinese mining giants: Minmetals, Chinalco, Shougang and Zijin

"These four companies are already developing large-scale mining projects nationwide, and they have recently reaffirmed their commitment to invest 7.4 billion dollars in Peru [mining]"

Peru’s Vice President Luis Giampietri

CHINA IN PERU Hu Jintao brought a 600-strong delegation with him.

Some of the group was interested in mining. Others were interested in new markets in agriculture or telecommunications, or to start up small businesses.

They were also looking for possibilities for manufacturers to get into other markets with the help of Peru

China had barriers to trade elsewhere and were looking to produce from Peru and sell elsewhere since Peru has free trade agreements with other countries in the world.

CHINA IN PERU Many Latin American nations are emerging economies and expanding quickly.

This creates investment opportunities for China’s companies.

Mining resources in LA are one obvious attraction.

China’s Jack Ma (Alibaba.com) was present in 2008 and commented on the current business climate in Peru.

"I believe in the next 10 years China's market will be the world's largest market"

“where there is crisis there is also opportunity”

"China should shift away from the US and Europe to focus [on] other parts of the world like Latin America and countries like Peru. There are a lot of mutual benefits."

CONCERNS There are also concerns that further development of bilateral

relations would push some Peruvian sectors out of business and cause job loss as a result of a surge of cheaper Chinese imports.

"We can't allow these jobs to go abroad"

"The government ministers are Peruvians so they should listen to what Peruvians are saying"

Diogenes Alva, an active leader in Peru’s textile industry

CONCERNS Despite improvements, Peru suffers with 19.8% of the population living in

poverty and an unemployment rate of 7%

o Some economists and locals argue that Peru should take care of its small businesses which create a lot of jobs

Peru’s exports are just 0.3% of China's imports but China has been Peru's second largest trading partner for the last four years. A wide trade imbalance is another concern.

Some say that there is a danger in competition from Chinese industry.

Others express concern over mining investment and argue that China doesn’t demonstrate a concern for the environment or labor rights in Peru

China has shown signs of improvement as its companies trade on international markets and are forced to comply with international standards.

POTENTIAL FOR A FRIENDLY FUTURE Last month Peru and China signed an agreement on further development of

bilateral economic and technical cooperation.

China will grant Peru 20 million yuan (3.07 million U.S. dollars) in assistance.

The money will be used in Peru's education, culture and health sectors.

(Right) Carlos Pando, Peruvian Agency for International Cooperation (Left) Zhao Wuyi, Chinese Ambassador to Peru

FRIENDLY FUTURE "The signing of this agreement reaffirms the friendship and mutual

understanding between both countries and shows China's firm support to Peru's social and economic development" (Zhao)

"Trade isn't the full content of bilateral cooperation. There are many potential areas for both sides to increase cooperation, including sectors such as anti-poverty fight and infrastructure construction“ (Zhao)

Regardless of some existing concerns, bilateral relations between Peru and China are continually improving and creating conditions for increased trade, investment and cooperation in other areas

CHINA AND CHILE

SINO-CHILEAN RELATIONS

Established Relations in 1970 Allende-Pinochet transition 1973

China did not break diplomatic relations Pinochet withdstood One-China Policy

Antartic Sovereignty Claims China aknowledges Chilean claims Chile grants permission for Great Wall Research

Center Policy of free trade

Chile agreed to accession of China to WTO FTA between Chile and China 2005

CHILE-CHINA ECONOMIC RELATIONS

Free Trade Agreement in 2005 First FTA between China and a Latin

American country Took less than a year to negotiate Reduction of tariffs 90% of Chilean exports to

China, 50% of Chinese exports to Chile Does not include services Impulsed by China’s thirst for raw materials Chile diversified its markets

Still reliant on commodity exports Continuing Chile’s tradition of free trader

SINO- MEXICAN RELATIONS

CHINA-MEXICO RELATIONS

Established diplomatic relations 1972 Tense economic relations

Mexico sees China as contributor to economic underperformance.

Competition to internal and foreign markets Both produce similar products Both have US as main export partner Mexico has conducted numerous anti-

dumping investigations

CHINA-MEXICO RELATIONS

2009 Swine Flu crisis - Cooling of relations Repatriation of Mexicans in China Mexico called acts as “discriminatory”

Calls to stop trying to compete with China “Turn Mexico into an access point for China

to the US market” “The road to America is Mexico” – V.I. Lenin

CHINA MEXICO ECONOMIC RELATIONS Chinese tourism to Mexico Mainly directed to high-income

Chinese Chinese tourists expenditure is

high 4000 to 7000 USD a week!

Golf and shopping destinations Favorite for the Chinese

Shanghai-Mexico City Only direct flight between China and Latin

America Trying to open Beijing-Mexico City flight

Visa application simplified Payments by China Union Pay

accepted

CHINA LATIN AMERICA MICRO LEVEL RELATIONS

Brazil – China case

BIGGEST CHALLENGE: CULTURALDIFFERENCES!

Chinese expansion in Brazil challenged by cultural differences

Chinese investments in Brazil Chinese companies compelled to hire Brazilian

employees Expectations on both sides are quite different

Labor regulations very different Labor unions = benefits, holidays, collective

labor negotiations Chinese have a centralistic system

42% of Brazilian employees change their job in less than a year in Chinese companies

Chinese companies in Brazil have a high rotation ratio

MAIN BRAZILIAN COMPLAINTS

Interpersonal relations are important for Brazilians in workplace Brazilian executives unconfortable with over-centralized

structures Chinese companies demand quick results

in a country of high-bureaucratic paperwork

Brazilians frown upon open exposure of mistakes of subordinates

“They want u in the office 24/7 to control you”

“Results and deals are made over the table with a couple drinks”

MAIN CHINESE COMPLAINTS

Lack of punctuality Chinese are very wary of hierarchies “Brazilians want days off for everything!” “They want holidays for everything!”