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China’s latest geopolitical assault on Latin American commodities and bilateral trade

Council on Hemispheric Affairs | 17 February 2009

China’s Latest Geopolitical Assault on Latin American Commodities and Bilateral Trade

 Chinese vice-president and vice-premier for agriculture on the road, visiting nine Latin American states, including regional powers Brazil and Mexico
 China tops the list of emerging Latin American trading partners, with exports rising tenfold in last decade
 In Washington, Obama administration yet to react to new Latin American realities, but must learn to adapt and accommodate

Two key figures in Chinese politics embarked on a tour of Latin American countries on February 9, in a sign that the Asian superpower is intent on consolidating its already substantial stake in the region. Vice President Xi Jinping — second in command to President Hu Jintao, who himself visited Costa Rica, Cuba and Peru last November — has traveled to the region for a two week-long tour, accompanied by Vice Premier for agriculture, Hui Liangyu. Between them, they will visit nine Latin American states, including the regional powerhouses of Brazil and Mexico, left-leaning Venezuela and Ecuador, as well as Colombia, a staunch ally of the United States.

With Barack Obama’s administration in Washington thus far focusing its attention on the influence of Iran and Russia in the hemisphere, it is hard to gauge the potential U.S. reaction to China’s increasing exercise of soft power. However, given the relative indifference with which the new White House has tackled China on other fronts — notably over the issue of its alleged currency undervaluing — further evidence that the Hu regime means serious business in Latin America is unlikely to pass without some form of diplomatic or trade riposte from the White House. With Hillary Clinton visiting Beijing in the coming days, the outcome may be seen sooner rather than later.

A Diversification of Partners
The eight-year presidency of George W. Bush marked a period during which Latin American countries increasingly turned to non-traditional players in forming their trade and political relations. The region has enjoyed an economic boom over the past decade, and while the U.S. continues to represent its largest trading partner, Washington with its major distractions in the Middle East, failed to make the most of the area’s recent prosperity, and consequently its dominance has slipped. World Trade Organization (WTO) statistics show that in 2000, the U.S. was the destination for 59.8 percent of Latin America’s exports, but by 2007 this figure had fallen to 46.2 percent.

Some of the gap left by the U.S. was filled by an increase in intra-regional trade. This had risen by 2.9 percent since 2000, to represent 19.6 percent of Latin American trade in 2007. No doubt this was in part a result of the various multilateral trade bodies which had sprung up (particularly in South America) during the Bush years. However, the large part of the squeeze on Washington’s hegemony came from non-hemispheric actors. The European Union has spread its already substantial development arms throughout the region, in particular through its relationship with the South American trade body Mercosur. It continues to consolidate its position in the region, opening negotiations on February 9 this year with the Andean Community states of Colombia, Peru and Ecuador over a potential trade agreement. EU statistics indicate that the value of its imports from Latin America rose by 42.6 percent between 2003 and 2007, with an average annual increase of 14.9 percent. The EU is now the destination for 14.4 percent of Latin America’s total exports, up from 11.5 percent in 2000, and the area provides 33.1 percent of the EU’s total agricultural imports.

Political Posturing?
Russian President Dimitri Medvedev visited various Latin American countries in November 2008, including Brazil and Venezuela, and sent several naval vessels to participate in maneuvers with its Venezuelan counterpart shortly afterwards. Again, trade with Latin America is the overriding concern in Moscow, with Foreign Minister Sergéi Lavrov stating that Russia aims to boost its hi-tech exports and cooperation with Latin America in the fields of energy, production and transportation of gas and oil. However, Russian relations with the region also feature an interesting political dimension with the re-emergence of a level of neo-Cold War-style hostility between the U.S. and Russia. The latter’s presence in Latin America represents for some a response to what are seen in Moscow as threats to its security interests in Eastern Europe, but, at the same time, the hunt for vital commodities is also very much in play.

Bolivian President Evo Morales embarked on a visit on February 15 to Russia and France, lending further evidence that the EU and Russia continue to hope to further their interests in the region. Morales is set “to sign a $3 billion deal” with the state-owned Russian energy company Gazprom which will allow it to play a role in exploring Bolivia’s gas reserves. He will also discuss EU-Andean trade with French President Nicolas Sarkozy, Bolivia being the only member of the Andean Community not to have signed up to the EU’s recent FTA initiative.

Iran’s Mahmoud Ahmedinejad has forged strong links with the Chávez administration in Venezuela both unilaterally and through the reinvigorated Organization of Petroleum Exporting Countries (OPEC). Chávez has signed scores of accords with Ahmedinejad during a number of official visits and meetings, and Iranian financing has facilitated some minor industrial projects in the country. Bilateral trade between the two counties increased from $1.1 million in 2004 to $50.7 million in 2006.

As for the rest of the region, Iran has promised $1 billion of investment for infrastructure and aid projects in Nicaragua — although this scenario, as of yet, largely has failed to materialize — and Tehran has also forged political relationships with Chávez’s allies in Ecuador and Bolivia. Summing up the influence of Iran in Latin America, a Woodrow Wilson Center assessment in July 2008 reached the conclusion that “A large gap ... separates the signing and actual implementation of cooperation agreements,” with Tehran’s various trade partners, including Venezuela. Iran differs from other outside regional factors, in that its presence in the region tends to be largely symbolic; much a case of diplomatic posturing in the United States’ backyard.

The Rise of China in the Western Hemisphere
China contributes significantly to this list of outside influences in Latin America. China’s trade with the region has risen tenfold over the past decade, with exports destined for the Asian superpower rising in value from $3.8 billion in 2000 to $36.1 billion in 2007. China is now the recipient of 4.7 percent of Latin America’s exports, up from a meager 1.1 percent at the start of the decade. At the November 2004 APEC summit in Chile, President Hu set a target for total bilateral trade between China and Latin America to reach $100 billion by 2010, at the time a faraway milestone which nevertheless was reached in half the time; Chinese figures indicated that total trade had reached $102.57 billion in 2007.

Helping boost these statistics have been the bilateral free trade agreements (FTAs), which China has begun negotiating with various Latin American countries, mirroring the path which Washington also recently has chosen to walk in its own regional trade relations. China became Chile’s primary trading partner (principally involving copper) after the two countries signed an FTA in November 2005, with 40 percent of the South American country’s exports heading for Asia in 2007. Peru successfully negotiated an FTA of its own with China in November 2008, and Costa Rica appears set to follow suit, with bilateral negotiations having begun on January 19 of this year.

Not only has its trade with the region risen inexorably, but China is also spending considerable sums on development in Latin America. The Peruvian Times reported on February 9 that the Chinese state mining company Shougang is to invest $1 billion in its operations in the country, the latest in a series of largely energy-related projects. The Chinese state entity Andes Petroleum has operated in Ecuador since 2005, and oil operations in Venezuela are also expanding, with the two state-owned oil companies PDVSA and CNPC announcing in May 2008 the launch of Sinovensa, a joint enterprise to exploit reserves in the Orinoco river valley. In January of this year, China joined the Inter-American Development Bank, contributing $350 million, ostensibly “paving the way for Chinese companies to take part in infrastructure projects” in Latin America.

However, while China officially invests $20 billion in FDI in the region annually, a recent BBC report claimed that “critics say much of this goes into offshore tax havens.” Indeed, an April 2008 submission to the U.S. Senate Committee on Foreign Relations by the Congressional Research Service indicated that “In 2005, almost 96 percent of Chinese FDI in Latin America and the Caribbean went to ... the Cayman Islands, the British Virgin Islands, and Bermuda,” all of which are well known as tax havens. The CRS further noted that FDI flows from these islands back to China are also significant, indicating that the vast majority of China’s so-called FDI in Latin America is likely “round-tripping,” being exported and then re-imported by investors keen to take advantage of benefits afforded to foreign investment by the Chinese government. Nevertheless, China’s evident desire to increase trade with Latin America does suggest that it will have to begin investing more tangibly in the region — particularly in infrastructure projects — if it is to enhance its position much further.

How Sustainable is China’s Position?
The BBC has further argued that the current visit by Vice President Xi Jinping to Latin America “is not simply a trip to groom a president-in-waiting or to strike more deals for natural resources, as is often the case with Africa.” Instead, China sees the region as an alternative trading partner to traditional markets in Europe and North America, which have been dangerously impacted by the current recession. While growth in Latin America has dropped off over the past twelve months, some of its economies are still, in relative terms, in healthy shape, ironically in part because of the minor presence of the banking sector. It is this potential for trade that attracts China above all else.

Nevertheless, a warning was recently issued last week by the financial firm Morgan Stanley. According to a February 9 Bloomberg report, analysts have warned that “Asia’s shrinking demand for raw materials amid a ‘collapse’ in its own exports will show up in Latin America in February and March,” and the region’s “economic slump will deepen.” Opinions, however, differ on China’s susceptibility to the global economic downturn. The international analysis firm Stratfor has argued that: “With plentiful cash reserves, Beijing and its state-owned companies can try to secure access to strategic commodities now, while global competitors are hamstrung by credit crunches and retrenching.” The outcome remains uncertain.

Obama’s Approach Towards China: Confront or Accommodate?
The new administration in Washington has, to date, barely recognized the presence of China in the Western Hemisphere. The rhetoric emanating from Obama’s cabinet has focused almost exclusively on Iran and Russia as external players, and Venezuela, Bolivia, Brazil and Mexico as matters of regional concern. Defense Secretary Robert Gates — a relic of the Bush administration — has spoken out against Iran’s “frankly subversive activity” in Latin America, and stated “I’m more concerned about Iranian meddling in the region than I am the Russians,” but the administration otherwise has remained somewhat quiet on China.

The new administration has, however, shown its hand when it comes to dealing with Beijing on other fronts. Comments made by Treasury Secretary, Timothy Geithner that China is “manipulating” its currency in order to keep it undervalued against the dollar and boost exports, provoked a robust response from the Chinese government. At the World Economic Forum in Davos, Switzerland, on January 28, the Chinese Prime Minister Wen Jiabao, according to the New York Times, “blamed the United States for the economic crisis the world is now experiencing. He talked in particular of ‘the failure of financial supervision.’”

There is little doubt that the U.S.’ period of hegemonic domination of Latin America has passed, and it must now settle for competing alike with developed nations in the West, the emerging regional superpower of Brazil as well as new non-traditional external forces like Iran. The Obama administration’s ability to compete with China in what was once exclusively its own backyard will likely be dictated by the approach it takes to the countries which are either not traditional U.S. allies or have become disillusioned with Washington under Bush.

Old Habits Die Hard in Washington
Talk on Capitol Hill of ‘two Americas’ — the one which the U.S. can do business with, and the other, comprised of left-leaning ‘outcasts’ — will get the administration nowhere. At a wide-ranging House of Representatives subcommittee hearing on February 4, congressmen demonstrated that the view of those who believe the U.S.’ priority must lie in negotiating free trade agreements with allies continues to hold significant sway in Washington. However, the longer the White House prioritizes its relations with ‘friendly’ countries, the more states like Venezuela will look to diversify their trade away from the region and towards the likes of China.

The U.S. is undoubtedly restricted in the action it can take by its current economic predicament. In visiting Mexico, Xi is flying the Chinese flag provocatively close to home for Washington, given the two countries’ traditionally close ties as members of the North American Free Trade Agreement (NAFTA). However, it may be in the interest of Mexico to diversify its trade links in order to avoid being dragged into the mire in which its main trading partner, the U.S., currently finds itself; indeed, Brazil’s relative insulation from the economic crisis engulfing the U.S. can be in part attributed to its trade diversification. Hegemonic trade relations are, in short, something the U.S. can no longer expect to prolong, or even defend.

Hard to Resist
The variety of non-hemispheric players which have increased their presence in Latin America over the past decade inevitably have had a range of motivations for doing so. For Iran, involvement appears to be little more than a superficial exercise in anti-U.S. posturing, and an element of this is also evident in Russia’s relations with the region. However, for the EU, the ultimate aim is unfettered and efficient trade, an approach which comes coupled with an agenda of development politics, aimed at increasing regional dialogue and achieving greater social cohesion.

China’s instinct is to err primarily on the economic side of this spectrum. Among its priorities traditionally has been an attempt to thwart the ‘dollar diplomacy’ practiced by Taiwan and win over Latin America — home to a sizeable, if diminishing proportion of the small number of countries which recognize the island’s sovereignty — with resources of its own, with some success. Chinese involvement in the region appears largely, however, to have moved beyond such relatively petty political concerns; as COHA noted in July 2008, “China’s political initiatives in the region are hardly comparable to its economic ones.”

The Obama administration’s approach to China to date has been cooperative, but at times fraught with implications. Secretary of State Hillary Clinton’s visit to Asia this week will surely provide a better idea of how relations will proceed. Learning to work with the Hu regime is imperative for Obama, and Latin America is a significant theater in which to observe the political maneuverings taking place. Xi and Hui’s visit serves to reinforce the appearance that China quite clearly means business, and the U.S. no longer finds itself in a position to do anything but attempt to compete and cooperate. Reaching out to the countries in the area alienated during the Bush presidency, and paying greater attention to this hemisphere’s own ideas on how to carry out the amplification of multilateral trade, would be a good way to start.

This analysis was prepared by COHA Research Associate Guy Hursthouse

 source: COHA