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China’s South America free-trade deal to have ‘clear impact’, but may irk US by seeking opportunities in its ‘backyard’

South China Morning Post | 12 February 2023

China’s South America free-trade deal to have ‘clear impact’, but may irk US by seeking opportunities in its ‘backyard’

by Kandy Wong

A proposed free-trade agreement between China and a group of South American nations, which includes Argentina and Brazil, will benefit all sides economically, but will further increase competition between Washington and Beijing in the so-called backyard of the United States, according to analysts.

New leftist Brazilian President Luiz Inacio Lula da Silva said that the proposed deal between China and the Southern Common Market (Mercosur), which also includes Uruguay and Paraguay as full members, will modernise and open up the South American trade bloc to other regions.

A possible agreement can be discussed after a similar free-trade agreement (FTA) with the European Union is finalised, added Lula, who returned for a third term as president in January.

“The unilateralism and hegemonism of the US contradict with the multilateralism and an open regionalism of Mercosur, including those in Latin America and Caribbean,” said Xie Wenze, a professor with the Chinese Academy of Social Sciences’ Institute of Latin American Studies.

Lula’s election had already renewed hopes of the deal with the European Union 20 years after negotiations started, and reports suggest it could be ratified this year.

China is Brazil and Uruguay’s No 1 trading partner, as well as Argentina’s No 2, but Beijing has not yet established an official relationship with Paraguay due to its stance on Taiwan. Paraguay is one of only 14 countries to have formal diplomatic relations with Taiwan, and President Mario Abdo will visit the self-ruled island next week.

“The election of Luiz Inacio Lula da Silva as president of Brazil opens up new possibilities for relations between Latin America’s biggest country and China,” said Santiago Bustelo, an international politics expert at Fudan University.

“It is clear that, in recent years, China’s economic presence on the continent has grown remarkably, and therefore it is natural that opportunities such as the signing of FTAs begin to emerge.”

In another move to cement bilateral ties and boost the global use of China’s currency, the central banks in China and Brazil signed a memorandum of understanding on Tuesday to set up yuan-clearing arrangements in the South American country.

Alongside the US influence, “pragmatism” will dominate China’s foray into the continent, as the Mercosur tends to steer away from taking sides towards either Beijing or Washington, according to analysts.

Bustelo said that a free-trade agreement will have a “clear impact” for South America that paves the way for the “Asian giant” to become a leading economic partner for the region.

“The truth is that most of the countries in the region – both the ones with left-wing and right-wing governments – opt for pragmatism,” he added. “Most Latin American countries have no interest in participating directly in the current competition between the United States and China.”

Stephen Olson, a senior research fellow at the Hinrich Foundation, said that the deepening economic or strategic ties between China and South America will be viewed with “apprehension” by the US because no outside power has challenged its “pre-eminence” in the region for more than a century.

“The US has historically considered – perhaps paternalistically – South America to be its backyard,” he added.

“Much like [the Association of Southeast Asian Nations], many countries in South America find it in their best interests to play off the US and China, benefit from relations with both, and avoid tilting too decisively towards one or the other.”

According to figures from the World Economics Forum, trade between China and Latin America grew from US$12 billion in 2000 to US$315 billion in 2020. It is also expected that the amount will more than double by 2035 to US$700 billion.

Bilateral trade between Latin America and China reached US$486 billion in 2022, according to He Weiwen, a senior fellow at Renmin University’s Chongyang Institute for Financial Studies.

“Beijing has been proactively developing trade relations with countries in South America since the 1980s,” said He, with China having already signed free-trade agreements with Peru and Chile, who are both associate members of the Mercosur.

Xu Shicheng, the vice-president at the Latin American Society of China, said that Uruguay started negotiating a free-trade agreement with China in 2016.

“Mercosur has a protocol to restrict any one of the member states making a trade deal with other third-parties alone,” he said.

“The other three members – Argentina, Brazil and Paraguay – disagreed with the Uruguay-China dialogue because it’s got to be a free-trade agreement between the entire Mercosur and China.”

Bustelo at Fudan University added that “regional integration and coordination mechanisms” like the Mercosur are important because it is fundamental for Latin America countries to maintain “their margins of decision and autonomy”.

“Above all, countries aim to take their foreign policy decisions based on national interests and not on pressure from any other country,” he added.

Information from the US’ House Foreign Affairs Committee showed that seven countries in South America – Venezuela, Ecuador, Peru, Bolivia, Chile, Argentina and Uruguay – are also participants of China’s Belt and Road Initiative.

Chinese state-owned firms are “heavily involved” in energy development, the committee said, including PowerChina, which has more than 50 ongoing projects across Argentina, Brazil, Bolivia, Chile and Peru.

“The trade collaboration between China and the Mercosur can help countries in South America drive the development of basic infrastructure, digital economy, re-industrialisation and high-quality employment,” added Xie from the Chinese Academy of Social Sciences.

Last year, the US created the Americas Partnership for Economic Prosperity to cement trade ties across the Americas when Brazil floated the idea of the free-trade deal between China and the Mercosur.

It is similar to the US-led Indo-Pacific Economic Framework, with a focus on inclusive trade, multilateral investment and anti-corruption measures.

The likes of Chile, Peru and Uruguay have already signed up for the framework, but Brazil and Argentina are not included.

 source: South China Morning Post