Regional Focus: China strengthens links with Latin America

Author: Countries and Consumers

Date published: 5 May 2009

Chinese trade with Latin America is increasing, reaching just over US$140 billion in 2008. Although the USA and Europe (particularly former colonial power Spain) have historically been the region's major trade and investment partners, growing trade with China will represent an important economic diversification for Latin America. However, the predominance of US economic influence in Latin America will ensure that the region will remain dependent on the fortunes of the US economy into the medium-term.

Key points

China's strengthening links with Latin America accelerated in November 2004 with pledges of US$100 billion investment into the region by 2014;

China is keen to source commodities such as oil, soyabeans and copper from Latin America in order to fuel its high rates of economic growth. China released its first policy paper on Latin America in 2008, indicating its growing interest in the region;

In turn, Latin American countries are keen to diversify reliance away from the USA, for political and economic reasons. In 2008 Latin America sent 42.1% of its total exports to the USA and 5.6% to China;

However, risks include the potential for trade to overtake Chinese investment, meaning that Latin America becomes simply an exporter of commodities and does not experience any long-term benefits, such as infrastructure investment;

Despite growing bilateral trade, China still remains a less important trade partner in economic terms than the USA. In addition, China's slowing economic growth will reduce prospects for bilateral trade in 2009, although this diversification will continue to provide some economic relief while the US recession reduces demand for Latin American goods.

Growing economic links

In 2008 Chinese trade with Latin America totalled just over US$140 billion:

Of this, bilateral trade totalled nearly US$120 billion, while Chinese foreign direct investment in Latin America totalled US$24 billion;

Latin American exports to China reached US$46.7 billion in 2008, up from US$14.7 billion in 2004, representing 5.6% of total exports;

Imports from China totalled US$71.4 billion in 2008, from US$28.2 billion in 2004, representing 8.0% of total imports;

Latin America’s export partners: 2008

% of total

Source: Euromonitor International from International Monetary Fund (IMF), Direction of Trade Statistics/trade sources/national statistics

Latin America exports mainly commodities to China, such as oil, copper, soyabeans and other assorted minerals. In turn, the region imports mainly manufactured goods from China;

China's strongest trade relationships are with commodity producers in the region. Oil and soyabean producer Brazil exports the most to China, at US$14.9 billion in 2008 (8.4% of Brazil's total exports), followed by copper producer Chile with US$10.6 billion (14.9% of total exports), oil and soyabean producer Argentina with US$5.4 billion (8.7% of exports) and oil producer Venezuela with US$5.2 billion (5.9% of exports);

Mexico is the leading importer of Chinese goods, with US$25.7 billion in 2008 (7.7% of total imports), followed by Brazil with US$14.9 billion (8.1% of imports) and Chile with US$5.6 billion (8.9% of imports);

Trade with Peru and Chile has been bolstered by the signing of free trade agreements with China in 2008 and 2005 respectively, while trade with left-wing Cuba and Venezuela is encouraged by ideological ties.

Selected Latin American countries’ imports and exports to China: 2008

% of total

Source: Euromonitor International from International Monetary Fund (IMF), Direction of Trade Statistics/trade sources/national statistics

Note: Cuba import data refers to 2007, the latest available data

Consumer implications

Increasing trade with China has positive and negative implications for consumers:

For net exporters to China, stronger links with China means more demand for goods and therefore the creation of new jobs. This is particularly the case in commodity exporters such as Argentina, Brazil, Chile, Venezuela and Peru;

However, dependence on commodity exports rather than manufactured goods leaves these countries and jobs vulnerable to a downturn in either commodity prices or demand from China. For example, oil prices fell from historic highs of US$147 per barrel in July 2008 to around US$52 per barrel in April 2009. Likewise, copper fell from US$8,980 per million tonne in July 2008 to US$4,374 in April 2009;

This means that Latin American companies are losing significant export revenues, leaving them with less money to increase wages or create new jobs. For example, oil-dependent Venezuela was forced to slash its 2009 budget by 6.7% in March 2009 to US$72 billion from the previous 2009 budget plan issued in late 2008;

In addition, China's slowing economic growth is weighing on demand for commodities, reducing profits for Latin American companies yet further. China's economy grew by 9.0% annually in 2008, down from 11.9% the previous year;

This is exacerbating the global impact of lower US demand for commodities as the US economy contracts. However, in the short term, Chinese demand – albeit muted – will pick up some of the slack from the USA, providing some respite for Latin American exporters;

In the longer term, the risk is that China may become a valuable trade partner but without providing in-country benefits such as infrastructure investment. For example, the original US$100 billion target set in 2004 was for investment, but was later altered to trade.

While growing trade with China will provide an overall benefit for Latin American consumers in terms of improved job and wage prospects, it also has negative implications of a growing dependence on commodity exports.

Diversification risks

Opening up new Chinese markets poses some risks for Latin America:

Although growing fast, trade with China represents a relatively small percentage of overall Latin American trade. In 2008, Latin America sent only 5.6% of its exports to China, compared to 17.8% to Europe and 42.1% to the USA;

In the same year, Latin America received 8.0% of its imports from China, compared to 16.5% from Europe and 34.1% from the USA. China will therefore never replace the USA as Latin America's major trade partner, given geographical advantages;

In addition, growing imports of Chinese goods could provide competition for Latin American workers. For example, Mexico is running a trade deficit with China, with US$25.7 billion worth of imports of manufactured goods and textiles providing competition for Mexico's domestic industry. In the longer term, increasing dependence on Chinese imports could reduce jobs for Mexican workers.

The USA will continue to be Latin America's most important trade partner, meaning that Chinese trade could become more import in terms of the domestic competition it poses for Latin American producers.

Prospects

Trade between Latin America and China will continue to grow over the long-term:

China will continue to source commodities from Latin America, albeit at varying levels of demand. However, bilateral trade will not grow so fast in 2009 as China's economic growth slows. China's economy is forecast to grow by 6.7% in 2009, limiting potential for Latin America to expand its markets in China;

This will be part of a general slowdown in trade, led by the recession in the USA. The US economy is forecast to contract by 2.6% in 2009, creating lower demand for Latin American goods;

Trade with China will accelerate in 2010 once economic growth begins to pick up again. Latin American governments will continue to seek stronger ties with China while recognising their primary trade links with the USA. China and Costa Rica are negotiating a free trade agreement;

China joined the Inter-American Development Bank in January 2009 and is investing US$350 million in the bank, which has a capitalisation of US$100 billion. This continuing financial support demonstrates China's commitment to a long-term economic relationship with Latin America.

Countries and Consumers