English > Finance > Finance-Featurestory>Blog: Enhancing China-Latin America Economic Relations

Blog: Enhancing China-Latin America Economic Relations

10-20 16:28 Caijing

Amid increased Chinese investment in Latin America, investment volume remains low. Exploring the economic relationship begins with an understanding of complementarity in export and import supply and demand between the two regions.


By Matt Ferchen and Alicia Garcia-Herrero

(Caijing.com.cn) China's rapidly expanding trade and investment relationships with the countries of Latin America and the Caribbean have created many recent headlines.  From a point of negligible ties less than just a decade ago, China has now become the number one market for Chilean and Brazilian exports and the number two destination for exports from Argentina, Peru, Costa Rica and Cuba. Indeed, China's overall trade with Latin America has expanded at an average of 40% since 2003.  Latin America has also become a major destination for overseas investment from Chinese firms, especially in important upstream petroleum and iron ore sources.  To underscore the importance of the relationship, especially in the midst of the ongoing financial crisis, Latin American exports to China have only fallen by slightly over 4%, whereas they have fallen by over 35% to the United States and over 36% to Europe. 

However, even with all of the daily news headlines touting the importance of the burgeoning trade and investment relationship between China and Latin America, it's important to step back and evaluate the larger contours of the relationship.  Indeed, although there remains vast untapped potential to further increase trade and investment between China and Latin America, there are also key challenges that must be confronted.  Despite the rapid growth of trade and investment relations between China and Latin America, both sides must seek methods to deepen mutual understanding to take advantage of the remaining vast potential for cooperation and development.

Opportunities

The opportunities for further enhancing the already rapidly expanding commercial and investment relations between Latin America and China fall into three categories.  First, China and Latin America share key complementarities in terms of supply and demand.  Since the early part of this decade, China's demand for a range of natural resources including petroleum and iron ore, among others, has expanded rapidly.  Latin America has these natural resources in abundance.  Trade figures have borne out this complementarity as over 80% of China's imports from Latin America have been made up of primary products and natural resource manufactures.  Latin America's abundance of natural resources is an excellent fit for China's large and increasing demand for those resources.  At the same time, Chinese manufactured exports are making up an increasingly large percentage of Latin American imports, ranking 1st or 2nd in total imports for at least 6 major countries in the region.

The second area of opportunity lies in China not only as a market for Latin American exports but also as a source of finance and investment.  As the UN Economic Commission on Latin America and the Caribbean recently reported, this Chinese demand for raw materials to fuel the country's rapid growth has been a key factor in sustaining Latin American exports to China even in the midst of the current economic crisis.  Moreover, China's investments in Latin America have been rapidly expanding, growing by 80% per year since 2003.  In fact, Latin America has become China's largest destination for foreign direct investment outside of Asia.

The third area of opportunity is directly related to the previous two. Despite the complementarity in export and import supply and demand between the two regions, as well as the rapid rise in trade and investment relations, there is still vast room for increases in both trade and investment between China and Latin America.  The rapid growth in trade and investment between Latin America and China is indeed impressive, but the starting point for this expansion was very limited.  There remains vast potential for increased export of a range of goods from a host of Latin American countries, including commodities and natural resources from countries who are already exporting to China and those who are just beginning to tap into Chinese demand.  In fact, unsatisfied Chinese demand for Latin American products is almost 100% or more (as a share of bilateral Latin American exports) of Andean, Southern Cone and Caribbean exports.

Challenges

While there are a great number of opportunities to further enhance the already burgeoning trade and investment relationship between China and Latin America there are also a number of important challenges that remain.  The first of these challenges is directly related to the complementarity in supply and demand structures across the two regions.  While it is true that China's large and increasing demand for natural resources and commodities is driving much of the recent expansion in trade and investment with Latin America, there remain concerns that Latin American reliance on exports of primary products may prove too prone to market fluctuations.  In order to confront this challenge both China and Latin America need to seek ways to diversify not only the range of goods and products that are traded but also to expand opportunities for investment in services that facilitate trade.  Two areas that stand out here are in enhanced transportation logistics services as well increased financial integration between the two regions.

The second challenge facing China-Latin American economic ties involves the cultural differences between the two sides.  While there are some long-standing connections between China and Latin America, including large numbers of Chinese migrants in various Latin American countries, the economic relationship has only really taken off in the last decade.  As a result, differences in language, history, business culture as well as labor-management relations all present challenges to a deeper and more solid relationship.  Both sides are making concerted efforts to confront these various challenges to mutual understanding through enhanced educational exchange and as the result of increased direct experience.  However, these efforts will need to be redoubled on both sides in order to take advantage of the many opportunities manifest in the relationship.

The third and final challenge confronting China and Latin America relates to the often confusing connection between government and business on both sides.  On the Chinese side, the connection between government policy and state-affiliated multinational corporations involved in many of the largest trade and investment deals remains unclear, especially to those looking in from the outside.  This can lead to confusion and anxiety on the part of Latin American governments, business partners and citizens.  Equally, from the perspective of the Chinese government and international businesses, often burdensome government bureaucracy as well as underdeveloped infrastructure in Latin America can create obstacles to enhanced cooperation.  Greater transparency at both the government and corporate levels are necessary on both sides to overcome these obstacles.

Matt Ferchen is a professor in the Department of International Relations at Tsinghua University.  Alicia Garcia-Herrero is the Chief Economist for Emerging Markets at the Spanish bank BBVA.

All opinions expressed in this blog are those of the author alone and do not necessarily reflect the views of Caijing Magazine.

Please contact Caijing Magazine for any inquiries. Reproduction in whole or in part without Caijing's permission is prohibited.
[ICP License: 090027] IDC License:[B2-20040250] Advertising Business License:[京海工商广字第0407号] 京公网安备11010502005607号
Copyright by Caijing. All Rights Reserved