What’s next for China and Latin America?

Trade between Latin America and China is moving from commodities to include more value-added goods -- putting them in direct competition with Australia.

What does a marvelous island in the Caribbean have in common with the freezing Argentinean Patagonia and the lush Brazilian Northeast?

Let’s leave that question for now and jump back to 2004. In November of 2004, while giving a speech at the Brazilian Parliament, Hu Jintao, the then-Chinese president, stated that China and Latin America should take "active actions to try to raise bilateral trade volume to more than $US 100 billion by 2010."

Ten years later, China - Latin America trade volume has exceeded $US 250 billion per year and, according to a report released last January by the Economic Commission for Latin America and the Caribbean, the Asian giant is expected to replace the European Union as the region's second-largest export market by 2016.
 
How did this happen? The first landmark of China's modern economic relations with Latin America can be traced back to 2005, when China signed its free trade agreement with Chile. Four years after that milestone, it signed another agreement with Peru and then another one with Costa Rica.

China’s position as Chile's and Peru's largest trading partner, as well as Brazil's and Uruguay's, rather than mere coincidence, is the result of a carefully designed strategy to optimize access to resources that are essential for China's economic development.

Yet, as a Latin American saying goes, not all that glitters is gold. Exports to China are mainly commodity-driven. So far, copper, petroleum, iron-ore and soybeans have been the most exported products.

This does not precisely incentivize the creation of innovative Latin American enterprises that could lead to the strengthening of higher value industries in the long-term.
 
Bilateral economic ties, though, go far beyond trade. China has become the world's third largest investor. Latin America is also experiencing the effects of this phenomenon.

What Caribbean, Argentina, and Brazil have in common is that they are the recipients of billions of dollars in investments from major Chinese companies. The China State Construction Engineering Corporation invested $US 3.6 billion in the Bahamas to construct one of the most astounding resorts of the West. Gezhouba will invest over $US 4.5 billion to build two hydroelectric dams in Argentina. And Chongqing Grain Group invested over $US 500 million to set up a soybean industrial base in Brazil -- not to mention the investments in energy and mining, such as those of CNOOC and CNPC, who are part of the consortium that has been awarded the exploitation rights of Libra, the enormous deep water oil deposit located 100 miles off the coast of Rio de Janeiro. Even a mysterious Chinese investor is said to be willing to embark in a $US 40 billion project to build a rival to the Panama Canal in Nicaragua.
 
So what to expect for years to come? The creation of a new China-Latin America High-Level Cooperation Forum, as was recently announced. Although it is still not clear exactly how the Forum will operate, China expects it to be the main platform to promote its economic and political interests in the region.

Another aspect to watch closely is how Latin American trade blocs will handle the China opportunity. In the case of Mercosur, during Wen Jiabao's visit in 2012, its members declared their intention of exploring the feasibility of an FTA with China.

But that does not seem to be happening any time soon. The Pacific Alliance -- the rising star among Latin American integration processes -- is moving faster. More than half of its members already have individually subscribed FTAs with China and last November they collectively organized a business forum in Shanghai to attract Chinese investment for key development projects.
 
A major challenge for Latin American nations is how to increase the technological content of their exports. China's massive new middle class can contribute to that end. Take the case of the agro-industry. Instead of exporting low-end products, Latin American companies can focus on processed foods and beverages, such as wine, olive oil and meat.

Uruguay has positioned itself as a top-quality beef supplier for the Chinese market and, as a result, last years' exports exceeded $US 200 million, and investments in R&D to improve traceability techniques are flourishing.

The country is now a direct competitor to Australia and New Zealand.


Nicolas Santo is an investment consultant with the Foshan Bureau of Foreign Trade and Economic Cooperation and has previously researched China-Latin America Economic Relations at the Harvard Law School and Tsinghua University.