Latin America Needs a China Strategy

To judge by the pomp and shuttle diplomacy, Latin America and China are best of friends. Witness the bonhomie in Punta del Este, where delegates from 33 nations in the Americas just rolled out the red carpet for authorities from Beijing and scores of corporate bigwigs at a business summit — one of many parleys celebrating what Uruguayan President Tabare Vazquez hailed as “the new normal China,” and his region’s chance to engage with a “champion of world trade and engine of global commerce.”

The Chinese understandably have a growing stake in the markets of South and Central America and the Caribbean, whether in locking up supplies of raw materials or bankrolling the roads, mines, sluiceways and ports required to fetch them. China is Latin America’s biggest lender and single investor, having made more than 70 loans worth around $140 billion to Central and South America and the Caribbean since 2009. What’s less clear is if the region itself is prepared to leverage the boom.

The result to date has been a lopsided playing field, where China takes the lead, controls the cash and writes the contracts, many of which are leonine. Instead of bemoaning the raw deal, Latin America needs to take China’s cue and write a better one.

Beijing’s plans for cultivating new friends halfway around the world are captured in white papers, summits and fat loans. China lately has broadened its interest, buying up not just iron ore and soybeans but companies. It injected more than $10.8 billion in 17 different mergers and acquisitions from January to October. Unfortunately, the strategic thinking isn’t reciprocal. “China knows what it wants from South America,” Luiz Augusto de Castro Neves, former Brazilian ambassador to Beijing, told me. “But other than make a lot of money exporting commodities, South America still doesn’t know what it wants from China.”

The pitfalls of Latin America’s deepening embrace of China have become more evident in the last few days. Even as China was talking up free trade with the nations of the Community of Latin American and Caribbean States, it also signaled it had no interest in playing sugar daddy to deadbeats or distressed companies.

On Dec. 6, the state-controlled oil major China Petroleum & Chemical Corp. announced a lawsuit against Venezuela’s PDVSA for some $23.7 million in unpaid bills, a small sum presaging a huge problem for a country $50 billion in China’s debt. (The Venezuelans subsequently settled.) And last week, squabbles over corporate governance drove China Telecommunications Corp. reportedly to table its bid to buy a controlling stake in Brazil’s troubled phone company Oi SA.

The message was hard to miss: Chinese cash comes with conditions. But before the nations of the region can begin drawing up their own, they need to tend to unfinished business, starting with weaning the region from its reliance on exports of raw materials. Economic diversification during the 1990s allowed Latin America to add value to its trade basket, shrinking the share of unfinished goods to around 27 percent of regional exports. Along came the ravenous Chinese, whose appetite for coal, copper, iron ore, oil and soy beans returned the region to its age-old status as a peddler of commodities, which now account for half of all exports.

Could the end of the global commodities bonanza actually drive Latin America up the value chain? That won’t be easy. Even as China expands aggressively overseas, it has protected its market by slapping stiff tariffs and non-tariff barriers on Latin American imports such as agriculture and packaged foods. Throw in China’s generous farm subsidies and value-added tax exemptions for native producers, and the bump on China’s storied Belt and Road trade initiative looms even larger for foreign suppliers. “The more you add value to your exports, the more you pay to enter the Chinese market,” said economist Mauricio Mesquita Moreira, who advises on international trade at the Inter-American Development Bank.

Of course, Latin America is not always its own best friend in global commerce. China, for example, has dedicated considerable resources to sizing up its new partners, inviting finance ministers to Beijing and opening some 65 Latin American study centers across the country in recent years. “Spanish and Portuguese language classes are booming,” said Margaret Myers, a China expert at the Inter-American Dialogue.

However, the same interest isn’t evident in Latin America. “In terms of boots on the ground, Latin America’s presence in China is pretty ridiculous,” said Moreira, who noted that in 2015, global Brazilian meatpacker BRF SA kept just one government affairs staffer in its Beijing office.

“I don’t see a strategy. Latin America is still reactive. A lot of this has to do with a real lack of expertise at the highest levels,” Myers said. “Increasingly more people are studying China, but not in top positions. That leads to an information mismatch, less ability to understand Chinese interests, and ultimately missed opportunities. There’s a lot of catching up to do.”

One example of the risks of this blind spot was Brazil’s lavish tax incentive program for local automobile manufacturers, who felt threatened by imports. Although the policy was designed to brake the advance of aggressive Chinese car makers, it also raised a howl from Brazil’s suppliers in Europe and Japan. The World Trade Organization ordered Brazil to remove the subsidies, opening the Brazilians to potentially pricey retaliation. “Instead of trying to negotiate the issue directly with China, Brazil opted for confrontation, and lost,” said Moreira.

In fact, risks of misperception exist on both sides of the negotiating table. Consider China’s proposal to launch a regional free trade zone, which echoes the ill-fated, Washington-inspired Free Trade Area of the Americas of the 2000s. The U.S. initiative collapsed in 2005, in a stew of anti-gringo acrimony and regional cross-purposes. Will Beijing have any better luck playing Yanqi to Washington’s backyard?

Part of the problem may be that Latin America is in large part a fiction. “Latin America is not a cohesive group, and individual nations have never been any good at addressing any other part of the world as a region,” Jorge Guajardo, Mexico’s former envoy to China, now a consultant with McLarty Global Associates, told me. Guajardo argued that China has more of an appetite for Latin America than it does a strategy. “The fact that China wants to deal with a group, just as it did with Africa, shows they really don’t know much about Latin America at all.”

Yet Latin America could still stand to gain by joining hands. “The U.S. is distracted. The World Bank and Inter-American Development Bank have scaled back. No one else is offering this kind of financing that the Chinese are at the moment,” said Boston University’s Kevin Gallagher, a scholar of Chinese involvement in the Americas. “Either Latin America gets a China plan or it risks squandering a perfect opportunity.”
Source: Bloomberg

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