With its economic weight and domestic consumption increasing rapidly, China has been expanding its ties with the countries of Latin America. While China stresses the complementary nature of the relationships and the benefits of increased South-South ties, some in Latin America worry about potential dependency on the rising power.

In this Q&A, Matthew Ferchen explores the growing link between China and Latin America and what that means for other world powers like the United States. The real challenge, according to Ferchen, is how to put both the economic and political China-Latin America relationship on more sustainable, longer-term footing.

What is the nature of the relationship between Latin America and China?

Matt Ferchen
Ferchen specializes in China’s political-economic relations with emerging economies. At the Carnegie–Tsinghua Center for Global Policy, he ran a program on China’s economic and political relations with the developing world, including Latin America.
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China-Latin America relations, especially economic ties, have boomed in the last decade. Between 2000 and 2010 China-Latin America trade expanded over 1,500 percent, and between 2008 and 2010 alone China’s investment in the region expanded more than 180 percent.

This boom in economic relations has been primarily driven by strong Chinese demand for South American mineral, agricultural, and energy resources like copper, iron ore, soybeans, and oil. At the same time, Latin America has become an important destination for increasing amounts of Chinese manufactured-good exports ranging from modems to motorcycles.

While there are other dimensions to the Latin America-China relationship, including a history of Chinese immigration to countries like Cuba and Peru, the recent decade-long surge in relations has been primarily driven by trade and investment ties. Though those ties have also underpinned renewed and strengthened diplomatic relations between China and countries throughout the region, the main binding force remains economic rather than political or ideological.

This has fueled a mixture of rising hopes and anxieties among government and business leaders in Latin America. The hopes ride on ever-expanding trade and investment links as well as the possibility that China might prove to be a positive alternative to long-standing American economic and political power in the region. Anxieties are rooted in concerns that the region’s ties to China repeat dysfunctional historical patterns of commodity dependence and a “hollowing out” of local industry in the face of Chinese manufacturing and export prowess.

Which Latin American countries have the closest links to China?

The main beneficiaries of the boom in economic relations have been a small number of commodity-rich South American countries. In particular, in recent years China has become the number-one trading partner (including exports and imports) for Brazil, Chile, and Peru and the number-two trading partner for Argentina. Within the last two years China has also quickly leapt to become the number-one source of foreign direct investment in Brazil and Peru.

In order to further solidify trade ties to key Pacific coast trading partners, China has also signed free trade agreements with Chile, Peru, and more recently Costa Rica. At the same time, China has made significant energy deals, for oil in particular, with countries like Venezuela, Ecuador, and Brazil.

Some Latin American leaders have reached out to China in an effort to develop more extensive political ties. Left-leaning political leaders from Cuba and Venezuela to Ecuador and Bolivia have all emphasized the importance of shared socialist values with China, even if China has been careful to downplay the ideological aspects of these relationships. China has, however, been eager to cooperate with its fellow BRIC member, Brazil, in leading multilateral calls for revisions to the international financial system in the wake of the 2008–09 financial crisis.

Which other Latin American countries have the potential to further develop their relations with Beijing?

Hope remains that China will continue to explore increased investment opportunities in Mexico (and also possibly in Panama and Colombia, with whom the United States recently signed free trade agreements) in order to leverage the benefits of proximity to North American export markets. As the second-largest economy in Latin America, thus far Mexico has been a key counterexample to the South American trend of booming commodity exports to China. Instead, the Mexican economy has been challenged not only by a negative trade balance with China but also by increased Chinese competition for exports to key North American markets.

For other countries in the broader Latin American and Caribbean region that do not have extensive raw material reserves, there is still a strong hope in the possibility of expanded economic ties to China. Costa Rica, because it exports substantial amounts of electronic goods to China (in the form of computer microchips), stands out as an interesting exception to the regional pattern of reliance on commodity exports to China.

In fact, Costa Rica’s relations with China provide a potentially important experiment in China’s links to the Central America and Caribbean sub-regions, in particular. Twelve of the 23 sovereign states that maintain ties to Taiwan rather than the PRC are in Central America and the Caribbean. But in 2007 Costa Rica broke with this trend by establishing official ties to China. Then, in 2011, a new China-Costa Rica free trade agreement came into effect.

If other countries in Central America and the Caribbean follow Costa Rica’s example, then the possibility for expanded economic ties to China also exists. But it is unlikely that other countries in the region would follow suit and also find success in exporting high-tech products to China. For those countries in Central America and the Caribbean that already have relations with China, the major beneficiaries so far have been tax havens like the Cayman and British Virgin Islands.

For other Central American and Caribbean countries wishing to establish greater economic ties to China the question is how to build on and beyond the region’s strengths as an international tourist destination. Regional educational leaders from Costa Rica to Barbados have proposed making local higher-education centers into regional powerhouses in teaching and research about China and its ties to Latin America and the Caribbean. For the time being, such programs remain very local and limited in scope but great potential remains for tapping into much needed demand for expanding understanding about China.

Are China-Latin America relations mutually beneficial?

In its official diplomacy with Latin America (as well as with other developing countries in Africa and Southeast Asia), China portrays its growing relationship with the region as “mutually beneficial,” “win-win,” and “South-South.” China emphasizes the complementary nature of the relationship: resource-rich Latin America helps to satisfy resource-scarce China’s strong demand for mineral, agricultural, and energy commodities. This view is clearly encapsulated in China’s 2008 white paper on ties to Latin America. While this is the official diplomatic position it is also clearly reflected in much of the Chinese media and scholarly writing on economic and political ties between China and Latin America.

This perspective is also mirrored by many government and business officials in Latin America. Brazil’s popular former president, Luiz Inácio Lula da Silva, stood out in his praise of Brazil’s booming ties to China as being win-win because they were South-South.

But there is also an alternative perspective that is critical of the depiction of Latin America’s growing economic ties to China as complementary. In this view, Latin America’s exports of raw materials to China and imports of manufactured goods from China are portrayed as reinforcing traditional regional patterns of commodity “dependency.” In this perspective, the benefits of the relationship are weighted in China’s long-term favor. Lula’s predecessor, Fernando Henrique Cardoso, summed up this view when he stated last year, “China's not the south. China is China, with its own set of interests.”

While the different attitudes of these two former Brazilian presidents may be largely about their own rivalries and efforts to preserve their distinct presidential legacies, they nevertheless highlight the combination of hopes and anxieties that have emerged as a result of booming Brazil-China trade and investment ties. Even for a country like Brazil, which has experienced clear benefits from its iron ore and soy exports and has been a primary beneficiary of rapidly increased Chinese foreign direct investment, there is a sense that relations with China present as many challenges as opportunities.

Some in Brazil worry about the erosion of the country’s manufacturing sector as the economy becomes more oriented toward natural resource exports and domestic producers face competition from China in domestic and third-country markets. Moreover, the rise of Chinese investment is seen as contributing to the upward pressure on the Brazilian currency.

Both the hopes of the complementarity perspective as well as the anxieties expressed in the dependency perspective may be exaggerated. Measures of commodity dependency in those South American countries most tied into a commodity-export, manufactured-import trade cycle with China demonstrate that dependency is actually relatively limited.

This is in large part because, with important exceptions like Chile, major South American commodity exporters to China do not rely heavily on trade to drive their overall economic development. But when China leaps to become the number-one trade and/or investment partner of a given Latin American country, the perception is that, for better or for worse, as goes China so goes the domestic economy. If we add in high-profile discussions about a “China Model” of development that has come to replace a previously dominant American or European one, then the role of China only takes on added perceived importance, no matter how exaggerated it may be.

How does China’s approach to the developing world and Latin America differ from other powers like the United States and Europe?

The Chinese government goes to great lengths to emphasize that its relations with the developing world, including with Latin America, represent a different approach than that of the United States or Europe. To highlight this difference, China has long promoted its foreign policy principles of respect for sovereignty and commitment to noninterference in the internal affairs of other countries.

Yet, there is, in fact, a heated battle to portray the relationship in a positive or negative light and much wealth and prestige are on the line. But the irony is that lost in all of this debate is that China’s economic ties to Latin America have important similarities to the historical experience of other rapidly industrializing countries. That is, China is undergoing an intense period of industrialization and urbanization and therefore has a voracious appetite for raw materials. Whether or not this industrialization is healthy, sustainable, or even the product of Chinese government policies is debatable.

What is clear is that for all of China’s efforts to emphasize its different approach to dealing with developing countries, the structure of its trade relationship with Latin America looks very similar to historical relationships between the industrializing countries of the “North” and the commodity-rich developing countries of the “South.” And difficult questions that Chinese mining or other firms in Latin America face about labor or the environment are very similar to those confronted by American or European firms in the past.

The real challenges for government and business officials in China and Latin America attempting to create a sustainable and stable long-term economic and political relationship are: the relationship is still very new, is relatively narrow (in its commodity basis), and is potentially more fragile than often understood (commodity booms can be followed by busts, or at least prices reverting to their historical downward trend). That is, those officials in China and Latin America might be best served by recognizing that China, at least in terms of its trade and investment relationship with commodity-rich countries in Latin America and elsewhere, is more “normal” than many recognize or would like to admit.

Does China’s interaction with Latin America differ from its involvement in Africa?

Very little research exists that explicitly and carefully compares China’s approach to and interaction with Latin America and Africa. However, especially in Chinese discussions about the country’s dynamic economic and political relations with the “developing world,” Latin America and Africa are often mentioned in the same breath. There are some obvious similarities, but also some clear differences.

In terms of the similarities, China portrays its relations with both Africa and Latin America as based on a form of developing country or “Southern” solidarity. As part of this, China emphasizes anticolonial sympathies and a general shared critique of the “hegemonic” role of America and Europe.

Despite longer-term flows of people and goods, the timing of the takeoff in contemporary China-Africa and China-Latin America relations is remarkably similar. That is, the recent booms in China’s economic and political ties to both Latin America and Africa are only around a decade old. At the most fundamental level, the takeoff in China’s trade and investment ties to both Africa and Latin America is rooted in China’s increased demand for energy, mineral, and agricultural resources. In both Africa and Latin America there are similarities in the mixture of hope and anxiety that has accompanied these increased economic ties to China.

However, China’s modern ties to Africa have deeper and stronger roots than those with Latin America. These roots are based in China’s efforts under Mao to provide a type of socialist revolutionary leadership for the “Third World.” Then, China saw itself as a benefactor of African independence and socialism. While there were also some ideological and revolutionary ties between China and Latin America (maybe most pronounced in the case of Peru’s Shining Path), they never reached the scale or intensity that they did with Africa.

The 1980s and ’90s were relatively quiet decades for China’s ties to both Africa and Latin America, but that has changed in the last decade. China’s relations with Africa are now much more of a lightning rod of contention than those with Latin America, even though China’s trade and investment volumes with Latin America continue to outpace those with Africa.

Despite China’s similar portrayal of Africa and Latin America as made up of developing countries, the two regions are quite different historically, economically, and politically. China-Africa relations are fraught with much more controversy than China’s ties to Latin America. Underlying part of the controversy is that China’s trade and investment ties with African countries are often couched in terms of development “aid.” This is much less often the case with potentially similar types of trade and investment arrangements with Latin American countries. Also drawing scrutiny is Chinese firms’ practice of bringing Chinese labor to Africa to work on projects whereas such deals are much rarer, even to the point of being constitutionally prohibited, in Latin America.

China’s stress on anticolonial solidarity also has quite different resonance in the case of Africa, whose experience with independence movements is much more recent than Latin America’s. And while some in the United States or Europe worry that China’s increasing economic ties to leftist Latin American leaders like Hugo Chavez may underpin a hollowing out of democracy, such concerns are dwarfed by similar fears about how China’s ties to Africa and commitment to noninterference help support authoritarian and would-be authoritarian leaders.

What impact does China’s increased presence in Latin America have on U.S.-China relations?

China’s increasing presence in Latin America presents a set of challenges and opportunities to the United States. In terms of challenges, China offers an alternative economic, and potentially political, partnership to countries in the region. Perceptions of America’s foreign economic and political impact on Latin America have often fluctuated between anxieties that the United States was either too involved or not involved enough. Especially since the financial crisis, countries more closely tied through trade and investment to the United States have suffered compared to those with closer economic ties to China.

While overall the United States remains the region’s main trade and investment partner, the perception that China’s star is rising and America’s is falling means the United States must reengage the region both economically and politically in a way that is seen as contributing to rather than inhibiting Latin American economic and political development. And even if the idea of a China Model or Beijing Consensus remains vague and open to various interpretations, the idea that China itself presents a successful model of development, and is a major new trade and investment partner for the region, exposes the need for the United States to rethink its own approach toward both economic and political development issues in Latin America and elsewhere.

But there are also benefits and opportunities for the United States. At the most basic level, to the extent that increasing trade and investment ties with China have helped boost economic growth in some Latin American countries, the United States should view China as a positive developmental force in the Western Hemisphere. China seems uniquely positioned to help Latin America build badly needed infrastructure, and to the extent that such infrastructure will be a kind of public good that facilitates transportation and development, the United States should welcome such a Chinese role.

Finally, the United States should see China’s growing presence in the region as an opportunity to help fill the large and growing demand for increased education and understanding between Asia and the Americas. Given the huge Latin American demand for increased understanding of China and vice versa, American universities should build on their already strong area studies programs to fill this demand.

What are the key challenges and opportunities in the relationship between China and Latin America?

The biggest strength of the China-Latin America economic relationship is also the biggest source of anxiety and potentially its largest weakness. What some (in particular the Chinese government) see as a fundamentally “complementary” relationship is a source of concern for many in Latin America. The optimism about the booming commodity-based trade and investment relationship is likely to remain high in the short term (two to three years), but in the medium term (three to ten years) and beyond there are serious questions about how long-lasting the current complementarity actually will be.

The real challenge is how to put both the economic and also the political relationship between China and Latin America—with an eye toward the United States—on sustainable, longer-term footing. And on this note, both sides have much work yet to do.

Latin America must diversify its trade and investment relationship with China and move beyond commodities. On the investment side, one oft-cited but still underdeveloped area is Chinese investment in infrastructure development. Latin American governments are also keen to diversify their exports to China, but on this front they face global competition to gain access to and succeed in China’s domestic markets.

China’s challenge is to move beyond the rhetoric of “win-win,” “mutually beneficial” relations to a deeper comprehension of the anxieties that are growing among its trade and investment partners in Latin America. Chinese government and business leaders need to work with their Latin American counterparts to diversify the nature of the economic relationship. Infrastructure investment again jumps out as an area of underdeveloped possibility. And both sides have vast room to explore experiences and ideas for dealing with the very real challenges of building health care, social insurance, and pension systems that will be crucial to avoiding the much-discussed “middle-income trap.”

The United States should do all it can to contribute in a positive and practical way to dealing with these development challenges. A rhetorical standoff between the Washington Consensus and Beijing Consensus will be to no one’s benefit.