Though American President-elect Donald Trump’s administration favours trade protectionism, China continues to sign ever-more trade deals with Latin America. Although Latin American governments are keen to receive the badly needed investment and trade, they have a lot of work to do to materialise the development promised by China’s financing.
After winning the American election, Donald Trump restated his resentment towards free trade agreements. Trump has vowed that the United States will withdraw from the negotiation of TPP (the Trans-Pacific Partnership Agreement) as soon as he assumes office, and has threatened to remove the U.S. from NAFTA (the North America Free Trade Agreement). This might mark the end of the U.S.’s effort to deepen comprehensive ties with Latin America.
Over the last two decades, the U.S. has been dedicated to strengthening its economic cooperation with Latin America. Although some U.S. farmers lost their livelihoods to the competition from foreign agricultural products through NAFTA, Mexico benefited from an unprecedented expansion of its manufacturing sector, with the U.S. as the primary investor. President Barack Obama also paid a visit to Cuba near the end of his tenure, breaking the long-standing diplomatic ice between the U.S. and Cuba, and paving the way for economic partnership in the future. Now, it is uncertain whether that spectacular economic growth in Latin America can be sustained, and whether new economic partnership can be forged.
While the U.S.-Latin American trade relationship might be diluted in the future, Chinese President Xi Jinping visited Ecuador, Chile and Peru in November. During his tour in Latin America, President Xi reassured these countries of China’s increasing interest in diversified investment in and trade with Latin America.
China has already increased its economic presence in Latin America over the last decade, especially after the financial crisis in 2008. According to CEIC Data Company (CEIC), China’s investment in Latin America has expanded more than 3-fold from $3.68 billion in 2008 to $12.6 billion in 2015 despite low commodity prices and depreciation of the currencies of Latin American countries in recent years. A steadily rising trade volume, along with Chinese investment that exceeded the amount contributed by the World Bank and the Inter-American Development Bank (historically Latin America’s two principal investors), display China’s commitment to increasing its dealings with Latin America
However, critical views emerge on the impact of China’s trade and investment, both from China and within Latin America. China’s investment and lending is not always profitable. In fact, some of China’s ventures seem to be a lost cause at the moment. The readiness and adequacy of Chinese money, which had made Chinese investment competitive, is now associated with high risks for investors and, therefore, is under public scrutiny in China. Within Latin America, complaints about low conversion rate of investment into local employment are common. Many jobs, especially the technical positions, are given to Chinese employees, only benefiting the local workforce marginally. Displacement of natives for infrastructure construction and extraction of natural resources have spurred rancorous protests by some natives and environmental groups. Neither the local government nor the Chinese government can afford to overlook the residents’ complaints, considering the precedent in Peru in 2003 when a contract with a Canadian mining company was revoked for the natives’ environmental petitions, costing the corporation $60 million. Reservation from home and suspicion from Latin America obscures the chance for Chinese investors to profit.
Regardless of the risk and dissenting voices, President Xi struck yet more deals during his Latin America tour in November. While most analysts are optimistic about the impact of China’s deepening ties with Latin America due to China’s open and cooperative stance unlike the protectionist one of the next U.S. government, much less attention is given to what Latin America could have done better. In fact, whether China’s commitment could materialise into a diversified economy and more local jobs depends on China’s long-term strategy as much as on Latin America’s initiatives. For the new deals to turn out to be win-win for both China and Latin America, the governments of Latin America countries have to overcome a multitude of challenges.
The most perilous challenge is the unstable economy in Latin America. The heavy reliance on natural resource extraction business renders Latin America and the Caribbean victims of low global commodity prices. Venezuela, China’s no.1 source of crude oil in Latin America, is now facing a simmering economic crisis. The Venezuelan currency, Bolivar Fuerte, depreciated more than 55% in November alone, necessitating a default on China’s loans which have accumulated to approximately $20 billion, according to CNNMoney. To make it worse, a high-speed train construction project ended up a fiasco, due to the shortage of funds from Venezuela. China’s major trade partners in Latin America still lack the monetary means to weather external risks. The resulting inability to keep to their obligations in any economic partnership hampers investment and trade materialising into healthily conducted businesses and employment opportunities. The most imminent consequence might be less money with few strings attached from China in the future. It also hurts the confidence of other financial institutions like the IMF and the World Bank in Latin America. In short, it will be harder to find money.
Economic instability sometimes stems from and exacerbates, in turn, problematic politics like authoritarian rule, the lack of transparency in decision making, corruption and mistrust of politicians. The myriad political problems in Latin America interrupt the economy and stir up suspicion over the legitimacy of Chinese business ventures.
Another noteworthy political issue is the restrictive labour laws in Latin America. Most Latin American countries have powerful unions. In Argentina and Brazil, two main investment destinations for Chinese investors, all employers are required to contract with a union. The unions are influential enough to dictate the cost of labour and organise strikes. Laws that make it extremely costly and tedious for employers to dismiss unproductive employees defend the interests of the local workforce while hindering the efficiency of businesses. If no major amendments were made to labour laws in Latin American countries (which will most likely be the case, as pushing such a reform in Latin American democracies against powerful unions that represent the predominant majority of the population is equitable with political suicide), Latin America would not be the most profitable region for efficient businesses. However, a viable business sector is necessary for Latin America to pursue faster growth and maintain its attractiveness to the few investors out there.
Non-political stakeholders like environmentalist groups also deserve to be attended by the government. Complaints about displacement of residents and pollution of the natural environment, more often than not, arise from trade and investment negotiations that lack transparency, as well as inadequate compensation. The local government has to keep the people in the loop: not only the loop of information but also the loop of benefit. Axel Meyer’s 2014 paper published in Nature reveals the sub-standard initiatives of the local government. For example, the Nicaraguan government was not proactive enough to conduct its environmental assessment before granting a contract to HKND, a Chinese company. The vehement backlash from the people and environmentalist groups shows clearly the people’s awareness of their rights. Only by catching up with people’s expectations of higher quality of life could the local government convert statistical development into higher standards of living.
The prospect of China’s economic stakes in Latin America is highly unpredictable, largely depending on whether the local governments can overcome the aforementioned challenges, of which most are seemingly insurmountable in the short term. It is idealistic to expect Latin America and the Caribbean to become the friendliest region to foreign investment and loans.
The region is unlike Southeast Asia, where RCEP (Regional Comprehensive Economic Partnership) and “One Belt and One Road” pivots. Latin America as a whole lacks a strong collective platform to enforce a uniform standard of investment and project management and thereby to boost its competitiveness. Also, unlike The Association of Southeast Asian Nations (ASEAN), Latin America does not appear to be China’s strategic focus and is outside of the reach of China’s geopolitical reach. Taking a tremendous risk by deepening cooperation with Latin America, could China be eyeing more than economic returns? Argentina’s Congress recently approved a Chinese satellite base, China’s first satellite base overseas. Some might suspect that China has potential military and geopolitical motives, but an isolated incident does not say much about China’s long-term plan. Economically, at least, instead of a white knight who offers a free ride, China sends a benign wave of opportunities across the Pacific for Latin America. Latin America has to find its own balance to surf on it.