Expert Analysis

February 2013

China in Latin America: Hegemonic challenge?

By Isabel Hilton1
Executive summary
The United States is Latin Americas traditional hegemonic power, but Chinas inuence in the region is large and growing. How far does Chinas presence in the U.S. backyard represent a hegemonic challenge? China is important in the region as a buyer of Latin American resources, primarily from four countries, an important investor and an exporter of manufactured goods. The impact of Chinas activities varies in degree from country to country. In several countries local manufacturing has suffered from cheaper Chinese imports; several countries have beneted from Chinese demand for resources, others from large investments, and China is having an important impact on the regions infrastructure. The risks to the region include resource curse, distorted development and environmental degradation due to a lowering of environmental and social standards. Despite its signicant economic presence, China has been careful to keep a low political and diplomatic prole to avoid antagonising the U.S. and to maintain a benign environment for its economic activities. Chinese support, however, has been important for partners, such as Cuba and Venezuela, that do not enjoy good relations with the U.S. So far the two powers have sought cooperation rather than confrontation, but rising tensions with U.S. allies Japan and Vietnam could have repercussions in Latin America if China feels the U.S. is becoming too assertive in its own East Asian backyard. Introduction
Ever since President James Monroes 1823 declaration that European powers must respect the western hemisphere as the U.S. sphere of inuence, the United States has been the dominant economic, political and military power in Latin America. As such, it has faced a series of challengers, from Nazi Germany to the Soviet Union and Japan. In the last two decades, the rise of the Peoples Republic of China (PRC) has been reshaping the politics and economics of the region. How far has the PRC become the new hegemonic challenger? China has not sought a strategic confrontation with the United States in Latin America, as the USSR did in the Cold War. However, against the background of U.S.China rivalry and potential confrontation over such issues as Taiwan, this could change in the future. In the meantime, Chinas economic weight offers its Latin American partners a new freedom to defy U.S. interests, should they choose to. China plays three major roles in Latin America: as an insatiable consumer of commodities; as an exporter of cheap manufactured goods; and as a lender and investor. The regions importance to a rising China is underpinned by its resources: Latin America has the worlds largest reserves of silver, at 49% of the global total, copper, at 44%, and tin, at 33%. It also has at least 16% of the global oil reserves and the largest quantity of arable land in the world. China plays a exible hand in different countries, within the framework of a regional strategy. Although Chinas policy papers treat Latin America as a region, this does not get in the way of Chinas ability to work with local differences in pursuit of its objectives: in Venezuela, for instance, China offers large loans in exchange for oil, whereas in Peru it favours direct investment in the mining sector. One of Chinas political objectives is to further the OneChina policy, which states that diplomatic relations with the PRC require a country to break ofcial relations with the

The author would like to thank Gervais Polden for his research.

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Republic of China (ROC) (Taiwan), as discussed, for example, in Chinas Policy Paper on Latin America and the Caribbean in 2008 (http://www.fmprc.gov.cn/eng/zxxx/t521025. htm). More than half of the countries in the world that still recognise the ROC are in Latin America and the Caribbean. Costa Ricas recognition of the PRC in 2007 was followed by the Chinese purchase of US$300million in Costa Rican bonds, an investment of $74million in a football stadium in the capital and, in 2012, a free trade agreement. Similar packages are on offer, no doubt, for other nations willing to switch. China has tried to foster good relations around the world to facilitate its smooth ascendancy to great power status. In Latin America, this creates a delicate balance between national interests and the desire to avoid prematurely antagonising the United States. China sees Asia as its own sphere of inuence, and the Obama administrations pivot a rebalancing of U.S. foreign policy towards Asia has raised hackles in Beijing. The PRC, until now, has been willing to tread carefully in the U.S. backyard, promoting soft power but playing down specic political challenges to the U.S., including from its Latin American partners.

outstanding example: Kevin Gallagher, of Boston University, calculated in 2009 that 97% of Mexicos manufacturing exports were threatened by Chinese competition. In addition, China enjoyed the competitive advantage of price and local supply chains, which, after China joined the World Trade Organization in 2001, stimulated the transfer to China of Mexican electronics assembly plants (maquiladoras) that served the U.S. market. More recently, as Chinas currency has appreciated and labour costs have risen by an annual 10%, the Mexican position has begun to recover. Central American nations suffered too, losing textile industries to China. This is of concern to the United States, which is anxious to protect manufacturing in some of its poorest neighbours, such as Guatemala, Honduras and El Salvador, in order to promote stability and maintain the U.S.-led War on Drugs. Nations such as Argentina, Brazil and Colombia which has a 10:1 trade decit with China are also exposed. Only Chile, which runs a trade surplus, and Peru, which has a near surplus on China trade, are exceptions. Brazil and Argentina, which have substantial capitalist middle classes and strong labour unions, have the strongest potential for anti-China policies. The Brazilian Industrial Association, for example, has lobbied President Dilma Rousseff to take a stronger line against Chinese imports. On September 15th 2011, Brazil announced a 30-point increase in its industrial-product tax on cars, with the notable exceptions of cars manufactured in Mexico and Mercosur. The policy was effectively aimed at China. Brazil, in fact, runs a slightly smaller risk from China than many other Latin American nations because of its relatively closed economy and substantial domestic market. Although Rousseff is under strong pressure to protect domestic sectors, she must also balance the benets of commodity exports to China. As Brazil continues to grow, it may decide, as the United States has in the past, that across the economy the benets from trading with China equal or outweigh the costs of dumping. Argentina was forced to accept a difcult lesson in 2010 when it was forced to reverse the attempt to impose a tariff on light manufactured goods after China responded with countervailing duties on Argentinian soy beans. Up to 74% of Argentinas soy beans go to China.

Resource exports
Chinas primary resources imports are largely concentrated in four countries: Brazil, Argentina, Chile and Peru, which together account for 90% of the regions exports to China. Agricultural products make up 30% of those exports, according to the Economic Commission for Latin America and the Caribbean (CEPAL), with about 65% in minerals and resources. For Chinas trade partners, the risks are resource dependency, currency overvaluation and the possibility that other sectors of their economies will become uncompetitive. It also renders them highly vulnerable to price and demand uctuations, whilst tethering them to unsustainable commodity-led growth with the associated negative environmental impacts. Few partner countries are investing sufciently in economic, social or environmental protection to offset these risks. Chile is the only nation in Latin America that has used its revenues to create a sovereign wealth fund. Chiles Pension Reserve Fund and its Economic and Social Stabilization Fund have total assets of more than $21billion, the latter supporting the national budget when copper prices are low. Chinas dependency on relatively few regional suppliers also carries risks for China. The total of soy and iron exports from Latin America to China represent more than half of Chinas imports of these commodities, offering the producer countries the potential to act as a bloc, were they so inclined.

Chinese loans
Chinese loans to Latin America have increased dramatically in recent years. Most of Chinas international lending comes from the China Development Bank (CDB) and China ExportImport Bank (China Exim Bank), both of which are required to further Chinese government objectives. From 2005 to 2011, CDB and China Exim Bank loaned about $75billion to Latin American countries, more than the World Bank or Inter-American Development Bank in the same period. Chinese loans do not require policy changes from borrower governments, but do require equipment purchases and sometimes oil sale agreements.

Excessive imports and uncompetitive exports

Latin American countries face trade imbalances: Chinese products are ooding domestic markets to the detriment of local manufacturers, and Latin America is losing out to Chinese competition in export markets. Mexico is the

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CDBs $1billion loan to Ecuador in 2010 required 20% spending on Chinese goods; a $10billion loan from the CDB to Petrobas in Brazil required the purchase of $3billion of drilling equipment; a loan of the same amount to Argentina in 2010 demanded the purchase of trains from CNR. China Exim Bank has also given loans that go entirely to Chinese companies; a $1.7billion loan to Ecuador to build the Coca-Codo Sinclair hydroelectric dam in 2010 went directly to a Chinese company. Loans-for-oil deals, in which loans are tied to oil-export agreements, have accounted for over half of Chinas loans to the region since 2006 and 91% of them have gone to Argentina, Ecuador, Venezuela and Brazil (http://ase.tufts. edu/gdae/Pubs/rp/GallagherChineseFinanceLatinAmerica. pdf).Venezuela has negotiated four such loans, totalling $32billion, since 2008. Brazil signed one for $10billion in 2009 to fund an offshore oil project using Chinese inputs. Ecuador signed a $1billion loan-for-oil agreement in 2009 and a second one in 2010. In July 2011, it added a third for $2billion. The sales are contractually agreed, but the price paid follows the market. Chinese loans to Latin America indicate that China funds different projects from its Western counterparts or the international nancial institutions (IFIs). Whereas Western and IFI loans cover a range of governmental, social and environmental purposes, Chinese banks focus 87% of their loans on the energy, mining, infrastructure, transport and housing sectors. The benets to China are that better infrastructure can facilitate the exports of resources, as well as providing contracts for Chinese companies. Between 2005 and 2011, the Chinese lent $33.7billion for housing and infrastructure projects, compared with $4.4billion from the Inter-American Development Bank and nothing from the World Bank, which favoured lending in micronance, antipoverty and health programmes. President Hugo Chvez, amongst others, has praised the fact that Chinese money comes with few strings attached. Some governments are tempted by the lack of stringent environmental, labour or social requirements; others are attracted to China for political reasons. Ecuador, Venezuela and Bolivia prefer to avoid World Bank loans because they dislike the economic liberalism of the institutions and the supervision that comes with the money. Mexico, Colombia and Peru continue to borrow from the World Bank and the Inter-American Development Bank for projects in which the requirement to purchase from China, or give contracts to Chinese companies, would be inappropriate or burdensome. China, despite relatively high interest rates, serves as the lender of last resort for Ecuador and Argentina, which face international funding difculties arising from their respective defaults in 20089 and 2001. The availability of Chinese funds changes the Latin American political and social landscape in a number of ways. The Pacic nations of Peru, Chile, Panama and Mexico seek Chinese money for market reasons unconnected with a po-

litical project, since these countries are building societies that are more consonant with U.S. than Chinese values. In other cases, however, the availability of Chinese funds signals a loss of political leverage for the United States and permits the survival of anti-U.S. governments in Venezuela, Bolivia and Ecuador, for instance that wish to pursue more radical political and social models. China, however, has exercised caution at times in its readiness to deploy lending. In November 2004, when Argentinas President Kirchner secretly requested Chinese support to pay off Argentinas debt to the International Monetary Fund (IMF), China refused, apparently to avoid a direct challenge to U.S. inuence.

Foreign direct investment

More than half of Chinese foreign direct investment (FDI) in natural resources is in Latin America, concentrated in 34 major projects in Venezuela, Ecuador, Brazil, Bolivia, Peru, Argentina and Chile. Chinese FDI in Latin America and the Caribbean increased from $226million in 2003 to $22.7billion in 2011. Whereas Chinese FDI tends to be in mining and infrastructure, high-tech investment still comes predominantly from the United States, and goes to Colombia, Chile and Uruguay. This pattern reects continuing U.S. dominance in the technology sectors, and Chinas importance in resources; it is Chinas large mining, oil and cement companies that are the major players in Chinas overseas investment.

Ethical and environmental practices and the reputation of Chinese companies

The environmental and ethical practices of Chinese companies have drawn unfavourable comment. The rst major Chinese mining company in the hemisphere was Shougang Group, which began operations in Peru in 1992 with the purchase of the state-owned Hierro Peru for 14 times an independent valuation. Shougang has contributed heavily to the poor reputation of Chinese companies, over nes for environmental damage for the contamination of water supplies, low wages and dangerous working conditions. It has been the object of frequent strikes and protests. Other companies have experienced problems with community relations. After buying the Canadian company Corriente in 2010, Tongling and China Railway Construction Corporation proposed an open-pit mine in the province of Zamora Chinchipe in Ecuador. National protests followed an agreement with the government, including a march on the capital by the countrys most powerful Indigenous movement, Confederacin de Nacionalidades Indgenas del Ecuador (CONAIE). Chinese companies lack experience of compliance with much higher environmental or community relations standards than prevail at home. Some are adapting, hiring local managers, public relations (PR) and law rms, but they are likely to struggle for some time with the cultural gaps and the lack of understanding of local concerns and political considerations.

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One example of an attempt to meet those concerns is the Chinese mining company Chinalcos relocation of 5,000 residents of the town of Morococha, 150 kilometres east of the Peruvian capital, Lima, to remove them from an area likely to be contaminated by the new $2.2million Toromocho opencast copper mine. Advised by local managers and PR consultants, Chinalco is investing $50million in an entirely new town nearby, a project it describes as the biggest privately-funded social project in Perus history (http://www.strategicstudiesinstitute.army.mil/pubs/ people.cfm?authorID=580). Two-thirds of the residents have moved, although the project has also been dogged by complaints about inadequate housing and compensation. Although some dispute the claim that Chinese conduct is worse than U.S. or local equivalents, China suffers from widespread negative perceptions and the identication of Chinese companies with the Chinese state. Local labour groups, some government ofcials and many indigenous and social groups in the region make little distinction between private Chinese companies and state-owned enterprises. Local opinion surveys reveal that most companies, whether large or small, state owned or private, suffer from antiChinese sentiment and the perception that they put prot above environmental and social concerns. In several African countries, Chinese security guards have been deployed to defend companies interests and have even, on occasion, killed Africans. Both the Peruvian president, Ollanta Humala, and the Bolivian president, Evo Morales, political allies of China, have felt obliged to insist to their electorates that Chinese troops would never be allowed to set foot in their countries.

UNASUR, the Union of South American Nations, is unlikely to nd enough common ground to develop a China policy; the Organisation of American States (OAS) has the United States as a dominant member. More promising is Mercosur, which opened trade negotiations with China after the admission of Venezuela and the expulsion of Taiwan-allied Paraguay after the coup there in 2012. Chinas presence, meanwhile, is having a major impact on the geography and infrastructure of the region. Brazil has become more interested in the Panama Canal Extension project and the connections to the Pacic through Peru, Bolivia and northern Chile, as it seeks smooth and economical passage for its exports to China. Venezuela has sought better relations with Colombia for the same reason.

U.S. reaction
The United States, distracted elsewhere in recent years, has reacted calmly to date to Chinas increasing presence in Latin America. In a striking acknowledgement of Chinas importance in the region, the U.S. and China have created a mechanism for mutual transparency through the U.S. China Dialogue on Latin America. This started in 2006, just before then-President Hu Jintaos visit to Washington, and continues under the Obama administration. Through four rounds of dialogue to date, the U.S. has conceded Chinas standing in Latin America, while seeking successfully to set limits to Chinas action in troublesome countries such as Venezuela and Cuba. In 2006, for instance, when Venezuela sought a chair on the United Nations Security Council, China was reluctant to lend its support. Although China eventually voted in favour, it did not otherwise back the campaign. The shale oil revolution in the U.S. has also diminished fears of Chinese competition for the regions energy resources, despite a strong Chinese presence in Venezuelan and Ecuadorian markets, and Chinas success in locking up the major sub-salt oil in Brazil and securing major acquisitions in Argentina. Venezuela now exports less than 50% of its oil to the U.S., down from 80% in the past. There are warnings within the U.S. security community about the potential implications of Chinese involvement in Latin America in the future, and concerns about Chinas still modest military sales to the region. Examples of these sales include Venezuelas 2010 purchase of 18 K-8 ghters from China. Despite the concerns of the State Department, however, there has been little response in senior policy circles to the China threat. Regardless of whether there is any real threat to the U.S., key decision-makers have not reacted. Chinas presence in Latin America is unlikely to diminish and will continue to affect its regional partners for the foreseeable future. Although this undoubtedly entails a loss of U.S. inuence in the region, both China and the U.S. have so far sought cooperation rather than confrontation. In the context of the Obama administrations pivot to Asia,

Chinese communities
Another potentially sensitive issue is the position of Chinese communities in Latin America, which have been the object of violence and discrimination, such as during the 2007 trucker strike in Buenos Aires. In the past, such incidents provoked little protest from Chinese embassies, but in October 2011 the Chinese ambassador in Suriname criticised the Bouterse government for failing to protect the Chinese community following attacks on Chinese shopkeepers in Maripaston, Suriname. The Chinese government is likely to come under increasing domestic pressure to protect Chinese communities abroad, with the attendant diplomatic tensions with host governments.

Political reactions of Latin American nations to Chinese involvement

At present, Latin American countries conduct their relations with China on a bilateral basis. Chinas growing inuence could prompt Latin American nations to form a joint policy to gain greater market strength, or to impose stronger environmental codes on Chinese companies. However, Latin Americas track record of joint action is mixed and some tentative efforts have not prospered to date. Nor is there an obvious vehicle for such an initiative;

however, and the latent, long-term strategic competition between China and the United States, there is potential for increasing competition for inuence in the future. An escalation of tensions between China and U.S. allies in the South China or East China Sea could prompt China to raise retaliatory tensions in the U.S. backyard. At that point, the traditional Latin American allies of the U.S. could face some uncomfortable choices.

The authOr
Isabel Hilton is a London-based writer and broadcaster. She was formerly Latin America editor of The Independent newspaper and is editor of www.chinadialogue.net, a non-prot Chinese/English platform for environmental and climate change news and analysis. Set up in 2006, chinadialogue promotes just and equitable solutions to shared problems through high-quality, reliable information.

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