IE Business School’s Riordan Roett: “China Will Move Cautiously in Latin America for the Next Few Years”

China, the United States and Latin America: Is there any room for Europe in this economic triangle? The presence of the Asian giant in the Western hemisphere is changing the rules of the game, especially after the intensification of its commercial relations with the Latin American region. Is this a relationship of equals? Or are China and Latin America emerging competitors? Riordan Roett, a professor in the Instituto de Empresa Business School’s master’s program in international relations and professor of political science in Johns Hopkins University, spoke with Universia Knowledge@Wharton about the influence of China in Latin America. Roett’s book, China’s Expansion in the Western Hemisphere, will soon be translated into Spanish.

Universia Knowledge@Wharton: At what stage are Chinese companies in terms of internationalization? Are they now fully established in Europe? Have they begun to position themselves in Latin America?

Riordan Roett: There is a very small private sector in China. Most of the important players are the state companies that have become increasingly competitive and aggressive in seeking to invest overseas or seeking a stake in companies viewed as vital to China’s economic development. Thus far, the impact in Europe is relatively small; it is increasing in Latin America and is far reaching in Africa.

UK@W.: What socio-economic impact is China having on Latin America?

Roett: After the state visit of President Hu Jintao to South America in 2004, the relationship was very positive for the next three to four years. Many countries were able to report trade surpluses with China. The current economic crisis, of course, will adversely impact the trade account because Chinese growth will drop this year; although still positive, the country will buy far less of Latin America’s commodities and natural resources. The adjustment for Latin American countries will be difficult because of the inability to sell many of their products in the U.S. and in the E.U. due to protectionist policies in both.

UK@W.: People refer to both China and Latin America as emerging markets, but are they comparable? What do they have in common, and in what sense are they different?

Roett: The differences are striking. China has emerged as a global economic super power. It is now the second-largest national economy in the world. It is the second-largest exporter. The country holds the largest current account surplus and foreign exchange reserves. Until this year, China has grown at an average of 10% for thirty years.

Latin America, in contrast, has grown far more slowly. It is less competitive globally. It remains very dependent on commodity and mineral exports. These are priced internationally and the Latin American governments have little control over pricing; fluctuations make it difficult for Finance Ministries and Central Banks to plan on a steady flow of foreign resources.

But [China and Latin America] share a number of issues in common. Both believe in the potency of South-South diplomacy. [Brazil and China] are active members of the “BRIC” group of countries (Brazil, Russia, India and China). The two countries often have a common position on policy questions such as trade negotiations in the Doha Round of the World Trade Organization. The two countries have a similar position in the G-20 group of important economies that are meeting in April in London to discuss financial reform. And both governments believe it is time to broaden the participation of developing economies in the management of the world economy, including greater decision-making “space” at the World Bank and the International Monetary Fund and others.

UK@W.: Can China make life difficult for U.S. firms operating in Latin America? And what about Spanish firms?

Roett: China has yet to pose any challenge to either banks or manufacturing companies in Latin America. The emphasis has been on resource extraction. There may come a time in the future when there will be a greater competition, but that moment has not yet materialized.

UK@W.: Does Europe have a chance against the U.S., China and Latin America when it comes to being a key economic region of the 21st century?

Roett: Europe confronts a series of structural problems that will make it difficult to compete unless these issues are resolved. Will the Lisbon Treaty be approved or not? If not, Europe remains a collection of states, some of which are dynamic, while others are far more dependent on the largesse of Brussels. When the E.U. can speak with one voice, it will be a much stronger player. Until then, Europe has little to fear from Latin America. The critical relationship in the foreseeable future will be the U.S. and China.

UK@W.: And what about the global economic crisis? How is it going to affect the expansion plans of Chinese and Latin American economies?

Roett: Morgan Stanley, the New York investment bank, issued a report on March 30, 2009, stating that “given the likelihood of a prolonged adjustment in the developed world, we suspect that Latin America may not see a meaningful recovery for some time.” That is a sober assessment. While we do not yet know the full dimensions of the crisis, it is clear that there are no quick “fixes.” A drop in demand for Latin American exports is clear. Reserves will fall. There will be less money for investment in needed physical infrastructure and in social equity programs.

China will move cautiously in Latin America for the next few years. The Beijing government places a high value on political stability and economic predictability. Decisions, such as that of the Argentine government to nationalize pension funds in October 2008, are disquieting to Chinese authorities. There are elections in many countries – in June 2009 in Argentina and July 2009 in Mexico. Brazil and Colombia have national elections in 2010. The Chinese government will want to see the results of these elections before making any greater commitments to the region.

UK@W.: What do China and Latin America have to gain (or to lose) if they continue to strengthen trade relations? Is there a risk that Latin America will become merely a source of the raw materials that China needs?

Roett: There is a great deal of concern in policy circles that the “resource curse” is at play once again; that is, Latin America historically has chosen to rely on commodity and mineral exports rather than either adding value to these traditional exports or moving into a deeper industrialization mode. Some countries are better than others. Chile has been successful in adding value to its exports and has targeted the Asian market place. Brazil, of course, is an important manufacturing country, but in recent years iron ore and soya beans have been the strongest part of its exports to China.

Given the current economic crisis, it is unlikely that any of the countries in Latin America will change their development model. Low growth will continue. Indeed, Morgan Stanley comments that they expect “Latin American economies to contract further and then bump around the bottom for an extended period.”

Many of the countries did not do what was suggested in the years of reasonable growth — follow counter-cyclical policies. Chile did and will probably fare the best in the region; Brazil should be able to hold its own. But many countries will indeed experience contraction. That will also mean less money for social safety nets as jobs are lost and, potentially, social conflict [erupts].

UK@W.: Is there any future for environmental policies like the Kyoto protocol if two of its greatest critics — the U.S. and China — team up? If Latin America joins them, what kind of effect could that have on the future of the environment?

Roett: The visit of U.S. Secretary of State Hillary Clinton to China very early after taking office was very significant. One of the major issues she and her Chinese colleagues discussed was collaboration on environmental policy. Both countries are increasingly aware of the challenge this poses to growth and to the environment. How to collaborate is the key question. But the administration of President Obama appears to see China as an opportunity for collaboration in contrast to the previous administration of President George W. Bush, which often appeared to see Beijing as an adversary.

It is obvious that the two countries will never agree on all matters of policy. China is emerging as a second super power and the [U.S.] leadership understands that…. Its military strength, while not comparable to the U.S. at the moment, is growing and is increasingly sophisticated.

The key player in Latin America is Brazil. In the recent White House conversation between President Lula and President Obama, the environment was an important point of discussion. The Obama White House apparently recognizes the need to include Brazil in any new initiatives with regard to the environment. Given the good relations between Brasilia and Beijing, the “triangulation” of policy cooperation by the three countries is not impossible and quite probable over the next few years.

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