During the past two decades, China’s unstoppable growth and its voracious appetite for raw materials have made Latin America one of its favorite locations for sourcing raw materials and a preferred destination for making its foreign investments. The recent confirmation that China has become — after only the U.S. — the second-largest economy in the world, overtaking Japan, comes at a time when China is showing interest in realizing the old dream of building an alternative route across Colombia to compete against the Panama Canal. This ambitious project would bring together the two coasts of Colombia – Atlantic and Pacific – by means of a railway, creating what some call a “dry canal.”

Although this project has yet to materialize, it is a good example of the growing interest that China has in Latin America. In 2010 alone, through a series of about 20 acquisitions and corporate stock purchases in such sectors as oil, energy, steel, telecommunications and autos, China’s investments in Latin America – especially in Argentina, Brazil, Peru, Chile and Mexico – exceeded US$30 billion, more than the cumulative value in previous years.

How have things gotten to this point? China’s emergence as one of the main engines of global growth can be explained in good measure by its strong effort to pursue the production and exportation of manufactured goods, notes Alejandro Micco, professor of economics at the University of Chile. These products include the latest technologies and devices in such sectors as appliances, automobiles, motorcycles and industrial machinery. “During the 1970s, Japan played that role, and now it is China,” he says. “Korea replaced Japan, and now China has replaced Korea as the leader.”

A key step for China came in 2001, when the country joined the World Trade Organization, notes Daniel Morales, macroeconomics analyst at the APOYO consulting firm in Peru, which provides financial and business advice. “This move enabled China to take advantage of Latin America as a destination for its manufactured goods and as an important source of supply for primary products,” Morales notes. During this period, China undertook a series of measures that opened up trade with the region, in part by reducing its own average tariff from almost 20% in 2000 to 10% in 2009.

As a result of such efforts, China is now one of the chief trading partners of Peru, Chile, Brazil, Argentina, Uruguay and other countries in the region, according to Morales. These countries have used this opportunity to export large volumes of commodities to China, including copper, iron, tin, zinc, petroleum and soy products.

In 2009, the economies of Latin America exported more than US$40 billion worth of goods to China, a huge increase from the US$4 billion in shipments of raw materials they made in 1999, notes Morales. He cites the data in a report by the Inter-American Development Bank (IDB), titled “Ten years after the Take-off: Taking Stock of China- Latin America and the Caribbean Economic Relations.”

Although trade with China has experienced spectacular growth, contributing significant revenue streams to the region, Diego Sánchez, professor of Latin American economics at the University of London, points out that the region has specialized in supplying primary products to China. “This involves risks for the region; it could remain mired in this position with little possibility for acquiring new technology and diversifying its basket of exports,” he says.

An Unequal Trade Balance

Germano Glufke, professor at the Getulio Vargas Foundation in Brazil, agrees that it is quite possible that much of Latin America will remain merely a provider of commodities for the Chinese market. The problem with this sort of trade, says Glufke, is that “it reduces the region’s potential for being part of the value chain of that Asian country, something that has boosted the recent expansion of some Latin American countries, such as Brazil.”

Roberto Durán, professor of political science at the Catholic University of Chile, also warns that trade relations between China and Latin America are moving at various speeds in different countries. “Until now, the most helpless countries, such as the Central American nations, have had almost no trade relations with China. In contrast, Chinese trade with Brazil, Argentina, Chile and Peru has been much more considerable…. It is easy to conclude that this is all about unequal and discriminatory trade ties, since the Central American nations are smaller and less competitive.”

Brazil, Chile, Argentina and Peru are the largest beneficiaries of the favorable trade relationship with China, notes Morales, since those four countries represent almost 90% of the region’s total exports to China. “This scenario can be explained by the large contribution of raw materials to their exports,” says Morales. “That creates a gap between the trade balances of these countries and those of the other Latin American countries that trade with China.”

One factor working in favor of China and against Latin America is that Chinese exports of manufactured goods to the region have grown much more than the region’s shipments of raw materials to Asia, notes Morales.  In 2009, Latin American commodity exports to China totaled US$40 billion, while the total for Chinese shipments of manufactured goods to Latin America was almost twice as high, at US$78 billion.

“Some countries in the region, such as Mexico and Costa Rica, have a great trade deficit with the Asian giant [China], since these countries export very little to China and import huge volumes of manufactured goods,” notes Sanchez.

Glufke warns that various sectors of Latin American industry have been negatively affected by the unstoppable expansion of Chinese competitors. “This has forced some manufacturers in the region to shut down.”  For example, in some countries of Central America and the Caribbean, many companies in the textile industry have lost their competitiveness because of the onslaught of Chinese products.

The Particular Case of Brazil

For now, Brazil – rather than Central America — is the source of greatest concern for analysts. According to Reuters news agency, Dilma Rousseff, the new president of Brazil, recently said that China’s undervalued currency, the yuan, is one of the greatest dangers for her country’s economic health. She added that a wave of cheap imports from China has affected the trade balance of Brazil, leading to the loss of thousands of jobs in Brazil’s manufacturing sector.

Afonso Fleury, professor of engineering at the University of São Paulo, says that although China’s currency is artificially undervalued in the Brazilian market, this has not affected trade ties between China and Brazil — despite pressure imposed by Brazilian business leaders, who want to create barriers to Chinese products. Since that approach has proven quite ineffective, notes Fleury, Brazilian businesses have now decided to change their tactics for counteracting the onslaught of Chinese products. “A recent study by the National Confederation of Brazilian Industry revealed that 67% of all companies – two-thirds of local companies – have changed their strategies regarding articles that are ‘made in China,’ and are now focusing on improving the design of their own products and investing more in their quality.” As a result, “Most Brazilian firms today are escaping [the full impact of] Chinese competition.”

According to Fleury, this strategy is also working because the Brazilian market is in a healthy process of expansion. But he warns that there could be new problems down the road if Brazil’s growth rate declines, and if competition with Chinese products becomes even more extreme.

A Continuing Opportunity

Although the trade balance is now more favorable for China than for Latin America, Micco stresses that trade with China was especially beneficial for Latin America during the global economic crisis of 2008, when it helped the region recover quickly from the economic disaster. “China managed to emerge quickly from the havoc created by the crisis, becoming an even stronger buyer of Latin American raw materials, which reinforced its trade with the region.” Micco adds that while the price of copper fell to very low levels after the crisis erupted, copper recovered within months thanks to growing demand from China. That fact, in turn, had a positive impact on exports of copper from Chile and Peru. “The same thing happened with soy beans, when shipments of that foodstuff from Argentina and Paraguay to China bounced back in little time.”

China continues to be an economic growth opportunity for Latin America, according to Osvaldo Rosales, director of the commerce division of the Economic Commission for Latin America and the Caribbean (ECLAC), one of five regional commissions of the United Nations. According to that organization, Chinese salaries rose by between 20% and 25% in 2010, opening up new trading opportunities for the region, especially for those countries that export primary products to China. “These shipments from [Latin America] will remain stable, and they have good prospects for growth in the future.”

What’s more, over the next three years China’s domestic consumption will increase by about US$9.5 billion; that is to say, by US$3 billion more than consumption will increase in the United States, according to Morales, citing the IDB report. In his view, Latin America must continue to nurture its bilateral relationship with China, so that its exports to that country continue to be vigorous while strengthening employment in the region.

Strategic Moves

One of the strategic steps that Latin America can take in this direction, notes Morales, is to invest more resources in the development of its agribusiness exports. In his view, such products still have room to grow in a sustained way. “Peru is one of the Latin American countries that have shown the most progress in taking advantage of this opportunity. Starting in 2010, Peru has had a free-trade agreement with China that will gradually permit its agribusiness exports – such as mangos, grapes and citrus fruits – to enter the Chinese market tariff-free following gradual reductions over a period of eight years.” Chile also has a free-trade agreement with China. For its part, Costa Rica signed such a treaty last April, but it is awaiting ratification by the Costa Rican congress.

It is equally important for Latin American multinationals to explore their potential in the Chinese market by investing their assets there, notes Glufke. These could be made through acquisitions of companies or by devoting their own funds to constructing plants in China. “There are some good examples of companies that have made these steps and have become success stories, such as WEG, the Brazilian producer and distributor of electric motors, and Gruma, the Mexican tortilla producer.”

Nevertheless, Glufke recognizes that a significant number of Latin American businesspeople are uneasy about investing in China because of the very sizable cultural differences between the two markets, and the differences in the Chinese business, legal and political systems.

In an effort to overcome these barriers, Diego Guevara, professor of economics at the Autonomous University of Colombia, suggests these steps: Promote international ties with China by devoting more economic and cultural assets to that country “and then establishing strategic alliances in the fields of science and technology. Certainly, this sort of technology transfer would provide greater added value for the products that the [Latin American] region exports [to China].”