Latin America is caught in the middle of the economic struggle between China and the United States. In a struggle between economic behemoths, smaller nations tend to get trampled but can Latin America (and others) profit from the U.S.-China Trade War?
There is an old African proverb, “when elephants fight, the grass suffers.” Well, in economic terms, the elephants – China and the United States – are brawling tusk-to-tusk and all the rest of the globe is trying hard not to get trampled in the scuffle.
In Latin America’s case, this is difficult because of the historical relationship with the giant to the North and the expanding influence from the colossus of the East. But can Latin America profit from a U.S.-China Trade War?
Summit – Lesser Peaks
Back in April, Secretary of Commerce Wilbur Ross, while attending the Summit of the Americas in Lima, Peru, was interviewed by Celia Mendoza of VOA (Voice of America). Arguably, Ross was the most important member of the United States peculiar delegation.
President Trump originally had been scheduled to make the trip but cancelled shortly after a raid on his long-term personal lawyer Michael Cohen’s offices in New York. Instead Vice President Pence was substituted along with Ross.
Most of the heavy lifting at the summit was left in the hands of U.S. Trade Representative Robert Lighthizer and Acting Secretary of State John Sullivan, who was also there as a stand in for former Secretary of State Rex Tillerson, ahead of the appointment of the then CIA Director Mike Pompeo. Rounding out the summit’s eclectic entourage was Ivanka Trump, the President’s daughter/advisor.
Mendoza asked Secretary Ross to explain the importance of trade with Latin America for the United States against the backdrop of China’s rising commercial activity in the region.
Ross answered, “The U.S. has 12 of its foreign trade agreements, free trade agreements with Latin America. That is 12 out of the 20 that we have, so the majority of our trade arrangements are with Latin America. Second, Latin America exports far more to us than it does to China, and third, Latin America has a surplus with the U.S. and a deficit with China, in fact the surplus with us is almost twice the deficit that the region has with China.”
Ross is right about the basic parameters of the U.S. trading relationship with Latin America. Latin America exported around $406 billion worth of goods and ran a $117 billion surplus in 2017. Around 80% of the exports were manufactured goods although this number is heavily weighted by Mexico’s exports to the U.S.
Mexico’s an important caveat to the ‘trade surplus’ storyline. Notably, Mexico posted a $71 billion surplus with the U.S. by itself last year. It is for this reason the Trump Administration is pushing Mexico for a new NAFTA deal [in the final stages of negotiations at this writing]. However, eight of the top fifteen countries with which the U.S. has a trade surplus are in Latin America.
Ross was also correct about China. Latin America has a $67 billion trade deficit with China with over 90% of the total exports being raw materials. But it is hard to downplay the importance of China to Latin America. China is the largest export market for Brazil, Chile and Peru and ranks number two for Argentina, Costa Rica and Cuba.
The preeminence of China as a destination for raw materials is understandable. China’s industries have a seemingly insatiable demand for raw materials and Latin America has the commodities to sell. Brazil, for example, is the world’s largest exporter of soybeans with China being the number one market. Chile and Peru are both exporters of copper ore and China again is the number one market.
Peru is a case in point of the rising importance of the China market. In 2017, Peru increased its exports to China by 36.4% to $11.6 billion and recorded a $2.7 billion trade surplus. On the other hand, Peru’s exports to the U.S. were $6.9 billion in exports and to the European Union $6.5 billion.
While the recent rise in commodity prices is good for Latin American economies, it is also a weakness. When commodity prices fall, few economies in Latin America have sufficiently developed industries or a diverse agricultural industry to weather the lows. This is exacerbated by the lack of a wide export base, a lack of sovereign wealth and the ability to raise capital on international markets.
China & US Disengagement in Latin America
Former U.S. Ambassador to Panama, John Feeley, who resigned in March over policy disagreements with the Trump Administration, pointed out one of the great ironies in the U.S. relations with Panama and China. China is now building its new embassy to Panama at the mouth of the Panama Canal, literally on land dug up by the U.S. led canal construction effort. As Feeley noted, “There is no greater symbolic statement of disrespect to the United States-Panama relationship than a Chinese embassy sitting on a spit of land built literally by the earth excavated from the U.S.-led building of the Panama Canal over 100 years ago.”
While the Panama embassy site might be the most poignant example, it is only one of many illustrations of China’s investment in the region. But the real question is whether the rise of Chinese influence in Latin America is because of U.S. disengagement?
In a September article in the Miami Herald, Latin American diplomats said that the U.S. has only itself to blame for the rise of Chinese influence in the region.
In a tweet, Florida Senator Marco Rubio responded by writing, “Latin American diplomats are right that U.S. disengagement in the region has contributed to Chinese gains in the region. What they conveniently fail to mention is the role of hundreds of millions of dollars, bribes and contributions to political parties from China.”
Of course, Senator Rubio’s assertion conveniently overlooks the considerable baggage that the U.S. has with Latin America. And the Trump Administration’s ‘America First’ policy does little to assuage the unease with which Latin Americans view the United States. A year ago, Trump said he was considering the “military option” in Venezuela, a highly unpopular idea in Latin America… and the same no less unpopular idea is again being bandied about in the Oval Office. A Pew Poll back in the spring of 2017 showed that 77% of the Latin Americans surveyed indicated that President Trump had “no confidence” in regards to doing the right thing in world affairs – a number unlikely to improve in the near term.
Conversely, China is engaged in a long-term charm offensive backed with desperately needed capital. It’s worth noting over the last five years, Chinese President Xi Jinping has made three visits to Latin America and met with leaders of almost all countries having diplomatic relations with China in the region. It is worth noting that back in 2015, Xi said the PRC would invest $500 billion in the region - $250 billion in direct investments – between 2015-2019. The investment is concurrent with the PRC’s political efforts to isolate Taiwan, which triggered the recent exchanges of which Senator Rubio’s was one.
The high-level visits and economic investment also works nicely with China’s Belt and Road Initiative (BRI). The BRI program has been taking aim at infrastructure and energy projects around the world. According to the China-Latin American Bulletin, in 2017, Chinese firms invested $4.4 billion in Latin America in new (greenfield) FDI projects, up from $2.7 billion in 2016. Chinese firms also spent a record $17.7 billion on mergers and acquisitions in Latin America in 2017. China’s targeted the Brazilian energy sector, where the State Grid Corporation of China and the State Power Investment Corporation both made important deals totaling $14.5 billion.
Latin American Opportunities
The underlying problem for Latin America (and global traders of all ilk) is how to survive and indeed thrive during this period of economic struggle between the U.S. and China.
Although the tariffs are certainly detrimental to many Latin American exporters, there may also be new opportunities. Alberto Oltra, CEO for DHL Global Forwarding, Spanish-speaking South America, in an interview with AJOT, (see interview on page 13) “The fact that Chinese products will be more expensive due to import restrictions can benefit some sectors in Latin America, and it will be now possible to start the production of some goods in the region due to competitive reasons. Some factories can establish operations in markets closer to the U.S. and reactivate the economy.”
Certainly, nearshoring of manufacturing is nothing new – the Caribbean has long been associated with garment and footwear reshoring initiatives. But the tariffs could certainly make nearshoring more attractive region-wide. Nearshoring also fits well with Chinese investment strategy, as China moves lower-end manufacturing offshore and concentrates on domestically building higher-end tech manufacturing.
The U.S.-China trade dispute could also alter China’s buying patterns to the benefit of Latin America. China is the largest importer of soybeans – some 60% of the global crop - and the largest purchaser of U.S. soybeans (or any agricultural commodity) but has halted soybean purchases from the U.S. because of the trade dispute. In a recent Bloomberg interview, David MacLennan CEO of ag-giant Cargill said of agricultural exports (especially soybeans) “Maybe if it were fixed quickly, we might go back to the way it was [U.S. exports of soybeans to China] but long term I’m concerned it [trade war tariffs] has a detrimental effect on the U.S. agricultural economy.”
In July, China imposed a 25% retaliatory tariff on U.S. soybeans and is now buying record volumes of Brazilian soybeans for fourth quarter shipments – 12 to14 million tonnes of soybeans. In 2017, Brazil shipped less than 9 million tonnes to China in the fourth quarter which itself was well above the 3.7 million fourth quarter average of 2010-2015.
There are opportunities for Latin America to leverage its geography. As with soybeans there will be alternative markets because of the trade war. But the danger to the fragile Latin American economies is very real as any slump in commodity prices could derail a promising economic run into the 2020s.