China’s Growing Influence in America’s Backyard: The Trends Policymakers Should be Watching

Hu Jianto is in Washington this week having already spent much time in the Western Hemisphere. Along with his previous trips to the United States, Hu has visited numerous Latin America (LATAM) countries as China has cultivated an increasingly strong relationship with the region. Although China is not as established in Latin America as in other regions around the world, trade between Beijing and America’s neighbors to the South have grown substantially in recent years. Driven in part by the United States’ own indifference to the region, PRC-LATAM trade grew tenfold between 2000 and 2007. By 2008, it had reached 142 billion dollars.

Although over half of the countries in the world that formally recognize the Taiwan government's rule are located in Latin America and the Caribbean, this is at most a secondary interest for China in the region. Instead, Beijing’s interest in LATAM is driven by the same concerns that have caused it to increase its presence elsewhere: the need to secure the primary commodities that are essential to its economic growth.

Unsurprisingly, energy plays an important role in the PRC-LATAM relationship. Chinese companies have purchased large stakes in the oil fields of countries such as Ecuador, Argentina, Peru, Columbia, Brazil and Venezuela. In some cases, the LATAM states are unable to extract this petroleum without the assistance and resources of these foreign companies. In some ways then, the active presence of China benefits the region. At the same time, it impairs indigenous development. Additionally, because Chinese companies supply their own labor, which they bring over from China, it also impedes employment for the indigenous labor market.

More so than in regions like Africa and the Middle East, however, China’s interest in LATAM is driven by non-energy natural resources as well as food stocks.  For instance, with four of the five largest Latin American exporters to China (in 2004), soya made up 75 percent of Argentina’s exports to China; copper made up 75 percent of Chile’s; soya, iron, steel accounted for two-thirds of Brazil’s, and a similar amount of Peru’s exports were copper and fishmeal. Nonetheless, whether in pursuit of energy or other commodities needed to sustain its economic growth, China’s focus is clear. A study by NYU’s Wagner School found that from 2002-2007, China spent 18.585 billion dollars on Natural Resource Extraction/Production, compared with 9.432 billion dollars in Africa and only 4.788 billion in Southeast Asia during the same period.

Beijing has used the same tactics to penetrate LATAM markets as it has elsewhere: relying on extensive loans and investments, as well as access to China’s domestic markets. According to official PRC data, in 2006, 25 percent of China’s foreign direct investment was in LATAM (though it dropped significantly in 2007 only to rise again after the global financial crisis). Recently, more of this investment has gone into areas that benefit the recipients, going towards modernizing infrastructure and building hospitals. Still, China has shown itself willing to build prestige projects for the local regimes. Moreover, much of this money also ends up going to the Chinese companies and laborers now employed in these countries. So while China runs a sizable trade deficit with many countries in the region, certain indigenous industries still suffer tremendously.

In the past, China has mostly developed its relationships in the region through bilateral treaties.  As has been the case elsewhere, however, China has been more open to operating through multilateral institutions in recent years. For instance, in the past few years it has participated in the Organization of American states (OAS) and the Inter-American Development Bank (IADB).

Similarly, as is the case in Africa, the Middle East, and other regions, China has also been its usual opportunist self in LATAM. This has manifested itself in a number of ways. One is exploiting western unease with unstable anti-American regimes. In the Southern Hemisphere, this mostly relates to China’s growing relationship with Hugo Chavez’s Venezuela. Not only has it sought to purchase Venezuelan oil resources, but it has also taken to selling the erratic Chavez increasingly sophisticated military technology. America’s apparent indifference to this development has seeming emboldened the two countries to pursue greater ties.

China has also taken advantage of the drop in Western investment in the region brought on by the global financial crisis. China has sought to fill the void left by fleeing western businesses, governments, and institutions. Worldwide, China has loaned more money to developing countries in the past two years than the World Bank. This lending has been especially pronounced in LATAM. To give just one example, in 2008, the Inter-American Bank approved11.2 billion dollars in financing; in 2009 China loaned 10 billion dollars in just one deal with Brazil’s national oil company.

While American policymakers should be mindful of these growing trends in their own backyard, one shouldn’t expect China to usurp U.S. influence in the region anytime soon. The United States is still far more active in the region than China; in 2009 U.S.-Latin America trade 4.75 times that of PRC-LATAM’s trade, at $530 billion and $111.5 billion respectively. Beijing has also been relatively cautious asserting itself in America’s backyard.

Finally, significant barriers between LATAM and China remain, including the lack of historical ties between the two as well as significant cultural differences. In fact, some countries in LATAM have grown increasingly suspicious of China in recent years. For instance, although China has become Brazil’s largest trading partner, and the two countries form half of the BRIC alliance, Brazil has accepted China’s presence only grudgingly, consistently reaffirming tariffs directed against Beijing. Brazil has also emerged as one of the most vocal critics of China’s currency manipulation. But while these suspicious countries may rebuff continued Chinese expansion into Latin America, Beijing’s not likely to quit making the sell (literally and figuratively) for building strong ties with an ascendant China.