DOES CHINA‟S STATE-LED CAPITALISM POSE A “NEOCOLONIAL” THREAT TO LATIN AMERICA, OR ARE CHINESE INVESTORS A BOON TO LATIN AMERICA‟S ECONOMY?Larissa Paschyn
CHINA‟S ECONOMIC FOREIGN STRATEGYRESOURCE DRIVEN - BUILDING SIMPLE COMMERCIAL AGREEMENTS - ECONOMICASSISTANCE, DIRECT INVESTMENT, JOINT VENTURES, AND MILITARY TIES.Joint Ventures Oil To meet domestic industrial When Argentinas &consumer demand: financial collapse rippled CNPC invested $300 mil. in through SA‟s Southern technology for Orimulsion fuel Cone, China increased its in Chinese power plants. stake in Argentina and 2003 - bid on concessions to Brazil, while U.S. Ecuadors major oil fields. investment declined by CNPC acquired stake in half. Argentine oil & gas firm Great Dragon Telecom Pluspetrol. - Cuba. Mexicos Pemex - boost in Brazil - rail link to the petroleum exports to address Pacific trade gap with the PRC.
CHINA‟S MOTIVES National „go-out‟ strategy …Deploy investments & capital in rich resource countries/regions with booming trade & commercial activities by Chinese enterprises.• - Zhang Yidong, Shanghai-based analyst- Industrial Securities
THE FORESEEABLE FOREIGN POLICY China, Brazils largest trading partner, 09. Military Presidents & media consider China: Training "Brazil‟s most promising business partner and a strategic ally" due to LA military Chinas "rapidly rising demand for raw personnel, due to a materials and agricultural produce”. three-year Bilateral trade grew from US$ 6.7 billion old U.S. law in 2003 to US$ 36.7 billion in 2009. surrounding Cuba is turning to Chinese companies International rather than Western ones to modernize its Criminal crippled transportation system at a cost of Court that has led to a more than US$1 billion. sharp decline Partnering w/ BRIC & LA‟s on int. issues in U.S.-run like Climate Change, IMFO, Welfare. training ICBC opening banks in Brazil, buy programs for Argentina Standard Bank Group the region.
CLOSER TIES: BOON?From Latin Americas perspective, expanding relations with Chinamight seem like a good idea. It offers the following advantages: Prestige: Elevates a small country into the „big leagues‟ of global actors. Supplies respect for those in shadow of U.S. colossus. Deals with few requirements: China‟s transactions simple exchanges. Leaders have broad authority to negotiate deals w/out legislative oversight. PRC State monopolies mesh with Latin American government management. No need to build up Latin American trade capacity to deal with diverse businesses.
CLOSER TIES: BANE?Closer ties to China have significant disadvantages for LA as China is driven by need to export low-cost production. Growing trade deficits: Chinas exports more affordable than LA • 2005 - Mexican President goods = trade deficits. Chinese Fox: dumping electronics andlaborers work for 1/3 of wages of clothing unacceptableLAs. Argentina, Brazil, & Mexico • For every dollar that Mexico have signaled unease about trade makes from exports to China, with such a hot competitor. the PRC makes $31 from exports to Mexico Disinterest in economic reform: Commodities- • Income may widen. based trade model of • Narrow economies vulnerable to China will undermine downturns in commodity prices. progress that LA has made toward industrialization. • 44% live below poverty line. If fail Those with ruling to adopt reforms, social inequality & oligarchies may be political instability could depress tempted to fall back on U.S. exports to the region, increase plantation economics. migration problems.
CASE EXAMPLE BRAZIL China is Capital based while Brazil is Resource endowed. ChinaBrazil imported $25billion worth the from China; China invested $20billion last year into Brazil. Bread Basket Trade jumped 53%; $51 billionin 2010. Exports paid off Brazil‟s of foreign debt. Capital Brazil now has reserve: $52 billion; trade w/ China helped toBrazil exit Financial Crisis early. BrazilBUT as Brazil‟s capital industry grows, will it come into direct competition with China?
CASE EXAMPLE - BRAZIL Fear of the Commodity-driven currency appreciation that undermines “Dutch manufacturing. disease” The bulk of Brazil‟s exports to China consist of commodities; by contrast, manufactures constitute more than half of Brazil‟s exports to the US and Europe. China‟s cheap manufactures are hurting Brazilian industry in home and third markets.
WHAT THIS MEANS FOR THE USA Evasion of American-styleScramble for resources bottleneck diplomacy To obtain commodities, China China flexibility v. rigid U.S. offers investments in infrastructure. Obtaining assistance from US cannot offer direct ties US requires restrictions: to state industries; only promising not to send U.S. development aid. military personnel to the Chinese competition may ICC, not assisting terrorists, make MCA money less effective incentive to not using U.S. provided democratize governments, equipment for other than its liberalize markets. stated purpose. 1-2 year lead time from to US commitments depend on disbursement of MCA aid gives volatile governments legislative approval; can be time to drop market reversed if mood in the U.S. performance requirements. Congress shifts.
RISK TO CHINA‟S INFLUENCE ON LATIN AMERICA China encounters problems: Obama has Argentina, Brazil announced goal of Opening for US to complain lopsided redress the balancedoubling exports in trading practices; 5 years. and enhance its have lost market role. share in its own markets to China.
WHAT COMES AROUND, GOES AROUND Will China lose its Just as China was seen influence? as an alternative to the US in previous years, so now Latin America sees the US as a useful BALANCE to rising Chinese influence on the continent…
WHAT SHOULD CHINA‟S POLICY BE?China wants Market Status but LA’s blocking ambitions• Anti-dumping measures would be more difficult to implement• Latin American countries not supporting Market Status b/c of growing trade deficit.New Domestic Export Subsidies?Float freely the RMB or Slowly adjust exchange rate?• Risk since RMB undervalued; appreciation impact Chinas trade balance = slowdown exports; increase unemployment.• Are these costs less than eventual welfare and capital losses from slowly adjusting the RMB exchange rates?Find Common Ground – Partner with Brazil on newtechnological programs (Ex. Sino-Brazil Satellite Program).
REACHING OUT Alexander Teixerio – President Brazil Trade & Investment Promotion Agency – welcomes Chinese companies for stadium construction investment for ‘14 Pres. Dilma World Cup, ‘16 Olympics. Rousseff, Brazil – Deeper cooperation in management service and creative industries.• Investment –logistics• Boost Brazil‟s competitiveness. • China Development Bank - 14.1 Bill RMB in loans to Brazil. • Promote cooperation and joint • High speed rail between Rio efforts in infrastructure: ports de Janiero and San Paulo railways, power stations, sewage dispensers.
VALUING BRAZIL‟S EXPORTS Diversify trade patterns to deepen Brazil‟s influence in Chinese markets. Upgrade Improve technology in trade new sectors structure, add (not just value to energy, iron Brazil‟s ore, soy exports. beans).Ex.: Hu Junlie, CEO Chongwing Food Corp. signed 5bill. RMB deal with Governor of Brazil‟s Bahiaprovince to build soybean industrial park and plant base.
BRICS FOR CLOUT Use BRICs to gain clout in G20, the maker of economic policy. Reach out to developing countries as focus in G20 shifts to developing world.
CHINA‟S FOREIGN STRATEGY = MAO‟S WORLDREVOLUTION? Mao‟s goal was for Marshal Lin Biao world revolution; Lin showed how…. • Long Live the • North America & Western Europe – world cities; Victory of the world revolution can be People’ War! achieved through encirclement of cities by rural areas (Asia, Africa, Latin America)
Examples of China and LA with emphasis on Peru Carlos Pando, executive director of the Peruvian Agency for International Cooperation, and Chinese Ambassador to Peru Zhao Wuyi after signing an agreement on bilateral economic and technical cooperation, in Lima, Peru, last month. (Xinhua)
CHINA AND LA In November 2004, Chinese President Hu Jintao flew to Argentina, Brazil, Chile, and Cuba, where he signed a total of 39 bilateral agreements with these countries in the areas of trade, investment, aviation, space flight, tourism and education. The President also pledged that China would invest over $100 billion in Latin America during the next decade. By the end of 2009, Chinas investment in Latin America had risen to $30.6 billion, accounting for 12.5 percent of Chinas total outbound direct investment Latin America is the second-largest destination for Chinese outbound direct investment, following the Asia-Pacific region. In Latin America, most goes to Brazil, Peru, Venezuela, Mexico and Argentina. Chinese companies have invested heavily in Latin Americas energy and mining industries and more business opportunities are arising.
CHINA IN LA By 2007 China and Latin America two-way trade totaled $102.6 billion and numbers continued to increase in years to follow. China mainly exports electronic goods, machinery, garments and shoes to Latin America. China is the largest importer of goods and services from Brazil and Chile, and the second-largest from Peru, Argentina and Cuba China imports large amounts of Brazilian iron ore, soybeans, sugar and aircraft. China mainly imports soy from Argentina. Bolivia, Venezuela, and Mexico are cooperating with China in the energy sector.
PERU’S TURBULENT PAST In the early 1980’s, the Peruvian situation was taking a downturn as the country was impacted by international oil crises, natural disasters, a decrease in exports, and excessive international borrowing and economic stability was in question. By 1985, Peru was facing financial collapse. In the 1980’s, Peru was suffering from a rise in violence from guerilla groups and an increase in criminal activity. One source estimates that over 20,000 people died as a result of political violence during the decade In 1992, Fujimori suspended Peru’s constitution. Perus foreign relations were dominated by the nations debt and need for foreign aid and capital. In the new constitution, the importance of foreign investment in the country for continued economic growth was emphasized.
PERU’S TURBULENT PAST Fujimori opened all sectors of the Peruvian economy to foreign direct investment (FDI) and lifted restrictions on remittances of profits, dividends, royalties. The government also offered tax-stability packages for foreign investors the new constitution adjusted land-tenure rights to encourage private ownership and foreign investment. FDI flows increased dramatically and, between 1994 and 2001 the mining sector was the second-largest recipient of FDI totaling US $10.7 billion The mining and mineral sectors are key players in FDI, but have little impact on the Peruvian economy.
PERU The budget balance in 1989 as percent of GDP was -7,234.7. Then in 1999 the current budget balance as percent of GDP was -.011999 and further improved to 4.4 in 2008 (World Bank). Much of the sector, which was previously dominated by state-enterprises, has been sold off to private firms. In 1990 private operations accounted for 55% of mineral production throughout the country and in 1999, private operations accounted for 95% of mineral production
CHINA AND PERUChina-Peru relations have strengthened in recent years with smooth development in the friendlycooperation in politics, economy, trade and culture, and even military relations.Bilateral relations entered a new phase in 2008, when President Hu Jintao and Alan Garciaexchanged visits further establishing a partnership between the two countries.The two sides have also met and exchanged views on further advancing bilateral defensecooperation. “The military relations form an important part of the China-Peru relationship and have made great contribution to the comprehensive development of bilateral relations” “China hopes the two countries could make joint efforts to advance the friendly cooperation between the two militaries to a new level” Xu Caihou, Vice Chairman of China’s Central Military Commission
CHINA’S ROLE IN PERU Chinese President Hu Jintao visited Peru for the first time and signed his countrys second free trade agreement with a Latin American country, after Chile in 2005. He has also promised to invest a further $6bn in Perus mining sector over the next three years - a welcome move for Peru as commodity prices plunge. China-Peru cooperation continued to increased over the 2006-2010 period, during which Peru received aid worth 120 million yuan (18.5 million dollars) from China. Hu Jintao and Alan Garcia met in 2008 to discuss and agree upon the FTA
CHINA IN PERUThe major players are the four Chinesemining giants: Minmetals, Chinalco,Shougang and Zijin"These four companies are alreadydeveloping large-scale mining projectsnationwide, and they have recentlyreaffirmed their commitment to invest7.4 billion dollars in Peru [mining]" Zhou Zhongshu, president of Minmetals Peru’s Vice President Luis Giampietri
CHINA IN PERU Hu Jintao brought a 600-strong delegation with him. Some of the group was interested in mining. Others were interested in new markets in agriculture or telecommunications, or to start up small businesses. They were also looking for possibilities for manufacturers to get into other markets with the help of Peru China had barriers to trade elsewhere and were looking to produce from Peru and sell elsewhere since Peru has free trade agreements with other countries in the world.
CHINA IN PERU Many Latin American nations are emerging economies and expanding quickly. This creates investment opportunities for China’s companies. Mining resources in LA are one obvious attraction. China’s Jack Ma (Alibaba.com) was present in 2008 and commented on the current business climate in Peru. "I believe in the next 10 years Chinas market will be the worlds largest market" “where there is crisis there is also opportunity” "China should shift away from the US and Europe to focus [on] other parts of the world like Latin America and countries like Peru. There are a lot of mutual benefits."
CONCERNS There are also concerns that further development of bilateral relations would push some Peruvian sectors out of business and cause job loss as a result of a surge of cheaper Chinese imports."We cant allow these jobs to go abroad""The government ministers are Peruvians sothey should listen to what Peruvians aresaying" Diogenes Alva, an active leader in Peru’s textile industry
CONCERNS Despite improvements, Peru suffers with 19.8% of the population living in poverty and an unemployment rate of 7%o Some economists and locals argue that Peru should take care of its small businesses which create a lot of jobs Peru’s exports are just 0.3% of Chinas imports but China has been Perus second largest trading partner for the last four years. A wide trade imbalance is another concern. Some say that there is a danger in competition from Chinese industry. Others express concern over mining investment and argue that China doesn’t demonstrate a concern for the environment or labor rights in Peru China has shown signs of improvement as its companies trade on international markets and are forced to comply with international standards.
POTENTIAL FOR A FRIENDLY FUTURE Last month Peru and China signed an agreement on further development of bilateral economic and technical cooperation. China will grant Peru 20 million yuan (3.07 million U.S. dollars) in assistance. The money will be used in Perus education, culture and health sectors. (Right) Carlos Pando, Peruvian Agency for International Cooperation (Left) Zhao Wuyi, Chinese Ambassador to Peru
FRIENDLY FUTURE "The signing of this agreement reaffirms the friendship and mutual understanding between both countries and shows Chinas firm support to Perus social and economic development" (Zhao) "Trade isnt the full content of bilateral cooperation. There are many potential areas for both sides to increase cooperation, including sectors such as anti- poverty fight and infrastructure construction“ (Zhao) Regardless of some existing concerns, bilateral relations between Peru and China are continually improving and creating conditions for increased trade, investment and cooperation in other areas
SINO-CHILEAN RELATIONS Established Relations in 1970 Allende-Pinochet transition 1973 China did not break diplomatic relations Pinochet withdstood One-China Policy Antartic Sovereignty Claims China aknowledges Chilean claims Chile grants permission for Great Wall Research Center Policy of free trade Chile agreed to accession of China to WTO FTA between Chile and China 2005
CHILE-CHINA ECONOMIC RELATIONS Free Trade Agreement in 2005 First FTA between China and a Latin American country Took less than a year to negotiate Reduction of tariffs 90% of Chilean exports to China, 50% of Chinese exports to Chile Does not include services Impulsed by China’s thirst for raw materials Chile diversified its markets Still reliant on commodity exports Continuing Chile’s tradition of free trader
CHINA-MEXICO RELATIONS Established diplomatic relations 1972 Tense economic relations Mexico sees China as contributor to economic underperformance. Competition to internal and foreign markets Both produce similar products Both have US as main export partner Mexico has conducted numerous anti-dumping investigations
CHINA-MEXICO RELATIONS 2009 Swine Flu crisis - Cooling of relations Repatriation of Mexicans in China Mexico called acts as “discriminatory” Calls to stop trying to compete with China “Turn Mexico into an access point for China to the US market” “The road to America is Mexico” – V.I. Lenin
CHINA MEXICO ECONOMIC RELATIONS Chinese tourism to Mexico Mainly directed to high-income Chinese Chinese tourists expenditure is high 4000 to 7000 USD a week! Golf and shopping destinations Favorite for the Chinese Shanghai-Mexico City Only direct flight between China and Latin America Trying to open Beijing-Mexico City flight Visa application simplified Payments by China Union Pay accepted
CHINA LATIN AMERICA MICRO LEVELRELATIONSBrazil – China case
BIGGEST CHALLENGE: CULTURAL DIFFERENCES! Chinese expansion in Brazil challenged by cultural differences Chinese investments in Brazil Chinese companies compelled to hire Brazilian employees Expectations on both sides are quite different Labor regulations very different Labor unions = benefits, holidays, collective labor negotiations Chinese have a centralistic system 42% of Brazilian employees change their job in less than a year in Chinese companies Chinese companies in Brazil have a high rotation ratio
MAIN BRAZILIAN COMPLAINTS Interpersonal relations areimportant for Brazilians in workplace Brazilian executivesunconfortable with over-centralized structures Chinese companies demand quick results in a country of high-bureaucratic paperwork Brazilians frown upon open exposure of mistakes of subordinates “They want u in the office 24/7 to control you” “Results and deals are made over the table with a couple drinks”
MAIN CHINESE COMPLAINTS Lack of punctuality Chinese are very wary of hierarchies “Brazilians want days off for everything!” “They want holidays for everything!”