1 China and Latin America’s Emerging Economies: Debates, Dynamism, and Dependence Carol Wise and Yong Zhang Abstract The tendency in the existing literature on the relationship between China and the Latin American and Caribbean (LAC) countries has been to treat the effect of China’s rise in this region over the past decade as more or less uniform, especially with regard to the South American countries. However, in this analysis of China’s impact on LAC’s top four emerging economies (Argentina, Brazil, Chile, and Mexico) we argue that the effect of China has varied significantly according to a given country’s factor endowments, institutional landscape, and the development trajectory underway at the turn of the new millennium. We begin by considering the main debates that have surrounded the phenomenon of China’s rapid entry into Latin America in the 2000s. In light of these debates, we rely on country sketches to illuminate how growing economic ties with China has shaped the development dynamic within each country. For the most part, we find that the rise of China in Latin America has highlighted a large reform deficit in the microeconomic realm and the urgency with which all four countries considered here need to articulate a much bolder development strategy based on higher spending allocations for science, technology, R&D, education, and infrastructure Paper presented on the panel “The Political Economy of China-Latin American Relations,” ISA-FLACSO Conference, Buenos Aires, Argentina, July 25, 2014.
Transcript
1
China and Latin America’s Emerging Economies:
Debates, Dynamism, and Dependence
Carol Wise and Yong Zhang
Abstract
The tendency in the existing literature on the relationship between China and the Latin American
and Caribbean (LAC) countries has been to treat the effect of China’s rise in this region over the
past decade as more or less uniform, especially with regard to the South American countries.
However, in this analysis of China’s impact on LAC’s top four emerging economies (Argentina,
Brazil, Chile, and Mexico) we argue that the effect of China has varied significantly according to
a given country’s factor endowments, institutional landscape, and the development trajectory
underway at the turn of the new millennium. We begin by considering the main debates that
have surrounded the phenomenon of China’s rapid entry into Latin America in the 2000s. In light
of these debates, we rely on country sketches to illuminate how growing economic ties with
China has shaped the development dynamic within each country. For the most part, we find that
the rise of China in Latin America has highlighted a large reform deficit in the microeconomic
realm and the urgency with which all four countries considered here need to articulate a much
bolder development strategy based on higher spending allocations for science, technology, R&D,
education, and infrastructure
Paper presented on the panel “The Political Economy of China-Latin American Relations,”
ISA-FLACSO Conference, Buenos Aires, Argentina, July 25, 2014.
2
Introduction
It would be difficult to exaggerate the sea change that has occurred within Latin
America’s emerging economies (EEs) as a result of China’s phenomenal rise within the
international political economy over the past two decades. Although a great deal has already
been written about the explosion of trade and investment ties between China and the region’s top
four emerging economies1---Argentina, Brazil, Chile, and Mexico---during the 2000s, less has
been said about the larger political economic dynamic that has evolved within each of these
countries under the thrust of this budding relationship. While empirical analyses of the China-
Latin America relationship confirm that China still represents a small share of trade, foreign
direct investment (FDI) and aid flows to the region, our focus is on the remarkable opportunities
and visible constraints that China’s entry into the region has already augured for the ongoing
development strategy in place within these four emerging economies in the 2000s.
First, is the effect of China’s voracious demand for commodities in the 2000s, as the
beginning of the new millennium marked China’s entry into the World Trade Organization and
its need for massive commodity inports to fuel a new development phase. The result for
Argentina, Brazil, and Chile was a spike in prices for soya, fishmeal, iron ore, copper, tin, zinc,
and oil, all of which are abundant to varying degrees in these countries. Second, although
China’s momentum for outgoing FDI has been slow, it has taken off in two of these Latin
American EEs (Argentina and Brazil) in ways that were simply unimaginable a decade ago (see
1 See, for example, R. Evan Ellis, China in Latin America: The Whats & Wherefores (Boulder and London: Lynne
Rienner Press, 2009); Rhys Jenkins, “China’s Global Expansion and Latin America,” Journal of Latin American
Studies, vol. 42, no. 1 (November 2010), pp. 809-837; Kevin P. Gallagher and Roberto Porzecanski, The Dragon in
the Room: China and the Future of Latin American Industrialization (Stanford: Stanford University Press, 2011);
and, Adrian H. Hearn and José Luis Léon-Manríquez, eds., China Engages Latin America: Tracing the Trajectory
(Boulder and London: Lynne Rienner Press, 2011).
3
tables 1 and 2). Thus far, the bulk of these investments and the loans that have accompanied
them have gone toward resource extraction. Although Latin America now accounts for about 15
percent of Chinese FDI (versus 65 percent for Asia),2 the pattern is a very lopsided one.
<insert tables 1 & 2>
<insert figure 1>
Third, China has become an important engine of growth for Latin America. This became
apparent when the four emerging economies considered in this article rebounded along with
China from the 2008-09 global financial crisis in 2010, while the OECD bloc has remained
mired in recession and financial instability. Although the shocks that hit the region in 2008 were
financial in nature, the recovery was trade-led and China was largely the leader.3 At the same
time, the Chinese government signed currency swap agreements with Argentina (2009) and
Brazil (2012) to facilitate bilateral trade and lower transaction costs, and it negotiated a loan-for-
oil agreement with Brazil in 2009.
On balance, the relationship between these newfound friends has been favorable but
contradictory, rendering debates about the political economy of China-Latin American relations
in the 2000s somewhat bipolar. With this political economy analysis of China’s relationship
with Argentina, Brazil, Chile, and Mexico we seek to steer away from the normative tone of
many assessments, highlight the complexities, and size up the benefits and costs for the countries
involved.4 In so doing we begin with an analysis of the political economy debates over the
2 Eduardo Daniel Oviedo, “Argentina Facing China: Modernization, Interests, and Economic Relations Model,” East
Asia, vol. 30 (2013), p. 27. 3 Su Zhenxing and Yong Zhang, “Guoji jinrongweiji beijingxia de Zhongla jingmao hezuo” (“An Analysis of
Economic Cooperation and Trade between China and Latin America in the Context of the International Financial
Crisis”), Ladingmeizhou he Jialebi fazhan baogao 2009-2010 (Development Report of Latin America and the
Caribbean 2009-2010), (China: Social Sciences Academic Press, 2010). 4 More nuanced assessments can be found in Daniel P. Erikson, “Conflicting US Perceptions of China’s Inroads in
Latin America,” in Adrian H. Hearn and José Luis Léon-Manríquez, eds., China Engages Latin America, pp. 117-
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evolving China-Latin American relationship, with an eye toward its impact on the development
model of the four countries under study. We then turn to an empirical section which reviews
those patterns of economic performance within these four EEs from 2003-2012. A third section
examines the data from the standpoint of the pitfalls in the China-Latin America relationship,
including the growing concern about Latin America’s over-dependence on Chinese demand.
Here, we argue that it is less an issue of LAC’s increased structural dependence on China that
endangers growth and development in these EEs and more a matter of path dependence, whereby
current policy choices are limited by “an initial set of institutions that provide disincentives to
productive activity.”5 A fourth section of the papers offers conclusions.
Debates
China’s Impact on the Development Strategies of Latin American EEs?
As tempting as it was for the US Treasury Department and international financial
institutions (IFIs) to chide Latin American policy makers for falling off the neoliberal
bandwagon in the wake of the Argentine financial crisis in the early 2000s,6 by that time market
reforms based on privatization, liberalization and deregulation had actually run their course in
the region with very mixed results. 7 With the exception of Brazil, the path followed by the other
three EEs could perhaps best be described as the polar opposite of the Chinese way.8 The highly
135; and, Jiang Shixue, “The Chinese Foreign Policy Perspective,” in Riordan Roett and Guadalupe Paz, eds., China’s
Expansion into the Western Hemisphere (Washington, DC: Brookings Institution Press, 2008). 5 Douglass North, Institutions, Institutional Change, and Economic Performance (Cambridge: Cambridge
University Press, 1990), p. 99. 6 Paul Blustein, And the Money Kept Rolling In (And Out) (New York: Public Affairs Books, 2005). 7 Nancy Birdsall and Augusto de la Torre, Washington Contentious (Washington, DC: Carnegie Endowment for
International Peace, 2001). 8 Barry Naughton, The Chinese Economy: Transitions and Growth (Cambridge: The MIT Press, 2006); and, Robert
Devlin, “China’s Economic Rise,” in Riordan Roett and Guadalupe Paz, eds. China's Expansion into the Western
Hemisphere.
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diverse outcomes of market reform in Latin America makes it difficult to entirely dispense with
this so-called neoliberal model; yet, the region’s comparatively lower performance in terms of
per capita growth, investment, productivity, and technological innovation suggests that the more
beneficial path forward lies in the moderated reform pace and hands-on public policy
interventions that has characterized the Chinese model. At play here is the exhaustion of rigid or
dogmatic notions of laissez-faire in LAC and the demonstration effect of China’s indisputable
success with more proactive approaches.9
In Argentina, Brazil, and Mexico, for example, the rapid and simultaneous liberalization
of trade and finance in the early 1990s and the failure to coordinate these policies with ongoing
efforts at privatization and deregulation proved to be explosive. The Mexican currency crisis of
1994 quickly drove home the difficulties of exchange rate management under new conditions of
high capital mobility based on securitized financial instruments. Even Brazil, which moved
more cautiously with privatization and the liberalization of trade and the capital account,10 could
not avoid its own devaluation crisis in 1999. The Argentine financial blow-up of 2001-02 was a
more drastic variation on this theme, the result being a US$100 billion default on the country’s
publicly held debt and a massive rejection of market reforms at the polls. In all of these cases,
the loss of real income at the level of working people tarnished the neoliberal mantle, even if a
considerable part of the problem was half-hearted implementation and reckless risk-taking by
economic decision-makers, especially in Argentina and Mexico.
Unequal Exchange and the Shadow of the Past?
9 Jiang Shixue, “Lamei jingji he Zhongguo yinsu” (“Latin American Economies and the China Factor”), Dangdai
shijie (The Contemporary World, no. 12, 2012). 10 Albert Fishlow, Starting Over: Brazil since 1985 (Washington, DC: Brookings Institution Press, 2011).
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Some of the best scholars now writing on the political economy of China-Latin American
relations have expressed concern that today’s pattern of exchange harkens back to the turn of the
last century, a time when LAC’s primary exports to the North were offset by the import of
manufactured and intermediate capital goods back from the developed countries.11 Yet, whereas
the earlier experience with this pattern of trade invoked policies of import-substitution and a
widespread critique concerning the unfavorable terms of trade for the region12---as the price of
manufactured imports continued to rise while commodity exports were plagued by cyclical price
downturns---the structural conditions that now prevail within most of these economies are
markedly different. With the exception of Chile, considerable inroads have been made with
industrialization and manufactured goods now account for some 40 percent of all regional
exports. Moreover, the terms of trade for all four countries have held quite steady in the 2000s.
The issue this time around is that the nature of those goods being imported is higher in
knowledge content, value-added and technological inputs, and China accounts for a steadily
increasing share in these domestic markets. What has not held steady is the ability of the four
LAC EEs in this study to keep pace with the competitiveness gains that China has registered in
its manufacturing sector over the past twenty years, advances which are the result of highly
focused expenditures and policies that have promoted science, technological adaptation,
advanced education in hard science fields, and research and development since the early 1980s.13
11 See, for example, Jaime Ortiz, “Déjà vu: Latin America and Its New Trade Dependency…This Time with China,”
Latin American Research Review, vol. 47, no. 3 (2012), pp. 175-190; and, Ruben Gonzalez-Vicente, “The Political
Economy of Sino-Peruvian Relations: A New Dependency?” Journal of Current Chinese Affairs, vol 41, no. 1
(2012), pp. 98-131. 12 The seminal work on this is Raúl Prebisch, The Economic Development of Latin America and Its Principal
Problems (New York: United Nations, Department of Social Affairs, 1950). 13 See Sunil Mani, “Have China and India Become More Innovative since the Onset of Reforms in the Two
Countries?” in Amiya Kumar Bagchi and Anthony P. D’Costa, eds., Transformation and Development: The
Political Economy of Transition in India and China (New Delhi: Oxford University Press, 2012); and, Kevin P.
Gallagher and Roberto Porzecanski, The Dragon in the Room, chapter 3.
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In numerous interviews that we conducted for this study, with policy makers, producers, and
local private sector analysts in all four countries, one of the most frequently mentioned themes
was the conviction that all of these countries should be trying harder to export non-traditional
higher-value-added products to the Chinese market. Remarkably, however, with the exception
of Chile, any serious national public debate along these lines seems to have been eclipsed by the
aura of plenty that has prevailed for most of the 2000s.
Moreover, due to higher costs, geographical disadvantages, and technological deficits, the
ability of these countries to export higher value-added goods to China is not likely, at least not in
the near future. Rather, the current juncture is a time for these countries to take stock of their
own export and production capabilities and to focus on the very features of the Chinese strategy
that could enhance their competitiveness in regional and world markets overall. At a minimum,
this would include the articulation of a longer-term vision for strengthening domestic productive
capacity, one based on higher spending allocations on science, technology, R&D, education, and
infrastructure.14 Based on his econometric analysis, Ortiz argues that LAC “has reached a point
in its production possibilities frontier at which it is not feasible to further increase its level of
output unless technology and innovation come into play. Latin America must broaden its
productivity base, move into more sophisticated endeavors, and diversify its export basket to
gain market share.”15 Even the earlier theorists of unequal exchange advocated technology
adaptation and export diversification.16 It’s the delay in going full speed ahead with these policy
reforms that calls up images of path dependence in twenty-first century Latin America.
14 Robert Devlin, “China’s Economic Rise,” pp. 137-139. 15 Jaime Ortiz, “Déjà vu: Latin America and Its New Trade Dependency,” p. 188. 16 Raúl Prebisch, The Economic Development of Latin America and Its Principal Problems.
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“Dutch Disease” Latin American-style?
The flip side of large capital inflows to the South American EEs since 2003 and the
accumulation of historically high levels of foreign exchange reserves has been a considerable
overvaluation of their currencies, a phenomenon that some are now referring to as a case of
“financial Dutch-disease.”17 The term Dutch disease first referred to the decline of the Dutch
manufacturing sector in the 1970s due to the discovery and development of natural gas in the late
1950s. As high natural gas prices triggered a foreign exchange boom and in turn, currency
appreciation, industrial exports and jobs languished. The fact that manufactured exports still
account for 40 percent of all LAC exports suggests that it would be premature to diagnose a
generalized case of traditional Dutch disease in the region.18
But financial Dutch disease is another matter. As heavy Chinese demand for South
American commodities continues to push prices upward, and the US Fed’s commitment to a
zero-interest rate policy since 2009 pushes funds outward toward the emerging markets, the
sheer mass of capital inflows and related currency appreciation have placed intense inflationary
pressures on all but Mexico. Chile and Brazil have acted quickly in combating inflation with a
combination of interest rate hikes, sterilizing interventions and capital controls. Argentina, as
can been seen in table 3, has been lax in fighting inflation and on this indicator has fallen back
onto its perilous pre-reform path. Apart from the need to tightly manage inflation, all three
South American countries face the ultimate challenge of channeling these incoming capital flows
into domestic savings and much higher levels of productive investment. However, when
comparing China and the LAC region, the latter’s deficit in terms of Gross Capital Formation
17 Mauricio Cardenas, “Curbing Success in Latin America.” 14 April 2011.
http://www.brookings.edu/opinions/2011/0414_curbing_success_cardenas_yeyati.aspx 18 Yong Zhang, “Development of China’s Trade with Latin America and the Caribbean and Its Challenge,” figure 7.
9
(GCF) is a bit startling. From 2000-2008, for example, LAC’s GCF rate averaged less than 19
percent of GDP; conversely, China’s average rate of GCF between 2000-20012 was over 42
percent, more than double the LAC figure.19
<insert table 3>
Another wake-up call appears in figure 2, where the “revealed comparative advantage”
(RCA) of Brazil’s manufacturing sector has declined in the 2000s. Some of the more powerful
industrial groups in Sao Paulo have blamed this trend on Chinese manufacturing exports to
Brazil; as a result, the Brazilian government has ratcheted up protectionist measures against
China and the PRC has responded in kind.20 But financial Dutch Disease has also kicked in here,
as the Brazilian real has been steeply over-valued since the onset of hefty capital inflows in the
early 2000s. Although Brazilian policy makers have complained that China’s under-valued
currency has put domestic exporters at a distinct disadvantage, Barry Eichengreen and others
argue that the Chinese yuan has appreciated considerably since 2005.21 It is just as likely that
Brazil’s unduly strong currency that has favored manufactured imports and penalized industrial
exports in the 2000s.22
<insert figure 2>
Dynamism
19 Yong Zhang, “Development of China’s Trade with Latin America and the Caribbean and Its Challenge,” tables 6
and 7. 20 Rhys Jenkins, “China and Brazil: Economic Impacts of a Growing Relationship,” Journal of Current Chinese
Affairs, vol. 41, no. 1 (January 2012), pp. 26-29. 21 Comments made by Prof. Barry Eichengreen on a panel entitled “China and Latin America: Perceptions,
Problems, and Opportunities,” co-sponsored by the Center for Latin American Studies and the Institute of East
Asian Studies, UC Berkeley, February 12, 2013. http://clas.berkeley.edu/event/china-and-latin-america-perceptions-
problems-and-opportunities (Accessed October 12, 2013). 22 Alexandre De Freitas Barbosa, “The Rising China and Its Impacts on Latin America: Strategic Partnership or a
New International Trap,” paper presented at the VIII Reunión de la Red de Estudios de América Latina y el Caribe
Macroeconomic Prudence versus Microeconomic Doldrums
At the turn of the new millennium there was little to suggest that a take-off was in the
making for Latin America’s emerging economies. The US had yet to rebound from the 2000
dot.com bust when the 9/11/01 terrorist attacks hit New York and Washington and this worked to
prolong a global recession. The data on average GDP growth rates for the four Latin American
EEs in table 3 ranged from dismal (Argentina) to lackluster (Brazil) between 2000 and 2002.
However, in 2004 China’s trade with all four countries began to climb quickly,23 the result being
LAC’s abrupt exit from the global recession and a higher pace of average aggregate growth than
in the OECD bloc. Again, it is important not to exaggerate the weight of China in Latin
America’s turnaround. In 2007, on the eve of the global financial crisis, Rhys Jenkins estimates
that the net impact of Chinese demand on export earnings for the Latin American region was
between 13 to 23 percent for that year.24 Yet, table 4 shows that for the four emerging
economies analyzed here, the projected effect of Chinese demand on net export earnings in 2007
varied more widely, with Chile’s range of a 28.8 to 47.8 percent net effect versus Argentina’s
range of 6.9 to 11.9 percent.
<insert table 4>
The five year span between 2003 and 2008 was a brief golden age for all four EEs
analyzed here. Mexico rebounded on the strength of global oil prices, with Chinese demand
spurring a petroleum price boom, even if Mexico exported little of its own oil supply to China.
For Argentina, Brazil and Chile, the combination of China’s annual average growth rate of 9-10
percent during this period and the increase in capital inflows due to the US Federal Reserve
23 See figures 1, 2, and 3 in Yong Zhang, “Development of China’s Trade with Latin America and the Caribbean and
Its Challenge.” 24 Rhys Jenkins, “The ‘China Effect’ on Commodity Prices and Latin American Export Earnings,” CEPAL Review,
vol. 103 (April, 2011), p. 84.
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Bank’s low interest rate policy provided the stimulus for high aggregate growth and an
impressive leap in per capita GDP. Inflation was running in the single digits and reserves were
rapidly accumulating. Despite the vociferous turn away from the Washington Consensus,
particularly in Argentina and Brazil, this period reflected the strength of institutional reforms that
had been implemented in the 1990s in the realm of banking, finance, and macroeconomic policy
making.25
The 2008-09 global financial crisis further tested the extent to which macroeconomic
policy approaches had been institutionalized across Latin America. Alejandro Izquierdo and
Ernesto Talvi offer the following assessment of the region’s macroeconomic fundamentals and
collective ability to hold its own when faced with an external shock of this magnitude:
“In 2007 the region exhibited an overall fiscal surplus of 1.9 percent of
GDP compared to a deficit of 0.9 percent of GDP at the onset of the {1997-98}
Asian/Russian crisis. Public debt-to-GDP ratios plummeted from an average of 52
percent in 2003---the end result of a period of financial crises---to 35 percent by
end-2007….The banking sector also showed significant signs of improvement as
non-performing loans declined sharply, sliding all the way from close to 10
percent of total loans in 2002 to 2.5 percent by end-2007…International reserves,
at around US$140 billion in 2002, more than tripled to US$ 447 billion by June
2008.” 26
Perhaps for the first time ever, the combination of a fiscal surplus, banking sector reform and a
large foreign exchange cushion positioned policy makers within all four of the EEs in table 3 to
respond to the crisis with counter-cyclical policies that eased the pain of adjustment.
25 Leslie Armijo, Carol Wise, and Saori Katada, “Introduction,” in Carol Wise, Leslie Armijo, and Saori Katada,
eds., Unexpected Outcomes: How Emerging Markets Survived the 2008-09 Global Financial Crisis (Washington,
DC: Brookings Institution Press, 2014), pp. 15-20. 26 Alejandro Izquierdo and Ernesto Talvi, Policy Trade-offs for Unprecedented Times: Confronting the Global
Crisis in Latin America and the Caribbean (Washington, DC: Inter-American Development Bank, 2009), p. 5.
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However, in all four EEs in table 3, this macroeconomic dynamism has been offset by a
slippage in global competitiveness rankings between 2007-08 and 2013-14 for all but Brazil.
Table 5 shows the 2013-14 rankings from the World Economic Forum’s annual Global
Competitiveness Report.27 Most notable is China’s 5-point gain since 2007-08, which ranks it as
more competitive than any of the four Latin American EEs in the table. Moreover, as China
moved up in the rankings, Argentina, Chile and Mexico all moved down. Brazil has jumped 16
points in the competitiveness rankings since 2007-08, albeit from a very low starting point.
Other measures of economic modernization and openness are displayed in table 6. Not
surprisingly, China scores poorly on the Heritage Foundation’s “Economic Freedom Index,” but
it does out-perform Argentina on this measure. Moreover, China out-performs all four of the
Latin American EEs on two key measures (registering property and enforcing contracts) in the
World Bank’s “ease of doing business survey,” and it beats out Argentina and Brazil on the
“overall ease of doing business” measure.
<insert tables 5 & 6>
It was on this very question of competitiveness and microeconomic restructuring that
Washington Consensus reforms based on deeper liberalization and deregulation had stalled in the
late 1990s in Argentina, Brazil, and Mexico. A stark reality of this period was the failure of per
capita growth and employment creation to keep pace with the positive aggregate returns. The
2000-03 global recession exacerbated these trends until, seemingly out of nowhere, the
commodity lottery struck; China suddenly became a crucial intervening variable for all four
Latin American EEs analyzed here. The following brief country sketches highlight the profound
but highly variable effects that this evolving economic relationship with China has had on
27 See Klaus Schwab, ed., The Global Competitiveness Report 2013-2014 (Switzerland: World Economic Forum,
2013). Also see: www.weforum.org/gcr.
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development strategies in each of these four countries. The analysis shows that there is no single
China-Latin America political economy profile, but rather a set of preliminary outcomes that
vary according to a given country’s factor endowments, institutional landscape, and the
development trajectory underway when Chinese trade and investment began to take off in Latin
America in the early 2000s.
Country Sketches: Varieties of Capitalist Development (from North to South)
Mexico
In one of the earliest and most comprehensive reports on China-Latin American relations
in the 2000s Robert Devlin and his co-authors point to Mexico as a potential “loser” due to its
high export similarity index (ESI) with China and the strong overlap in goods that both China
and Mexico are exporting to the US market.28 Indeed, by 2003 China had displaced Mexico as
the second most important US trade partner; over the period 2000-05 Mexico had increased its
share of US imports by 25 percent, while China’s share of US imports grew by 143 percent;29 by
2011, 31 percent of all US imports from Mexico were deemed to be under “direct threat” from
Chinese competition in the US market and some 46 percent of Mexico’s manufacturing exports
to the US were classified in this same category.30 Apart from this head-on competition from
China in the US market, China accounted for around 15 percent of Mexico’s imports in 2011 but
28 Robert Devlin, Antoni Estevadeordal, and Andrés Rodríguez-Clare, eds., The Emergence of China: Opportunities
and Challenges for Latin America and the Caribbean (Cambridge: Harvard University Press, 2006). 29 Ralph Watkins, “Meeting the China Challenge to Manufacturing in Mexico,” in Enrique Dussel Peters, Adrian
Hearn, and Harley Shaiken, eds., China and the New Triangular Relationships in the Americas (Miami: Center for
Latin American Studies, University of Miami, 2013), p. 38. 30 Kevin P. Gallagher and Enrique Dussel Peters, “China’s Economic Effects on the U.S.-Mexico Trade
Relationship. Towards a New Triangular Relationship?” in Enrique Dussel Peters, Adrian Hearn, and Harley
Shaiken, eds., China and the New Triangular Relationships in the Americas, pp. 18-19.
14
just 2 percent of its exports.31 In contrast to the South American EEs, Mexico does not have an
ample supply of oil or other raw materials to sell to China, the result being a burgeoning
manufacturing trade deficit with China in the 2000s (see table 3). Chinese FDI to Mexico lags
far behind Argentina and Brazil (see tables 1 & 2), with a modest presence in computers and
autos, as shown in figure 1.
The irony for Mexico is that policy makers there spent the last twenty years working to
diversify the country’s exports away from primary products. Although they largely succeeded,
they took the market route toward restructuring and did so via Mexico’s entry into the North
American Free Trade Agreement (NAFTA) with Canada and the US in 1994. Under NAFTA,
Mexico’s expectation was that, by liberalizing its trade and investment regimes, it could count on
US FDI and the heightened competition from US imports to force a restructuring of the domestic
industrial sector.32 Industrial policy was tapered off and the tough tasks of technology
acquisition and adaptation were basically turned over to foreign companies operating in export
production zones located in central and northern Mexico. Figure 2 shows that Mexico is the only
Latin American EE that comes close to China in terms of the RCA (revealed comparative
advantage) of its manufacturing sector;33 it has outpaced Brazil on this measure, but is also
struggling to regain the competitiveness peak it had reached at the outset of the 2000s.
Hindsight suggests that Mexico’s entry into NAFTA has been as much a burden as a
blessing. Back in the early 1990s newly converted neoliberal technocrats sought NAFTA entry
as a way to permanently lock-in market reforms and implement new ones. But NAFTA
31 Kevin P. Gallagher and Enrique Dussel Peters, “China’s Economic Effects on the U.S.-Mexico Trade
Relationship. Towards a New Triangular Relationship?” p. 15. 32 Carol Wise, “Unfulfilled Promise: Economic Convergence under NAFTA,” in Isabel Studer and Carol Wise, eds.,
Requiem or Revival? The Promise of North American Integration (Washington, DC: Brookings Institution Press,
2007). 33 Also see Kevin P. Gallagher and Roberto Porzecanski, The Dragon in the Room, p. 68.
15
membership also cemented the country’s overwhelming trade and investment dependence on the
US market. In 2011, 89 percent of Mexican exports that incorporate imported inputs were
destined for the US market.34 Having harnessed the country’s economic fate to NAFTA,
Mexican politicians and policy makers have spent most of the 2000s crafting protectionist tariffs
on Chinese manufacturing imports and stalling on the completion of essential reforms. As
recently as 2012, this reform lag included fiscal policy, utility inputs, oil production, labor
markets, anti-trust, and education35----all of which are essential for the country to climb up the
industrial ladder on par with China.
Despite Mexico’s obvious geographic advantage over China, the latter has gradually
eclipsed Mexico in the US manufacturing market by virtue of its lower overall costs and by
actively deploying public policy in the expansion, upgrading and infusion of technology into its
manufacturing sector.36 The World Economic Forum’s Global Competitiveness Report 2013-
2014 further refines the differences between China and Mexico; with regard to those indicators
(FDI and technology transfer, local supplier quality, and sophistication of production
processes)37 that reflect an industrial model like Mexico’s, with its strong orientation toward FDI
operating in export processing zones, Mexico readily outshines China in the rankings.
Conversely, on those indicators (capacity for innovation, company spending on R&D,
availability of scientists and engineers, venture capital availability, and ease of access to business
loans)38 that capture the development of an endogenous industrial model like China’s, one that is
34 Ralph Watkins, “Meeting the China Challenge to Manufacturing in Mexico,” p. 43. 35 Carol Wise, “Unfulfilled Promise: Economic Convergence under NAFTA.” 36 Robert Devlin, “China’s Economic Rise,” pp. 137-139. 37 Klaus Schwab, ed., The Global Competitiveness Report 2013-2014, pp. 512, 525, 530. 38 Klaus Schwab, ed., The Global Competitiveness Report 2013-2014, pp. 503, 504, 534, 536, 539.
16
steadily accruing value-added and absorbing new technologies,39 China basically leaves Mexico
in the dust.
Brazil
Now ranked as the world’s sixth largest economy, political and economic elites in Brazil
have converged around a gradualist strategy that has incorporated market norms into a
developmental capitalist framework. Like Mexico, Brazil’s banking and financial sector reforms
have been impressive, as indicated by its timely recovery from the 2008-09 global financial
crisis. On an index of trade openness Brazil’s ranking is 71.6 on a scale of 1-100 (with 100
being the most open), versus 80.2 for Mexico and 85.8 for Chile. Nassif argues that Brazil’s
comparatively higher level of protection reflects how “the country has sacrificed higher and
more productive growth over the past twenty years due to the partial and incomplete nature of its
microeconomic reforms.”40 This statement is borne out by the data on Brazil’s lagging
competitiveness in tables 5 and 6.
All of the various ways of measuring the impact of China on Brazil suggest that the
situation is worlds apart from that which Mexico now faces vis-à-vis China in both its home
market and in the US. Table 4 estimates the effect of Chinese demand on Brazil’s net export
earnings in 2007, which was 16 percent at most and as high as 25 percent from 2007-2012;41 as
39 Bikramjit Sinha, “Increasing Industrialization of R&D in China,” in Amiya Kumar Bagchi and Anthony P.
D’Costa, eds., Transformation and Development. 40 André Nassif, “Brazil and India in the Global Economic Crisis,” in Sebastian Dullien et al. eds., The Financial
and Economic Crisis of 2008-2009 and Developing Countries (New York and Geneva: United Nations, 2010). Also
see Yong Zhang, “Baxi jingji zengzhang fangshi zhuanxing he jiegou yanbian” (“The Transformation and Structural
Reform of the Economic Growth Model in Brazil”), in Veloso Pereira and Zheng Bingwen, eds, Kuayue zhongdeng
shouru xianjing: Baxi de jingyan jiaoxun (Surmounting the Middle Income Trap: the Main Issues for Brazil),
(China: Economy & Management Publishing House, 2013). 41 Rhys Jenkins, “China and Brazil: Economic Impacts of a Growing Relationship.”
17
of 2011 China accounted for about 15 percent of Brazil’s imports and 17 percent of its exports;42
and, from 2000 to 2011 bilateral trade between the two countries grew by more than 2000
percent.43 As of 2012, Brazil’s trade surplus with China was over US$18 billion,44 and China’s
FDI stock in Brazil towered over the other three EEs analyzed in this paper (see table 1). A
sticking point for Brazil is that in 2006 its volume of raw material exports surpassed that of
manufactured goods for the first time since the early 1990s and Brazilian industrial producers are
feeling the pinch in both domestic and third country markets. In 2011Brazil’s GDP growth
dropped by 5 percentage points over the previous year and by 2012 it had all but stalled (see
table 3).
The country’s economic slowdown since 2011 suggests that currency reform, including a
floating exchange rate, and sustained macroeconomic stabilization are necessary conditions for
growth but not entirely sufficient. In this respect, Brazil’s thick regulatory/bureaucratic
overhang reflects the extent to which this version of the developmental capitalist model is still
too much of a drag on growth. Whereas the average South American rate of government
spending as a percent of GDP is about 26 percent, Brazil stands at 40 percent. The private
banking sector, meanwhile, has made itself scare. Interest rates are off the chart and Brazil has
some of the highest risk spreads in the world. In 2012, the private sector provided just 12.8
percent of long-term financing, while the state-owned development bank (BNDES) provided
around 72.4 percent.45 Between 2000-2012 Brazil’s total foreign exchange reserves increased
11-fold and stood close to US$370 billion at the end of 2012. This scenario is precisely what we
42 IDB DataIntal. 43 Daniel Cardoso, “China-Brazil: a Strategic partnership in an Evolving World Order,” East Asia, vol. 30, no. 1
(2013), pp. 31-51. 44 Yong Zhang, “Development of China’s Trade with Latin America and the Caribbean and Its Challenge,” figure 5. 45 Seth Colby, “Brazil’s Second-Best Financial Strategy,” Americas Quarterly, vol. 7, no. 2 (spring 2013), pp. 34-35.
18
mean by Brazil’s possible case of financial Dutch disease, as mentioned in the previous section
of this paper: capital is abundant but absurdly expensive; investment and productivity are flat;
and, bolstered by an overvalued real, domestic consumer spending is running at around 62
percent of GDP.
Where does the impact of China fit into this scenario? For perhaps the first time in the
post-World War II era the Brazilian industrial sector has not been able to shelter itself from the
levels of competition that Chinese manufactured imports are now presenting. On the upside, this
has been a powerful incentive for industrial restructuring and certainly some sub-sectors of
manufacturing are stepping up to the task. On the downside, the losers in this scenario, such as
producers of machinery, electrical equipment, and smaller miscellaneous manufactured goods,46
have succeeded in lobbying for high levels of protection. In 2011, alone, Brazil initiated 50 anti-
dumping investigations against China at the WTO. Debates over the country’s
“deindustrialization” have become commonplace, although the figures thus far do not entirely
support this notion. Jenkins and Barbosa report that only a fifth of Brazil’s total manufacturing is
exported, half of that to Latin American countries.47 Brazil has gone far on an industrial model
that caters mainly to domestic and regional markets; however, as in the case of Mexico, China’s
entry into the Brazilian market has illustrated the urgent need for a number of microeconomic
reforms that can bring down the costs and increase the efficiency and competitiveness of the
Brazilian economy.
46 See figure 9 in Yong Zhang, “Development of China’s Trade with Latin America and the Caribbean and Its
Challenge.” 47 Rhys Jenkins, “China and Brazil: Economic Impacts of a Growing Relationship;” Rhys Jenkins and Alexandre de
Freitas Barbosa, “Fear for Manufacturing? China and the Future of Industry in Brazil and Latin America,” The
China Quarterly, vol. 209 (2012), pp. 59-81.
19
Argentina
Since the launching of the 1991 Convertibility Plan Argentina has run the full gamut
from neoliberal (1991-2001) to developmental or heterodox economic policy approaches (2001
to present). With the country’s 2001 default on some US$100 billion in government-held debt
and the collapse of the decade-long currency board (which tightly pegged the Argentine peso to
the US dollar) in 2002, the situation could not have looked more bleak. Growth was down by
nearly 11 percent in 2002 and inflation, which had been reduced to single digits through the
1990s, spiked to 30 percent this same year (See table 3). By imposing a unilateral restructuring
on about 75 percent of the country’s outstanding external debt, the government reduced its debt
service burden from 8 percent to 2 percent of GDP.48 This, along with a more competitive
exchange rate and significant financial reforms implemented in the 1990s, set the stage for what
looked to be a modest recovery. However, Argentina’s growth rebounded to nearly 9 percent of
GDP in 2003 (see table 3) and would go on to average 7 percent annually between 2003 and
2011. As with Brazil, in 2003 Argentina suddenly began to thrive under the thrust of brisk
Chinese demand and the resulting high world prices for its main commodities (soya beans and
crude petroleum).
In the decade from 2002 to 2011 China advanced to become Argentina’s second most
important trading partner (after Brazil) and total trade between the two countries had increased
nearly twelve-fold to about US$17 billion dollars in 2011.49 Argentina, moreover, is second only
to Brazil as a destination for Chinese FDI in the 2000s (see tables 1 & 2), the bulk of it
48 Ignacio Labaqui, “Living Within our Means: The Role of Financial Policy in the Néstor and Cristina Fernandez de
Kirchner Administrations.” Paper presented at the Latin American Studies Association Annual Meeting, San
Francisco, May 2012. 49 “China-Argentina Trade, Investment Ties Booming,” Xinhua News Agency (Beijing) 8 May 2013.
20
concentrated in natural resources (e.g., oil, iron, wood, gas, copper, gold and lithium).50 In the
first few years following the Argentine default, the country’s leaders embraced China as a new
political and economic ally now that Argentina had basically frozen itself out of Western capital
markets and IFI relations had similarly cooled. And, although perhaps not to the extent that
Argentina had hoped, China has become a source of alternative financing. First, was the
aforementioned US$10 billion currency swap in 2009 and in 2010 China put up US$10 billion in
loans and rolling stocks to modernize Argentina’s railway system.51 Yet, tensions have
gradually arisen as Argentina has sought (unsuccessfully) to increase the value-added of its
primary exports to China, for example, to ship soybean oil rather than solely raw soya beans;52
moreover, Argentina has filed numerous anti-dumping complaints against China over the past
few years on everything from bicycle tires, to textiles, to shoes.53
When we look at the estimated impact of China on the net export earnings of the four
Latin American EEs analyzed here (see table 4), Argentina appears to be the least vulnerable in
this sense. Nevertheless, we would argue that the importance of China has been paramount for
Argentina in the 2000s. It was, after all, Chinese demand that breathed new life into the
collapsed Argentine economy beginning in 2003. More recently, the investment side of the
relationship has picked up considerably as Argentina now accounts of some 40 percent of
Chinese FDI to the region. On the less favorable side, Argentina’s foreign exchange earnings
from high commodity prices, combined with the burst of FDI from China, has prompted a
populist-style spending spree. Whereas Brazil’s ability to productively invest its windfall
50 Ruben Laufer, “Argentina-China: New Courses for an Old Dependency,” Latin American Policy, vol. 4, no. 1
(2013), pp. 123-143. 51 “China/Argentina: China, Argentina Sign 10-bln USD Rail Deal,” Asia News Monitor (Bangkok) 14 July 2010. 52 Eduardo Daniel Oviedo, “Argentina Facing China: Modernization, Interests, and Economic Relations Model,” p.
26. 53 “Latin America/China: Global Crisis Boosted Trade Ties,” Oxford Analytica Daily Brief Service 15 September
2010.
21
earnings is mostly a matter of dense over-regulation and bureaucratic bungling, Argentina is
engaged in one of Latin America’s more dramatic episodes of capital squandering.
The county’s fiscal and current accounts have deteriorated, double-digit inflation is on
the rise, and the government is now resorting to import, price and capital controls. As of 2010
the government began dipping into Central Bank reserves to cover its expenditures, the result
being a precipitous US$12 billion drop in reserves between 2010 and 2012 (see table 3). At this
current juncture, to speak of Argentina’s competitiveness or even a development model proper,
is a moot point, as the country’s rankings in table 5 indicate. However, thanks to its growing
economic ties with China, Argentina could muddle along with macro-profligacy, high inflation,
and sub-optimal returns for some time to come.54
Chile
As the most open, market-oriented, and trade-dependent of the four Latin American EEs
analyzed here, the negotiation of FTAs has been an integral part of Chile’s development strategy
since the 1990s. Chile was the demandeur in the initiation of an FTA with China, which makes
sense given that China has now become the most important export destination for Chilean
copper. Chile’s request to negotiate an FTA was underpinned, first, by the growing conviction
that domestic producers should be trying harder to export non-traditional and higher-value-added
products to the Chinese market; and second, by the goal of attracting Chinese FDI into efficiency
and market-seeking investments, as opposed to resource-seeking investment limited to mineral
extraction.55
54 Albert Fishlow, “Crying for Argentina,” Foreign Policy 11 March 2013. 55 These insights are based on authors’ confidential interviews conducted in Santiago, Chile during June 2011 with a
range of protagonists in the public and private sectors. Former Chilean trade negotiator, Osvaldo Rosales, offered
particularly helpful insights.
22
In principle, both Chile and China saw eye-to-eye on the numerous merits of the FTA.56
In practice, however, the main focus of the 2006 Chile-China FTA is on the WTO’s “old trade
agenda,” including the quest to liberalize market access for agriculture and labor-intensive
manufactures. Moreover, whereas all other Western Hemisphere FTAs have strong provisions
for increased market access in manufacturing production, China actually agreed to numerous
exceptions and restrictions in terms of its access to the Chilean industrial sector.57 Chilean
negotiators were able to completely exclude 152 “sensitive products” (e.g. wheat, flour, sugar,
some textiles and garments, and some major appliances) from this FTA while obtaining
immediate duty-free access to the Chinese market for 92 percent of its products covered by the
agreement.58 More than 90 per cent of Chile's imports from China are manufactured goods, with
over 42 per cent ranking as medium and high-tech;59 these higher-tech Chinese imports grew by
more than 900 percent between 2003 and 2011.60
The importance of copper and minerals in this agreement is highlighted by the fact that
only six of Chile’s abundant agricultural exports are covered by the FTA: apples, grapes, plums,
chicken products, cheese, and cherries.61 The negotiation of a copper deal between China and
China in 2005 was widely seen as a pre-condition for going forward with the FTA. Under this
deal, China Minmetals Corporation and the Chilean state-owned copper company (Codelco)
established a joint venture with an initial investment of US$550 million that could be expanded
to US$2 billion. This is the first time that Chile has allowed a foreign company to invest in its
56 Stephen Hoadley and Jian Yang, “China’s Cross-Regional FTA Initiatives,” Pacific Affairs, vol. 80, no. 1
(Summer 2007), p. 333. 57 Carol Wise, “Tratados de libre comercio al estilo chino: los TLC Chile-China y Perú-China,” Apuntes: Revista de
Ciencias Sociales, no. 71 (2013), pp. 161-188. 58 Jonathan R. Barton, “The Chilean Case,” in Rhys Jenkins and Enrique Dussel Peters, eds., China and Latin
America: Economic Relations in the Twenty-first Century (Bonn: German Development Institute, 2009), p. 244. 59 Jonathan R. Barton, “The Chilean Case.” 60 Carol Wise, “Tratados de libre comercio al estilo chino: los TLC Chile-China y Perú-China,” pp. 170-171. 61 Evan Ellis, China in Latin America: The Whats and Wherefores, p. 38.
23
copper sector, which accounts for about 37 per cent of world output.62 The new infusion of
capital will enable Codelco to supply China with 55,000 tonnes of copper over a 15-year period,
with beneficial prices to be negotiated periodically. For 2014, for example, Chile set the copper
premium for China at US$138 per tonne, as opposed to the US$198-200 per tonne charged by
other copper suppliers to China.63
While both the US and the EU FTAs heavily emphasize the WTO’s “new trade agenda”
around services and investment liberalization, China’s exceedingly low levels of non-mining
investment and services trade with Chile suggests that the promotion of market- and efficiency-
seeking investments were of less concern from the Chinese standpoint. With Chile’s prompting,
the two governments did sign a “The Supplementary Agreement on Trade in Services of the Free
Trade Agreement in 2008,”64 and in 2012 they completed an agreement on investment. Of note
here are the very few limitations set by Chile in terms of market access for services and national
treatment for investors compared with China’s thick list of restrictions concerning Chile’s access
to its services market, in particular. With Chinese FDI in Chile currently amounting to less than
.02 percent of China’s total FDI (see table 1),65 it seems safe to say that the focus of this FTA on
the old trade agenda will prevail. The bottom line: Chile and China have contractualized a
traditional comparative advantage trade model which shows weak signs of diversifying into a
pattern of more dynamic and competitive exchange between the two countries.
Chile-sign-copper-mining-deal-3423.html. 63 “Chiles Codelco Increases Premium for 2014 Copper Shipments to China,” Global Times 20 November 2013.
http://www.globaltimes.cn/content/826483.shtml#.UpEABXfl7f4. 64 For a summary go to: http://fta.mofcom.gov.cn/topic/enchile.shtml 65 Jude Webber, “Chile and China: No Deals,” Financial Times, 4 October 2011.
24
Douglass North reminds us that path dependence need not be “a story of inevitability in
which the past neatly predicts the future.”66 Rather, in a more positive vein, path dependence
can also be a way to pinpoint the development link between decision-making and policy choice
over time and against a given country’s institutional backdrop. Of the four EEs analyzed in this
paper only Argentina has fallen prey to the path of inevitability in which institutions that
previously provided disincentives to productive activity continue to do so at the present time. In
1991, the size of the Argentine economy was 50 percent that of China’s, but by 2011 it had
dwindled to just 6.1 percent.67 The complementarity of the China-Argentine economic
relationship is such that Argentina’s commodity exports will be in high demand indefinitely,
meaning that the country has a long horizon for muddling through and achieving much less than
is warranted by its rich factor endowments.
Both Brazil and Mexico have moved considerably outside of their traditional
development paths based on import substitution industrialization and financial repression over
the post-World War II era.68 Although the respective routes that each has taken to achieve
macroeconomic stabilization and industrial restructuring are markedly different, the data we have
reviewed here suggest that each has sought to head in the same steady upward direction. The
data in table 6 confirm that Mexico has moved more quickly than Brazil on a competitiveness
agenda, although both trail badly behind China on the majority of policy indicators analyzed in
the Global Competitiveness Report 2013-2014. If anything, the rise of China has confirmed how
much these policies matter: in 1991 Brazil’s total GDP was 107.3 percent the size of China’s, but
66 Douglass North, Institutions, Institutional Change, and Economic Performance, pp. 98-99. 67 Eduardo Daniel Oviedo, “Argentina Facing China: Modernization, Interests, and Economic Relations Model,” p.
17. 68 See Albert Fishlow, Starting Over: Brazil since 1985 and Juan Carlos Moreno-Brid and Jaime Ros, Development
and Growth in the Mexican Economy (New York: Oxford University Press, 2009).
25
just 33.9 percent in 2011; Mexico’s total GDP was 82.8 percent the size of China’s in 1991, but a
mere 15.8 percent in 2011.69
A main response toward China by both Brazil and Mexico has been to raise tariffs
through the roof on Chinese goods coming into these markets. Yet the Brazilian economist,
Alexandre Barbosa, cautions that “China’s ascent cannot serve – as the vague concept of
globalisation once did – as an excuse for fatalistically giving up on national development and
regional integration. On the contrary, it makes these policies more urgent than ever.”70 Clearly,
the reform lag in both countries confirms that there still exist “disincentives to productive
activity” in each.71
Whereas Brazil and Mexico are still struggling against the “inevitability” of sub-optimal
economic performance, Chile has stuck firmly to the open-economy, macro-prudent
development path that it embarked on some forty years ago. It is also the only EE analyzed here
that has taken a proactive stance toward the China phenomenon. The stakes for Chile are high:
table 4 showed how the estimated impact of China on its net export earnings could range
somewhere between 28.8 and 47.8 percent, an exposure that is at least three times higher than for
the other three EEs in table 4; the asymmetries are such that Chile’s total GDP in 2011 was 3.4
percent that of China’s.72 In 2000-05 the government’s income from copper mining averaged
$2.1 billion a year; as Chinese demand accelerated, that rose to $11.5 billion a year between
2005 and 2011.73
69 Eduardo Daniel Oviedo, “Argentina Facing China,” p. 17. 70 Alexandre De Freitas Barbosa, “The Rising China and Its Impacts on Latin America,” p. 22. 71 Douglass North, Institutions, Institutional Change, and Economic Performance, p. 99. 72 Eduardo Daniel Oviedo, “Argentina Facing China,” p. 17. 73 “The Mining Industry has Enriched Chile, but Its Future is Precarious,” The Economist 27 April 2013.
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