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For Latin America, China's Boom Should Neither Scare Nor Seduce

Chinatown in Buenos Aires
Chinatown in Buenos Aires
América Economía

SANTIAGO - It was revealed a few days ago that, by the end of this year, the fastest computer in the world will be running in the National Supercomputing Center in Guangzhou, China. Under the name of Tianhe-2 or Milky Way-2, the machine is the result of a joint private sector and state undertaking made up of a local enterprise, Inspur, and the National University of Defense Technology.

This is a great achievement given that the rate at which it works (54,9 petaflops) almost equals the combined speed of the 500 fastest computers in the world in 2011. Today, within this list, the fastest single machine belongs to the U.S. Among the 100 fastest, five are Chinese and only one is Latin American (held by Petrobras). If we extend the comparison to the top 250, China has 20 and our region only two (again the contribution is Brazilian and belongs to the Brazilian National Space Research Institute).

Supercomputers are not only used for matters of defense or climate prediction, but also in banks, oil, automotive, and Internet companies. The unstoppable rise of China in these sectors shows the Asian nation's undeniable ambition to be No. 1 across a wide spectrum.

This, of course, also includes trade. In what way can Latin America benefit from China's ambitions? What is in the region's best interest? Chinese leaders, for sure, are not the ones who have the right answers to these questions.

China already knows what it is looking for in the region: cheap raw materials and faithful buyers to their ever-improving manufacturing. This means that Chinese President and Communist Party leader Xi Jinping’s recent visit to Trinidad and Tobago, Costa Rica, and Mexico was much more than a simple tour promoting commerce. From the start, a Chinese analyst crudely put it this way: “They (the United States) come to our backyard. We go to their backyard.”

Nobody doubts that there were geopolitical intentions to the visit. Even so, stopping by Trinidad and Tobago might have had more to do with commercial aims given that this nation is a great producer of oil and gas, and China is always anxious to diversify its energy providers.

Mexico is a former competitor who has become a great customer (and emerging exporter), as well as, a nation with a long record of political autonomy on the world stage -- so both business and political intentions mix.

The Cuban exception

However, China is relevant to Central America and the Caribbean given the smallness and weakness of these economies and the fact that Mexico will naturally tend towards having stronger political and commercial ties with the United States and Canada in particular.

There is one exception in the area: Cuba. Beijing can exert economic and social influence, impossible for Washington, to promote further liberalization and sophistication of its economy. Chinese enterprises in the agricultural sector could, for example, help boost Cuban productivity.

Furthermore, it is in South America where the relationship with China is full of consequential opportunities and wider risks. In the last decades, the bilateral commerce between the region and China has expanded 20 times over. The most favored nations have been the Andean and those in the Southern Cone. According to figures from 2010, the explanation is simple: the Asian giant has become the main importer of iron (60.5%), soybeans (58%), metals (32.7%), and copper (27.5%) of the world.

An interesting analysis of trade between China and Latin America, conducted by the Hong Kong office of BBVA, noted that Chilean exports to the East Asian nation accounted for 9% of its GDP. This ratio falls to 2% in the cases of Argentina and Brazil. This is due to the lower impact of international trade on these two countries’ economies (with relatively surprising evidence that the Brazilian economy has an exposure to international trade of 9% compared to Argentina’s 18%).

In fact, in strict terms based on 2002-2007 figures, Professor Rhys Jenkins of the University of East Anglia in the UK estimated that Chinese demand contributes only 0.34% to Chile’s annual GDP growth. This figure falls to 0.05% in Brazil and 0.02% in Argentina.

The conclusions for the BBVA are obvious: the claim that China has saved Latin America from the effects of the financial crisis are exaggerated -- it is instead domestic demand that sustains growth. However, this analysis does not take a fundamental fact into consideration: in a world where the United States and the European Union demand less of everything, only powerful Chinese growth explains and sustains the aforementioned high prices of commodities. As such, China has indeed saved Argentina, Brazil, Chile, and Peru at least from stagnation.

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Shoe Factory in Las Flores, Argentina - photo: Administración Nacional de la Seguridad Social

Therefore, the fact that there are now four buyers rather than the three traditional ones (U.S., EU, Japan) is very good news for South America. The bad news is that the pattern of sales of raw materials and de-industrialization is on the rise. It is not China's fault, but a mix of the price effect (of commodities), local currency devaluations, and a political blindness that goes from left to right and leads to very poor cooperation between the private sector and government to drive innovation in cutting edge areas.

Lessons from Africa

Is there a way out? Yes, according to Osvaldo Rosales and Mikio Kuwayama’s “China and Latin America and the Caribbean: Towards a strategic economic and commercial relationship.” Groups of countries in the region should negotiate with China frankly and openly discuss how to achieve better integration into value chains forming inside the country. At the same time, they must look for a smart way to encourage Chinese investment in the very areas that could improve local productivity and diversify economies, including energy, infrastructure, and technology.

Not doing so would mean that, when China's demand slows or it finds cheaper economic replacements, South America risks having Mexico’s relationship with that nation where imports heavily outweigh exports.

Latin America should not be naive about China. In these parts, Beijing is looking for more than insuring a supply chain, or finding a destination for their capital surpluses. For now, Chinese enterprises are very good clients. We shall see if the current bounty evolves into a long-term commercial partnership.

When it comes to investment, Chinese activity in Africa has not been entirely rosy. Beijing has no shame in partnering with and supporting regimes hostile to the most basic freedoms and dignities. As a result, how the Latin America-China relationship projects itself in the long run will also depend on whether or not there is the possibility of sharing common values. Even though our region must respect China’s particular history and not be frivolous about its values, Latin America cannot delude itself into taking on, as an integral, strategic partner, a giant that considers political and civic liberties a disposable good. Or even an outright risk.

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