China's growing influence on the Latin American economy
In recent decades, China’s impact on global growth has showed no signs of waning; this was especially evident in the years following the global financial crisis. In fact, the country's influence on Latin America is growing stronger by the year, and this is due primarily to three main factors.
In the year 2000, the Asian giant represented 3.6% of global GDP; in 2016 this number reached 15% and China claimed the title of the largest industrial and agricultural producer in the world. This boom has not only caused a radical transformation within the most populous country in the world, but since the turn of the 21st Century it has also greatly impacted economies as far away as Latin America.
1. Bilateral Trade
Bilateral trade has been the main growth driver in Latin America, thanks to hefty demand from China that caused raw materials prices to skyrocket. Starting in 2014, however, the economies of developing countries cooled and the value of trade between Latin America and China dampened for three consecutive years. The situation turned around in 2017 when Latin American exports returned to growth with a 25% increase, nearly reaching the historical high of 2013, according to the report Exploring new areas for cooperation between Latin America and the Caribbean and China from the Economic Commission for Latin America and the Caribbean (ECLAC).
Although trade with China has strong growth driven by an increase in fuel prices and certain basic products, it continues to be considerably deficient. CEPAL projects that 10% of the exports of Latin American goods in 2017 were destined for China, while 18% of imports into Latin America originated in the Asian country. If this trend continues, China will surpass the European Union as the second biggest buyer of Latin American products after the United States, which has already lost its position as main exporter to Latin America.
Looking more closely at the region, the Caribbean, Central America and Mexico in particular have large trade deficits with China, while South America’s trade balance is nearly balanced. The only countries with trade surpluses are Brazil, Chile, Peru and Venezuela. This is because these countries export their raw materials, which represent 26% of all agricultural imports to China. Beyond the strong export data, the composition exports is not so encouraging since trade with China continues to be basically comprised of raw materials for manufactured products.
2. Foreign Direct Investment
Another way the Chinese economy is influencing the region is via external investment. While in 2016 Foreign Direct Investment (FDI) in Latin America fell sharply, in the same year China became the second largest investor in the region after the U.S., and in 2017 China represented around 15% of total FDI. That said, new Chinese acquisitions are primarily focused in just a few sectors, such as energy and mining, which indicates that China’s strategy in the region is centered on natural resources and the energy supply market, at least for the time being. Argentina, Brazil and Peru are the biggest beneficiaries, having received more than 80% of overall Chinese investment since 2005.
3. Economic Financing
The third of the three main ways in which China is influencing the region’s economy is through economic financing. According to the ECLAC report, the main recipients of financing were countries with significant hydrocarbon deposits: Venezuela, Brazil, Ecuador and Argentina (in that order). Most of these loans were awarded for developing infrastructure, hydrocarbon extraction and energy generation and distribution.
ECLAC has noted that, during the first meeting of the China-Latin American and Caribbean Countries Cooperation Plan (2015-2019) that took place in January 2015, both parties expressed their intention of doubling commercial trade by the year 2025. The ECLAC report highlights that while expanding trade is an important aspect for the region, it will not solve "the significant deficiencies that characterize commercial relations between the two parties".
*Guest blog post from Latinoamerica21
Jeronimo Giorgi, a Uruguayan journalist dedicated to international issues, is pursuing a master's degree in Latin American Studies. He has collaborated with various media outlets in Latin America and Europe, and has received distinctions such as the Premio Rey de España for Journalism.
Latinoamerica21 is a blog about current economic, political and social topics in Latin America that is currently published within the newspaper El Observador de Uruguay and Pagina Siete in Bolivia, and will soon be published in other media outlets within the region. The original version of this blog post is available in Spanish: La creciente influencia de China en la economía de América Latina.
*Guest blog posts do not reflect the views of FocusEconomics.
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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.
Date: January 26, 2018
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