China and Latin America Magic, or realism?

Dec 29th 2004 BUENOS AIRES
From The Economist print edition

China and Latin America can help each other, though some claims made for the “China effect” are more fantasy than fact

IN SOUTH AMERICA, the Spanish expression cuento chino—literally a “Chinese story”—means a fairy tale or a fantasy. Is it too harsh a way to describe the recent talk about a blossoming trans-Pacific partnership, linking a confident, commodity-hungry China with a continent in search of new friends?

As fantasies go, this is certainly a powerful one, and it does have some basis in hard reality. But an element of make-believe is never absent either. On a visit to Beijing in December, Venezuela's President Hugo Chávez (above, left) told some tallish tales about the revolutionary spirit linking his nation and his hosts. Unveiling a statue of the (quite conservative) Simón Bolivár, who led Venezuela to independence, Mr Chávez called the anti-colonial hero a soul-mate of Mao Zedong, and noted the “great similarities” between the revolutions they led. To mark this brotherhood, Mr Chávez added, China would invest heavily in Venezuela's oil sector, while bilateral trade would hit $3 billion in 2005, more than double the 2004 figure.

None of this changes the fact that the United States will remain the biggest customer for Venezuelan oil. But the heady atmosphere of the Venezuelan leader's Chinese Christmas was only the latest in a series of spectacular displays of Sino-Latin solidarity. China's President Hu Jintao visited Argentina, Brazil and Chile in November—and promised to lay out tens of billions of dollars on improving the region's infrastructure. He also vowed that China's imports from Latin America—already showing an impressive rise (see chart)—would grow even faster; and he added Argentina and Brazil to China's list of approved tourist destinations. In Peru, meanwhile, tour-guides at Inca sites are brushing up their Chinese in anticipation of a huge influx of visitors.

What did Mr Hu get in return? Most obviously, a big diplomatic concession: his three host countries agreed to recognise China as a market economy, a move which makes it harder to bring anti-dumping charges.

All over Latin America, meanwhile, there have been eager predictions of a massive boost to employment and economic growth, thanks to a new benefactor who could supplant, at least in part, the role played by American-dominated financial institutions and America itself.

On inspection, the agreements signed by Mr Hu on his tour do not quite amount to the money on the table for railways, housing and oil exploration which some Latin Americans expect. What China's president signed were “letters of intent” for work in these areas: “the first two minutes of a two-hour movie,” says Juan Llach, an economics professor at IAE Austral University in Buenos Aires.

The film could still be worth watching. It is true that the economies of China and South America are in some ways complementary. With galloping GDP growth and a scarcity of arable land, China's appetite for natural resources and farm products seems insatiable, and South America has both. China's imports from the region, primarily soy products and minerals, have nearly trebled since 2002.

If China is now offering to boost the continent's infrastructure, that reflects something more than just philanthropy or diplomatic opportunism. As many a European coloniser found, procuring goods from distant lands is harder when basic facilities—ports, roads, docks—are inadequate. If Latin America's are improved, China can buy more and faster.

The Latin countries, naturally, are looking forward to the promised spike in trade: an “understanding” between China and Argentina calls for a rise in Argentine exports from $3 billion to $7 billion over five years. And almost any big foreign investment would be a boon to Argentina, abandoned by capital markets after a default three years ago.

But despite the triumphant handshakes between Mr Hu and his Latin counterparts, nobody is sure whether China's financial assistance will really amount to investment in the ordinary sense. According to Miguel Broda, from an Argentine think-tank, Estudio Broda, the ultimate deals are unlikely to take the form of direct capital outlays by Chinese companies, on the lines of Victorian Britain's railway-building ventures in Argentina. Instead, China may offer a “tied loan”, at very low interest rates, for projects whose execution is then assigned to Chinese state enterprises. Some way would have to be found to bypass an Argentinian law that mandates open bidding for state contracts.

Is it worth the trouble? Already, some doubts have been aired. As Andres Cisneros, a former deputy foreign minister of Argentina, has argued forcefully, “we would remain indebted for decades and decades, to pay back loans tied to direct awards to foreign corporations chosen by mere government functionaries [...when] other businesses could have done the same job on better terms.”

Even if China's commitment does take the form of real capital investment, some see it as a mixed blessing. As any anti-colonialist can tell you, investment that focuses heavily on extracting raw materials can be frustrating for host governments that want to boost skills and employment, and to add value locally—even though it hauls in some tax and foreign currency.

China, of course, needs raw materials for its own value-adding industries: hence the fears of some Latin American trade unionists, and industrialists, that a closer relationship with the Chinese will simply help them to compete in the world market in manufactures. Among the Andean states, there are fears that their textile sales to America will lose out to China's as the world textile trade deregulates this year.

Brazil in particular could be compromised by Chinese competition in sectors such as cars, according to a recent Inter-American Development Bank report. Sensing such a risk, Brazilian industrial groups nipped in the bud some recent discussions about a Brazil-China free-trade agreement. Many Latin Americans feel their hand would be strengthened if they bargained with China as a block. In the words of Felix Peña, an Argentine ex-minister: “They can just take advantage of the divisions if we are not working together.”

As Mr Llach sees things: “Together, perhaps in exchange for market-economy recognition, we could have sold them not just soybeans but oil in bottles to sell in the supermarket.” Putting oil in bottles sounds a great deal better than conjuring genies out of lamps.

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