The China Syndrome

The rise of China has created an unprecedented demand for Latin American and Caribbean exports, which has helped boost the region’s growth for almost a decade. But ultimately, such export growth may not be sustainable. Perhaps even worse, Chinese manufactured goods are more competitive than those from Latin America in both home and world markets. These twin trends may jeopardize prospects for long-term growth in the region.
Yet what China contributes to economic growth in Latin America may be balanced with policies to mitigate the more concerning impacts of China’s rise in Latin America – such as job losses, environmental degradation and deindustrialization.

DIVERGENT PATHS
China and the Latin American-Caribbean region began to implement economic reforms within a few years of each other; China in 1978, much of Latin America in 1982. In 1980, the collective economic output of Latin America and the Caribbean was seven times that of China – 14 times greater on a per-capita basis. Nearly 30 years later, China had pulled ahead, with gross domestic product of $2.7 trillion in 2008 versus pan-regional GDP of $2.6 trillion in Latin America. Over the three decades, China registered a robust annual economic growth rate of 8 percent. The average annual rate in Latin America has been a more modest 3.8 percent. Between 1980 and 2008, GDP per capita increased by 6.6 percent annually in China, while in Latin America, per-capita GDP edged up by a mere 1.7 percent annually during years that were marked by crises and volatility.
Boom times in China have been indisputably good to Latin America, whose exports to the Asian powerhouse more than tripled between 2000 and 2007, far outpacing the region’s overall exports, which increased by 62.5 percent over the same period. However, the windfall was not widely shared: five countries generated 85 percent of all regional exports to China. Of that amount, metals, including iron and copper, accounted for nearly half, highlighting how the China factor was limited to certain sectors (see chart, page 18).
Between 2000 and 2007, China’s burgeoning industries and infrastructure absorbed half the increase in global iron ore exports while the country accounted for nearly 58 percent of additional soybean exports. Beyond creating a new, hungry market, China’s voracious appetite resulted in higher prices for these Latin American raw materials and agricultural outputs in markets around the world.
China buys 75 percent of the world’s soybean exports. Nearly half of Brazil’s soybean production is exported to China. Argentina supplies three-fourths of all soybean oil to China.
Latin America and the Caribbean have a comparative advantage in primary commodities. But this advantage may not translate into longer-term, dynamic benefits. And relying on one country as an export market can create vulnerabilities.
In Argentina, which supplies both soybeans and oil, soy farmers were up in arms over the loss of access to the China market. The Asian country canceled soy oil imports in the spring in retaliation after the Argentine government took measures to block imports of manufactured goods amid questions of dumping.

UNANTICIPATED CONSEQUENCES
Another policy problem for Latin America stems from the dire social and environmental consequences that are the result of commodity-led economic growth. For example, between 1995 and 2009, Brazilian soy production quadrupled. At the same time, related employment shrank as cultivation became highly mechanized. Moreover, increased demand for soy has been linked to the deforestation of some 528,000 square kilometers in the Brazilian Amazon.
In our recently published book, “The Dragon in the Room: China and the Future of Latin American Industrialization,” co-author Roberto Porzecanski and I calculated that nearly all of the exports from Latin America and Caribbean are under threat from China. By threat, we mean those products in global or home markets where China’s market share is increasing while the market share of Latin America and the Caribbean is either decreasing or increasing at a slower rate.
We found that 94 percent of manufacturing exports from Latin America and the Caribbean are facing this threat. These products represented 40 percent of all regional exports in 2006, and are collectively worth more than $260 billion.
Mexico is most vulnerable, with 99 percent of its manufacturing exports – which represent 72 percent of the national export base – under threat from China. More than 90 percent of manufacturing exports from Brazil and Argentina also are threatened, but those goods account for only 39 percent and 27 percent of their total exports, respectively.
Central America, one of the poorest sub-regions in Latin America, is of particular concern. In the 1980s, most of the countries in this region established processing zones that assemble apparel for export into the United States. By 2001, such zones generated 87 percent of all Salvadoran exports to the United States, 78 percent of those from Honduras and 63 percent for both Guatemala and Nicaragua.

LOSING THEIR SHIRTS
As recently as 2001, China and Central America were on par, with each selling about $6.5 billion worth of apparel to the United States and each holding a 12 percent share of the American apparel market. In 2004, Central American clothing exports to United States had risen to $7.5 billion, while those from China, whose entry in to the World Trade Organization was under way, had jumped to $10.7 billion.
In 2005, the capstone of this relationship, the Central American Free Trade Agreement (CAFTA) took effect. By lowering tariffs and locking in access to the U.S. economy, CAFTA was supposed to solidify Central America as a clothing hub. Instead, clothing exports from Central America plunged 25 percent from pre-CAFTA days to $5.6 billion in 2009. Their share of American apparel imports has slipped to 8.7 percent while China enjoys a commanding 38 percent share.
The news is not much better for intraregional trade. For instance, Latin America absorbs nearly 70 percent of Argentina’s manufacturing exports. By our calculations, in 2006 two-thirds of Argentina’s exports were under threat from China.
China is not necessarily to blame. These trends are largely the result of policies taken by Latin American countries. Many had adopted “shock therapy” or the “Washington Consensus.” Governments rapidly liberalized trade and investment regimes and reduced the role of the state in economic affairs, often through privatizations that, in a number of cases, went painfully awry. China has taken a more gradual approach to integrating with world markets.
All is not lost. The additional revenue generated by exports to China may provide new sources of funds for stabilization programs, such as those implemented by Chile, which can help individual countries. Stabilization funds could invest in environmental programs to mitigate the negative effects of commodity-driven growth, and, perhaps most importantly, in programs to boost industrial competitiveness.
China’s position as the leading globalizer in the developing world is tied to its one-party political and economic system. For the nations of Latin America, crafting and implementing new strategies will demand taking the long-term perspective, one that can be politically difficult considering how contemporary democratic decision-making is often wed to electoral cycles.

Kevin P. Gallagher is an associate professor of international relations at Boston University, where he directs the Global Development Policy Program. He has co-authored with Roberto Porzecanski, a Uruguayan political economist, “The Dragon in the Room: China and the Future of Latin American Industrialization.”

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