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China Slowdown Doesn’t Weaken Latin America

China's trade with Latin America should continue at impressive levels despite a slower Chinese GDP expansion, experts predict.

Inter-American Dialogue 

“As China's leaders know, the country's current economic growth model is unsustainable," World Bank president Robert Zoellick said Feb. 27 at the release of a new report from the bank and a Chinese state-controlled think tank, the Development Research Center. After three decades of fast growth, China must reduce the government's role in the economy and support free markets if it is to become a high-income country, the report said. How would the report's recommendations, such as opening state-dominated sectors to competition from private companies, affect China's economic and business relations with Latin America? How would slowing Chinese growth affect Latin America, and which industries in the region would experience the greatest impact? What measures should Latin American countries take to protect themselves from slower Chinese growth?    

Erik Bethel, managing partner at SinoLatin Capital in Shanghai: For decades, China been opening its state-dominated sectors to private companies. Outside of defense and other obvious industries, there are few sectors in China today where the private sector is not in competition with state-owned enterprises. China's economic and business relations with Latin America are built on fundamental needs on both sides. China needs to buy commodities as it develops its middle class. Meanwhile, Latin America needs to sell commodities in order to grow. These needs bind China and Latin America (as well as Africa and other commodity-rich regions) and they transcend whether or not a company is state-controlled or not. It used to be said that when the United States caught a cold, Latin America developed pneumonia. Yet something interesting happened during the 2008-2009 financial crisis. The United States and Europe got into serious trouble, and what happened in Latin America? Did Brazil default on its debt obligations? Did Mexico have a peso crisis? No, on the contrary. Latin American economies actually grew and their currencies appreciated. The reason is straightforward: China buys a lot of Latin America's commodities and the region's economies grow as a result. Last year, Brazil's soy crop was a record 75 million tons and most of it went to China. In 2011, Chile and Peru sold roughly 2.5 million tons of copper concentrate to China-a figure that accounted for more than 40 percent of China's imports. The story is the same in iron ore, oil, zinc and a host of other commodities. In short, Latin America is feeding China's appetite for natural resources. If China has a serious slowdown-a hard landing, so to speak-Latin America could be in big trouble. But in the unlikely event that this happens, it's not just Latin America that should be worried.

Antoni Estevadeordal, integration and trade sector manager at the Inter-American Development Bank: The story of Latin America-China economic relations has largely been about the power of resource complementarities. China's enormous demand for natural resources and abundance of cheap labor has driven a booming commodities-for-manufactures trade. This has been a boon for resource-rich Southern Cone countries, but, elsewhere in the region, Chinese competition has meant lost market share. While domestic reforms and slower growth in China could change things on the margins, they seem unlikely to alter the basic view across the Pacific for LAC. Even with moderate growth, we can expect China's demand for raw materials such as soy and copper to continue to increase (from already high levels) for years to come. At the same time, the emergence of India and other Asian economies reinforces the dual trends of strong demand for food and minerals and growing supply of cheap manufactures. Still, the region has an important opportunity to diversify and add value to its exports to Asia and China in particular, within the overall pattern of commodities-for-manufactures trade. Here, reforms on China's part would be helpful. Lowering tariffs, especially the escalating tariffs imposed on many agricultural products, and reducing the power of state-owned enterprises would create opportunities to add value to LAC exports and find niches to export more manufacturing goods. Regardless of China's course, the region should focus on diversifying its exports (goods and services) and increasing its competitiveness by raising the quality of education, investing in research and development, and improving infrastructure. Taking these steps will ensure LAC is well-positioned for both the challenges and opportunities associated with China's future growth. 

Sun Hongbo, associate professor at the Institute of Latin American Studies of the Chinese Academy of Social Sciences in Beijing: China's economy has come to another crucial turning point and is in urgent need of comprehensive and significant reforms. If China's private capital could enjoy increasing market participation in more domestic sectors, it would become another force to enter Latin America through governmental policy incentives. Latin American companies could also find Chinese partners to explore the biggest Asian market. In the past few years, China's private capital influence has been very small in Latin America, while the country's state-run companies have been the dominant purchasers of primary commodities and the heaviest investors in the region. Premier Wen Jiabao's lowering of China's 2012 growth to 7.5 percent increased suspicion about the sustainability of the Chinese miracle. In the short term, a decrease in imports to China could affect some sectors in Latin America, such as minerals. But that does not necessarily mean Sino-Latin American economic relations would be weakened. China will continue to make incremental contributions to the region's growth. China's development means higher domestic consumption for foodstuffs and higher demand for agricultural products from South America. The rising trend toward more Chinese investment in Latin America will not change, and Chinese financial institutions will also be able to provide loans to consolidate bilateral economic relations. If China's model is not sustainable, neither is Latin America's. Latin America also must deepen institutional reforms for poverty reduction, building infrastructure, improving education, making public service more efficient and boosting investment in research and development. Fortunately, Argentina, Brazil, Peru and Chile have geographically diversified their trade with Asia, Europe and the United States. What is more important for China and Latin America is innovating cooperation models in high-tech value-added sectors in order to climb to the high end of global production chains.

Gonzalo Gómez T., tax partner at Galaz, Yamazaki, Ruiz Urquiza, S.C., member firm of Deloitte Touche Tohmatsu Ltd. in Mexico: Although it is expected that China will keep growing above 7 percent this year, the 'Year of the Dragon' will be marked with immense challenges to the country's government as well as opportunities for companies that can identify China's needs. A large manufacturing base will have to find a way to keep gaining share in mature European markets with slow growth. Also, there is increasing competition on costs from neighboring Asian countries. Small- and medium-sized companies lack access to capital and there is a developing domestic market with higher industry standards. Under this scenario, the economic outlook for China's trading relationship with Latin America should be neither uncertain nor complex. China's hunger for mining and metallurgical resources will keep growing. In 1992, China was producing a little more than 1 million vehicles a year. In 2009, it produced almost 14 million vehicles. In 2011, total bilateral trade between Mexico and China reached more than $50 billion, growing at more than a 45 percent compound annual growth rate. Trade and investment between China and Latin America also kept evolving tremendously while maturing to include non-resource sectors such as manufacturing. In 2009, while Latin America's export to the United States and Europe contracted by 26 percent and 28 percent respectively, exports to China grew 5 percent. These figures only represent the tip of the iceberg and that there are vast unexplored business opportunities between Latin America and China.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter


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