The US may be involved in trade wars, but the rest of the world is not. As China expands its presence in Latin America, so should we.
Anyone who has been following the global trade and economy news over the last couple of months must have noticed allegations, tit-for-tat tariff implementations, infighting between developed nations, and growing anxiety among the developing countries led by China. No one knows how the events will play out as the year unfolds. Announcements, allegations, counter-allegations and feisty negotiations among the many countries under looming elections are ongoing. ‘Trade’ is the new face of the conflicts among nations.
You have the world’s most powerful country, the United States, playing the victim card, ranting about how unfairly it has been treated by its trading partners for all these years. Donald Trump has consistently criticized all-weather allies such as Canada and the European Union, along with Mexico and China, railing against their trade surpluses with the United States. He says other countries cannot take the US for granted anymore. In his effort to find that elusive ‘better deal’ with America’s trading partners, he may achieve better optics among his own constituency for upcoming mid-term elections in November. But he will risk a great deal of instability among many regions of the world that have traditionally relied upon the US as a bellwether of stability and policy continuity.
Rhetoric on trade across many of these other countries may then take a cue from the oldest democracy and its slogan of ‘American First’. There might still be hope for a more globalized world to follow a rule-based order, with or without an active participation of the US. Recent bilateral trade agreements under discussion, including agreements such as TPP, give an optimistic signal for an increase in global trade. The European Union, the United Kingdom and Australia among developed countries have gone ahead to negotiate bilateral and regional trade agreements that do not include the US, or have continued negotiating a trade agreement even after US pulled out. On other hand, emerging economies from China to Peru have negotiated trade agreements and kept the global trade relevant. The world is indeed moving, with or without the United States.
China’s investments in Latin America
Let’s look closely at what is happening around trade developments in Latin America. Following on from my piece on Latin America and trade opportunities for India, this is a good time to take stock of the region and China’s influence. NAFTA negotiations between the US, Mexico and Canada have been undergoing now for several months with no clear winners. Mexico has an interest in a favorable outcome before its general elections in July, since the new government will become more hard-line on the trade agenda, even when the US itself is looking at its own mid-term elections. Trump wants to project himself as the sole winner from these trade deals. He has threatened both Mexico and Canada in the past, but the two trading partners aren’t looking to let Uncle Sam intimidate them, at least not yet, due to the sheer difference in the size of their economies.
The economic prospects of the Latin American region are not very bright in the near future. Brazil and Mexico both are part of the BRICM (others being Russia, India and China) grouping, which was once considered a shining light among the emerging market economies. With most key Latin American countries looking at a low-single-digit GDP growth, inflation is surging in Argentina while the Venezuelan economy is in turmoil over the past few years. Venezuelan inflation is so high that it reminds one of the Zimbabwean crisis. Consistent with the current political phenomenon over the past few years globally, Latin American is set to take its chances when it comes to populism. Brazil and Mexico are likely to elect a populist government. Colombia for now may have a more centrist one.
China, whose trade with Latin America has grown nearly 200 percent over the past decade, is now looking to grow its clout in the continent. The Chinese state-owned Bank of China has made a foray into Chile, and plans to further open up in countries such as Argentina and Brazil. It is already in talks to help the Argentinian central bank with a US$5 billion swap line, over and above the $50 billion loan the country recently secured from the IMF. Mexico may be one of those big Latin American countries still not heavily influenced by China, but the next likely President of Mexico, Andres Manuel Lopez Obrador, and his team are cozying up with Chinese for a significant partnership in the years ahead. We can understand the FDI flows from this 2017 report by Atlantic Council in collaboration with OECD Development Centre, titled ‘Chinese FDI in Latin America’.
Chinese FDI in Latin America by Country (2003 to 2016)
The Chinese have invested nearly USD 110 Billion over the past 15 years, most of which came in the last five year period. Out of this more than half the investment has gone to Brazil alone. Interestingly, China has invested in Brazil during a time when others have shied away from the market, due to its political and economic instability. The chinese have been smart in buying assets when they are cheap, during the troubled times in some of these nations. What also seems to be changing over the years is the quality of Chinese investments in the Latin American markets. Below is the trend in their investments across industries.
Chinese FDI in Latin America by Industry (2003 to 2016)
Earlier, investments were primarily focused on the extractive sectors of mines and minerals, which fed into the global supply chain of resource-guzzling Chinese manufacturing industries, and for domestic consumption. Gradually, the Chinese are acquiring more assets in these countries to have a better influence by investing in services sectors, such transport, finance, electricity, information and communications technology (ICT), and alternative energy. This sectors make up nearly 50 percent of its investments now, allows it to have a better influence today, than the earlier perception of it exploiting host countries.
One must also take into account that the lower American influence in this region, or anywhere else around the world, will only augur well for the Chinese trade expansionism. Latin American countries such as Chile, Peru and Costa Rica have lower FDI restrictions even by Latin American standards, which means that China will eye more investments in these countries over the next few years. Nearly 80 percent of foreign investments in Latin American countries are made by Chinese State Owned Enterprises (SOEs), whereas 10 percent of Latin America’s exports head for the ports located in China. Most big Latin American countries have much less inward FDI restrictions when compared to the Asian giants, India or China. And China has moved very fast in these Latin American markets since 2000, with nearly USD 140 billion in financing till 2017, largely to the oil and gas industry of Latin America.
How should India grow in Latin America?
India should learn from the Chinese experience in the Latin American region. It should balance its investments in the continent so as to secure its domestic energy and agro demands through this market. But equally important for it is to make investments which create jobs that are beneficial to host countries of the region. A study found that when these Latin American countries exported to China, for every USD 1 million worth of exports, nearly 20 percent less jobs were created, compared to Latin America’s global exports for a similar export value.
So Indian investments should allow value generation in these countries with the dollars it plan to spend, and not leave them environmentally worse off with their investments like the Chinese. Over a long period of time, this affects trade, business and people sentiments towards such exploitative nations. Indians have experienced it firsthand under colonial rule. True, India has its own challenges in creating enough jobs domestically. But in a globalized world, trade is imperative with other countries, and it is in one’s own domestic interests to have a long-term strategy that is mutually beneficial.