Latin America’s external relations have historically been shaped mainly by the region’s relationships with the US and Europe.
In contemporary times, China has been interested in the region since the cold war. Until the late 1990s, relations between Latin America and the Caribbean (LAC) and Asia were relatively limited, with the notable exception of Japan, which had established strong diplomatic, trade, economic and development ties with several countries in the region, particularly Brazil, Mexico and Peru.
More recently, other Asian countries such as India and South Korea, and some countries belonging to the Association of Southeast Asian Nations, such as Vietnam, have begun to develop closer relations with LAC.
It is especially in the past two decades that Asian countries, and first and foremost China, have begun to play a more important role in the foreign relations of Latin American countries. China’s political engagement with Latin America since the early 2000s has been based on its strategy of so-called ‘south-south’ or ‘mutually beneficial’ co-operation.
The narrative of ‘respect for sovereignty’ and ‘non-interference’ globally advocated by Beijing in its diplomacy converged with the economic and political interests of leaders of the ‘New Latin American Left’ (such as Hugo Chávez in Venezuela, Lula da Silva in Brazil, Evo Morales in Bolivia or Rafael Correa in Ecuador). Although these leaders were wary of jeopardising their privileged trade relations with the US, they were drawn to the idea of a bilateral rapprochement with Beijing that could reduce their dependence on the US market.
Over the past two decades, China has emerged as a key trading partner for Latin America. Compared to the US and the EU, Latin America’s bilateral trade in goods with China grew dramatically in this period, from $14.6bn in 2001 to $315bn in 2020 — a 21.5-fold increase since Beijing joined the World Trade Organization.
During the same period, trade in goods between the US and Latin America almost doubled from $364.3bn to $758.2bn, as trade in goods between EU countries and Latin America doubled from $98bn to $197.4bn.
This increase has allowed China to become the most important export market for South America and the second-largest trading partner (in goods) for Latin America as a whole, after the US, far ahead of the EU.
China is also expanding its financial footprint in Latin America. Since 2005, the country’s two main policy banks — China Development Bank and China-Export Import Bank — have provided more than $141bn in loan commitments to LAC countries and state-owned enterprises; this is more than the World Bank, the Inter-American Development Bank or the Latin American Development Bank. These mainly concern four countries (Argentina, Brazil, Ecuador and Venezuela), which account for almost 93% of the total commitment. Most of these loans were spent on energy (69%) and infrastructure (19%) projects.
In total, Latin America was the recipient of 24% of the loans granted by Chinese official institutions worldwide between 2005 and the end of 2021, ranking behind Asia (29%) but ahead of Africa (23%) in terms of geographical destinations.
Unlike the international financial institutions, Beijing does not attach governance and project feasibility standards to its loans. China thus acts as a lender of last resort for countries that have lost the confidence of traditional international lenders.
However, Chinese contracts contain special confidentiality clauses and ensure repayment priority over other creditors. According to a recent study of 100 Chinese loan contracts, many loans have inbuilt collateral mechanisms, such as Chinese-controlled revenue accounts. In this scheme, profits from the sale of commodities by a debtor are deposited in an account controlled by Beijing. They serve as collateral for the loan.
This is the case, for example, of the $1bn oil-backed loan granted in 2010 by the China Development Bank to Ecuador. More problematically, this loan contract also contains policy change clauses that allow China to cancel a loan if the debtor country undertakes policy changes “unfavourable to any [Chinese] entity in the borrowing country”.
These clauses constrain Ecuador’s ability to adopt domestic policies that could negatively impact Chinese interests. They put pressure on the country to maintain positive bilateral relations with China, as a default on the loan could trigger a series of punitive measures, such as cross-defaults on other Chinese loans to the country or mandatory prepayment of the defaulting loan. In addition, several of the China Development Bank’s contracts with Argentina also include so-called ‘No Paris Club’ clauses, named after the Paris Club’s (a group of officials from major creditor countries whose role is to find co-ordinated and sustainable solutions to the payment difficulties experienced by debtor countries). These clauses exclude Chinese debt from the Paris Club’s collective restructuring efforts, thereby ensuring that Beijing is prioritised over other bilateral creditors and allowing it to benefit from multilateral debt relief efforts.
As a result, these loans create significant leverage for Beijing. Even in the absence of asset seizures to offset debt, sustained debt pressure shapes these countries’ long-term policies towards Beijing.
In Ecuador and Venezuela, this leverage manifests itself in China’s sustained access to discounted oil for in-kind repayments through resource-backed loans. Although Chinese resource-backed loans have, at times, provided below-market rate financing, falling world oil prices have forced both countries to dedicate greater volumes of oil production to repaying Chinese loans.
Faced with its own growing public debt, Ecuador even had to negotiate an IMF bailout of $4.2bn in 2019 and another IMF loan of $6.5bn in 2020. In August 2020, the Venezuelan government negotiated an agreement with Chinese banks to extend payment on some $19bn in loans, which are to be repaid by oil shipments. China and Venezuela have not confirmed since then whether the grace repayment period is still in effect. Some voices in the region have denounced these Chinese loans as “debt trap diplomacy”.
China’s presence in the specific area of foreign direct investment (FDI) is often overstated by observers. In Latin America, Chinese companies invested around $160bn in about 480 transactions between 2000 and 2020, mainly through mergers and acquisitions and, to a lesser extent, greenfield projects and other non-financial direct investments. However, these transactions represent only 5.74% of the total FDI received by the region over that period. Beijing’s weight in Latin America’s FDI remains small compared to that of the EU and the US, which together account for around 70–80% of the FDI received by the region between 2010 and 2020.
China’s economic penetration has been leveraged and accompanied by greater political engagement with Latin America. A roadmap published in 2008 and updated in 2016 has defined China’s Latin American policy priorities. Beijing relies on strengthening political dialogue to promote its interests at the regional level and on deploying extensive public diplomacy to reassure its partners at the bilateral level.
On the multilateral front, China has pursued a long-term strategy through increased participation in regional organisations.
Political dialogue has also been promoted within the framework of the Belt and Road Initiative (BRI), which was extended to Latin America in 2017. Some 20 LAC countries have since signed a memorandum of understanding with China under the BRI.
China has also sought to conclude free trade agreements with its Latin American partners that have adopted and maintained a policy of trade and financial liberalisation along the lines of the neo-liberal Washington consensus: Chile (2005), Peru (2009) and Costa Rica (2010). These three countries have formally committed to recognising China’s market economy status and in exchange they benefit from more advantageous tariff conditions in terms of access to the Chinese market than those granted by the general most favoured nation regime.
Beijing has also expressed interest in negotiating free trade agreements with Ecuador and Uruguay. Negotiations are now underway with Colombia and Panama.
The growing importance of China, and more broadly east Asia, as a destination for Latin American exports since the 2000s has led to a reorientation of the diplomacy of many LAC countries towards the Pacific. This has been seen with the creation of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership in 2018. The links between Latin America and east Asia look set to grow stronger in the coming decades as the global economy shifts from the Atlantic to the Pacific, a trend which is expected to continue into the 21st century.
Extract from “China’s footprint in Latin America: Recent developments and challenges ahead”, Brief no. 9, European Institute for Security Studies (EUISS), September 2022. Reproduced with permission of the EUISS.
Sophie Wintgens is a lecturer at Université libre de Bruxelles, associate researcher at Cevipol (ULB) and CEFIR (ULiège).
This article first appeared in the February/March 2023 print edition of fDi Intelligence. View a digital edition of the magazine here.