In a speech to the Brazilian Congress in November 2004, China’s president Hu Jintao said that his country would invest $100bn in South America in the next 10 years, $20bn of that in Argentina alone. If these investments were to materialise, the investment climate in several South American economies would be transformed and the relationship between the region and Washington dramatically altered.

In 2004, 50% of China’s outward investment – totalling $1.78bn – was destined for Latin America. China’s imports from the region grew from $3bn in 1999 to $21.7bn in 2004. Already, it is the fourth most important export market for Brazil and Argentina and the third most important for Chile.

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Cynthia Watson, professor of strategy at the National War College in Washington, DC and a Latin America expert, says: “Beijing is desperate for energy and Latin America looks like becoming one of its main sources. South Americans have grown frustrated with the US. They do not feel that Washington has been giving much back. “Latin America is like a young child tugging on its mother’s skirt, wanting something but not quite knowing what it wants. The US has not delivered much and South Americans now wonder if another parent might be coming along.”

Investment promise

Although Latin American exports to China still represent a small fraction of the latter’s total imports – 3.88% in 2004 – the proportion could increase dramatically in the future if the Asian giant fulfils its promise to invest heavily in South America.

However, Federico Thomsen, an economic consultant based in Buenos Aires, says: “I think the sums have been greatly exaggerated. At the moment, China is only investing a few billion dollars overseas a year throughout the world. I cannot see Latin America, let alone Argentina, swallowing up all Chinese investment within the next decade.

“Yet it’s clear that China is emerging as an important player in the region and it could have a highly beneficial impact on several South American economies.”

Regional approach

As a region, Latin America has not been able to adopt a cohesive approach to foreign trade. An example of this has been the lack of progress towards a Free Trade Area of the Americas and the widely differing visions for the continent espoused by US president George W Bush and Venezuela’s president Hugo Chávez. A number of countries – in particular Chile and Mexico – have adopted a go-it-alone approach.

On November 17, 2005, on the fringes of the summit of Asia-Pacific Economic Co-operation in South Korea, China and Chile signed a full bilateral free trade agreement (a similar agreement between Chile and the US took effect on January 1, 2004). This was the first full accord between China and a Latin American nation.

Chile, which has been the most successful South American economy of the past five years, wants to position itself as a bridgehead between China and South America, despite its relatively small population of 16 million (against Brazil’s 195 million and Argentina’s 39 million).

“The challenge for Chile is to constitute an effective bridge for trade and investment between the Asia-Pacific region and Latin America. The change of the epoch is the transfer of the axis of the global economy in the direction of Asia and the Pacific. Chile is in a good position to fit in well with this trend,” says Osvaldo Rosales, director of the international trade division of the Economic Commission for Latin America and the Caribbean, based in Santiago, Chile.

“There could be joint initiatives between the two countries, at the public and private level, in exports, investment, tourism and air transport, as well as in infrastructure and energy.”

Chilean connection

Commentators say that China is more comfortable with investing in and trading with Chile than other Latin American nations because it regards the rule of law and legal certainty in Chile as better. The main sectors of the Chilean economy that stand to gain from the Chinese connection are wine, fisheries, forestry, infrastructure, tourism, mining and the motor industry. About 30 Chinese groups are poised to invest in Chile and 120 Chinese companies are ready to increase trade with the country.

In mid-2005, China Minmetals Corporation signed agreements valued at $550m to buy copper from and invest in the Chilean corporate Codelco.

Brazil also expects to benefit hugely from its relationship with China but some Brazilian commentators are now wondering whether the country has sold out to the Asian giant.

About 400 Brazilian business leaders accompanied Brazil’s president Luiz Inácio Lula da Silva on a trade mission to China in June 2004. In return, Mr Hu visited Brazil in November 2004 and said that he expected bilateral trade to double to $20bn within three years. In exchange, Mr Lula da Silva agreed to recognise China as a ‘market economy’ under World Trade Organization (WTO) rules, which makes it harder to impose anti-dumping penalties on goods.

The move was at odds with the stance of most other major nations and Mr Lula da Silva has suffered a backlash in Brazil because of a flood of Chinese textile and shoe imports, which threaten domestic jobs.

“The openness of the Brazilian economy cannot just lie in opening imports to every country while not getting anything in return,” argues Josué Gomes da Silva, president of the Brazilian Textile Association. “We run the risk of being overrun with imports while we, as producers, are not ready to compete with low-cost goods from countries like China.”

The furore led Brazil to put limits on Chinese textile and shoe imports on September 13, 2005, after they surged almost six-fold during the year. It may be the beginning of many similar protective measures.

The steel sector expects to flourish from Brazil’s embrace of China. China imported 2.3 million tonnes of Brazilian steel in 2003 – valued at $730m – and has become the country’s main export market for steel, ahead of the US. Brazil’s steel industry is investing billions of dollars to improve its production capacity by 30% in the next three years to cope with Chinese demand. Most financing is expected to come from Brazil’s own steel industry but global heavyweights such as China’s Baosteel Shanghai Group plan to build blast furnaces to churn out steel in the South American country.

Germano Mendes De Paula, a steel specialist at the Federal University of Uberlandia in Minas Gerais, Brazil, says: “Even if China’s economy starts to cool off, millions of Chinese are leaving the countryside each year to move to cities. It’s not hard to imagine the demand for housing – and thus steel – that migration like that generates. Demand from China may shrink a bit but it is not going to dry up anytime soon.”

Lured by Brazil’s vast reserves of iron ore, Baosteel is joining forces with Brazilian mining group Companhia Vale do Rio Doceto to construct a $1.5bn steel mill in São Luís, a city in Maranhão state.

Instead of shipping iron ore directly to China, Baosteel plans to save money by shipping lighter, ready-made steel slabs from São Luís (only a few days by ship from the Panama Canal). The plant is on course to produce about 3.5 million tonnes of steel a year by 2007 and eventually increase output to 7.5 million tonnes.

Oil sales

In July 2005, Brazilian state oil company Petrobras announced that it had agreed to sell 12 million barrels of crude oil to China’s Sinochem International Oil Corporation, in a contract valued at $600m. Petrobras expects to enjoy annual revenues of $1bn from exports to China alone.

The Brazilians are also lobbying the Chinese to fund up to $5bn in railways and roads in Brazil. The fact that a former Portuguese colony, Macau, now belongs to China has helped to cement relations between the two.

In the case of Argentina, president Hu’s visit was greeted with much fanfare in the local media. The press widely reported that the Chinese planned to invest $20bn in railways, oil and gas exploration, and construction projects in the country during the next decade. There was the sensation that the Chinese were about to buy huge swathes of Brazil. Subsequently, however, the Chinese delegation downplayed the likely level of investment.

Different approaches

“Chile and Argentina’s approaches to trade are as different as night from day,” says Esteban Fernández Medrano, a partner at Buenos Aires-based economic consultancy Macrovisíon. “Chile has a much more outward-looking approach while Argentina is much more concerned with protecting its economy. These different outlooks will affect how the two countries interact with China. However, China will still be an important economic partner for Argentina. It is likely to invest in infrastructure projects that give it better access to the South American nation’s mineral resources.”

For example, the Chinese government has indicated that it might foot the bill for improving the Cristo Redentor Pass between Argentina and Chile, which has to be closed every year because of snow.

China became a net importer of agricultural goods in 2003 and as it becomes more industrialised, it will become increasingly dependent on major agriculture-producing economies like Argentina and Brazil. There has been a boom in the Argentine countryside on the back of rising soya bean prices, mostly due to buoyant Chinese demand.

South America’s embrace of China has already sounded alarm bells in Washington. In 2005, Congress held a number of hearings on the subject. Latin American leaders such as Mr Chávez see China as a potential counterweight to the US’s power in the region.

However, Mr Hu was careful not to visit Caracas during his South American tour, rather than offend Washington.

No strings

“China is a potential trading partner and benefactor that is willing to invest $100bn that does not come with the usual strings attached and humiliating lectures from Washington,” says Sanho Tree, fellow of the Institute of Policy Studies in Washington, DC. “Many South American countries view China as an uncle they can like.”

Chinese investment in Latin America has not yet reached the galloping pace that many commentators predicted, partly for cultural reasons. The continent is literally on the other side of the globe from China and many Chinese entrepreneurs have little understanding of what they see as an exotic region.

As Mr Lula da Silva has discovered, the Chinese connection has its downsides as well as its upsides, and Latin American trade negotiators must be careful that they do not give too much away in forging a relationship. However, the long march towards a highly dynamic economic interaction between the Asian giant and South America has clearly begun.