Recently, AméricaEconomía, the leading business magazine in Latin America, published an article by Germán Ríos, senior advisor at ATREVIA, entitled, “The changing relations between China and Latin America.” Relations between Latin America and China have drastically changed in the last 20 years. In 2001, exports from the region to the Asian country barely represented 1.6% of total foreign sales. In 2020, they reached 26%, implying that China has become one of the leading commercial partners of several countries in the region.
“This contrasts with the region’s exports to the United States, which went from representing 56% in 2001 to 13% in 2020. This radical change is primarily due to China’s accelerated growth during this period and its growing demand for raw materials, especially from South American countries such as Peru, Chile, Brazil, Argentina, and Uruguay. We have seen a similar change in the case of imports.
In contrast, China’s direct investment in Latin America has not been as significant during the last two decades compared to other countries. The United States is the leading investor in the region, followed by Spain; however, this has recently changed. Chinese companies have acquired companies in Latin America, especially in the infrastructure, raw material production, and energy sectors. The most notable acquisitions are in the energy sector in Chile and Mexico and the raw materials sector in Peru and Argentina.
According to data from the Economic Commission for Latin America (ECLAC), in 2005-2020, Chinese companies participated in 150 mergers and acquisitions in the region for around $83 billion. This represents an increase in their share from 1.7% of these operations in 2015 to 16.3% in 2019. Additionally, the Asian country has announced new investment projects that would mean another $75 billion. Part of the explanation for this momentum of Chinese investments in Latin America is related to Chinese companies’ inability to invest in the United States or the European Union for regulatory and geopolitical reasons. In addition, Chinese manufacturing companies want to secure their raw material markets in the future, which is why the region has become a strategic part of the international expansion of these companies, most of which are state-owned.
Another critical factor in understanding the changing relationship between China and Latin America is related to funding. In recent years, there has been an increase in loans from Chinese banks to Latin American governments. According to data from the Inter-American Dialogue, as of 2020, the China Development Bank and the China Export-Import Bank had granted 94 loans totaling $137 billion, mainly to Venezuela, Brazil, Ecuador, and Argentina. Most of these loans have been granted to finance infrastructure, executed by Chinese companies, and in some cases include financial conditions involving the prospective sale of raw materials. Although this type of financing has stalled in recent years, the debts acquired may represent a significant financial burden for the recipient countries.
An essential difference in relations with China is that while investments and trade with the United States and the European Union are mainly conducted through private companies, the relationship with the Asian country is mostly through bilateral agreements between governmental and state-owned companies. This makes economic diplomacy and bilateral relations between Latin American states and China key. Politics and ideological affinities are also fundamental, as reflected in funding terms, directed to countries perceived as close to Beijing.
The U.S. government, since the administration of former President Trump, and even with the current administration of President Biden, has moved away from Latin America in terms of foreign policy, allowing China to gain ground, the pandemic case in point. While the United States has been more concerned with resolving its domestic situation, China, through so-called health diplomacy, has provided Latin America with medical supplies and vaccines, winning over the region’s sympathy.
Latin American governments and companies must understand that both China and the United States will continue to be their main trading partners, financiers, and investors, so a pragmatic attitude should be the norm. They should try to take advantage of the different opportunities presented by both parties. From a trading standpoint, intelligent integration, strengthening intra-regional trade, and market diversification should be the strategy, with the aim of increasing participation in global production chains. From an investment and financing standpoint, technological transition, human capital formation, and productive diversification take priority.
Looking ahead, it is clear that China will continue to be one of Latin America’s main trading partners, and its role as an investor will increase, often accompanied by financing from its state-owned banks. Geopolitics will play an essential function due to the trade and technology war between the United States and China, where many battles occur in Latin America. The U.S.- China struggle in the region will continue and will intensify over trade, investment, and raw materials supply. This represents challenges and opportunities for Latin America, but if the cards are played well, it could bring significant benefits for the region.”