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The new issue of the Integration & Trade Journal explains the keys to renewing the convergence between Latin America and China.

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Confucius wisely said that he who neglects the future will probably encounter worries very soon. Few topics are as relevant to the future of Latin America and the Caribbean as its integration strategy with China and the impact that the new geopolitical chessboard will have on the region’s economies.

This is why the Institute for the Integration of Latin America and the Caribbean (INTAL) has focused the latest issue of the Integration & Trade Journal on rethinking relations between Latin America and China. The 40th issue of the journal includes exclusive interviews with Nobel Prize winners and other high-profile figures, unpublished academic papers, and case studies of Latin American firms that have managed to triumph in the Chinese market.

We analyze the recent transformations in the Chinese economy, how these have impacted Latin America and the Caribbean, possible outlooks for China’s demand for food, and the public policies that might contribute to promoting innovation and closing the technological divide between China and our region.

From this issue onwards, as the result of a new partnership with the publishing house Editorial Planeta, the Integration & Trade Journal will be available in book format in all good bookstores to make it easier to read and its contents more widely available.

The link between China and Latin America and the Caribbean needs to be renewed in the light of current geopolitical transformations. This agenda is essential to development: in only a few years, China has gone from being a relatively minor market to becoming one of the region’s main trading partners, taking the place of more traditional destination markets for exports and starting to provide vital flows of financing to the region.

Most countries in Latin America and the Caribbean have taken advantage of China’s growing needs for raw materials and foodstuffs, some more directly than others, and have decided to ride the wave from the Far East by simply cashing in on their natural endowments.

A series of factors has enabled China’s exponential growth in recent decades: the pursuit of innovation, increased productivity, and an outlook that focuses on the long term, to name but a few. In 2010, China overtook Japan to become the second-largest economy in the world, with a share of approximately 15% in global GDP. In 2015 it completed its 12th Five-Year Plan, which aimed to consolidate the country as a world power. In 2016, the 13th Five-Year Plan was launched, which focuses on strengthening domestic consumption and private investment and positioning capital in strategic sectors.[1]

The convergence was almost automatic. Bilateral trade went from US$18 billion in 2004 to US$260 billion in 2014. At present, 36% of LAC’s total mining exports, 12% of its food exports, and 10% of its energy exports are to the Chinese market.

 

Figure 1. Balance of trade with China

In millions of US$, selected countries from Latin America, 2014

237_e_ACTIVIDADES1_img1-01-01


Source: Prepared in-house with data from INTradeBID.

However, China is going through a process of transformation that raises many questions, one in which three patterns are simultaneously at work.
First, China has redesigned its trade strategy, driven by the explosive growth in its productivity and its expansion into other sectors and markets. There is a correlation between the density of its trade ties and the influx of Chinese investment in other countries for financing infrastructure and other public works projects, as Song and Wagner at the University of Chile have shown.[2]
After extraordinary growth, the Chinese economy is now expanding at a lower rate than in the last 30 years, which has been putting the brake on global markets. The consequences for Latin America and the Caribbean are immediate: 60% of the region’s external sales are made up of commodities and almost 20% are hydrocarbons. The drop in the prices of raw materials (especially oil) has abruptly reduced the value of exports from the region.[3]

Figure 2. Latin America’s Total Trade with China
 

In millions of US$
237_e_ACTIVIDADES1_img2-01-01

Source: Prepared in-house with data from INTradeBID.

 

There is, therefore, a growing risk of suffering the backlash of increased dependence and the primarization of exports. These are the effects that come from a boom followed by a shift in the cycle, which is reflected in a decrease in commodity prices, as has been seen in recent years. The commodity boom could have given rise to a typical case of Dutch disease and the exposure and vulnerability that tend to follow it. The difficult remedies to this would have been the early establishment of counter-cyclical funds and the launching of active policies to encourage export diversification so as ease the problems of a trade profile that has come to revolve around primary products.

The second prevailing tendency is taking place within the financial sphere and is another key piece of the transformation that is underway. With new banking institutions (AIIB, NDB), the gradual opening up of capital markets, and greater exchange rate flexibility, China has set out to internationalize its finances.

The risks for Latin America and the Caribbean are associated with the potential contagion of financial volatility and spillover effect of sudden market movement. In this sense, macroeconomic stability, reputation, and clear rules of play are potent antidotes when risk aversion begins to rise and capitals start a flight to quality. What lies ahead is the challenge of resisting the temptation to reduce China’s role to that of a lender of last-resort and to instead rationally optimize available resources for financing infrastructure.

The third tendency is technological change, which could modify the way we relate to the world, just as the advent of the car, the telephone, or the internet did. China is at the forefront of that disruption. According to a recent report from the Oxford Martin School, China has replaced the United States as the leading market for industrial automation. Some 77% of Chinese jobs are at risk from automation, which is much higher than the 57% average for OECD countries.[4]

How will these exponential technological changes impact Latin America and the Caribbean? In November 2015, China Daily reported that a Chinese consortium will open the largest cloning laboratory in the world in the city of Tianjin, where it expects to produce a million heads of cattle per year.[5] The vision of a China that specializes in products intensive in cheap labor and is a food importer is turning out to be somewhat naïve.
237_e_ACTIVIDADES1_Foto1-01During his presentation at INTAL 50, the event to mark the institution’s 50th anniversary, Raymond McCauley (video in Spanish) of Singularity University argued that before long supermarkets will be stocking hamburgers made in labs through genetic and biotech processes. Firms such as Memphis Meats, Mosa Meat, and Modern Meadow are competing in Silicon Valley to be pioneers in popularizing and lowering the cost of artificial meat. We need to pay attention to this: the MERCOSUR alone exports US$9 billion of beef per year.

 

Figure 3. Breakdown of Trade with China, by Major Items
Share in percentages, 2003–2004, in millions of US$

237_e_ACTIVIDADES1_img3-01-01

Note: China includes trade for the mainland territory of the People’s Republic of China in addition to Taiwan and the Macau and Hong Kong Special Administrative Regions.

Source: Prepared in-house with data from INTradeBID.

 

Estimates show that a 10% increase in R&D investment translate into an almost 2% surge in total factor productivity, and China is planning to raise its R&D investment from 2% to 3% of its GDP (a 50% increase) by 2020.[6]

Latin America and the Caribbean urgently needs to keep up with the pace of global innovation and establish technology exchanges and knowledge transfers that enable it to avoid technological deglobalization, while also analyzing the future impact of new technologies on its productive structure and trade.[7] Cooperation to close the technological divide between the two regions could be achieved through mutually beneficial agreements.

 

Figure 4. The Chinese Economy: Trends, Risks, and Challenges for Latin America and the Caribbean

237_e_ACTIVIDADES1_img4

Source: Compiled by the author.

 

In addition to the risk of technological deglobalization, there are other forces at work in a similar direction, such as currency wars or the oligopolistic concentration of production techniques.[8]

In this context, the question that guides this issue of the Integration & Trade Journal is what position Latin America and the Caribbean should take vis-à-vis the new outlook for China. In it, we emphasize new problems in order to construct a point of reference regarding how the region should face these three tendencies.

We begin our exploration by getting the lay of the land from the perspective of structural transformations, as Margaret Myers (Inter-American Dialogue), Carlos Moneta (University of Tres de Febrero), Evan Ellis (US Army College), Dominik Hartman (MIT), and Rhys Jenkins (University of East Anglia) explain the keys to China’s progress, the outlook towards 2030, the opportunities associated with the New Silk Road, and the relationship between growth and social inclusion.

From the perspective of trade, Kevin Gallagher (Boston University), Mauricio Mesquita Moreira (BID), Tang Jun (Zhejiang International Studies University), and Romina Gayá and Rosario Campos (INTAL) analyze the future of trade with China and the prospects opened up by its market economy status at the WTO.

From the perspective of food security and energy sustainability, Yang Wanming (China’s ambassador to Argentina), Nelson Pizarro (CODELCO), Martín Piñeiro and Eduardo Bianchi (Grupo CEO), and Iacob Kosh-Weser (US Department of Commerce) examine the synergies between Latin America and the Caribbean and China in mining, energy, and food.

From the perspective of innovation, Eric Warner (Rand Corporation), Gary Gereffi (Duke University), and Pamela Aróstica (Free University of Berlin) explore China’s decisive move towards the knowledge-based society, new production processes, development financing, and Latin America and the Caribbean’s capacity to move forward towards the knowledge-based society.

237_e_ACTIVIDADES1_Foto2-01Throughout this issue of the journal, it will become clear that the relationship needs to move beyond the easy, automatic complementarity phase (2000–2008) and the post-crisis impasse (2009–2014), to a new stage of intelligent convergence. The years of passive adaptation are over. Instead, a change of strategy is required that will come hand-in-hand with strong initiatives. The partnership that was once natural must now be sought out through public policies for active integration. Edmund Phelps, winner of the Nobel Prize in Economics, uses the perfect metaphor for this in the first article in this issue: the low-hanging fruit has already been picked and we will now need to work harder to achieve the same results.

The characteristics of this new phase are very different to those that went before it, and it thus demands that we take a different approach. Macroeconomic and financial volatility, low commodity prices, and lower growth rates are just some of the factors that are weakening the link between China and Latin America and the Caribbean, which is based entirely on trade.

Likewise, it will be more difficult to reap the benefits of the integration with China that countries in the region previously achieved at the individual level. The new forces of globalization are unfolding in the form of regional mega-agreements, in which negotiation and cooperation between countries occupy prime positions on the agenda.

In a changing world, this journal provides information and research from world-class authors and suggested reading for those who are interested in the complexities of the relationship between China and Latin America. It puts forward different visions of how to forge deeper ties between the two regions, learn from experience, and take advantage of the new context. We need to rethink and strengthen our connection with China so that it can grow to maturity on the basis of mutual trust.

We are not starting from scratch. In terms of multilateral cooperation, there are relevant past experiences such as the MERCOSUR–China dialog, which began in Beijing in 1997 and which led to successive rounds of meetings in 2000, 2003, and 2004. In mid-2012, former prime minister of China Wen Jiabao visited Brazil, Uruguay, and Argentina and expressed his interested in moving towards a free trade agreement with MERCOSUR countries, which led to a feasibility study. But the idea of joint negotiation lost momentum, and bilateral agreements proliferated, such as the Strategic Partnerships with Argentina and Brazil, or the different Cooperation Agreements currently in force with Uruguay and Venezuela, to mention only those with the MERCOSUR.

As is revealed in the article by Renato Baumann (IPEA) and the negotiation experiences of Costa Rica, Peru, and Chile, the new type of “made-to-measure” agreements that we describe here are vital precedents from any regional perspective.

In November 2015, experts from China and Latin America took part in the international seminar entitled The Economic Relations between China and Latin America and the Caribbean: a Prospective Vision, organized by INTAL. At the event, there was debate around the potential of non-traditional exports, the cultural challenges that businesspeople face when entering new markets, and the need to reduce logistics and transportation costs so as to improve the region’s competitiveness. Trade, not aid, was the motto that representatives from both regions agreed on.[9]

The recipe to mitigate crosswinds may contain multiple ingredients: diversifying exports, integrating into global value chains, supporting small and medium-sized enterprises, reducing trade frictions, training government officials, moving towards regulatory transparency,[10] increasing the incentives for local competition and external cooperation, broadening the scale of policy transfers, improving environmental standards, promoting food security, social inclusion, investment in innovation and technology, incorporating value added, and generating quality employment.

The time of plain sailing on fair winds from the east is over. It is time to plot a creative route forward and lucidly calibrate an integration strategy that will allow us to move past the difficulties that the stormy waters of 21st-century globalization have laid before us. To return to Confucius, we need to do more so that we can worry less. The opportunities are out there.

 

Bibliography

World Bank and the Center of Research for Development. 2013. “China’s Growth through Technological Convergence and Innovation,” in: China 2030: Building a Modern, Harmonious, and Creative Society. Washington, DC: World Bank.

Frey, C.; Osborne, M.; and Holmes, C. 2016. “Technology at Work v2.0. The Future Is Not What It Used to Be.” Oxford Martin School Working Paper. Citi GPS: Global Perspectives & Solutions.

Giordano, P. (Editor). 2015. Trade and Integration Monitor 2015. Double-Dip: Latin America and the Caribbean Facing the Contraction of World Trade. Washington: IDB. October.

Gransow, B. 2015. “Chinese Investment in Latin American Infrastructure: Strategies, Actors, and Risks,” in: E. Dussel Peters and A. Armony, editors. Beyond Raw Materials: Who Are the Actors in the Latin America and Caribbean-China Relationship?. Buenos Aires: Nueva Sociedad and Red ALC-China.

Gruss, B. 2014. “After the Boom–Commodity Prices and Economic Growth in Latin America and the Caribbean.” Working Paper No. 14/154. International Monetary Fund.

International Centre for Trade and Sustainable Development (ICTSD). 2016. Strengthening the Global Trade and Investment System in the 21st Century. Geneva. ICTSD.

Institute for the Integration of Latin America and the Caribbean (INTAL). 2015. INTAL Connection No. 232. Buenos Aires: IDB/INTAL. December.

—–. 2015. MERCOSUR Report No. 20. Technical Paper No. IDB-TN-876. Buenos Aires: IDB/INTAL. November.

Jiang, W. 2015. “Tianjin Plans World’s Largest Animal Cloning Factory.” China Daily. November 23.

Orr, G. 2016. “What Might Happen in China in 2016?” McKinsey. January.

Sheng, A. 2015. “What Can Douglass North’s Work Tell Us about China’s Future?” World Economic Forum. December 21.

[1] IDB/INTAL (2015).

[2] Between 2005 and 2014, 40% of the loans Latin America and the Caribbean received from China were for infrastructure projects. For more on this, see Gransow (2015).

[3] Giordano (2015). The report shows that between July 2014 and June 2015, the value of global trade went down by 11.8%, which represents a downturn one-third the size of the trade collapse of 2008–2009.

[4] Frey, Osborne, and Holmes (2016).

[5] Jiang (2015).

[6] For more on this topic, see the document from the World Bank and the Center of Research for Development (2013). For more on the impact of productive shocks, see Gruss (2014).

[7] In issue 39 of the Integration & Trade Journal, we took a detailed look at the impact of new technologies on trade and regional integration.

[8] One example of concentration could arise in the primary sector with genetically modified seeds.

[9] INTAL (2015).

[10] ICTSD (2016).

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