|Wall Street Journal:China's Latin Economic Gambit|
Americans tend to see China's economic rise through the prism of the bilateral trade deficit and competition for manufacturing jobs. But the real story is that Chinese institutions are buying equity stakes and making loans to increase their influence in natural resources. And Latin America is the most important arena for China's investments.
Some observers portray this as a threat in the U.S. "backyard." The truth is that the developing trade between China and Latin American countries represents an opportunity—if the U.S. plays its cards right.
There are several reasons to be relatively sanguine about China's increasing involvement in Latin America. Most obviously, the Chinese interest in the region is pragmatic rather than ideological. The goal is to further economic growth at home by opening new markets and guaranteeing a supply of necessary inputs.
Rocking the boat politically is not on the agenda. Even where Beijing is engaging America's foes, like Venezuela's President Hugo Chávez, it is careful not to offer encouragement for their destabilizing activities.
Still, part of the attraction of Chinese money is that it comes with few strings attached. That naturally tends to undermine the leverage the U.S. has enjoyed as the region's biggest trading partner and investor. China's arrival, coinciding with the rise of Mr. Chávez and Bolivian President Evo Morales, makes it more difficult to contain the damage from these populist left-wing governments.
Yet the reality is that the U.S. still has plenty of leverage—for now. China still only accounts for less than 10% of the region's trade. Chinese trade and investment garners more of the attention because that's where the growth is.
Brazil’s President Lula da Silva (left) toasts China’s President Hu Jintao in Beijing, where the two countries signed 13 cooperative economic agreements in May.
The main tool Beijing is deploying in the region is China Development Bank's massive pile of U.S. dollar reserves. At a time when capital is in short supply, especially in emerging markets, Chinese institutions can make a critical difference in financing new projects. The Inter-American Development Bank is largely tapped out.
China would seem to be in the driver's seat—yet it has had to offer loans at preferential rates and 20-year terms in order to secure guaranteed supplies of oil and other commodities at market prices. Though commodity prices are well off their peaks, it seems that producers still have leverage because of China's seemingly insatiable appetite for minerals and fear that its supply could be disrupted if it relies on the open market.
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Indeed, Beijing's state-directed policy of buying up and securing supplies of commodities may not be so pronounced in a few years time if it turns into a bust. Take iron as an example. Raw ore has been piling up on the docks of Chinese ports this year, as steel companies expand capacity and traders stockpile in anticipation of higher prices. But Beijing's stimulus package, which threw infrastructure spending and thus steel consumption into overdrive, will wind down over the next two years. Real estate developers are also in a frenzy of construction at the moment, but this may prove to be the result of a bubble. Falling stock prices in Shanghai suggest that China's recovery is not as robust as first thought.
It wouldn't be the first time the government's investments prove to be misguided. China Investment Corp., the $200 billion sovereign wealth fund, lost big investing in Blackstone and Morgan Stanley in 2007. That debacle, plus the past pain inflicted by high oil and ore prices, may have contributed to the current policy favoring investments in commodities.
The more China invests, moreover, the greater the risk of an eventual backlash. Already there are murmurings from vested interests in Latin countries that Beijing is a neocolonial power, buying raw materials and flooding the region with its cheap manufactured goods. Certainly competition from Chinese goods has had a much greater effect in Latin America than in the U.S., hurting the textile industries in Brazil, Argentina and Mexico. This has brought a wave of antidumping suits.
For all the talk of budding South-South relations, the reality is that developing economies directly compete with each other because their comparative advantages are similar. The U.S. may ultimately be able to play the other two sides off against each other in this triangular relationship because its own economy is complementary with both.
The U.S. may yet be able to bind the region together by offering Latin America greater access to its markets and giving its neighbors a leg up in competition with China. After the failure of the Free Trade Area of the Americas negotiations in 2005, the only way forward for opening markets was much more limited agreements.
But as China's footprint expands in the Americas, it may concentrate minds and bring the negotiators back to the table. That would be a win-win outcome for the whole hemisphere.
Mr. Restall is the editor of the Far Eastern Economic Review and a member of the editorial board of The Wall Street Journal.