China’s ascent as a prominent fta partner is sparking concerns over trade asymmetry. Still, development opportunities remain of key interest for Latin American governments. Compared to initiatives by other major players, China’s fta track record aligns with Latin American countries seeking quick economic boosts.
Over the past few decades, China has rapidly ascended to the status of a major trade partner for Latin America, fundamentally reshaping the economic dynamics of the region. In the year 2000, Latin America’s exports to China were a mere fraction, comprising less than 2%. However, in the eight subsequent years, trade between China and Latin America experienced remarkable growth, with an average annual rate of 31%, culminating in a substantial value of usd 180 billion by 2010. As of 2022, the trade volume reached a historic high of usd 482.6 billion. Some economists even estimate this number could surge beyond usd 700 billion by 2035.
China’s rise as an economic powerhouse fueled its appetite for natural resources, agricultural products, and manufactured goods. Latin American nations, endowed with abundant commodities and resources, found a lucrative market in China’s growing demand. This synergy led to the establishment of extensive trade relationships, with countries like Brazil, Chile, Peru, and Argentina becoming prominent exporters of minerals, soybeans, oil, and other raw materials to China. Simultaneously, Chinese manufacturers flooded Latin American markets with affordable consumer goods, electronics, and machinery.
As a result, trade imbalances between China and Latin America have become a salient aspect of their economic relationship. This trade asymmetry has led to concerns about the long-term sustainability of the Latin American region’s economies, as heavy reliance on exports of raw materials can leave them vulnerable to fluctuations in commodity prices. The influx of higher-value-added Chinese goods, which are often competitively priced, can also pose challenges to local industries and hinder the growth of domestic manufacturing.
At the same time, China’s activities in the region continue to offer economic opportunities. Investments in infrastructure, energy, and telecommunications projects have become instrumental in supporting the region’s development aspirations. Countries in the region are seeking Chinese financing, lending and investments, and preferential access for their exports to China.
Encouraged by the dynamic ties that have undoubtedly brought economic benefits, China has emerged as a compelling partner for engaging in trade agreement negotiations. The enthusiasm for trade agreements underscores a strategic pivot towards attempting to harness China’s growing appetite for commodities and products. China swiftly sealed an accord with Ecuador in early 2023 after only ten months of negotiations and has engaged in talks with Uruguay, illustrating its dynamic approach to bolstering ties in Latin America. This interest in concluding agreements is not exclusive to China but aligns with an apparent increase in general demand for trade agreements across the region under the leadership of current Latin American governments. For example, Uruguay, Costa Rica, and Ecuador have formally applied to join the cptpp. Moreover, despite longstanding difficulties, the negotiations of the eu-Mercosur agreement have gained renewed momentum and seem more likely to be concluded.
China’s ftas as a key instrument of foreign economic policy
For states worldwide, Free Trade Agreements (ftas) remain a key instrument to frame and shape economic ties with partners. With the World Trade Organization (wto) in crisis, given stalled multilateral negotiations, criticism of its judicial activism, and de facto rulemaking, China – like most other countries – uses ftas to promote trade and trade regulation. In contrast to other Chinese instruments of foreign economic policy, such as the Belt and Road Initiative (bri) or the more recent Global Development Initiative (gdi), ftas are more formal binding agreements negotiated and tailored to bilateral economic relations. As a result, Chinese trade agreements can vary significantly in scope and depth depending on the partner.
China’s ftas are characterized by a scope that predominantly emphasizes trade in goods while displaying limited liberalization and regulatory coverage in the investments and services domains. These agreements primarily concentrate on reducing tariffs and facilitating merchandise exchange between China and its trade partners. In contrast to us, eu, or Japanese agreements, Chinese ftas include neither substantial coverage, procurement, or competition provisions nor labor and environmental regulation.
China’s evolving presence in Latin America
China’s prominence in the region has been notably amplified by its strategic outreach in recent years. Employing a charm offensive, Beijing has elevated its diplomatic involvement, exemplified by initiatives like the China-celac (Comunidad de Estados Latinoamericanos y Caribeños) Forum. Not only has this effort strengthened relationships, but it has also fostered collaboration and investments across diverse industries. Furthermore, China has extended its attention to Latin America in the context of the bri, emphasizing its evolving priorities and engagement in the region. With 21 Latin American countries participating in the bri and Argentina signing a memorandum of understanding on Belt and Road cooperation, China continues to make inroads in the region.
The landscape of ftas between China and Latin American countries has undergone significant development in recent years. Chile was the first Latin American country that China signed an agreement with. The fta was signed in 2005 and entered into force in October 2006. Since then, China has finalized agreements with Peru in 2009 and Costa Rica in 2010. Following the recent conclusion of the agreement with Ecuador, China has moved on with its current bilateral talks with Uruguay. Negotiations with the latter are seen as a potential obstacle not only to a minilateral deal between China and Mercosur – which comprises four countries, including Argentina, Brazil, Paraguay, and Uruguay – but also as a factor that could exacerbate regional fragmentation. This new momentum of initiating and concluding agreements between Latin American countries and China signals government commitment to creating a stable environment for conducting business.
According to data released by the General Administration of Customs in the People’s Republic of China, the estimated total value of trade between China and the lac region – Latin America and the Caribbean – reached usd 482.6 billion in 2022. That same year, China’s imports from the lac region accounted for usd 231.1 billion, with ores (32%), oil seeds (18%), and mineral fuels and oil (12%) constituting the primary imports. On the other hand, China’s exports to the region amounted to usd 251.5 billion, with key exports encompassing electrical machinery and equipment (23%), machinery and mechanical appliances (14%), and motor vehicles and parts (8%).
Notably, China stands as the largest trading partner for Brazil, Chile, Peru, and Uruguay, and holds the second-largest trading partner position for numerous other countries within the region. While China’s foreseen deceleration in economic growth in the near future might lead to reduced demand for Latin American and Caribbean exports and decreased capital flows from China to the region, its continued economic engagement remains significant.
The economic relationship between China and Latin America presents a complex interplay of opportunities and challenges. Latin American countries benefit from expanded markets for their commodities, which fuels economic growth. Simultaneously, they face competition from Chinese products that can strain local industries. China, on the other hand, secures resources crucial for its rapid industrialization while risking to exacerbate trade imbalances. Moreover, as investment grows, concerns over debt sustainability and environmental impact emerge. Chinese financing in the region has come with strings attached, requiring borrowing countries to pay back part of their loans with oil, to purchase Chinese equipment, and to provide Chinese firms with market access to telecommunications and energy. A report delivered to the un Committee on Economic, Social and Cultural Rights included 14 cases from nine Latin American countries noting some examples of environmental hazards or human rights violations. This intricate web of economic effects requires nuanced policy decisions to maximize gains and address potential drawbacks as China and Latin America navigate their evolving economic relationship.
Geoeconomic competition in Latin America
The rising influence of China in Latin America poses a multifaceted challenge to players like the eu and the us, impacting both commercial and geopolitical interests. China’s robust engagement through trade, investments, and infrastructure projects positions it in direct rivalry with the eu and the us for resource access and market presence. Moreover, China’s ability to offer a vast alternative export market and substantial funding has allowed it to secure major infrastructure contracts and cast itself as a compelling partner for Latin American countries.
Simultaneously, countries within the region can capitalize on this competition as an opportunity to enhance their economic position. By diversifying exports, fostering value-added industries, and engaging in balanced negotiations for trade agreements with other major global players, these partners can provide a pathway toward countering China’s dominant influence and addressing trade imbalances more effectively. To do so, countries in the region are turning to deals such as the eu-Mercosur Agreement, the Americas Partnerships for Economic Prosperity (apep), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (cptpp). The initiatives, however, differ significantly in terms of scope, depth, and platform and the circumstances under which they are being negotiated. In comparing eu-Mercosur, cptpp, and apep, it becomes evident that these trade initiatives exhibit distinct characteristics, each with its own set of challenges and potential benefits in shaping the economic landscape of their respective regions.
The momentum of trade deals: A comparison between eu-Mercosur, cptpp, and apep
The eu-Mercosur negotiations, spanning nearly two decades, have continued to grapple with core issues. The most salient debates revolve around the eu’s demands for expanding the Mercosur market to industrial goods, which are in part protected by high import duties, and the opening of public procurement for European companies. In turn, Mercosur demands better access for their competitive agricultural exports to the highly protected European agricultural market. Both parties reached an agreement in principle in 2019. But since then, the preliminary agreement has been reevaluated. Since the 2019 eu Parliament election and the shift towards the eu Green Deal, the agreement has faced strong criticism from the European agricultural lobby, green parties, and environmental activists. A broad “Stop eu-Mercosur” coalition of 450 civil society organizations and social movements both from Europe and South America has been organized against the agreement. Nonetheless, negotiations have resumed recently, and it remains to be seen whether the agreement will be implemented.
The apep stands as the us economic initiative directed towards Latin America. Following the withdrawal from the Transpacific Partnership under President Trump and in an era of strong domestic opposition against trade agreements, apep is the us solution to effectively foster engagement with the region and counteract Chinese influence without committing substantial political capital or relying on the us Congress for ratifying the deal. Thus, apep allows circumventing a legislative process and will not result in a binding agreement in the near future. It will include little to no concrete instruments, as it lacks any dispute settlement process or treaty interpretation mechanism. With these limitations, apep is unlikely to move beyond existing international obligations—such as the ones posed by the wto or the International Labor Organization (ilo). Thus, apep mainly serves as a transparency, information-sharing, and coordination mechanism.
In contrast, the cptpp, involving eleven members in the Asia-Pacific region, including New Zealand, Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, Singapore, and Vietnam, stands out as an agreement characterized by its emphasis on high-level standards and comprehensive scope. The pact already includes three Latin American members. Designed to be both dynamic and progressive, the cptpp allows for adjustments in response to evolving circumstances while remaining open for potential candidates and offering a future re-entry option for the United States. The allure of cptpp membership has garnered interest from a diverse range of contenders, among them South Korea, China, Taiwan, Ecuador, Costa Rica, Uruguay, and Ukraine. The conclusion of negotiations with the United Kingdom in July 2023 marks a significant milestone, indicating the inaugural accession case and setting a noteworthy precedent for subsequent candidates, with implications for China’s aspirations. While several Latin American candidates have applied, it will likely take a long time to go through negotiations and formally join the agreement.
To sum up, long-standing eu-Mercosur negotiations face renewed challenges; apep focuses on engagement but lacks binding agreements; and the dynamic cptpp gains traction with global interest and an eye on China’s role. While all initiatives, if and when implemented, could contribute to diversifying Latin American members’ trade and investment relations vis-à-vis China, their slow progress shows that China is much more effective and faster in concluding such agreements. Whereas the eu and the us are facing domestic constraints in finalizing their initiatives with Latin America, and the cptpp application process will likely take several years, China’s offer is much more tangible in comparison, making it a more compelling partner to conclude an agreement with in the short-to-medium term.
Reevaluation of China’s engagements in Latin America: Strengths and limitations
With formidable strengths such as robust trade relations, strategic investments, and ambitious infrastructure projects, China has emerged as a driving force behind economic growth and development in several Latin American countries. However, this ascent is not without limitations, including concerns over trade imbalances, dependency risks, and potential environmental and labor issues.
China’s dominance in infrastructure and finance
Chinese companies have significantly enhanced their competitiveness in Latin America, particularly in infrastructure development, dam construction, and electricity grids installation. Chinese firms have gained recognition for their ability to execute large-scale projects efficiently, bringing modern infrastructure and energy solutions to the region. Their activities span from the construction of refineries and processing facilities for various resources like coal, copper, gas, oil, uranium, and lithium, to substantial participation by state-owned Chinese entities in over 50 energy development initiatives across 15 Latin American nations. Furthermore, Chinese involvement extends to expanding ports, airports, highways, and railways.
Additionally, Chinese banks have become pivotal providers of alternative funding sources, injecting fresh momentum into projects that might have otherwise faced financial constraints. China’s approach to lending and funding has introduced an appealing alternative that frequently offers more flexible terms and expedited decision-making processes compared to traditional financial institutions by multilateral banks or banks from oecd countries. Over the past two decades, Chinese state-owned policy banks, specifically the China Development Bank and the Export-Import Bank of China, have committed multiple loans to the lac region. As reported by the Inter-American Dialogue, between 2005 and 2022, lac countries accumulated a combined Chinese borrowing of usd 136.5 billion. These funds have been primarily allocated to the energy sector (66%) and infrastructure initiatives (19%).
This strategic combination of technical expertise, reliable execution, and innovative financing has propelled Chinese companies and banks to the forefront of infrastructure and energy endeavors in Latin America, fostering development and reshaping the region’s economic landscape.
Unveiling China’s competitive shortcomings in Latin America: Environmental sustainability, services, and investments
As China’s influence continues to grow, Latin American nations are tasked with striking a delicate balance between reaping the rewards of this partnership and safeguarding their long-term interests. It is therefore essential to evaluate China’s limitations and gaps in the region.
China’s presence in Latin America is still relatively minor in some spheres. Regarding the services trade area, China remains a subordinate partner, scarcely quantifiable. In comparison, the eu holds a much more substantial position as a trading partner in services, with services exports to Mercosur amounting to eur 17.2 billion and imports from Mercosur reaching eur 7.7 billion in 2020. This exchange yielded a services trade surplus of eur 9.5 billion.
While China has only recently emerged as an investor in the region, the eu remains a primary investor in Latin America. In the Mercosur region alone, the eu’s accumulated stock of investment has gone up from eur 130 billion in 2000 to eur 330 billion in 2020. Between 2005 and 2022, Chinese entities directed investments totaling usd 148.9 billion into the LAC countries. Notably, Brazil stood out as the recipient of usd 66 billion (44% of this investment), followed by Peru with usd 25.5 billion (17%). The majority of these investments, comprising usd 62 billion, were allocated to energy projects, while metals/mining secured a significant share of usd 21 billion. Additionally, the database illustrates that construction projects by the People’s Republic of China within lac during the same period reached a valuation of usd 68.6 billion. This allocation benefited predominantly the energy sector (50%) and the transportation sector (30%). Given the focus on resources and energy-related investment, along with scarce manufacturing investment, China’s activities in the region provide limited value-added production and contribute little to the local economy.
While Chinese lending has emerged as an important alternative source to oecd countries, the flip side of Chinese loans is that they typically diverge from the policy conditions and environmental safeguards commonly associated with major international financial institutions. Instead, they often present a blend of preferential and commercial terms, frequently accompanied by stringent confidentiality clauses. In recent years, Chinese lending in LAC has declined, a phenomenon attributed to factors such as diminished demand for Chinese financing, shifts in Beijing’s management of its foreign exchange reserves — a source of loan funding —, and increased risk aversion among Chinese lenders.
Seizing Opportunities and Balancing Acts: China’s Strategic Window in Latin America
The current landscape presents China with a strategic window of opportunity to forge agreements with Latin American nations. The region’s growing interest in cooperating with China, its inclination towards trade liberalization and ftas, and the alignment of China’s commercial interests with Latin American development aspirations expedite this process. These factors make China appealing as a partner, especially when contrasted with the potential complexities of other initiatives.
In the broader context, prospects for tangible outcomes from initiatives like apep remain uncertain, the eu-Mercosur agreement advances at a slow pace, and the accession to the cptpp could entail a protracted timeline. In light of these challenges, Latin American countries might find it easier and faster to conclude agreements with China, given the favorable conditions of swift negotiations and barrier removal to access the vast Chinese market.
However, it is essential to acknowledge the potential imbalances that could arise from China’s typically trade-focused agreements. As these agreements predominantly emphasize trade in goods, they risk of exacerbating existing asymmetries rather than diversifying the region’s economic ties more evenly. As China continues to solidify its role in the Latin American economic landscape, it becomes paramount for both parties to seek mechanisms that address and mitigate these trade imbalances.
References
Inter-American Dialogue (2023). China-Latin America Finance Databases. https://www.thedialogue.org/map_list/
Nolte D (2023, February 3). A Last Chance at an eu-Mercosur Agreement. Dgap. https://dgap.org/en/research/publications/last-chance-at-eu-mercosur-agreement
Stevenson-Yang L, & Tugendhat H (2022, August 8). China’s Engagement in Latin America: Views from the Region. Usip. https://www.usip.org/publications/2022/08/chinas-engagement-latin-america-views-region
Radwin M (2023, February 28). Chinese investment continues to hurt Latin American ecosystems, report says. Mongabay. https://news.mongabay.com/2023/02/chinese-investment-plagues-latin-american-ecosystems-report-says/
