Doing it for love or money?

The uneasy relationship between China, Latin America and the United States

By James Stranko For U.S. Foreign Policy in Latin America Prof. Jacqueline Mazza

Introduction A stranger in the backyard

When asked about Chinas growing influence in Latin America in an interview with China Daily, the English-language daily controlled by the Chinese government, Arturo Valenzuela emphatically said Look, we dont see China as a threat in Latin America. What we do see is that China provides Latin America with many more opportunities to grow their economies, to provide better jobs, to increase standards of living. And we agree with the Chinese that that is an important objective for both countries. We both benefit from a stable, prosperous Latin America that engages much more in world tradethis is a win-win in both countries.

The Chinese interviewer did not look convincedand retorted: So China and the U.S. are partners in Latin America?

Valenzuela stumbles, and the avuncular secretary of Western Hemisphere affairs runs into trouble pinning down exactly what Sino-American cooperation looks like in the region. His first thought expressed itself as China and the United States in some ways are not partners right now, which later turned into possible areas we might operate in the Western Hemisphere. By the end the interview seemed like a fitting, uncomfortable metaphor for the United States complicated relationship with Latin America and with Chinas growing role in complicating it further.1

Valenzuela, video interview

Chinas rapid economic growth has captured the imagination of Americansimbuing American views of the worlds largest country with wonder, bewilderment and fear. Chinese growth statistics are, of course, impressivewith near to 10 percent annual rates for the period from 2003-2010 and a bloated trade surplus with the United States. Even without thinking about Chinas important rising military spending, its growing confidence to intervene in matters of global importance alongside new bilateral relationships and growing use of yuan diplomacy means that Americans sense that something is changing quickly in the world order.

Ed Crooks from the Financial Times puts it this way in a piece from March 25th: Anxiety about US decline and the rise of China has become an obsession, from the Rand Corporation thinktanks warning in February that the Chinese air force will be an aggressive opponent in the event of a conflict to Amy Chuas recent book Battle Hymn of the Tiger Mother, a humorous memoir of Chinese-style child-rearing.2

Always in a search for a menacing counterparty, the United States has focused its sights away from Latin America and, in some ways, has missed the important developments that have been sweeping the region. A less-publicized economic success story is that of Latin America, and the unparalleled years of growth, prosperity and democratic consolidation that the region have experienced while the United States was focusing elsewhere. Two of South Americas most dynamic economies, Brazil and Chile, have experienced high single digit growth in the same period while expanding the reach of their exports and trade partnerships. Other countries like Colombia and Peru have undergone significant structural economic changes that have allowed

Crooks, full text

them real GDP gains, better wealth distribution, and more diverse trade relationships. Exacerbating this trend, issues that drew the most American attention to the region began to abate precisely in the period China began investing. In the meantime, government attention, aid funding, and general priority-setting, combined with the fresh financial crises of 1999 and 2001 in the region, meant priorities were shifted elsewhere, leaving China to quietly expand its trade role.

At the same time, there is little doubt that Latin Americans are struggling to keep up with Chinas rapid riseboth economically and politically. If Americans are paranoid that their economy may be soon eclipsed by Chinas, Latin America has already been there and back. In just thirty years since 1980, the collective economic output of Latin America was seven times as large as that of China. Now, Chinas economy is larger than all of the economies in Latin America combined.3

This paper lays out five broad issues that contribute to the vagarious nature of U.S. policy in Latin America with respect to China. These include: political failure, muddled economic policy, historical hang-ups; differences in perspectives; and distractions. This is followed by an analysis of what Latin America has at stake in this new relationship. The paper concludes with an examination of likely outcomes as the relationships mature.

Gallagher, full text

Five reasons why has U.S. policy been so incoherent: A brief summary and introduction
Political failure: The failure of the Free Trade Agreement of the Americas (FTAA), alongside the relative success of NAFTA (which diverted regional investment to Mexico), has been a major policy failure for the United States in the context of Sino-Latin relations. The FTAA had been a policy goal of the United States for decades and its unquestionable failure has revealed a certain confirmation that the power dynamics in US-Latin American relations are changing. Chinas government had been closely observing the progress of the FTAA because of the potential effect it could have on their own large export markets in the U.S.4

Certainly, without strong rules of origin protections, Chinese companies could have easily established bases within North and South American countries to stage duty-free exports to the entire continent (much as they have been accused of doing in Mexico under NAFTA). But more plausibly, hemispheric free trade could have meant important sectors in Latin American countries would be competitive with China, such as textiles and consumer electronics. These would create competition to Chinese goods in the United States and similarly to other Latin American markets, which usually impose high import taxes on these products.

Bad economic luck: American economic growth, particularly industrial and manufacturing growth, suffered huge stagnations in the period when Chinas industrialization hit its most feverish pace. For Latin Americas commodity export-led economies, this meant a better customer in Asian markets than in the United States. The similarity of North and Latin American

Yang, 5

export markets, and their similar comparative advantages particularly in raw materials, also created barriers to trade growth. In this sense, the catch-up game that China has been playing is partly a result of flagging demand from the United States.

Historical hang-ups: From a Latin American perspective, the United States is an agent provocateur in a long line of events ranging from interventionism to Washington Consensus economics. Despite the recent popularity of orthodox economic policy in large Latin American countries, finance ministers are decidedly reluctant to align orthodox economic policy closely to trade with the United States. And while it is less measurable, elites across a broad swathe of industry can be reluctant to engage in business with American companiesparticularly when monopolistic interests may be threatened in the process.

International financial market turbulence and perspective of US vs. Chinese investors: American and Western investors in general base their decisions on profits and growth while Chinese invests mainly components that feed their economic growtha means to an end instead of an end in itself. Whereas American companies either invest via FDI flows or capital flows in domestic assets, Chinese investments are purpose-driven and built. Thats to say that they are built around the need to satisfy a certain domestic commodity or resource demand, and that they are much more of a means to secure resources than to invest for profit-making or economic development purposes. The United States does not need to make the types of investments in the commoditieswith the possible exception of oilthat Latin America produces since it produces many of the same products itself.

Distractions: With Islamist terrorism rocketing to obsession within the Department of Defense and the State Department during the George W. Bush administration, Latin Americas limited role in the phenomenon created a noticeable drop in interest in security issues in the region. Aside from several years of concern around possible Islamist terrorist training and fundraising activity in the triple border region of Paraguay, Argentina and Brazil, the U.S. shifted its terrorism focus away from narcotrafficking after September 11, 2001 and turned its interest to radical Islam.

Whither the Monroe Doctrine?

Mention of Chinese encroachment in Latin America conjures up fresh memories of the Cold War and more distant Old World preoccupations that then led to the formation of the Monroe Doctrine. But from Richard Nixons comment that people dont give one damn about Latin America5 to George H.W. Bushs supplications to Bernie Aronson to get the region off his agenda to George W. Bushs Latin American priority turnaround after 9/11, U.S. policy in the region has been in disarrayleaving the door open to challenges on American influence. Still reeling from the American experience with Cuba, policymakers feared for many years about a challenge that would come from Communist ideology creeping into domestic politics in Latin Americaleading to Soviet satellite states in Americas backyard.

Cardenas, full text

Some high profile projects financed by Chinese government money have raised eyebrows, like Costa Ricas largest soccer stadium. This has led some to question whether they are simple acts of solidarity with developing world brethren or just ways to curry favor to advance an antiTaiwan agenda and regional hegemony. According to the opening day article in Costa Ricas Tico Times, the National Stadium was built after President [Oscar] Arias severed diplomatic ties with Taiwan to officially establish Costa Ricas new partnership with China. As a token of appreciation, the Chinese government offered Costa Rica a new National Stadium as a gift, and spent an estimated $100 million on its construction.6

Another high-profile example was the late 2010 Chinese government proposal for a dry canal to be constructed across the northern part of Colombia. The rail link would connect the Pacific Ocean with the Caribbean and connect to a new city near Cartagena where imported Chinese goods would be assembled for re-export throughout the Americas and Colombia-sourced raw materials would make the return journey to China. Despite initial claims that the plan was far from any implementation, Colombian center-right president Juan Manuel Santos has said the plan is a real proposal... and it is quite advanced, and that the studies [the Chinese] have made on the costs of transporting per tonall work out.7

In Suriname, the Chinese have lent vital aid support to a leader that has been abandoned by their former Dutch colonial masters due to antidemocratic acts like accused assassination of opposition officials. When interviewed by the New York Times, it was hard to tell if the Chinese ambassador Yuan Nansheng was giving a compliment or foreshadowing what further Chinese
6 7

Williams, full text Rathbone, full text

investment would look like when he said, Suriname is a lucky country, such small population, so much land.8 Indeed, Chinas appetite for Surinames agricultural products like palm oil and the willingness to build the infrastructure to extract these goods is attractive to a small economy like Surinames. But others view it as a gateway to further land acquisition and expansion in the region, particularly in politically-weak countries.

On the other hand, in Chile, Chinese investment in copper has filled the coffers of the countrys sovereign wealth fundallowing for a significant amount of countercyclical spending that smoothed the global financial crisiss effects. In Argentina, Chinese soy purchases have driven economic growth and incited strong political debates around the distribution of economic rents from agriculture. In Brazil, strong Chinese imports combined with a high domestic currency value have enabled millions of consumers to enter the middle class in consumption terms.

What has been going on in Latin America in the meantime?

President Obamas speech to the Brazilian people in Rio de Janeiro in March 2011 was a grandiose expression of American fraternity and solidarity with Brazil and its story 9. Nonetheless, he underscored an important differenceespecially in the eye of American foreign policybetween the growth stories of places like Brazil and countries lacking the same commitment to a democratic market economy. The millions in this country who have climbed from poverty into the middle class, they could not do so in a closed economy controlled by the
8 9

Romero, full text Obama, full text

state. Youre prospering as a free people with open markets and a government that answers to its citizens.10

Nobody can be certain whether this subtle jab at centrally planned economies was a veiled jab at more cantankerous partners in the region like Venezuela, Bolivia or even Argentina, an outright indictment of the Chinese economy, or an extremely outdated reference to the Soviet Union. Regardless of its intent, the sentiment is clear: democracy has been consolidating alongside economic growth in Latin America in a way that has been elusive in the past. The United States, more than any other major actor, has credibility in promoting fair, transparent market reforms. In Latin America, though, economic development agendas have tended to demand structural changes a l Washington Consensus. This approach too often fell victim to short-termism, and created monopolistic firmsblunting the positive American values the region has co-opted.

Chinese investment, in turn, has not yet created major political issues in the region, and Americas neighbors in the Western Hemisphere have constructed, on the whole, relationships with China predominantly based on raw economic interest. The only major political concession has been around the recognition of Taiwan, which will be discussed later, although analysts have tended to link this to purely economic incentives. And the driver behind the economic relationship is a simple oneLatin America has the raw materials China needs and has the internal demand to buoy prices and drive economic growth through this trade. Latin America, in turn, is by and large a middle-income region that has a growing appetite for Chinese exports like electronics and textiles.

10

Rousseff/Obama, full text

Up until now, the economic relationship has been the driver and Chinese relations have been cordial, pragmatic, and predictably vague. While it may be tempting to think that some governments like Venezuela might look to China when looking for military supplies and cooperation, most Latin American countries prefer security ties to the U.S. both because they are politically important and because they dont trust Chinas longer-term political ambitions.11 This does not mean that some countries in the region are not planning for all possible scenarios of Chinese involvement, and nowhere is this more evident than in Brazil.

Brazil has increased military spending by 39% over the last decade, and is continuing to put resources into building up its naval and jet fighting capacityincluding courting the U.S., French and Swedish governments to vie for Brazils investment in three dozen jets. What is different this time, and from other hikes in military spending in Latin America, is the current buildup is focused not around domestic political order but rather around protecting Brazils coast and borders from external economic threats.12 Still, serious fissures in political structure, differing views toward authoritarianism, economic organization, and incorporation of civil society make closer ties with China uneasy for many Latin American governments.

11 12

Americas Quarterly, full text Economist, full text

What is China doing that the U.S. isnt? A new colonialism or a sign of increased political and economic maturity?

China is doing two things different than the West: it is buying up what the region produces and it is putting down hard cash in exchange for securing energy and other commodity supplies in the future. The headline numbers behind the Sino-Latin American agreements mask the symbiosis of agreements like the loans-for-oil accords. These agreements are simple upfront loan payments that are destined to develop the infrastructure to develop the fields and ancillary projects to facilitate oil export. China gets energy security, Brazil and Venezuela get the funding for the longer-term capital investment, and no messy international organizations are involved in the process.

Given all this, it is little wonder that Chinas growing economic participation in Latin America bemuses the American foreign policy establishment. At its heart, the phenomenon is so complicated because it cross-pollinates Americas new fear about losing to China with its persistent fear of losing Latin America. And the numbers certainly are convincing. For instance, in 2009 and 2010, the China Development Bank made promises to lend $35 billion to borrowers in Argentina, Bolivia, Brazil, Ecuador, and Venezuelathreefold the amount the Inter-American Development Bank approves every year for the entire region.13 This is a very different type of loan aid than the type given by the West and organizations like the IDB. China also signed headline-catching agreements with Brazil to help finance construction of extractive capacity in

13

Cardenas, full text

its new offshore Tupi fields, in return for a long-term delivery contract once production comes onstream.14

With the exception of showpiece political projects like Costa Ricas stadium, the investments that Chinese companies make in the region are aimed at improving access to raw materials via infrastructure. This comes at a time when, after 40 years of relative economic decline, Latin American countries are in most need of finance for reconstruction and repair of aging public works. Xiang Lanxin, the director of the Center for China Policy Analysis at HEI-Geneva, argues that although official Chinese government rhetoric seeks to promote the idea of SouthSouth cooperation in its dealings with Latin America, the PRCs trade pattern with the region in fact resembles a North-South model, with trade and investment heavily tilted toward energy and natural resources.15

What does China want? Does the U.S. even know what it wants?

Is it raw capitalism? Is it whittling away at Western Hemisphere diplomatic recognition of Taiwan? Is it provocation? With the exception of promoting the One China policy, Chinas official goals in the region are vague. In a policy paper published in November of 2008, the Chinese government outlined its four principal policy goals in Latin America, (in full text in an appendix). The paper further sets out goals to foster a wide range of bilateral activity from trade,

14 15

Liu, full text Xiang, 55

agricultural and industrial cooperation to infrastructure development, cultural exchange and debt cancellation.

Chinas rise in the region in the past decade could be seen through a simple trade lens. Chinas growth markets have shown a significant demand for the products that Latin America exports. Similarly, the economic slowdown in the second half of the decade meant an even larger proportion of the raw materials that Latin America specializes in went to fuel booming growth in China while the developed world lagged. But Latin American economies may soon find that this temporary boost in natural resource export income does not fix the structural lack of competitiveness and long-term deindustrialization of their economies. Brazils own government has been particularly quick to criticize domestic firms cashing in on cheap labor in China to offshore some value-added production processes, and critical of China for not opening up to Brazilian industrial imports while flooding Brazils market with cheap manufactured Chinese goods.

Middle-income Latin American governments, particularly those in the Southern Cone, are not banana republics, and have a sophisticated understanding of what it means to accept Chinese investment. It may provoke the United States, but ultimately governments have doubts on their own involvement in the Chinese growth machine.16 And indeed, Latin American countries are taking a step-by-step approachfrom Argentinas laws requiring domestic provision of domestic oil to Brazils recent restrictions on the amount of land foreigners can acquire in the country. 17

16 17

Nye, full text Mercopress, full text

But smaller countries like Costa Rica and Suriname may not have the political power to rebuff Chinese encroachment into matters of national importance or economic independence.

In cases like these, however, the Chinese may have yet to learn an important lesson about investment in Latin America. As investments in production capacity become investments in property and infrastructure, it would be nave to rule out the possibility of future expropriations, arbitrary capital controls and nationalistic legislation aimed at controlling the influence of Chinese companies operating in the region. The United States, Europe, and fellow Latin American countries have been through this and Chinese reaction to political defiance may not be as respectful of the rule of law and sovereignty as those of other actors.

For the United States the main issue is that, in a world of influence begotten through trade relationships, it cannot respond to the Chinese incursion as simplistically as it may have done in the Cold War. Influence dominance via international trade in a region where the United States has pushed free trade agendas for decades breeds an uncomfortable diplomatic position. The Obama administration has repeatedly advanced the message of regional cooperation, friendliness and, most strikingly, a strategy of partnerships amongst equals. Officially, the era of paternalistic, policing American power has ended in the region. More cynical Latin Americanists might view this as an admission of the historical neglect of the region in the American foreign policy apparatus. Perhaps it is an admission of shifting priorities in the wake of dwindling government budgets.

At the same time, it is important to consider the nature of the trade relationship and what impact it has on other nuances of diplomacy. On one sticky questionTaiwanChinas anti-U.S. policy is clear. In a report by the Congressional Research Service, China is charged with creating competition with Taiwan for diplomatic recognition, particularly in the Caribbean and Central America.18 This lines up with the most concrete statement in the Chinese governments One China Policy conditionality in dealing with the region. But with Taiwan at one of its lowest historical points on the bilateral Sino-American agenda, even this outright policy challenge has failed to provoke any major American response.

Conclusion

In one sense, Chinas influence is not a threat to U.S. preeminence because that same control has been slipping away for decades. In another sense, U.S. preeminence may just have been a case of de facto hegemony vis--vis the combination of economic power and proximity (a la so far from God, so close to the United States). Part of the problem boils down to the monolithic views the U.S. government holds of their southern neighbors. It is very different to look at Chinese investment in places like Brazil in the same way as in smaller, weaker states like Suriname. In smaller states, there is a real chance China may yet win over elites happy to access a huge base of capital and ordinary citizens happy to have jobs. Combined with economic development projects, be they infrastructure for trade facilitation or just showy soccer stadiums, China is creating a favorable image in some parts of the region. Larger Latin American countries

18

GPO, 31

are more aware of the potential risks involved in getting too close to China, yet see how trade with China can assist in economic development while carving out Latin American space in a multi-polar world.

U.S.-Latin ties are complicated because they are complex. They span centuries, they have a strong social component, and most importantly being neighbors the prospect of breaking them is implausible. But if the United States cannot offer viable economic development vehicles via investment or effective economic aid, it is difficult to imagine that historical and cultural ties alone will prevent the deepening of Chinese investment. But at this early juncture, China can pull out when times get tough, or when their extractive investments have served the purpose they need to serve. No hard feelingsjust business. The fear that Chinese economic hegemony is going to create an unstoppable shift away from the United States is already showing cracks. Cultural, historical and political differences between China and region are significant, and like neighboring countries in Asia some Latin American countries are looking back to the United States as a counterweight to Chinese economic influence.19 U.S. foreign policy may drift away from a Latin American focus, and economic interests may not always align, but economic and human ties to most countries the region are too strong to sever entirely. This time, though, the U.S. is just one of many options for Latin American countries looking for trading partners and political allies.

A more delicate question is what the U.S. fears in Chinas involvement in the hemisphere. Unlike encroachment by actors in the past, be they Spain, Great Britain, France or the

19

Nye, full text

U.S.S.R., Chinese investment comes at a time when neither ideology nor territorial control is at stake. If both countries maintain normal political and trade relations and consider their roles complementary, as Secretary Valenzuela awkwardly admitted in his interview, the U.S. should theoretically welcome Chinas role in the economic growth and prosperity of its neighbors. Perhaps the United States needs to worry less about why it may be losing Latin America to China, and more about why it is losing relevance in its own hemisphere in general.

Appendix: Chinese Official Policy Goals in Latin America

Source: Ministry of Foreign Affairs, Peoples Republic of China | Nov 5, 2008 To enhance solidarity and cooperation with other developing countries is the cornerstone of China's independent foreign policy of peace. The Chinese Government views its relations with Latin America and the Caribbean from a strategic plane and seeks to build and develop a comprehensive and cooperative partnership featuring equality, mutual benefit and common development with Latin American and Caribbean countries. The goals of China's policy on Latin America and the Caribbean are: Promote mutual respect and mutual trust and expand common ground. Based on the Five Principles of Peaceful Coexistence, China and Latin America and the Caribbean will treat each other as equals and respect each other. They will strengthen dialogue and communication, enhance political mutual trust, expand strategic common ground, and continue to show understanding and support on issues involving each other's core interests and major concerns. Deepen cooperation and achieve win-win results. The two sides will leverage their respective strengths, tap the potential of cooperation, and seek to become each other's partner in economic cooperation and trade for mutual benefit and common development. Draw on each other's strengths to boost common progress and intensify exchanges. The two sides will carry out more cultural and people-to-people exchanges, learn from each other and jointly promote development and progress of human civilization. The one China principle is the political basis for the establishment and development of relations between China and Latin American and Caribbean countries and regional organizations. The overwhelming majority of countries in the region are committed to the one China policy and the position of supporting China's reunification and not having official ties or contacts with Taiwan. The Chinese Government appreciates such a stance. China is ready to establish and develop stateto-state relations with all Latin American and Caribbean countries based on the one China principle.

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