Ariel Castro-Martinez | Latin America Fellow
'When China sneezes, the world catches a cold.' But not equally.
Latin America’s first history of global exchange was one of tragedy and deep unfairness. Now, new disease and resource extraction from foreign powers—this time China—is threatening to throw the region back into a new era of unbalanced trade and economic exploitation. Through disease, disunity, and unsustainable development, the region may again be vulnerable to acquisitive outsiders.
Chinese interest in Latin America increased significantly in the 2000s and onwards as the Asian powerhouse’s expanding economy—particularly in construction—demanded resources and fresh markets abroad. High commodity prices and the need for foreign investment naturally led many Latin American countries to increase trade with China while Chinese firms and institutional lenders poured money into the continent—most vigorously in extractive sectors. This, however, was not a fair or well managed exchange.
Seventy per cent of South America’s exports to China consist of only four commodities: soybeans, oil, copper, and iron ore. Exporting commodities works as an economic development strategy only when commodity prices are high and when the incoming revenue is invested in more sustainable, long-term development strategies like education. ‘Re-primarisation’ in Latin American economies–most egregiously in Venezuela–has slowed their ‘upgrading’ towards value-adding industries that create more jobs with higher wages, better working conditions, and less carbon emissions. When the price of oil fell in the early 2010s, Venezuelan debt and diplomatic isolation incentivised the country to take predatory Chinese loans to cover the shortfall.
Chinese lending differs from other institutional lendings, as Chinese loans often come with commodity clauses (‘loans-for-oil’) or mandate the use of Chinese labour and materials for infrastructure development. China also explicitly promises to not interfere in the internal affairs of Latin American nations. This makes Chinese lending particularly attractive to states like Ecuador and Argentina that are resistant to calls for political and economic reform from lenders like the World Bank.
The weakness of Latin American states to strike fair deals is amplified by poor regional integration. Trading blocs like Mercosur have struggled to harmonise commercial interests between its constituent economies and countries like Uruguay have instead opted for bilateral negotiations with China. Brazil, under President Bolsonaro, has emphasised bilateralism over regional cooperation and even expressed animosity towards the region’s second-largest economy Argentina’s newly elected President Fernandez for the ideological threat his left-leaning government poses to Mercosur, of which both nations are party to. Latin American trading blocs could better rebalance China by pushing cooperatively for better investment terms, such as conditioning infrastructure development on local hiring and knowledge transfer.
Latin America may even find itself on the losing side of a strategic game it is not even playing.
Global foreign direct investment (FDI) has fallen for the last three years due to great power rivalry and trade disputes among the United States, Europe, and China. South America’s share of global FDI remains steady at about 14 per cent, but this might be due to investment restrictions being erected amongst the world’s powers as they jockey for technosecurity independence. Eager for development and preoccupied with domestic politics, Latin America’s relative lack of both investment restrictions and geostrategic decisionmaking render it a playground for foreign powers like China looking to acquire strategic assets. These include the construction of Caribbean ports, transcontinental energy and communications cables, and export-expediting railways. Although Latin American nations may benefit from inflows of capital and infrastructure, it is playing a passive role as China gains control of vital assets whilst boosting its extractive capacity. The true value of this exchange will depend on how much equity Latin American states can secure from these assets in the long run.
Amidst this context, the Economic Commission for Latin America and the Caribbean expects Latin America will begin the decade with its worst economic contraction in history due to fallout from the COVID-19 pandemic. Regional hunger and poverty rates are expected to increase significantly as global supply chains dry up, and the region’s already strained economies suffer untold human and economic loss. China, necessarily, has donated large numbers of supplies and aid to the region, but the damage has already been done.
Economically strained, multilaterally divided, politically preoccupied, and strategically absent, China coughed and now Latin America is very ill. Political divisions and rich earth have made the continent easier than is equitable to exploit. China’s ‘win-win’ economic engagement strategy is insincere and unbalanced against South American nations that lack the development and political infrastructure to match China’s long-term dealmaking. Responsible economic engagement would have China invest in Latin America rather than through Latin America. Moreover, the global community needs to extend greater assistance to Latin American development lest it becomes an arena for great power competition or driven into making unfair and unsustainable exchanges. Latin America clearly has great potential, but the continent has yet to fully tap into it for itself.
Ariel Castro-Martinez is the Latin America Fellow for Young Australians in International Affairs.