1. Negotiations
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China’s New World trade coveted, feared

Miami Herald, Sep. 26, 2005

China’s New World trade coveted, feared

China pursues stronger economic ties with Latin American and the Caribbean. But will the new relationship spur development or be a step backward?

By Jane Bussey
jbussey@herald.com

From the Chinese-made Virgin of Guadalupe statues hawked in Mexico City to the bulk carriers loaded with South American copper steaming toward the Chinese port of Quingdao, the ties that bind Latin economies to the rest of the world no longer run just north-south.

China’s burgeoning appetite for raw materials and quest for export markets has sparked a boom in south-south trade, as the world’s fastest-growing developing country courts its Latin American counterparts, engendering both anticipation and alarm.

While China is hungry for Latin America’s raw materials, it also has the potential to eat into Latin countries’ markets for their own products in the industrialized world.

’’We feel very vulnerable,’’ said Roberto Giannetti da Fonseca, director of the foreign trade department of the powerful Federation of Industries in Brazil’s Sao Paulo state.

In the past five years, China’s trade with Latin America has grown at an annual rate of 42 percent, reaching nearly $22 billion last year.

Chile and Peru now sell $1 out of every $10 in exports — mostly copper — to China. And roughly 8 percent of exports from Cuba and Argentina are headed to China, according to a September report from the Economic Commission for Latin America and the Caribbean.

Latin Americans are also expecting a flood of Chinese investments. Billions of dollars are promised and in recent years more than half of China’s foreign investments have been directed at Latin America to acquire natural resources.

Now more than ever Latin Americans are reminded of Napoleon’s 19th century observation that, when awakened, the sleeping giant China will shake the entire world.'' With its rock-bottom labor costs, numerous government subsidies and other advantages, low-cost Chinese toys, clothing and appliances are not only supplanting domestic-made goods in Latin America but also edging out Mexican and Central American factories in sales to the lucrative U.S. market. But if China is proving to be the bane of the region's manufacturers, it has been a boon to South American mining companies, petroleum interests, soybean farmers and other producers of raw materials. Spurred on by higher prices for their commodities and growing Asian markets, Latin America and the Caribbean are importing more from China -- a move that could redirect Latin American trade patterns and potentially dent Florida's trade ties with the region. Higher exports also have helped the region service its foreign debt and prevented new financial turbulence -- which in the past has diminished Florida's trade with Latin America and the Caribbean. Anticipation over the new Sino-Latin American ties reached a peak last November when Chinese President Hu Jintao toured Brazil, Argentina, Chile and Cuba and reportedly pledged that his country would invest $100 billion in the region over the next decade. South American presidents hailed the developing relations, which come as China has edged out the United States as the world's largest consumer of copper, nickel, aluminum and iron ore. Investments so far are a mere trickle. Chinese investment last year, for example, was just $889 million out of a total of $54 billion in investments that flowed into Latin America. {{DEAD-END STRATEGY?}} While experts note that the effort is still in its infancy, they question whether providing critical commodities to sustain China's growth is a step forward or will prove to be another dead-end strategy in a region trying to shake off massive poverty and build up its own infrastructure. ''The Chinese are becoming another world power, a manufacturing power,'' said James Petras, emeritus professor at the State University of New York at Binghamton.Latin Americans are falling further behind. Instead of investing in manufacturing production, they are going back to an early model that preceded their industrialization.’’

Before Latin America embarked on industrial development in the 20th century, it provided raw materials that fueled the economies of Europe and later the United States.

Petras noted that relying on exports of raw materials has other drawbacks: Commodity prices are highly volatile, and investments in mining and oil generate only a handful of jobs compared to the employment created by investing in factories.

Albert Keidel, China Program senior associate at the Carnegie Endowment for International Peace in Washington and a former Treasury official in the Bush administration, said there is nothing to prevent Latin American countries from concentrating on both manufacturing and exporting commodities — but that export success is often counterproductive as a development strategy.

’’It tends to make a country feel that it doesn’t have to industrialize because it’s getting money from its raw material exports,’’ Keidel said.

Although China is still much poorer as a whole than Latin America, with annual per capita income of $1,200 compared to $3,000, the Asian giant is attracting more attention from international investors and growing at a faster clip.

’’What do they [Latin American countries] do in the face of a strutting China?’’ asked Keidel. ’’Study China.’’

VALUABLE LESSONS

The lessons would be investment in education and health services, development of high-tech industries and heavy investment in infrastructure, such as highways, ports and telecommunications networks.

Meanwhile, sales to China have reversed decades of low export performance in countries such as Argentina.

’’Argentina is basically a food and agriculture country,’’ said José Ignacio de Mendiguren, an Argentine industrialist who pushed trade with China during his brief stint as minister of production in 2002. The Western world does not want to buy from us. China is going to become the principal buyer of food production in the world. What do you want Argentina to do?'' But others argue that relegating the region to a raw materials purveyor will ultimately cost Latin America jobs and shutter its factories. As China became America's favored factory floor, Mexico, for example, lost some 300,000 assembly plant jobs in 2002 and 2003 -- despite its status as free trade partner of the United States in the North American Free Trade Agreement. {{WARMER RELATIONS}} Sino-Latin American ties have warmed considerably since 2000. Hu's visit to the four Latin countries last fall came less than three years after his predecessor Jiang Zemin made a 12-day swing through Chile, Argentina, Uruguay, Brazil, Cuba and Venezuela to firm up trade and military ties in April 2001. As Hu pledged Chinese investment in South American companies, roads and ports, Brazil, Argentina, Chile and Peru all bestowed market economy status on China, which makes it even more difficult for the countries to counter the flood of Chinese imports by imposing trade rules. And Chile, which is among the Latin economies most open to foreign trade, took a further step and is negotiating a free trade agreement with China. President Ricardo Lagos has said it will be completed before he steps down from office early next year. Chilean salmon farmers and wine makers hope to take advantage of a future free trade accord by exporting to China. But the manufacturing sector opposes the trade talks. ''We are not totally in agreement about negotiating with China because it does not adopt the rules of the rest of the world,'' said Alejandra Molina, manager of foreign trade at the Metal and Metallurgy Association in Chile.They don’t have to comply with the laws, and we do.’’

Others around the region aren’t thrilled with the prospect of closer trade ties with China either.

’’Agreeing that China would be considered a market economy is a big mistake in our opinion,’’ said Fonseca in Sao Paulo. Argentine manufacturers echoed Fonseca, criticizing the government for tying the hands of industries hurt by Chinese imports.

SMUGGLED GOODS

Apparel, footwear and toys are just some of the industries hit hard by Chinese competition. Now such goods are often smuggled in to avoid high duties. Mexico, for example, has duties as high as 500 percent on some Chinese products, but these tariffs have failed to slow the influx of Chinese-made likenesses of the Virgin of Guadalupe — Mexico’s patron saint — and other products.

The change has been swift. Mexican children were still waving domestically made flags when China’s president visited in 1997. Today many Mexican flags come from China.

After Chinese imports into Colombia surged by 56 percent in the first half of 2005 to $680 million, the country imposed safeguard duties of 61 percent to 87 percent on textile and apparel imports.

Meanwhile, Chinese investments have failed to materialize as rapidly as the countries in South America had hoped. But given the Chinese government’s desire to acquire companies that will assure its access to raw materials, there is little doubt the investments will be forthcoming.

Some 400 Chinese business executives, including those from China Minmetals and Shanghai Baosteel Group — two of the country’s largest corporations — accompanied Hu on his swing through the region last year.

MAJOR ENDEAVORS

In May, Minmetals and the China Development Bank announced a strategic partnership with Codelco, the state-run copper company in Chile, to develop copper resources. Baosteel has held discussions with Brazil’s Companhia Vale do Rio Doce about the construction of an iron ore production plant.

Earlier this month, CNPC, China’s major state oil company, outbid an Indian exploration company to purchase Ecuadorean oil and pipeline interests from EnCana.

Argentina also has signed letters of intent with China to study the construction of a seven-mile tunnel through the Aguas Negras Pass from the San Juan province into Chile.

The highway improvement would allow Argentine soybeans to be shipped through Chilean ports to China, significantly diminishing the 45 days it currently takes to reach Chinese ports.

The intertwined business future of China and Latin America will depend upon continued future economic growth in China, something which cannot be guaranteed.

Even for exporters who benefit from China’s huge appetite for commodities, commercial ties can be risky.

In 2004, China turned away six vessels laden with Brazilian soybeans, claiming they were contaminated with fungicide. Europe later accepted the Brazilian shipments, but the price of soybeans plunged.

But Blairo Maggi, governor of Brazil’s Mato Grosso state and the world’s largest soybean producer, said Brazilians are realistic about Chinese ties.

’’The Chinese always want to have the best business for themselves,’’ Maggi said earlier this year. ``They knock down the price — this causes conflict. So do we trust them in the long-run? The answer is no.’’