Money Morning | November 19 2008
China and Peru Sign Free Trade Agreement, Extending Asian Influence in Latin America
By Jason Simpkins
China and Peru signed a free trade agreement today (Wednesday) that will pave the way for further cooperation between the two countries and broaden China’s influence in Latin America.
Chinese President Hu Jintao landed in Peru along with a delegation of nearly 600 business leaders and finance ministers that will accompany him to this weekend’s Asia-Pacific Economic Cooperation (APEC) summit in Lima. However, before the conference officially kicks off, President Hu and Peruvian President Alan Garcia signed a free trade agreement that will likely result in China overtaking the United States as Peru’s biggest trading partner.
The mineral-rich Peru, which is home to large deposits of iron ore and copper, figures to play a large part in China’s relentless quest for raw materials. Aluminum Corp. of China Ltd., for instance, recently signed a $2.2 billion deal to extract more than 7 million tons of copper from Peru’s Toromocho mine.
“Some foreign companies are basically canceling their projects in Peru,” Zhu Jingyang, a Chinese representative in Lima told The Associated Press. “That’s not the case for China.”
China has made similar forays into other Latin American countries, such as Chile, where it signed a free trade agreement in 2005. Last year, China supplanted the United States as Chile’s top trading partner. Analysts see a similar situation unfolding in Peru.
“It is inevitable that China will become Peru’s number one trading partner,” Juan F. Raffo, chair of APEC Business Advisory Council, told the Financial Times. “China now has 300 million people that are comparable to U.S. citizens in their consumption . . . that figure is growing. Their 1.3 billion citizens, minus the elderly, are sooner or later going to jump the fence and consume at developed world levels.”
Luis Valdivieso, Peru’s finance minister, told the FT that China would be instrumental in helping Peru outgrow its dependence on the United States.
“We are very concerned about the recession that is going on in the U.S., Europe and the slowdown in Japan,” Valdivieso said. “So for us, China becomes an important partner.”
Valdivieso added that the United States will remain an important trade partner, but that it is also crucial that the country diversify its markets. That is true of most all Latin American countries where trade with China is growing at a torrent pace. China’s trade with Latin America totalled $102 billion last year, but it has already eclipsed $111 billion in the first nine months of 2008.
In addition to Peru and Chile, China has already signed free trade agreements with Costa Rica and Cuba. In fact, Cuba’s state news agency reported that President Hu has signed almost a dozen agreements with Cuba, including plans to upgrade infrastructure and buy sugar and nickel.
And last year, China’s State Administration of Foreign Exchange (SAFE) last year used the purchase of $300 million in Costa Rican government bonds as leverage to get the Central American nation to sever diplomatic ties with Taiwan that stretched back 63 years.
In Brazil, China is currently in negotiations are negotiating to build a $3 billion steel mill with help from the Bank of China, which is set to open a branch with a $100 million in lending capital there next year. China has also sunk billions into oil exploration in Ecuador, Colombia and Venezuela.
“The reality is that to some degree the fate of Latin America has been decoupled from the US,” Daniel Erickson, of the Inter-American Dialogue thinktank, told the AP. “Or at least it’s not as tightly entwined as it used to be.”