Senior representatives of the Latin American and the Caribbean (CELAC) states travelled to Beijing early in January to “consolidate the ever-lasting friendship” between these two global economic powerhouses. A new framework was proposed to increase bilateral trade to US$500 billion, and raise Chinese investment into Latin America to US$250 billion, with both targets to be achieved by 2020. If reached, the latter figure would represent a 150 percent increase on the current level.
Though unprecedented, targeting this level of investment and financial partnership has been over a decade in the making. Between 2000 and 2009, China increased bilateral trade with Latin America from US$13 billion to $120 billion, a nine-fold increase. Dominated by China, populous and rapidly expanding countries in the Asian market sought oil, copper and iron ore as well as a variety of crop-based commodities – both sets of which Latin America has in abundance. Although China has a well diversified supply chain and buys these and other primary commodities from African, Asian and North American suppliers, 55 percent of its copper supply comes from Latin America. China has now become the largest export market for Brazil, Chile and Peru, as well as the second largest for Argentina, Costa Rica and Cuba.
China Provides the Majority of Foreign Direct Investment into Latin America
From a Latin American perspective, further deepening trade relations with China has provided the region with an opportunity to diversify their source of finance – one that has historically relied on the West. At a time when the US and EU economies have exhibited anaemic growth since 2008, trade with China has helped spur growth in Latin America. Every one percent increase in Chinese growth is correlated with a 1.2 percent increase in Latin American growth. Since 2010, Chinese companies have provided an average US$20 billion in annual direct investment for the development of roads, ports and railway lines across the continent. There is also significant investment into oil extraction, the most recent being China’s US$36 billion pledge in 2013 to develop Libra, one of the largest oil and gas field ever discovered in Brazil.
Lower Chinese Demand for Commodities has Widened the Latin American Trade Deficit
The gathering has been timely; despite Latin American exports to China increasing in volume, falling prices have resulted in a contraction in export values over the last three years. In 2014 Mexico imported US$56.94 billion of goods from China and exported US$5.72 billion to China, creating a trade deficit of US$51.22 billion. Many in Brazil are also concerned that Chinese industrial exports are cutting into their market share worldwide, while making inroads into their own domestic markets. As long as the commodity price cycle remains in a downturn, this level of trade imbalance is likely to continue in 2015.
Latin America has secured access to a reliable source of finance at this year’s China-CELAC forum, giving the region a valuable opportunity to meet their own development goals for the next five years. The possibilities are enormous if Latin America can achieve efficient, cost-competitive production, which is currently being impeded by inadequate infrastructures in transportation and energy.