Risks Posed by South America's Growing Ties to China

Risks Posed by South America's Growing Ties to China 
Insidecostarica.com. ^ | Thursday 06 January 2005 | Diana Cariboni 

 by hedgetrimmer

MONTEVIDEO, (IPS) - While the United States has its gaze trained elsewhere, China has been nudging its way into South America.

Its influence could perpetuate a weak economic model based on commodity exports, and exacerbate the already serious problem of corruption, according to analysts, who identify these as the immediate risks posed by the sudden interest in this region expressed by the Asian giant.

Given that China has the potential to become a major new presence in South America over the next two decades, it could also contribute to a significant change in the balance of geopolitical and economic forces in the hemisphere, say some observers.

The importance of this region for China was underscored by President Hu Jintao's visit to three South American countries in November: Brazil, Argentina and Chile. (He also stopped over in Cuba).

Latin America and the Caribbean currently account for just 3.2 percent of China's trade with the rest of the world.

But for this region, China represents a market of 1.3 billion people.

For Brazil, which accounts for half of South America's combined gross domestic product (GDP), China is now the second biggest export market. Brazil's sales to China climbed 153 percent in 2003, with respect to 2002.

Beijing has signed a free trade accord with Mexico, and is negotiating another with Chile, a country with which it did 3.29 billion dollars in trade in 2003, up 35 percent from the previous year.

”China's planners are well aware of the country's internal strengths and weaknesses” and ”operate with anticipation, lining up markets and business platforms that guarantee long-term growth,” Sergio Cesarin, an Argentine economist who holds a masters degree in economics from the University of Beijing, told IPS.

Companies and the government form a ”symbiosis of interests that is part of the success of the model of 'Chinese capitalism' or 'Chinese-style socialism',” he said.

China is a powerful motor that needs raw materials to sustain its growth, which has averaged more than eight percent a year over the past decade. Its enormous appetite has been responsible for the overall rise in commodity prices.

According to the Asian Development Bank, China is the world's biggest consumer of copper, tin, zinc, platinum, steel and iron. Last year it gobbled up 40 percent of the world's steel, 30 percent of coal, 30 percent of steel and 25 percent of aluminum and copper.

Economists link Latin America's strong economic growth in 2004 to the rise in Chinese imports of raw materials.

Furthermore, China is among the five leading investors in this region, and for the first time overtook Japan in 2003, which put it in fourth place, after the United States, Britain and France, according to the United Nations Conference on Trade and Development (UNCTAD).

In his speech in the Brazilian parliament in November, Hu said his country would invest 100 billion dollars in Latin America over the next 10 years. He also talked about strengthening the ”strategic partnership” between the two countries.

China is seeking to ”expand its political influence, markets and networks of business contacts for its companies,” said Cesarin, coordinator of Pacific Studies in the Institute of Social Science Research at the Argentine National Council on Scientific and Technological Research.

Several heavily indebted countries in this region, especially Argentina and Brazil, are finding relief in their rising exports of farm commodities like soy beans to China, while others are seeking a route to growth that differs from the free market, structural adjustment model followed in the past 20 years, largely as a result of prescriptions from the international financial institutions in Washington.

The nations of Latin America are in need of liquidity and financing. In 2003, foreign direct investment (FDI) in the region dropped nine percent, to 36.7 billion dollars. In 1998, the year that privatisations peaked, FDI amounted to 88 billion dollars.

At the same time that ties with China have been growing, the United States has distanced itself from this region. Washington's top priority has been the ”war on terrorism”, and progress towards its project for hemispheric integration, the Free Trade Area of the Americas (FTAA), has stalled.

Without any traumatic history of relations with Latin America, China's overtures have not awakened a sense of wariness or apprehension.

Beijing, which is stepping into ”a vacuum of ties left by the United States, has well-oiled political relations with the centre-left governments that predominate in the region, a positive public image, and the overseas networks of Chinese nationals, who are involved in bilateral relations,” said Cesarin.

But South America, and more specifically the Southern Common Market (Mercosur) trade bloc that consists of Argentina, Brazil, Paraguay and Uruguay, do not seem to have any clearly defined strategy for developing business ties with the Asian giant.

Despite the high-level meetings that Beijing and Mercosur have held since 1997 (the most recent took place in July), the bloc is just beginning to ”build” a strategy to guide the forging of closer ties with China, Eduardo Sigal, under-secretary of integration in the Argentine foreign ministry, admitted to IPS in November.

But while Mercosur attempts to come up with a coherent strategy, Hu found it to be a relatively simple matter to get Brazil, Argentina, Chile and Peru to recognise China as a market economy - a status it does not enjoy in the World Trade Organisation (WTO).

That step drew protests from industrialists in Brazil and Argentina, who are traditionally divided by trade disputes, but are now united in their complaints about the threats to the barriers that currently protect them from the ”dumping” - the export of products at prices deemed artificially low - of cheap Chinese goods.

South America is running a risk ”if we establish relations that increase our vulnerability to the ups and downs of commodity prices,” said Cesarin.

The error, he said, ”is not sitting down to reflect.”

”We need China to help drive an improvement in the manufacturing capacity and the diversification of the export base in our countries,” he maintained.

Mexico is one example not to be emulated. Many businesses in industries like footwear, clothing and glass have found it impossible to compete with Chinese products, which are up to 60 percent cheaper.

China's exports to Mexico soared from 195 million dollars in 1989 to over four billion in 2002, and 300 ”maquiladoras” or export assembly plants have left for China.

Corruption is another grey area in the newfound proximity between South America and China.

Graft, rather than drug trafficking, is the source of 70 percent of the ”dirty money” laundered in Brazil, where only one-third of the resources disbursed by the government actually reach their intended destination, according to the director of the international legal department of the Brazilian Attorney General's Office.

In the Corruption Perceptions Index 2004 report released by the global anti-corruption watchdog Transparency International, China received a score of 3.4 on a scale of one to 10, with 10 representing squeaky clean.

In South America, Brazil was given a score of 3.9, Argentina 2.5 and Paraguay 1.9. Chile and Uruguay stood out in the region, with scores of 7.4 and 6.2, respectively.

In China, ”the level of corruption is high, as it is in Latin America,” said Cesarin. The Chinese ”are often involved in money laundering, as is a large part of the Latin American elites.”

A business source involved in the promotion of Asian investment in the region admitted to IPS that there is a ”sensation” of ”shady” business dealings and money coming from China or Hong Kong for apparently unprofitable business endeavours that could mask money laundering activities.

Since China prohibits the withdrawal of deposits, ”money from corruption has to be laundered somehow,” said the source, who did not want to be identified.

According to a 2002 report by the official Chinese newspaper the People's Daily, money laundering was equivalent to nearly two percent of GDP in 2001 and to 11 percent of the country's foreign reserves.

The fourth generation of Chinese leaders, who rose to power in March 2003, are aware of the ”Trojan horse” of corruption, according to the book ”China's New Rulers: The Secret Files”, published in November 2002 by The New York Review of Books.

But they are divided over how to tackle the problem, say the authors.

While Hu defends strict regulations for the recruitment, training and promotion of members of the ruling Communist Party, including investigations and interrogations, other leaders believe that is not sufficient.

They advocate measures of popular oversight, which they describe as ”democracy”, like limited competitive elections and partially free media, as ways to put some limits on power.

But in China there is no movement like the perestroika that brought down the Soviet Union in 1991, say the authors Andrew Nathan, a professor at the University of Columbia, and Bruce Gilley, a doctoral student at Princeton University and a former contributing editor at the Far Eastern Economic Review.

Anyone who would have dared to express the view that the party's monopoly on power should come to an end would not have survived the selection process for the Politburo's Standing Committee, says the book, which is based on leaked information provided by a Chinese informant.

”The question is how to keep corrupt politicians in our countries from doing business with similar agents from China,” said Cesarin.

But in his view, ”the problem is not these people themselves, but those who govern us, who have the obligation of designing collective policies and strategies” to fight graft.

The coming year will be key, because the agreements and negotiations in progress will begin to delineate the magnitude of China's influence in the region.