China, South America and Regional Integration

China has big investment plans for South America. Will the region benefit?

By Bruno Gomes Guimarães and Diogo Ives

September 21, 2015 

The trip to Brazil, Peru, Colombia, and Chile by Chinese Premier Li Keqiang in May this year sought to follow up on the planned cooperation between China and CELAC (the Community of Latin American and Caribbean States) announced in January of the same year. This plan’s main goals are to increase bilateral tradeto $500 billion and the inflow of Chinese direct investments to the region to $250 billion until 2025.

The two objectives are linked, since China expects that the bilateral trade will grow if it invests in Latin American infrastructure. This strategy has also been used to bolster China’s economic relations with countries in Europe, Asia, and Africa. Railways, roadways, ports, and airports have been built or revamped to enable Beijing to buy raw materials and sell its manufactures around the world more cheaply and easily.

The investments promised by Li Keqing during his trip to South America are largely in line with this strategy. The flagship project is a $10 billion railroad between Brazil and Peru that will connect the Atlantic and Pacific ports. The railroad will make it easier and cheaper to export of soybeans, beef, and ore from the Brazilian hinterlands. Currently, these exports must first reach Brazilian ports in Pará or Maranhão, and then traverse the Panama Canal to reach the Pacific and China.

In Colombia, China promised to modernize the port of Buenaventura, the country’s second most important harbor, and pledged to build a 600 km highway linking central Colombia with the Venezuela border. The road is supposed to cross the region of Orinoquía – rich in agriculture, cattle, oil, and minerals. China and Colombia also pledged to negotiate a bilateral free trade agreement.

These announcements join a long list of projects in South American logistics proposed by China in recent years. Examples include the construction of a port in Suriname, which will also get a railway and a road connecting Paramaribo with Manaus to facilitate the export of Brazilian minerals; the expansion of Venezuela’s Palúa port, in the Orinoco delta, as a vital complement to the investments announced in Colombia; the overhaul of the Chilean port of Desierto to export iron ore from the Atacama mines; and the expansion of the San Antonio West port in Argentina, to enable the export of agricultural goods cultivated in lands administered by the Chinese themselves.

During his visit to Chile, Li Keqiang signed a series of financial agreements that will also be important for China’s strategy of binding Latin American commerce with its own economy. A currency swap arrangementworth 22 billion yuan (approximately $3.5 billion) was announced, together with the establishment of a yuan clearing bank in Chile, which would be the first in South America. Both initiatives seek to reduce the use of the U.S. dollar in bilateral trade, restricting U.S. influence over their commercial dynamic. China and Chile also agreed to expand their bilateral free trade agreement, which was signed in 2005.

Of course, some of these proposals probably will not materialize, but the strategy behind them reveal China’s intentions. Beijing seeks to deepen its ties with South America and its investments are essentially oriented towards transporting commodities to coastal areas, connecting ports to mines and farmlands from the region’s hinterlands. This is what has historically always been done in South America. China may be trying to update the model of cooperation, but it is up to the South American countries themselves to effectively use the export revenues and the Chinese investments to avoid the deindustrialization that has occurred in the past.

Meanwhile, a significant shift in regional dynamics looks likely. There is a clear will on China’s part to redirect South American production to the Pacific. That will economically benefit the countries located in coastal areas. Keqiang visited three countries that have that characteristic (Peru, Chile, Colombia) and which are articulated in the Pacific Alliance. This trade bloc seeks to facilitate trade and external financial flows, making it easier for China to develop its presence in the region, and contrasts with the more protectionist Mercosur, which is led by Brazil and Argentina. For South American countries facing the Atlantic Ocean and the Caribbean Sea (most of them members of Mercosur), China seeks to create transoceanic links to reach the Pacific, such as the Brazil–Peru railway or even the Nicaragua Canal.

This scenario suggests an especially important challenge for Brazil (but also for the other countries of the region) concerning South American regional integration and its domestic economy. It will be necessary to devise a national and regional project that mitigates the negative effects of investments from China (or indeed any other country), considering that “(…) the promotion of infrastructure focused on economic and commercial development does not guarantee that it will be useful for geopolitical and strategic objectives of a State of region, since it may be conditioned by private or external interests” (Jaeger, 2014, p. 87, authors’ translation). Doubtless, these investments will increase inter-regional trade between South America and China (or East Asia) as a whole, but that by itself does not assure intra-regional development and integration.

There will certainly be social, environmental, and deindustrializing impacts. However, South American countries need to develop strategies and establish rules to enable more effective use of the resources coming from Beijing in the defense of their interests. Infrastructure investments will not modernize local economies or guarantee regional integration on their own, but they could be very helpful if long-term development policies are in place and if the investments are used as leverage in bargaining with the U.S., the EU, or China itself. In fact, ECLAC affirms that the logistics infrastructure that China provides could well stimulate intra-regional trade and the formation of regional value chains. It is up to South America states to use Chinese investments for their own development goals and deepening regional integration.

Bruno Gomes Guimarães is a researcher at the South American Institute for Policy and Strategy (ISAPE). Diogo Ives is an MA candidate in Political Science at the Federal University of Rio Grande do Sul (UFRGS).