Trade Strengthens Ties between China and Latin America: Mutual Economic Interests Have Caused the Trade Relationship between China and Latin American Countries to Blossom in Recent Years, and the Benefits to the Participants Have Been Manifold. but How Will Trade and Currency Policies-Already a Source of Friction-Affect the Delicate Balance of Interests Down the Road?

By Kay, Stephen J. | EconSouth, Summer 2011 | Go to article overview

Trade Strengthens Ties between China and Latin America: Mutual Economic Interests Have Caused the Trade Relationship between China and Latin American Countries to Blossom in Recent Years, and the Benefits to the Participants Have Been Manifold. but How Will Trade and Currency Policies-Already a Source of Friction-Affect the Delicate Balance of Interests Down the Road?


Kay, Stephen J., EconSouth


As China's economy has grown, so has its economic influence in Latin America. Chinese imports from Latin America, mostly commodities, have surged and exercised a profound impact on the economies of the exporting countries in the region, while Latin American imports of Chinese products have had a dramatic effect on both consumers and producers. China is now Brazil's top trading partner, Chile's second-largest export market, and Peru's second-largest trading partner. All three of these countries have experienced high levels of economic growth in recent years. Conversely, countries that are not big exporters of commodities to China, such as Mexico and the Central American countries, have not enjoyed the same levels of growth.

China's economic growth has averaged a dizzying 10.3 percent real annual growth since 2000, and it's now the second-largest economy in the world in terms of gross domestic product (GDP) at official exchange rates. In 2000, Chinese trade with Latin America amounted to just over $12 billion. By 2009 it had grown to around $118 billion. The Economist Intelligence Unit projects that during the next five years, China's real GDP growth will be between 8 percent and 9 percent, making continuing Chinese demand a key component of global growth and an important market for Latin American exports. The United Nation's Economic Commission on Latin America and the Caribbean (ECLAC) forecasts that by 2015 China will surpass the European Union to become Latin America's second-largest export market after the United States and that by 2020 China will purchase nearly 20 percent of the region's total exports.

[GRAPHIC OMITTED]

Chinese demand for Latin American exports played a vital role during the global financial crisis and recession. Unlike previous downturns, Latin America's economies were strong when the recession hit, with solid domestic macroeconomic fundamentals (such as low fiscal and current, account deficits and a greater degree of exchange rate flexibility), low levels of short-term foreign debt, and high levels of international reserves. Chinese demand for commodities meant that exporting economies enjoyed growing volumes and high prices for their products. Not coincident ally, the Latin American countries with the highest levels of exports to China, including Brazil, Chile, Peru, and Argentina (see chart 1), were the countries that recovered fastest from the recession.

In recent years, imports from China have also risen dramatically in the region, particularly for Brazil, Mexico, Chile, Venezuela, and Argentina, a rapid rate of increase slowed only by the economic crisis in 2009 (see chart 2). These imports from China are concentrated in processed and manufactured goods (see chart 3). China is also investing in energy and mining projects throughout the region.

[GRAPHIC OMITTED]

[GRAPHIC OMITTED]

The progress of processed goods

When it comes to trade between China and Latin America, the region has a clear comparative advantage with respect to primary products (raw materials and resources used in the manufacturing process), but other factors also affect the composition of trade. China imposes barriers to trade, including relatively high tariffs and directives from state-owned firms that prioritize the purchase of domestic goods. The restrictions on trade also tend to increase with the degree of processing and value added of the traded good. For example, Argentina found itself in a trade dispute with China when it tried to export soya oil instead of raw soybeans to China. When its shipments were deemed unacceptable because of alleged sanitary concerns, Argentina relented and went back to shipping soybeans. Finally, China's foreign exchange policies, which hold down the value of the Chinese yuan, serve to increase the price of the Latin America's exports to China. Taken together, these restrictions complicate efforts to expand exports of more processed and manufactured goods.

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Trade Strengthens Ties between China and Latin America: Mutual Economic Interests Have Caused the Trade Relationship between China and Latin American Countries to Blossom in Recent Years, and the Benefits to the Participants Have Been Manifold. but How Will Trade and Currency Policies-Already a Source of Friction-Affect the Delicate Balance of Interests Down the Road?
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