Wednesday, August 12, 2020

The economy dominates South America’s relationship with China and Japan

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The United States and Europe tend to associate South America with Amazon rainforest burning, pink-tide leftist ideology, drug trafficking, corruption and illegal migration. These issues oppose their values of justice, social stability and global order. For China, whose 2016 Policy Paper on Latin America and the Caribbean states a position of ‘non-interference in each other’s internal affairs’, these are not of concern.

China seeks South American natural resources like oil, gas, metals and food and access to its capital and consumer goods markets comprising 431 million potential consumers. South America also receives substantial Chinese investment in the resources and infrastructure sectors. For South American countries, the growing presence of China is an opportunity to pursue development agendas which may not be otherwise viable.

China has extended the Belt and Road Initiative (BRI) to South America and invested in mega-infrastructure projects, including ports and railways. Chinese technology company Huawei is also selling 5G networks to Brazil, despite US efforts to block it by tempting President Jair Bolsonaro’s administration with a military cooperation program. If realised, Brazil would become a showcase of a South American regional market using a technological platform made by China.

China has become the number one or two trade partner for all South American countries. But a high concentration in natural resources trade has created tensions in economic relations, as shown by the increasing number of anti-dumping complaints against China. WTO statistics show that South American countries initiated 23 per cent of anti-dumping probes against China over 1995–2019 — the same as the United States and European Union combined.

There is also a fear that the South American economy may be too dependent on China. The fear is becoming a reality as the COVID-19 crisis unfolds. The UN Economic Commission for Latin America and the Caribbean estimates that the value of the region’s exports to China will fall by 10.7 per cent in 2020. It will impact production and employment negatively in the short-run. Foreign investment in the region showed a sharp drop in the first few months of 2020. Beida scholar Guo Jie wrote that diversification of investment is the ideal path for China to ease the tension and sustain the economic relationship with South America.

Most of the investment comes from state-owned enterprises which have favourable access to financing from Chinese state-owned banks and are utilised as foreign policy instruments. The risks of the highly volatile South American economy to the state-owned sector may be problematic. A recent study by Margaret Myers and Kevin Gallagher showed that Chinese state finance to the South American region fell to US$1.1 billion in 2019 from US$2.1 billion in 2018, continuing a downward trend from 2015 onwards. The BRI also suffers from reputational risk as Western critics say that projects associated with the BRI are creating ‘debt traps’.

For sustainable development, local and third-party participation should be increased. An example is the co-financing for Autopistas de Uraba, a Colombia–China consortium for highway construction, by the Colombian state development bank Financiera de Desarrollo Nacional, the China Development Bank and the Sumitomo Mitsui Banking Corporation, a Japanese mega-bank. In addition to the benefit of securing diversified financial sources, third-country participation can provide additional expertise to host countries. Non-Chinese participants will also feel more confident thanks to pre-existing engagements by Chinese participants.

Economic partnership between Japan and South America go back to the early 20th century when Japan started government-sponsored migration programs. Like China, Japan approached South America in the 1970s seeking resources and economic diplomacy during its high economic growth era and after the first oil crisis. Such active engagement ended in the 1980s when South American countries were mired in severe financial crisis. Japan was unprepared to face debt defaults, interruption of joint projects and the downturn of local markets. Since then Asia and South America tended to keep one another at a distance until China recently bridged the gap.

Japan learned a bitter lesson from the 1980s downturn, but has recently become more proactive about its relationship with South America. Japan increasingly engages in high-ranking official professional development exchanges with…

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