for century Latin American economies are characterized by brief booms and sudden busts, often on the back of commodity cycles. When silver was discovered in the Bolivian highlands in 1545, the village of Potosí was for a time one of the most populous places on earth, as it provided more than two-thirds of the world’s supply. A century later, it became a ghost town as the mines dried up.
As China reopens after nearly three years of lockdown, some countries in Latin America are preparing for another boom. Morgan Stanley believes that China’s economy may grow by 5.7% in 2023. This will trigger a rise in demand for commodities in the region. China consumes more than 16 percent of the world’s oil, more than half of its copper and more than three-fifths of its iron ore. Copper prices rose 7% in a day last year when rumors swirled that covid-19 restrictions would be lifted.
All of this is good news for commodity exporters such as Chile and Brazil. Chile exports 67% of its copper to China; Brazil exports 70% of its soybeans to China. But, like gold rushes of the past, the good times may not last long. While strong growth is likely this year, the long-term relationship between China and the region is likely to disappoint.
The decade after 2002 the Latin American dollar gross domestic product Growth of more than 3% a year has been fueled by a commodities boom sparked by China’s industrialization. Between 2005 and 2020, state-directed “policy banks” such as the China Development Bank and the Export-Import Bank lent more than $138 billion to Latin America. As China buys the region’s grains, metals and hydrocarbons, poverty falls and government coffers swell.
Trade with China grew from $12 billion in 2000, accounting for 0.6% of Latin America gross domestic productreaching USD 445 billion by 2021 (8.5% of the region’s gross domestic product). By 2021, China’s share of Latin American trade will rise from 5 percent in 2005 to 18 percent. This rises to 24% if Mexico is excluded (see chart). China became South America’s largest trading partner, while the United States remained Mexico and Central America’s largest trading partner. Brazil, Chile and Peru all have trade surpluses with China.
Booming trade has led some Latin American politicians to become complacent. Margaret Myers of the Americas Dialogue, a Washington think tank, said many wanted the relationship to remain the same forever, direct current. But this ignores China’s structural problems, such as a sluggish domestic property market and the impact of the trade war with the US. There are already signs that China’s engagement with some parts of the region is weakening.
China’s policy banks have not approved new lending to the region since 2020 (see chart). While commercial banks and private equity funds have filled some of the gap, they have not been as generous. Venezuela, which used to receive two-thirds of Chinese funding in the region, now only gets credit to help it maintain oil shipments to China.
After a few bad experiences, Chinese lending has changed. China struggled to recoup a multimillion-dollar oil-for-loan deal with Venezuela after oil prices fell after autocratic President Nicolás Maduro took power in 2013. Elsewhere, opposition from environmental groups has also held back investment, as have policy shifts by different governments.
Between 2000 and 2017, more high-value deals related to China’s Belt and Road Initiative were suspended or canceled in Latin America than almost anywhere else, according to AidData, a research arm at the College of William and Mary in Virginia.Likewise, by working African Economic UnionA United NationsAccording to relevant research institutions, Chinese investment peaked between 2010 and 2014, and then began to decline.
Even if engagement with the region increases again as China reopens, it won’t follow the same pattern. As China’s economy shifts to services and manufacturing of high-tech products, electric vehicles and renewable energy products, its foreign imports and investments will change. China’s crude oil imports will decline and imports of key metals will increase. From 2005 to 2009, 95% of total foreign direct investment (Foreign Direct Investment) by China inputting raw materials in the region. Between 2015 and 2021, this share has dropped to 46%, with the balance divided between manufacturing and services.
Between 2017 and 2021, Latin America exported 28 times more aluminum to China for use in solar panels than in the previous four years. During the same period, China’s annual imports of balsa wood from Ecuador for use in wind turbines increased by 57%. Lithium can be especially valuable. The price of lithium carbonate, used in electric vehicle batteries, soared from a five-year average of $14,000 per ton to $72,000 in 2021 and 2022.
The future of other commodities may be trickier. Goldman Sachs expects copper prices to rise to $11,000 a tonne in the next 12 months from the current $9,000 a tonne. But Andrés Bórquez of the University of Chile thinks less copper may be needed — and demand will eventually level off if China replenishes its 15-year low copper reserves. This could hurt some overexposed countries, such as Chile: 38% of its exports go to China, more than three-quarters of which are copper.
Chinese investments have also become more strategic. Electricity is an area of focus. Investment in the sector accounted for 71% of Chinese M&A deals in the region between 2017 and 2021, according to Boston University’s Center for Global Development Policy. In 2021, two Chinese state-owned companies will spend a combined $6 billion to acquire power companies in Chile and Peru. Both projects are among the largest foreign investments ever received by the two countries.
Chinese investment in other infrastructure appears to be accelerating. A survey by the National Autonomous University of Mexico showed that of the 192 regional infrastructure projects that China participated in between 2005 and 2021, 57 were implemented in 2020 and 2021. The reason may be related to the strengthening of strategic projects related to China’s food security. A state-owned company is building a port 50 kilometers (30 miles) north of Lima to boost food supplies from China. (So far, the protests in Peru don’t seem to have affected it.)
All of this angered Washington. In 2020, Donald Trump’s administration pressured Brazil to not allow Chinese telecom giant Huawei to participate in 5G auction. Regardless, the Brazilian government is moving ahead, but is creating a separate network for government agencies, excluding Huawei. Likewise, the Trump administration offered Ecuador a loan to help repay its multibillion-dollar debt to China on the condition that Ecuador exclude Chinese telecom companies from its 5G network. 2021 G7 launched “Rebuilding a Better World” to compete with China’s global infrastructure investments. It was such a flop that it had to be renamed last year.
South America does not benefit as much from wooing the US as Central America. Brazil’s relationship with China “really makes sense,” said Larissa Wachholz of the Brazilian Center for International Relations. “It’s good for both sides.” She sees what Latin America lacks in investment in roads, ports and utilities that China can provide. Now that Brazilian leftist Luiz Inácio Lula da Silva is in power, the Brazilian government may court China.
Some countries are trying to reduce their dependence on Asian superpowers. While Ecuador’s centre-right president is finalizing a free trade agreement with China, his government also wants to join the Pacific Alliance, a trade bloc comprising Chile, Colombia, Mexico and Peru. Uruguay, which exports more than 60 percent of its beef to China, is seeking a free trade agreement with China and trying to join other free trade agreements. Across the region, however, few countries are considering how to adapt if China’s comeback lacks the strength of the past. The impending boom may not last long.■