Chinese Trade Impact on Latin American Emerging Markets
Research Paper Superviser : Dr. Sekou Conde
Minzhu University of China
2006-2007 Academic Year
Abstract: China’s progress since it first opened to foreign investment and reform in 1978 has been dazzling. Over the last 20 years, and after a long period of economic autarky, China emerged as a major player in world trade. In this context, the China’s accession into World Trade Organisation (WTO) in 2001 could be considered as a milestone. China emerged as both a threat and an opportunity for Latin American emerging markets. On average, and in spite of some exceptions, Latin America is a clear trade winner from Chinese global integration. In order to analyse the Chinese trade impact, I study the exporting and importing structure of the country. In general terms, the results confirm that there is no relevant trade competition between China and Latin America. Not surprisingly, Latin American countries that export mainly commodities face lower competition. This is an expected result since China is a importer of raw materials.
Key words: China, Latin America, Trade Competition
1. The Exporting and Importing Structure of China
Over the past two decades, China has become a major global economic player. In less than twenty years its GDP has grown at an impressive rate of nearly 9.5 percent according to official figures and its share of world trade has jumped from a meagre 1 percent to more than 6 percent. [1]In this context, China’s accession into the World Trade Organisation (WTO) in December 2001 could be considered as a milestone. During those years, China significantly reduced its tariffs and progressively joined global trade. Nowadays, the weighted average tariff is 6.4% vs. 40.6% 10 years ago. [2]
In this process of commercial opening, the Chinese share in global market grew quickly.However, when compared to some Latin American countries, China’s growth rate for exports looks less impressive in relative terms. During the 90s for example, countries like Mexico, Chile or Costa Rica, have seen registered a growth rate of exports more impressive than China during the same period. The accession to WTO opened up global markets to Chinese goods and it made, even more obvious, the Chinese ability to compete successfully in those markets. To ratify the perception, the share of China in world exports has increased rapidly over the last 20 years. In 1980 China amounted to 0.9% of world exports and in 2002 China represented 5%.[3] In 2003, it reached nearly 6% and by the end of 2004 China was becoming the world’s third biggest exporter (after America and Germany). [4]
On the positive side, we find that there are benefits to be hand from trade with China.China has an enormous domestic market. The development of China will be accompanied by a flowering of its market. The emergence of China entails long term benefits from trade. Developing countries like those of East Asia, which have established a strong trade and investment relation with China, could benefit from this process.
2. The Importance of Latin American Countries
Latin America consists of 33 countries with a total area of more than 20 million square kilometers, which forming 13.8% of the land area of the world and is three times larger than the European continent.[5] The distance between the north and the south is 11 thousand kilometers. Latin America enjoys a vast territory and abundant natural resources. In addition to forest resources, Latin America has rich mineral resources with some mineral reserves rank among the first in the world. Besides, Latin America has favorable condition for agricultural production.
To be frank, the so-called ton-materialization trend, which is featured by the vast use of synthetic materials, develops at a fast speed in the recent decades. However, scientific and technological development cannot completely replace the need of human society for raw materials and natural resources. So, known as the raw material base and the brovider of primary products, the status of Latin America in the world market can never be underestimated. With no doubt, the large amount of resources which are needed in China's rapid economic growth can be imported from Latin America.
No matter a nation or a region, the status in the world economy is decided by its economic total amount and development level. Most of the Latin American nations have gained their national independence in the early 18th century. After the development of two centuries, some nations now have relatively high-level economies. In terms of total economic amount, Latin America is better than other developing areas. According to World Bank's statistics, the aggregate GNP of Latin American nations amounted to 0.17 billion dollars in 2002, ranking top in low and middle income countries. [6]Obviously, while Chinese enterprises strive to join the world, the importance of Latin American market cannot be neglected.As a result, Latin America will take a more prominent seat in the world economy in the future.
3. Chinese Trade Impact on Latin American Emerging Markets
Much of China’s interest in Latin America — especially in South America — is
economically motivated, with Beijing eager for access to such commodities as iron and other ores, soybeans and soybean oil, copper, iron and steel, integrated circuits and other electrical machinery, and oil in order to meet the demands of China’s booming economy. Because of this growth in imports,China has run a trade deficit with the region for the past two years. While imports from Latin America are just a small percentage of China’s overall imports, they grew from 1.81% of total Chinese imports in 1999 to 3.88% in 2004. [7]China’s top five import markets in Latin America in 2004 were Brazil ($8.7 billion), Chile ($3.7 billion),Argentina ($3.3 billion), Mexico ($2.1 billion), and Peru ($1.5 billion). [8]China’s exports toLatin America have also grown considerably in the last five years,from $5.3 billion in 1999 to $18.3 billion in 2004, with major exports including electrical appliances; woven and knit apparel; computers, office machinery, and other machinery;and mineral fuels and oil. During this period, the overall share of China’s exports to the region as percentage of its worldwide exports, although small, increased slightly from 2.71% in 1999 to 3.09% in 2004. China’s top five export destinations in Latin America in 2004 were Mexico ($5 billion), Brazil ($3.7 billion), Panama ($2.2 billion), Chile ($1.7billion), and Argentina ($852 million).[9]While China’s trade flows have increased dramatically, both globallyand with Latin America, Chinese foreign direct investment (FDI) abroad has not been significant.China’s cumulative FDI worldwide amounted to $33.2 billion at the end of 2003 — just 0.48% of global FDI stock — with 41% concentrated in HongKong, United States, Japan,and Germany. Turningto yearlyinvestment flows, China’s foreign investment flows for 2003 amounted to $2.85 billion, with $1.04 billion of that — more than one-third —going to Latin America.[10]
Chinese investment in Latin America has focused on the extraction and production of national resources, but also has included investment in manufacturing assembly, telecommunications, and textiles. China’s FDI in the region has been concentrated in Brazil, Mexico, Chile, Argentina, Peru, and Venezuela.
Many Latin American nations welcome the increase in foreign capital that the
Chinese are promising.The PRC is also investing in energy deals in Ecuador and in off shore projects in Argentina.Among the investment pledges highlighted in the press during President Hu’s trip to Latin America were: railway, oil exploration, and construction projects in Argentina;a nickel plant in Cuba; copper mining projects in Chile; and a steel mill, railway, and oil exploration projects in Brazil. In January 2005, Venezuelan President Hugo Chávez traveled to China to sign some 19 cooperation agreements, including plans for Chinese investment in oil and gas exploration. Colombia President Álvaro Uribe traveled to China in mid-April 2005 promoting increased investment in his country. In addition to China’s plans for increased investment, China and Chile announced in 2004 that they would be negotiating a bilateral free trade agreement. In response to China’s requests, many Latin American nations — including Argentina, Brazil, Chile, Peru, and Venezuela — have conferred on China the status of market economy, decreasing the potential impact that
anti-dumping measures mayhave on cheap Chinese imports.
4. Conclusions
Chinese trade impact on Latin America is, on the short and medium run and in general
terms, positive. On average, and from the point of view of trade impact, Latin
America will benefit from increased Chinese demand and growth. In comparative terms,as stressed by the IMF, the only net looser will be South Asia, while for Latin America the welfare effect will be positive. For sector like agriculture in Latin America, the estimated impact of faster Chinese integration around 2020 is clearly positive. The clear losers will be however sectors like textiles and from the point of view of countries, the ones specialized in labour-intensive manufactures exports.
References
· Santiso, Javier ed., (2007) The Visible Hand of China in Latin America, Paris, OECD Development Centre.
· Santiso Javier (2006), Latin America’s Political Economy of the Possible: Beyond Good Revolutionaries and Free Marketeers, Cambridge, MIT Press, 2006.
· Anderson, J. And E. van Wincoop (April 2004). “Trade costs”, NBER, Boston Collegeand University of Virginia (unpublished), in preparation for the Journal of Economic Literature. See: http://fmwww.bc.edu/ec-p/wp593.pdf
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