China and Latin America: rewards and risks

Kevin P. Gallagherkpg@bu.edu

Global Development Policy ProgramDepartment of International Relations

Boston University

Outline: One Point, Five Questions

• LAC trade/investment with China has real benefits:– New export market for LAC commodities– New investment destination for Chinese finance– Price effect on LAC commodities– Cheaper import prices for manufactures and consumers

• Five Questions:– How long will Chinese demand last and in what form?– What are the implications for competitiveness and

industrialization?– How will employment and environment be effected?– Will LAC channel the benefits to productive use?– What can LAC learn from China?

• Approx. $75b in 2011 ($4.2b in 2000)• 11.7 percent of all LAC exports•More than 25% of China’s commodity imports

Source: Author’s calculations based on United Nations commodity Trade Statistics, 2012

Source: Author’s calculations based on United Nations commodity Trade Statistics, 2010

SectorShare of total LAC exports to China

Country Share of Total LAC Exports to China in Sector

Copper Alloys 17.9% Chile( 90%)

Iron ore and concentrates 17.3% Brazil( 89%)

Soybeans and other seeds 16.8% Brazil( 83%) , Argentina( 16%)

Ores and concentrates of base metals 13.5% Chile( 47%) , Peru( 39%)

Crude petroleum 4.5% Brazil( 65%) , Colombia( 20%)

Soybean oil and other oils 4.5% Argentina( 79%) , Brazil( 20%)

Pulp and waste paper 4.4% Brazil( 55%) , Chile( 43%)

Feedstuff 2.4% Peru( 63%) , Chile( 30%)

TOTAL 81.3%

Five Countries, Eight Sectors, Dominate LAC Trade to China (2009)

Country, Sector Exports to China in Sector

(USD 2005)

Argentina

Soybean oil and other oils 1,458,265,606 38%

Soybeans and other seeds 1,099,203,909 62%

Crude petroleum 205,349,443 9%

Brazil

Iron ore and concentrates 6,402,428,920 53%

Soybeans and other seeds 5,792,662,027 55%

Crude petroleum 1,222,191,176 14%

Pulp and Paper 1,001,722,671 33%

Meat 371,845,753 32%

Chile

Copper Alloys 6,635,603,970 39%

Ores and concentrates of base metals 2,647,063,384 28%

Pulp and waste paper 771,871,242 43%

Iron ore and concentrates 331,705,359 65%

Peru

Ores and concentrates of base metals 2,156,998,736 38%

Feedstuff 618,422,279 45%

% Total Country Exports in Sector

Share of China Exports in Selected Countries and Sectors (2009)

Year Month Investor Quantity (m) Sector Subsector Country

2005 May Minmetals $500 Metals Cuba2005 June Minmetals $550 Metals Copper Chile2005 September CNPC and Sinopec $1,400 Energy Oil Ecuador2006 September Sinopec $420 Energy Oil Columbia2007 February Zijin Mining $186 Metals Copper Peru2007 April Golden Dragon $100 Metals Copper tubes Mexico2007 June Chalco $790 Metals Copper Peru2007 December Minmetals and Jiangxi Copper $450 Metals Copper Peru2008 May Chinalco $2,150 Metals Copper Peru2008 May Jinchuan Group and China-Africa Development Fund$214 Metals Copper Tubes Mexico2009 February Shougang Group $1,000 Metals Iron Peru2009 December Shunde Rixin $1,900 Metals Iron Chile2010 March State Grid $1,050 Metals Copper Chile2010 March East China Minerals (Jiangsu) $1,200 Metals Iron Brazil2010 March CNOOC $3,100 Energy Argentina2010 April CNPC $900 Energy Oil Venezuela2010 May China Sci-Tech $255 Metals Copper Peru2010 May State Grid $1,720 Power Brazil2010 May Sinochem $3,070 Energy Oil Brazil2010 September Chongching Co $300 Real estate Soy land Brazil

2009 May Lenovo $40 Manufacturing Electronics Mexico2009 September State Construction Engineering $100 Real estate Tourism Bahamas2009 November Wuhan Iron and Steel $400 Metals Iron Brazil2010 August Chery Auto $700 Transport Autos Brazil2010 September Sany Heavy Industry $100 Manufacturing Metalworking Brazil

2007 June Chery Auto $100 Transport Autos Uruguay2008 April Sinotex $92 Manufacturing Textiles Mexico2009 December Hebei Zhongxin $400 Transport Autos Mexico2010 April Foton Mexico $250 Manufacturing Autos Mexico

Total $23,437

Efficiency-seeking

Chinese Foreign Direct Investment in Latin America

Resource-seeking

Market Seeking

Source: Author’s calculations based on United Nations commodity Trade Statistics, 2012

The New Banks in Town:

Chinese Finance in Latin America

LAC’s (new) largest creditor

Chinese Development Bank, Export-Import Bank of China and a few others have provided

$75 billion (USD) of loan commitments to Latin American governments since 2005

Loans to sectors that get little finance

Pay a premium and hire the Chinese

The China Hedge

What about the Longer-Run Future?

• Will Chinese demand and prices continue?

• Competitiveness and De-industrialization?

• Impact on employment and environment?

• Will LAC channel China benefits productively?

• What can LAC learn from China?

Chinese Demand?

CRUDE OIL CONSUMPTION PER CAPITA

0

5

10

15

20

25

30

35

93 122

141

186

290

392

658

949

1,35

11,

684

2,11

32,

824

3,51

05,

011

7,47

49,

702

11,3

4712

,783

15,1

5817

,345

18,3

2319

,899

20,6

7122

,382

23,0

3925

,010

26,5

1828

,062

29,5

5031

,828

34,5

1334

,890

36,2

5336

,792

38,0

6340

,719

37,0

0338

,972

GDP per capita (2000 USD)

Crud

e O

il c

onsu

mpti

on p

er c

apita

(bar

rels

)

China

South Korea

Japan

United States

Sources: BP Statistical Review of World Energy 2010; and World Bank.

IRON ORE CONSUMPTION PER CAPITA

0

0.2

0.4

0.6

0.8

1

1.2

1.4

186

228

311

383

476

658

827

1,02

11,

323

1,81

23,

510

4,32

35,

515

6,89

58,

248

9,70

210

,547

12,4

7813

,802

15,4

4722

,911

24,4

8425

,241

25,8

9127

,362

28,0

6228

,551

29,9

4231

,716

33,3

6934

,513

34,6

2935

,304

35,9

4736

,776

36,7

9237

,674

38,2

3640

,455

GDP per capita (2000 USD)

Iron

Ore

con

sum

ption

per

cap

ita (g

ram

s)

China

South Korea

Japan

Note: Apparent consumption = Production + Import -Export

Sources: Iron Ore Statistics 2010 (UNDP); and World Bank.

REFINED COPPER CONSUMPTION PER CAPITA

0

2

4

6

8

10

12

14

72 99 122

141

186

290

392

658

949

1,13

21,

351

1,68

42,

113

2,82

43,

510

5,01

17,

118

8,52

810

,119

11,3

4712

,783

14,3

8215

,447

17,3

4518

,323

19,8

9920

,671

22,3

8223

,039

25,0

1026

,518

28,0

6229

,550

31,8

2834

,513

34,8

9036

,253

36,7

9238

,063

40,7

19

GDP per capita (2000 USD)

Refin

ed C

oppe

r co

nsum

ption

per

cap

ita (k

g)

China

Japan

United States

Notes: Apparent consumption for China, reported consumption for Japan and the U.S.

Sources: International Copper Study Group; and World Bank.

SOYABEAN CONSUMPTION PER CAPITA

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

0.2

72 99 127

146

194

311

422

716

1,02

11,

209

1,48

71,

880

2,49

73,

358

4,32

36,

390

8,24

89,

702

10,5

9512

,764

14,3

8215

,741

17,4

7018

,542

20,0

3420

,837

22,4

7423

,508

25,2

4127

,012

28,2

6329

,942

32,6

7134

,606

35,3

0436

,318

37,0

0338

,972

GDP per capita (2000 USD)

Soya

bean

con

sum

ption

per

cap

ita (t

onne

s)

China

South Korea

United States

Japan

Note: Soyabean consumption per capita is domestic supply quanitity divided by total population. Sources: Food and Agriculture Organization (FAO); and World Bank.

Competitiveness?Resource Curse?

1990

Fmr Fed. Rep. of Germany 17.8% Japan 17.9% Fmr Fed. Rep. of Germany16.4% USA 13.3% USA 14.4% Germany 11.8% China 15.9%USA 16.1% Fmr Fed. Rep. of Germany 15.4% USA 13.6% Japan 12.8% Japan 10.4% China 11.5% Germany 12.6%Japan 14.5% USA 14.8% Japan 13.5% Germany 12.6% Germany 10.2% USA 10.2% USA 9.7%France 8.8% France 6.9% France 7.3% France 6.3% France 5.2% Japan 7.5% Japan 7.0%United Kingdom 8.4% Italy 6.7% Italy 7.0% Italy 6.0% China 5.0% France 4.7% France 5.0%Italy 7.4% United Kingdom 6.3% United Kingdom 6.5% United Kingdom 5.4% Italy 4.7% Italy 4.4% Italy 4.6%Netherlands 3.7% Canada 4.7% China, Hong Kong SAR 3.7% China, Hong Kong SAR 4.9% United Kingdom 4.6% United Kingdom 4.1% Rep. of Korea 4.6%Canada 2.9% Netherlands 3.1% Netherlands 3.4% China 3.7% China, Hong Kong SAR 4.5% China, Hong Kong SAR 4.0% China, Hong Kong SAR 4.4%Switzerland 2.7% Rep. of Korea 2.9% Canada 3.1% Rep. of Korea 3.5% Canada 3.7% Rep. of Korea 3.7% Belgium 3.5%Sweden 2.5% China, Hong Kong SAR 2.9% Rep. of Korea 3.0% Canada 3.2% Rep. of Korea 3.6% Belgium 3.2% United Kingdom 3.3%China, Hong Kong SAR 2.1% Switzerland 2.2% Switzerland 2.5% Netherlands 3.1% Mexico 3.3% Netherlands 2.9% Singapore 2.8%Rep. of Korea 1.8% Sweden 2.2% China 2.1% Singapore 3.0% Belgium 2.8% Singapore 2.7% Mexico 2.5%Austria 1.6% Spain 1.6% Sweden 2.0% Switzerland 2.0% Singapore 2.7% Canada 2.5% Canada 2.0%Spain 1.5% Austria 1.4% Spain 1.9% Spain 2.0% Netherlands 2.7% Mexico 2.5% Switzerland 2.0%Poland 1.2% Singapore 1.2% Singapore 1.8% Mexico 1.9% Spain 1.9% Spain 1.9% Malaysia 1.5%Denmark 1.0% Brazil 1.1% Austria 1.6% Malaysia 1.7% Malaysia 1.8% Switzerland 1.6% Thailand 1.5%Singapore 1.0% Denmark 0.9% Denmark 1.0% Sweden 1.6% Sweden 1.5% Malaysia 1.5% Austria 1.4%Finland 0.8% Finland 0.7% Malaysia 0.8% Austria 1.3% Switzerland 1.5% Sweden 1.4% India 1.4%Norway 0.6% Poland 0.6% Brazil 0.7% Thailand 1.2% Thailand 1.2% Austria 1.3% Czech Rep. 1.3%Ireland 0.5% Ireland 0.6% Finland 0.7% Denmark 0.8% Ireland 1.1% Thailand 1.2% Sweden 1.3%India 0.4% Norway 0.5% Ireland 0.7% Ireland 0.8% Austria 1.1% Czech Rep. 1.0% Turkey 1.1%Australia 0.4% Turkey 0.5% Thailand 0.7% Finland 0.7% Philippines 0.8% Poland 1.0% Ireland 1.0%Portugal 0.3% Malaysia 0.4% Portugal 0.6% Brazil 0.7% Denmark 0.7% Turkey 0.9% Denmark 0.8%Malaysia 0.3% Portugal 0.4% Mexico 0.5% Portugal 0.5% Indonesia 0.7% Ireland 0.9% Brazil 0.7%Greece 0.2% India 0.4% India 0.5% Indonesia 0.5% Finland 0.7% India 0.8% Russian Federation 0.6%Argentina 0.2% China 0.4% Norway 0.5% India 0.5% Brazil 0.7% Brazil 0.8% Indonesia 0.6%Thailand 0.2% Israel 0.4% Turkey 0.4% Czech Rep. 0.5% India 0.6% Hungary 0.8% Finland 0.6%Philippines 0.1% Australia 0.3% Poland 0.3% Turkey 0.5% Hungary 0.6% Denmark 0.7% Philippines 0.5%New Zealand 0.1% Thailand 0.3% Australia 0.3% Poland 0.5% Czech Rep. 0.6% Finland 0.7% Israel 0.5%Hungary 0.1% Greece 0.2% Israel 0.3% Australia 0.4% Poland 0.5% Russian Federation 0.5% United Arab Emirates 0.5%Saudi Arabia 0.1% Pakistan 0.2% Indonesia 0.3% Israel 0.3% Russian Federation 0.5% Philippines 0.5% Romania 0.4%Tunisia 0.1% Argentina 0.2% Pakistan 0.2% Norway 0.3% Turkey 0.5% Indonesia 0.5% Portugal 0.4%China, Macao SAR 0.1% Venezuela 0.1% Romania 0.2% Hungary 0.2% Israel 0.4% Slovakia 0.4% Norway 0.3%Colombia 0.1% Philippines 0.1% Greece 0.2% Philippines 0.2% Portugal 0.4% Portugal 0.4% South Africa 0.3%Bangladesh 0.1% Saudi Arabia 0.1% Argentina 0.2% Pakistan 0.2% Australia 0.3% Ukraine 0.3% Australia 0.3%Peru 0.1% Indonesia 0.1% Philippines 0.1% Slovenia 0.2% South Africa 0.3% Romania 0.3% Slovenia 0.3%Indonesia 0.0% New Zealand 0.1% Saudi Arabia 0.1% Argentina 0.2% Norway 0.2% South Africa 0.3% Argentina 0.2%Morocco 0.0% China, Macao SAR 0.1% United Arab Emirates 0.1% Slovakia 0.2% Slovakia 0.2% Israel 0.3% Saudi Arabia 0.2%Cyprus 0.0% United Arab Emirates 0.1% Tunisia 0.1% Romania 0.2% Ukraine 0.2% United Arab Emirates 0.3% Pakistan 0.2%New Caledonia 0.0% Hungary 0.1% Morocco 0.1% Greece 0.2% Pakistan 0.2% Australia 0.3% Tunisia 0.1%Kenya 0.0% Bangladesh 0.1% New Zealand 0.1% Saudi Arabia 0.1% Argentina 0.2% Viet Nam 0.3% Luxembourg 0.1%Sri Lanka 0.0% Tunisia 0.1% China, Macao SAR 0.1% Tunisia 0.1% Romania 0.2% Norway 0.2% Belarus 0.1%Syria 0.0% Morocco 0.1% Venezuela 0.1% Croatia 0.1% Slovenia 0.2% Saudi Arabia 0.2% Lithuania 0.1%Mauritius 0.0% Colombia 0.0% Syria 0.1% New Zealand 0.1% United Arab Emirates 0.1% Slovenia 0.2% Bulgaria 0.1%Barbados 0.0% Sri Lanka 0.0% Colombia 0.1% Bangladesh 0.1% Viet Nam 0.1% Pakistan 0.2% Morocco 0.1%Trinidad and Tobago 0.0% Uruguay 0.0% Bangladesh 0.1% Colombia 0.1% Luxembourg 0.1% Argentina 0.2% Colombia 0.1%

Taking Away the Ladder? China Becomes Most Competitive Manufacturing Exporter

2009

(percent of World Manufacturing Exports)

1980 1985 1995 2000 2006

Direct Partial Total

ArgentinaAs % of Manufacturing Exports in 2009 20% 53% 73%As % of All Exports in 2009 6% 15% 21%

BrazilAs % of Manufacturing Exports in 2009 30% 54% 84%As % of All Exports in 2009 10% 18% 27%

ChileAs % of Manufacturing Exports in 2009 21% 70% 91%As % of All Exports in 2009 1% 4% 6%

ColombiaAs % of Manufacturing Exports in 2009 27% 62% 88%As % of All Exports in 2009 6% 14% 21%

Costa RicaAs % of Manufacturing Exports in 2009 48% 51% 99%As % of All Exports in 2009 21% 22% 43%

MexicoAs % of Manufacturing Exports in 2009 52% 45% 97%As % of All Exports in 2009 38% 33% 71%

LACAs % of Manufacturing Exports in 2009 52% 40% 92%As % of All Exports in 2009 22% 17% 39%

Percentage of LAC Export Markets under "Threat" from China

Rising Wages in China

Source: updated from Gallagher, Kevin P., and Lyuba Zarsky (2007), The Enclave Economy: Foreign Investment and Sustainable Development in Mexico’s Silicon Valley. MIT Press.

De-Industrialization in Brazil?

Source: Financial Times, 2011

Jobs and Environment

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

World Soy Price

Source: UN FAO Commodity Price Statistics, April 1, 2011

AMAZON SOY PRODUCTION 1990

Source: del Carmen, Maria Vera-Diaz, Robert K. Kaufmann, Daniel Neptstad, and Peter Schlesinger (2008), “An Interdisciplinary model of soybean yield in the Amazon Basin: The Climatic, Edaphic, and Economic Determinants, ” Ecological Economics, 65, 2, 420-431

AMAZON SOY PRODUCTION 2005

Deforestation:528,000 km2

Mato Grosso 40%

Source: del Carmen, Maria Vera-Diaz, Robert K. Kaufmann, Daniel Neptstad, and Peter Schlesinger (2008), “An Interdisciplinary model of soybean yield in the Amazon Basin: The Climatic, Edaphic, and Economic Determinants, ” Ecological Economics, 65, 2, 420-431

Will LAC Channel Channel China benefits?

• Stabilization funds

• Development banking, SWFs, and endogenous innovation

• Environmental protection

WHAT CAN LAC LEARN FROM CHINA?

China’s Neo-developmentalism and Mexico’s Neo-liberalism

Macro/Factor side

ChinaChina• Undervalued exchange rateUndervalued exchange rate• Abundant supply of credit to

local firms, at very “competitive” interest rates

• A public funded national innovation system, which has contributed to reduce the costs and risks of R&D

• Major public investment in human capital

• A pragmatic enforcement of IPRs

• Diaspora venture capital

Mexico• Tendency to overvalue

exchange rate• Very low levels of credit

or support to domestic firms

• Very poor national innovation system

• Passive approach to IPRs and FDI

Mexico’s Neo-Liberalism

Micro/Product Side

Mexico• ‘Horizontal’ policy that

favors foreign firms – (exchange rate plus maquila

programs)– No indigenous innovation

• Rapid liberalization of markets

• Reliance on low wage assembly operations

• Passive “quantity over quality” approach to FDI

China

• Sector targeting: e.g. semiconductors, automobile and software

• Firm targeting: “National Champions” and “indigenous innovation”

• “dual track” approach to liberalization that combines state support and gradual, experimental liberalization

• Proactive approach to FDI and learning in key sectors

World Development Indicators, 2012

Mexico China

Patent applications, nonresidents 13,668 65,441Patent applications, residents 582 101,028Research and development expenditure (% of GDP) 0.40 1.19Scientific and technical journal articles 3,647 34,310

Science and Technology in China and Mexico, 2000-2010

Upgrading for Growth?

Political Economy Implications

Winners

Commodities Investment and Imports Commodities exporters Small-holder agricultureGovernment revenue Natural environment

Manufactures exporters

Penetration of Manufacturing Markets Manufacturing firms using inputs from China Manufacturing firms competing with ChinaEmployment in Chinese input intensive firms Employment in firms competing with ChinaConsumers of Chinese imports

Swaying Taiwan Supporters Sectors and employees that can export to China Sectors and employees that exported to TaiwanSectors receiving foreign investment from China Sectors losing foreign investment from Taiwan

Political Economy of the China-Latin America Economic Relationship

Losers

Latin America and the Caribbean

Politics

Brazil and China: the political economy of the tricky

• Export expansion, employment decline in primary sector, environmental degradation and associated activism

• Export contraction and employment decline in urban manufacturing centers

• Some positive response– Leveraging Chinese

demand to climb the value chain

– Stabilization fund– BNDES

industrialization strategies

– Environment?

Lessons for Policy

• LAC could learn how to be more of a strategic globalizer from China, and build on new innovations of its own

• LAC innovations– Stabilization funds– Environmental protection*

• China– Focus on industrialization and modern services

• Leveraging location-specific assets• Innovation and science policy

– Coalitions for global economic governance