Investing in their future: China and Latin America’s budding relationship

  • + Latin America is tired of trading with the United States
  • + China has presented itself as an alternative partner, willing to invest in Latin American infrastructure
  • + Are Latin nations simply moving from the shadow of one hegemon to another?
Source: El País

Why does Latin America have an interest in trade with China?

Latin America has long been considered the “backyard” of the United States. They are indisputably tied to their Northern neighbours through economic and political relations. In recent years, especially under the current administration, US-Latin relations have been frayed. Worsening friendships between North and South America can be attributed to US President Donald Trump having cut off aid to several Central American nations for not doing more to prevent migration north. On top of that, Trump has proposed a physical wall to separate Mexico from the US as he has made clear his view of the migrants in repeatedly calling them rapists, criminals, and drug traffickers. The tradition of Latin America’s reliance on US support has been tested and is beginning to dwindle.  

Latin America has drifted across the Pacific Ocean, away from its rather intrusive northern hegemon, finding an unlikely ally in China. China, after having little contact with the region for decades, has presented itself as not only an alternative to the United States but as a more relatable and friendlier partner. Understandably, Latin America has looked to build stronger relationships with the world’s second-largest economy and China has reciprocated. 

What does China want?

China’s own economic development has brought it to the point where it can challenge US influence in other countries. Additionally, China has shown that government-led industrial policies can be very effective in creating upward economic mobility for its citizens. Latin America, a region viewed as experiencing similar points on the path to development as China did previously, could benefit greatly from such policies.

The existing need for development in Latin America:

  • + 60 percent of the region’s roads are still unpaved
  • + 70 percent of the region’s sewage is untreated
  • + Most cities have unreliable power grids that result in power outages

American efforts to develop the nations south of the Rio Grande have often resulted in far-right dictatorships, crippling economic recessions, and debt-generated hyperinflation. Seldom have US aid efforts created rapid and substantial developments in Latin America. China provides an example of the development Latin America still needs to this day. 

China, in particular, is looking to expand its global presence. It has consolidated massive economic power and is ready to move beyond its own borders and solidify itself as a global superpower. Similar to the Chinese presence in Africa, investing in Latin America will let China garner more influence across the southern hemisphere.

What does Latin America want?

Infrastructure projects have characterized the relationship between China and Latin America thus far. The United States is aware of the infrastructure needs of their southern neighbours, however, they must go through the trouble of convincing private companies to invest. China, on the other hand, is capable of readily providing investment because of their state-owned enterprises (SOE’s). Latin American countries are willing to embrace Beijing because of this aspect; China’s word is the same as their investors, while the US presents much more discrepancy and uncertainty. 

China is much more appealing as a trade partner as well because of the understanding Beijing has of the region’s current circumstances—they’ve been there themselves. Since 1978, the World Bank has reported approximately 10 percent GDP growth a year in China’s economy. This has resulted in 850 million people being able to ascend out of poverty and into a more mobile working class. Many Latin nations would like to follow suit.  

Negotiations on China’s investment in Latin American has resulted in $109 billion being sent to Central and South American nations. This large sum of money is meant to be a direct investment in the region’s energy and infrastructure projects. Specifically, Chinese SOE’s have loaned $6.5 billion to Ecuador to help fund oil extraction. Oil is Ecuador’s main source of revenue from exports. When China initially granted the loan, their intention was to help Ecuador develop its oil extraction infrastructure. However, the massive loan Ecuador received has proven difficult to pay back. This has given Chinese SOE’s more leverage over the oil industry in Ecuador. This dynamic translates to more influence over Ecuador for the Chinese government. 

What is China doing?

The heavy investment in Latin America on behalf of Beijing is expected to produce enormous gains for the region. However, there are caveats to beware of. This heavy investment is followed by overbearing control. Latin nations are finding themselves moving out of the shadow of one super-power and into another. The Chinese are planning to develop power grids throughout the region and they claim that no one will own them. However, this claim is difficult to believe given the total Chinese ownership of similar projects in Africa.

Additionally, the loans the Chinese are giving to Latin America have exceptionally high interest rates, making them extremely hard to pay off. These loans then result in the following

  • + Crippling debt in Latin America
  • + Concentration of Latin American commodities to China
  • + The creation of rigid competition for Latin American companies against Chinese companies

Moreover, large debts have allowed the Chinese government to take ownership of facilities that were originally meant to help the host country. In many cases, being unable to repay a loan gives Chinese SOE’s the right to seize any facilities they have funded. Far too often, Chinese investors negotiate rights over the surrounding land of infrastructure projects at the onset of negotiations. Having large debts make future negotiations with Beijing increasingly difficult to leverage. This process is called ‘debt trapping’ and it is producing more influence for the Chinese in the region, all the while beginning to edge out US domination. This is a conscious effort on behalf of the Chinese to carry out their economic and political interests around the world. Examples such as this exhibit how the shift in focus from the US to China has, in some ways, been more beneficial for Beijing than for Latin America.  

Who is winning and what can you take away from this?

Latin America is at a vital point in its development, a point that China knows all too well. The leaders in Latin America are seeking investments in order to improve their infrastructure. The United States has been their historical ally in investments like this but times are changing. A culmination of issues has driven Latin American countries to look elsewhere from the US. Trump’s clear denunciation of Latino immigrants, his border wall, and cancellation of aid to nations with fleeing citizens has created a distaste for American business in recent years. Such a negative association with the US, coupled with the ease of dealing with Chinese SOE’s has made seeking investment from China much more desirable for Latin America. Consequently, China has looked to strengthen their relationship with Latin nations by pouring massive sums of money into their future. This has effectively pulled Latin America away from the US and closer to China, moving the continent from one hegemonic romance to another. Presenting the following question: can Latin America escape the shadows of global hegemony and stand by themselves? If China replaces the US as their main trade partner and investor, it might be a tough task to achieve.

Wesley Swan

Team Member of Communications