How a Great Power Falls Apart
Decline Is Invisible From the Inside
As the United States prepares to turn inward after Donald Trump’s election to the presidency, Chinese President Xi Jinping has been busy reaching out to the world in a bid to fill the global leadership gap left by Washington.
Fittingly, China is making its move in Latin America, once regarded as “America’s backyard.” On November 17, Xi began a weeklong tour of South America, attending the 2016 Asia-Pacific Economic Cooperation summit in Lima, where he made the case for the Free Trade Area of the Asia-Pacific, a Beijing-backed trade agreement involving 21 APEC member countries. During the trip, which will also take him to Chile and Ecuador, Xi will also look to expand on China’s growing economic and political influence in Latin America.
In recent years, China has rolled out tens of billions of dollars in loan-for-infrastructure deals, and Xi has promised to double Chinese trade with the region to $500 billion by the end of the decade. But for some Latin American countries, more trade with China is not necessarily a good thing. Many are wary of their widening trade imbalance with China and worry that protectionist Chinese trade policies have handicapped the competitiveness of their economies in the global marketplace.
During his visit, Xi will no doubt be keen to highlight China’s role in promoting economic development in Latin America and in championing South-South cooperation. Indeed, China has done much to revitalize the region’s stagnant economies over the past two decades. From Brazilian iron ore to Venezuelan oil, China’s hunger for natural resources drove up global commodity prices from 2003 to 2013, fueling a natural-resource boom that resulted in one of Latin America’s fastest periods of growth in decades. By 2014, the region’s trade with China was 22 times greater than it had been in 2000, dwarfing the growth of its commerce with any other country.
Then, in mid-2014, waves of new U.S. shale-oil production and China’s slowing economy sent commodity markets crashing, and Latin America’s resource-driven boom collapsed with it. As the value of oil, minerals, and soybeans plummeted on international markets, Brazil—Latin America’s largest economy and China’s primary trading partner—fell into recession, where it has remained since early 2015. Venezuela’s petrostate fared even worse. Despite having received some $60 billion in oil-backed Chinese loans over the previous decade, Venezuela’s economy utterly collapsed under the pressure of falling oil prices, and the country is now teetering on the brink of political crisis.
It is not China’s fault that Latin American leaders failed to prepare their countries for the volatility of commodity markets. But the resource bust did expose a very unhealthy trade relationship. Latin American exports to China are predominantly natural resources, and while the value of commodities has dropped since 2014, the value of Chinese manufactured goods—clothing, footwear, machinery, and electronics—has not. But these Chinese goods are still entering Latin American markets at a frantic pace: the region’s balance of trade with China, still in surplus in 2005, had fallen into a deep deficit of $30 billion by 2015. With a few exceptions, most large economies in Latin America, particularly Mexico, but also Colombia and Argentina, run large trade deficits with China. As a result, competition from China has dimmed development prospects for some of Latin America’s most populous countries.
It is not China’s fault that Latin American leaders failed to prepare their countries for the volatility of commodity markets. But the resource bust did expose a very unhealthy trade relationship.
In Argentina, Brazil, and Mexico, manufacturing as a share of GDP shrank since 2005, largely as a result of Chinese competition in domestic, regional, and international markets. For instance, the share of electronics in Mexico’s total exports fell by one-third from 2003 to 2013. It is no surprise, then, that China is the main target of protectionist trade measures—earlier this year, Mexico placed new duties on Chinese steel entering its market, and in Colombia, the government has even protected the traditional straw hat, the sombrero vueltiao, from cheaper Chinese imitations. Latin America’s powerful labor unions are beginning to protest Chinese incursion, and politicians are having to walk a fine line between attracting investment and protecting domestic constituencies.
Beijing has not taken kindly to the restrictions and has at times retaliated. For instance, China has periodically banned imports of Argentine soy oil for extended periods, first in 2004 and then again in 2010, and this year its purchases of the product dropped 97 percent from 2015 levels. These measures were officially made on technical grounds but were widely regarded as both a response to Argentine restrictions on Chinese goods and a means to encourage the development of China’s own soy-manufacturing industry. As a consequence, Latin America’s key soy producers, Argentina and Brazil, are left mostly selling raw soybeans to China, rather than profiting from the sale of value-added products such as soy oil. Nor is the soy industry an exception—Latin America’s manufacturing sector has never really found an opening in the Chinese market, and today China takes in just 3 percent of total Latin American–manufactured exports.
Despite the rhetoric of mutual benefit and co-development that Xi is sure to employ during his visit, China remains, to many Latin Americans, a dangerous competitor and possibly even an obstacle to development. Xi is aware of the criticism his country faces over its lopsided trade surpluses and has expressed a wish to remedy the situation by allowing more Latin American products into the Chinese market. China intends to open special economic zones across Latin America in the coming years to spur on joint manufacturing investment, but Beijing must ensure these initiatives have developmental spinoffs for the countries involved. It will also need to make real sacrifices, such as opening up the Chinese agriculture market, that will expose Chinese companies to new competition. Otherwise, Latin America’s experience will continue to serve as a warning to other developing economies about what happens to those who open the gates too widely to China. That, in turn, will undercut Beijing’s ambition to be the new architect of global trade deals. The United States may be turning its back on free trade in the coming years, but China still faces challenges of its own if it wants to take the reins of the global economy.