Most analyst predict a spike of Chinese economic influence in the Latin America region during and after the pandemic. On one side, China has already committed to several infrastructure, energy and mining investment projects, but also, Latin America economies are really suffering the economic impact of COVID 19, with many companies struggling to get capital to restart operations and governments redirecting infrastructure budget to attend the health emergency.
We are also well aware that the US is really leaving the Latin America economies to deal on their own with the pandemic and its impact. And therefore, its easy to really understand why China is working hard in what analyst have called “mask diplomacy”,and why Latin American economies are opening their arms to these diplomatic efforts.
Just last month, Wang Yi, China’s chancellor offered a huge aid package to Latin America economies to help buy the Chinese vaccine. Additionally, in the past few months there have been many rounds of medical supplies donations and shipments from China. Jack Ma, Huawei, are among those offering support to Latin American countries combating the pandemic.
For the last decade, trade and investment between China and Latin America has continuingly increased. In 2019, trade between regions reached almost $315 billion and almost $8.9 billions of investment transactions were recorded. Many countries in the region have joined the Belt and Road initiative, and continue to promote bilateral investment projects in infrastructure, energy and natural resources sectors.
However, the reality is that Belt and Road initiative is not a free trade agreement nor an investment agreement. And in that sense, in order to deepen the relations between China and LatAm countries, trade and investment agreements are the only available next step. So far, China has signed FTAs with Chile, Peru and Costa Rica, and its working towards a Panama FTA, with only Peru including investment provisions. Other countries like Mexico have signed IPPAs with China, but the provisions are outdated and do not reflect the investment potential between the two regions.
Another important consideration is that China is entering into a new economic era, with a significant shift in the country’s economic policy. Just a few weeks ago, President Xi and China’s top officers were introducing the Dual Cycle economy concept. The “Dual Circulation” model is based on the objective of improving the functioning of the both the domestic and global economic cycles, to achieve a healthy performance of the national economy. It comprises high-quality development and greater economic openness.
High quality development
- Implementation of the social credit system
- Increase in risk management
- Higher standards of compliance
- Digital transformation
- Transparency and visibility.
- Market and FDI liberalization
- Globalization of Chinese companies
- Promotion of the Belt and Road initiative
- Expansion of exports and global businesses
- Strengthening supply chains
What can analyst expect from this new economic strategy?
At the economic policy level, it means that the focus will be on the domestic market. This means more policies to promote domestic consumption, increase domestic production, technology development and employment creation. It also means that the demand of certain products will increase: raw materials, food, inputs for high technology industries. In addition, there will be a push from the top of the country to advance in 5G, IoT, e-commerce, fintech, financial services, Artificial Intelligence, among others.
How does this new economic strategy fits with Latin America? And most important, what is the road to recovery?
First, according to the most recent forecast of the IMF, Latin America and the Caribbean can expect a GDP contraction of 9.3 percent this year, due to the lockdowns and spill overs from the rest of the world, including lower commodity prices, remittances, tourism and capital outflows.
The IMF also projects a partial recovery in the region of 3.7 percent in 2021.
Second, on trade, the UN Economic Commission for Latin America and the Caribbean projects a steep 23% drop in trade in the region during 2020. During the first half of the year, exports to the US declined 22.2%, EU -14.3%, and within the region -23.9%. However, exports to Asia showed greater resilience, and in particular to China only fell -2%.
Despite the pandemic, China continued purchasing products from Latin America, mainly food, raw materials, mining products, oil. Therefore, it is clear that the economic recovery for Latin American economies goes hand in hand with China and Asian economies.
However, we are witnessing a new trend in trade towards a more regional, more resilient, more stable supply chains. This trend will lead to what some experts call the Balcanization of the world economy, mainly into three productive hubs, North America, Europe and East-South East Asia. In this new scenario, regional free trade agreements will become more popular, more useful. Examples are USMCA, Pacific Alliance, CPTPP, and maybe RCEP at the end of this year.
How can we overcome the challenges posed by the regionalization of trade?
First, during theAPEC TRADE MINISTERS MEETING last meeting in May, the ministers pledged to work towards the facilitation of the flow of essential goods and services to fight the pandemic including medicines, medical supplies and equipment, agriculture and food products, and minimise disruptions to the global supply chains.
They also acknowledged the importance of strengthening regional connectivity by intensifying efforts to make global supply chains more resilient and less vulnerable to shocks.
But most importantly, and here is the key, the Ministers committed to harnessing the opportunities of the digital economy and technologies, enabling international business and cross border trade.
In this sense, the way forward with China is definitively continue to deepen cooperation in infrastructure, energy and agriculture projects. But we should move forward to other new topics like digital economy and other new infrastructure, financial services, technology and research development.
Unfortunately, most of the efforts are done by Chinese companies in Latin America: Alibaba, Tencent, and until very recently, Latin America companies and associations working on an ecommerce agenda with China.
And here is where the GBA region is key. China is a huge and diverse country, but it is within the GBA region were we can find a wide offer of business facilities for ecommerce: B2B platforms, B2C platforms, cross-border commerce, logistic hubs, data centres. And moreover, the ecosystem for the development and commercialization of IoT solutions, AI, robotics, Industry 4.0, fintech.