Monday, March 05, 2012

Thoughts on the US-China Economic & Security Review Commission Report: China in Latin America

The U.S.-China Economic and Security Review Commission has been a source of policy generation in government circles in the United States. 

The Commission was created on October 30, 2000 by the Floyd D. Spence National Defense Authorization Act for 2001 § 1238, P.L. 106-398 (codified at 22 U.S.C.§ 7002 (2001) as amended.  The e Commission  was established "to review the national security implications of trade and economic ties between the United States and the People's Republic of China."  22 U.S.C. § 7002(a)(1).  The Commission's Fact Sheet explains that the "Commission is composed of 12 members, three of whom are selected by each of the Majority and Minority Leaders of the Senate, and the Speaker and the Minority Leader of the House. The Commissioners serve two-year terms." 

In May, 2011, the Commission has released a backgrounder entitled China in Latin America. "The backgrounder provides an overview of China's growing economic and political ties to Latin America over the past ten years. It examines China's current trade relationship with countries in the region, the scope and nature of China's foreign direct investment, the extent of its diplomatic, military, and regional organization engagement, and its interaction with Latin American countries that officially recognize Taiwan as an independent country." U.S.-China Economic and Security Review Commission, Announcements, May 31, 2011.

The Introduction set the tone of the report:
China has gradually expanded its economic and political presence in Latin America1 over the past ten years. Though trade between China and Latin America continues to remain a relatively small share of their respective global trade, it is an increasing source of new economic growth for both. Resource acquisition remains a cornerstone of Chinese trade and investment in the region. China has also sought to use investment and funding to encourage Latin American countries to officially recognize China instead of Taiwan, thereby weakening Taiwan's global support for a role in the international arena. In addition to investments, China has sought to improve its diplomatic presence through an increasing number of high- level visits, military cooperation and exchanges, and involvement in several regional organizations. Although China is currently not a major player in the region, China's appeal as an additional source of investment and a potential new export market for Latin American goods will ensure the growth of its political and economic influence in the region. (From China in Latin America, page 3).
 (Brazil's huge new port highlights China's drive into South America, Friends of the People's Republic of China September 15, 2010 (""This project marks a new phase in relations between Brazil and China," Rio's economic development secretary, Julio Bueno, said during the recent visit of about 100 Chinese businessmen to the port complex, which is being built by the Brazilian logistics company LLX and should receive billions of dollars of Chinese investment. This new phase of engagement with Brazil and South America, is part of China's "going out strategy" – an economic and, some say, diplomatic push for Chinese companies, many of them state-run, to invest abroad, snapping up access to minerals, energy and food by pouring the country's colossal foreign reserves into overseas companies and projects." Ibid.))
The Report included no surprises.  Analysts have been seeing this coming for at least half a decade.  See, e.g., 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. But the Commission Backgrounder did remind people that China's Go Out policy may produce benefits as well as challenges to Chinese foreign and economic policy.  This was brought out nicely in a summary analysis of trade between China and Brazil:
Brazil's Growing Trade Relationship with China

Brazil is one of China's largest trading partners in the region. From 1998 to 2008, trade between the two countries increased 1,838 percent.32 This rapid growth in trade and investment has fueled Brazil's economy and provided needed demand in a slumping global market. However, similar to the rest of the region, Brazil exports mainly raw commodities and imports manufactured products from China. In 2009, 77 percent of Brazil's exports to China consisted of raw materials and commodities while industrial products were only 23 percent. Of Brazil's total exports to China, iron ore accounted for approximately 40 percent and soy beans and soy oil accounted for an estimated 23 percent. In contrast, Brazil's imports from China are 98 percent industrial products.

While these exports have led to further economic growth in Brazil and improved quality of life by providing low-cost products, competition in manufacturing sectors has led to the outsourcing of factories to China or an inability of domestic firms to compete with the lower prices of Chinese firms.36 According to a study of 1,529 firms conducted by Brazil's National Industrial Confederation, one-fourth of Brazilian manufacturers face competition from Chinese firms in the domestic market, and two-thirds of Brazilian exporters have lost foreign clients to China. The Federation of Industries of the State of Sao Paulo estimates that this competition with China has led to the loss of approximately 70,000 Brazilian manufacturing jobs in 2010 and $10 billion in expected earnings for local industry.

As these two countries compete in the same manufacturing sectors, the results of this competition have led to some recent political tensions. For example, in statements with union leaders, Brazilian President Rousseff stated that "There is a misbalance in our relations with China. Brazil exports commodities and imports too many knick-knacks. This happens particularly between Christmas and Carnival. I'm told that 80 percent of this year's [2011] Carnival costumes came from China." (From China in Latin America, page 8-9.)
The same issues, of course, apply to trade in other areas as well, particularly in Africa, where, in addition, there is a sense that second quality goods are dumped reserving first quality goods for the richer markets of the U.S. and Europe.The great danger for Latin America is that its own growth will be sacrificed to satisfy the market demands of a great power.  Just as in the 19th and 20th centuries, Latin American economic development was bent to the service of the rising economies of North America and Europe, so in this century Latin America runs the risk of turning into China's plantation--with economies subordinated to the needs of the dominant master economy.   See, Backer, Larry Catá, Ideologies of Globalization and Sovereign Debt: Cuba and the IMF. Pennsylvania State International Law Review, Vol. 24, 2006. Available at SSRN: The dangers were hinted at recently by the strong connection between Brazilian financial marlets and Chinese economic production.  See, Carla Mozee, Brazilian stocks drop as China cuts growth outlook: Brazilian Q4 GDP, interest-rate decision due this week, Market Watch, March 5, 2012.

("Chinese Defense Minister Liang Guanglie met his Mexican counterpart Guillermo Galvan Galvan here Wednesday to promote bilateral military cooperation." Chinese, Mexican defense ministers hold talks on military cooperation, The Coming Crisis, June 1, 2011)
But the military connections are important as well.  In this area, especially, the importance of emerging regional trade associations, especially the ALBA cannot be underestimated. (From China in Latin America, pp. 14-15).  Cuba, Venezuela, Bolivia, Nicaragua and some of the CARICOM states will provide a useful entry point for military influence and connecitons.  . See, e.g., Backer, Larry Catá and Molina, Augusto, Cuba and the Construction of Alternative Global Trade Systems: ALBA and Free Trade in the Americas (May 20, 2009). University of Pennsylvania Journal of International Economic Law, Vol. 31, No. 3, 2010. Available at SSRN: Trade and military need may also affect the relationships between China and its Latin American trading partners.

In addition to arms sales and contacts between the PLA and Latin American militaries, select commercial interactions must be considered as part of its military engagement. In Latin America, this includes collaboration between the Brazilian aircraft manufacturer Embraer and China Aviation Industrial Corporation (CAIC) II to produce ERJ-145s business jets in Harbin, China, as well as sales of Y-12 turboprop aircraft to Venezuela. In the space industry, ties include four major ongoing space-related projects in Latin America, the China-Brazil Earth Research Satellite (CBERS), Venesat-1, the Venezuela Remote Sensing Satellite, and the Tupac Katari satellite, as well as other projects in development and more modest collaboration initiatives. In the telecommunications industry, Chinese firms such as Huawei and ZTE are major players in the leading nations of Central and South America. (From R. Evan Ellis, China-Latin America Military Engagement: Good Will, Good Business, and Strategic Position, Strategic Studies Institute, Aug. 2011, pp. xi-xii)

Ellis seeks to put together Chinese economic and military strategies, tying both to the protection of the Go Out Policy.  "Growing Chinese military contacts with Latin America are, in some ways, an understandable part of the expansion of the PRC as key global actor with global interests." (Ellis, supra, at p. 43). These interests include:

1. securing access to reliable sources of primary products in support of manufacturing activities and capital formation,

2. assuring the ability to feed the Chinese population as it both urbanizes and consumes more protein,

3. establishing and protecting markets for Chinese goods as its producers continue to expand production and move up the value-added chain,

4. securing access to technology and global information flows,

5. maintaining a presence in institutions key to China’s global economic transactions, and

6. avoiding the consolidation of an international coalition opposing the “rise” of the PRC.

Chinese military engagement with Latin America supports each of these imperatives, albeit often in in- direct ways. (Ellis, supra, at 2-3).

Despite this assessment,"the PRC has been extremely cautious to avoid establishing an overt military presence in Latin America that could facilitate the emergence of a consensus within the United States and its allies to op- pose PRC engagement with the region." (From Ellis, supra, at p. 39).  All of this is worth considering when one approaches analysis of China's geopolitical actions.   First, outbound actions are closely tied to internal policy.  Second, external and internal policy is focused on preserving stability within China.  Third, the Chinese fear the possibility of being encircled and starved--they are well aware of the disastrous effects of a similar containment policy against Japan in the 19320s and will do much to avoid a repetition of that scenario.  Fourth, China remains committed to a sphere of influence approach to international relations, in which Latin America will remain a secondary target, but one that can be used against the United States to counter action in other places, for example in Vietnam and Pakistan. Fifth, military, political and economic interests are aligned in China in ways that are much more efficient than similar policies in the United States.  Sixth, these realities will have a substantial effect on internal Chinese policies as "leftist" and "rightist" camps within the Chinese Communist Party vie for control of the development of the Party line. It suggests that any heavy turn leftward would have a noticeable effect on China's global engagement and therefore on its ability to continue to maintain internal economic (and political) stability without greater police action. But rightists that would abandon Party  domination would also upset the careful balance of domestic and foreign policy alignment that has propelled China forward.  That also has its dangers for stability. Whether leftists or rightists are willing to take the risk will be an important question during the transition to new leadership.  

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