Milestone in Sino-Latin Cooperation

The two-day forum bringing together China and the 33 countries of the Community of Latin American and Caribbean States (CELAC) in Beijing on January 8th and 9th – the first of its kind – ushers in an era of bilateral cooperation in trade, political security and development.

First, China is becoming a juggernaut in the region and is reaping the benefits of the United States’ decreasing leverage in its own backward.

Beijing is deepening South-South cooperation and mutual trust with left-leaning heads of state in Latin America, namely Bolivia’s Evo Morales and Venezuela’s Nicolas Maduro, who are increasingly distancing themselves from Washington.

By pledging to boost trade with Latin America by US$250 billion over the next decade, President Xi Jinping is discrediting the US-headquartered Organisation of American States. It originally served as a bulwark against communist penetration in the continent.

In contrast, CELAC is an alternative political bloc established in 2011 in Venezuela – US’s foe.

Emblematic of China’s increasing clout, trade in goods with Latin America skyrocketed from more than US$12 billion to about US$ 275 billion between 2000 and 2013, according to a report by the United Nations Economic Commission for Latin America and the Caribbean published the first day of the forum. China is the main recipient of Brazil and Chile’s exports and it accounts for 10% of the region’s exports.

Redrawing the global economic landscape

Under the banner “New platform, new starting point and new opportunity,” President Jinping and Latin American leaders also reasserted their desire to redraw the international economic map.

Latin America is not only a commodity basket for the largest economy on the planet, it also plays an important role in Beijing’s strategy to internationalize its renminbi and hence become a financial power. Using renminbi in international transactions with Latin America would strengthen the competitiveness of Chinese financial institutions and mitigate exchange rate risks.

China alleviated Argentina’s economic woes with a US$11 billion currency swap agreement inked in 2014. The South American nation has been locked out of international credit markets since 2001, when it defaulted on its debt, and its US dollars reserves are depleting.

Indicative of Beijing’s unprecedented financial clout, China Development Bank denominated half of its US$20 billion loan to Venezuela in renminbi in 2010. Caracas, which borrowed more than US$40 billion in the past five years from the Asian giant, is today the largest recipient of Chinese credit in Latin America.

A strategic ally

In addition, the CELAC forum reaffirmed Latin America’s strategic role for China as a stepping-stone to the US market.

In particular, China is strengthening its ties with Mexico, one of the US’s largest trade partners. There, Beijing opened about 30 maquiladoras – sweatshops to capitalize on less expensive labour.

These factories allow China to benefit from the North American Free Trade Agreement – which eliminates tariffs between Canada, Mexico, and the US – and have more competitive manufactured products in the US market.

This is also good business for China as production costs in Mexico are lower. Chinese workers now earn more than many of their Mexican counterparts.

Finally, China is courting Latin America for knowledge transfer purposes. Emerging economies like Brazil offer insights into how to overcome the middle-income trap, in which the Asian giant fell. In 2014, productivity in China has been a drag on growth for the first time since the Cultural Revolution.

Latin America has proven that development relies both on the size and the stability of the middle class – an advice China could use as economic reforms are under way.

On the other hand, the Sino-Latin alliance has significantly benefited Latin America as it has increased demand for raw materials and boosted trade amid falling demand from the US and the European Union.

This analysis was published in the South China Morning Post on January 13, 2015. Click here

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