Once a peripheral presence in Latin America, China has become one of the region’s most important partners. Bilateral trade expanded from US$12 billion in 2000 to more than US$300 billion last year, raising China’s share of the region’s total trade from 1.7 percent to 14.4 percent.
China has also become an increasingly significant source of foreign direct investment in Latin America, accounting for nearly 10 percent of inflows in the past few years.
Growing Chinese influence in the western hemisphere has not gone unnoticed by the US. With no reset in sight for US-China relations, the rivalry between the world’s two largest economies and trading countries continues to escalate globally and in Latin America.
In the short term, the politicization of COVID-19 vaccine access could become the latest trigger for renewed tensions between the two. Over the medium and long term — perhaps as soon as 2035 — China could replace the US as the region’s largest trading partner.
The country is already the top trading partner of Brazil, Peru and Chile, and receives 30 to 40 percent of their exports.
In this context, the key question for Latin America is whether the region can successfully adapt to — or even benefit from — the persistent competitive dynamics between the US and China.
However, the answer remains at best mixed and unclear, in part owing to significant differences across the region.
Consider the US-China trade dispute, which escalated in March 2018 with the first round of retaliatory tariffs: Although Brazil’s soybean exporters have realized sizeable gains over the past three years by replacing US exports to China, other Latin American countries and sectors did not necessarily benefit from trade diversion to the same extent.
Even in Brazil, there is uncertainty as to the long-term sustainability of the export boom triggered by the trade dispute.
Moreover, northern Latin America (Mexico, Central America and the Caribbean) has markedly different trade relations with China compared with the region’s commodity-dependent south.
While Mexico previously captured reshoring and nearshoring opportunities as some supply chains shifted out of China, the COVID-19 pandemic wiped out much of that windfall, at least temporarily.
Latin American economies are susceptible to the indirect spillovers of trade wars as well. On a macro level, the region is among the worst affected by the pandemic in human and economic terms. Latin America accounts for only 8 percent of the world’s population, yet consistently represents 30 percent of COVID-19 deaths, and last year posted the deepest economic contraction of any developing region.
Continued US-China tensions might put additional downward pressure on an already uncertain global and regional recovery.
On a micro level, retaliatory tariffs and growing protectionism triggered by the trade dispute have caused collateral damage for Latin American firms.
In 2019, for example, Chilean nut exporters were caught off guard when the Indian government increased most-favored-nation tariffs on nuts in response to bilateral US tariffs on Indian steel. This decision affected a Chilean shipment of nuts already at sea en route to India.
With Latin America facing a potentially unsupportive international environment, owing to divergent post-pandemic recoveries and sustained US-China trade frictions, policymakers should pursue three priorities.
First, Latin American countries must remain vigilant and carefully navigate US-China tensions on issues ranging from trade and investment to 5G technology and COVID-19 vaccines. The region is highly heterogeneous, especially between its north and south, so that the only rule of thumb for choosing between the US and China — which many regard as a false dichotomy — should be alignment with national development goals and strategies.
Second, Latin America needs to diversify its exports, starting at the country level. Embracing greater trade openness globally and intra-regionally reduces dependence on individual markets, whether the US or China. Despite widespread protectionism, exacerbated by pandemic-induced export controls, Latin America can play a constructive role in strengthening international trade cooperation.
Chile, for example, which has 30 trade agreements with 65 countries, is a regional and global free-trade champion.
Lastly, the region should explore ways to boost its long-term export competitiveness. Lowering tariff and non-tariff barriers, including through infrastructure and regulatory improvements, and seizing the opportunities presented by the fourth industrial revolution will be instrumental in reducing export costs.
Effective trade promotion and facilitation measures would not only help mitigate the effects of trade-dispute spillovers, but would also support export diversification and development. Governments should complement these measures with supportive domestic policies to ensure the distributional benefits of trade.
US-China tensions are unlikely to abate anytime soon, and Latin America will not be able to insulate itself fully from the fallout.
However, by heeding the lessons of the past three years, the region’s governments and businesses can better position themselves to succeed over the next three years and beyond.
Felipe Larrain, a former Chilean minister of finance (2010 to 2014 and 2018 to 2019), is professor of economics at Universidad Catolica de Chile, and a member of the Lancet COVID-19 Commission, the UN Leadership Council for Sustainable Development and the Atlantic Council’s Adrienne Arsht Latin America Center’s advisory council. Pepe Zhang, associate director of the Atlantic Council’s Adrienne Arsht Latin America Center, is coauthor of China-LAC Trade: Four Scenarios in 2035 and LAC 2025: Three Post-COVID Scenarios.
Copyright: Project Syndicate
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