WorldCity Business Magazine

Winners & losers

by Claudio Mendonca

During the past three years, China’s robust expansion has been the talk of the trade world. The country’s economy has been growing at an annual rate of 10 percent and its 1.3 billion consumers hold the promise of a nearly insatiable market. For areas of Latin America, China has become the land of opportunity.

Brazil provides the Asian powerhouse with steel and iron ore as China continues its construction frenzy. Argentina ships it massive quantities of soybeans, and Peru and Chile load container vessels with copper bound for Asia.

If not for China, according to former U.S. Ambassador Manuel Rocha, Latin America’s economies would be posting far more lackluster results.

“Ever since China transformed from a socialist economy to a market economy, that country began to grow at historical and unprecedented rates,” says Rocha, who now owns Globis Group, a Miami-based business development consulting firm. “China is a country that began a major transformation 27 years ago and has not stopped since. It is now considered the fourth largest economy in the world.”

While the Chinese machine is bringing boom times to some of Latin America, it is not a win-win proposition. There are also losers – countries and industries being elbowed out by China’s inexpensive exports.

Textile and shoe industries all over the region are being hurt by the flood of Chinese goods. University of Illinois economist Werner Baer, who specializes in Latin American economies, says shoe and apparel manufacturers in South America are unable to compete with the Asian country’s extremely low wages and undervalued currency.

Mexican and Central American maquiladoras, which turn out products ranging from apparel to electronic goods, also have been slammed hard. Mexico alone has lost 300,000 jobs in the past two years because of Asian competition. Mexican imports of Chinese products, for example, surged 56 percent in 2005, hurting local industries for one of the United States’ key trading partners.

Because of China’s trade leverage, in fact, Mexico is in danger of losing its position as the United States’ second-most-important trade partner after Canada. China’s doubledigit increase in trade with the United States in 2005 puts the Asian country close at the heels of Mexico. The United States and Mexico did just more than $290 billion in trade in 2005, while the United States and China registered $286 billion in trade during the same period

“Mexican flags and Virgin of Guadalupe statues are all made in China,” says Jerry Haar, a professor at Florida International University’s Chapman School of Business. ”[Chinese] textiles, clothing, toys and consumer electronics are threats to Latin America.”

Colombia was able to stave off some of the China damage, but only by imposing safeguard duties of up to 87 percent on textile and apparel products.

And it’s not just the legitimate goods arriving from China. There’s also the problem with counterfeit products. Haar says Latin America has become a destination for cheap Chinese knock-offs of branded goods, with contraband goods selling as much as 60 percent below the price of legal products. Contraband movie and music DVDs, as well as electronic products, are popular pirated items.

“In 2005, China exported $1 billion of contraband goods to Latin America,” says Haar. “Two-thirds of Brazil’s pirated products come from China, and 66,000 army uniforms marked ‘made in Brazil’ were actually made in China.”

Globis Group’s Rocha, who held diplomatic posts in Argentina, Bolivia, Honduras and Mexico, predicts that China’s economy will continue to grow 8 percent to 9 percent annually, at least through the next decade. But other experts, even as they acknowledge the boom enjoyed by select countries in the Americas, question the longevity of the consumption craze.

Looking ahead

Rocha says for China’s economy to remain successful it needs to continue its pursuit of new markets and additional sources of energy and raw materials. And that is good news for Latin America. But critics say the bounty may be short-lived.

“For the time being, some Latin American countries are benefiting from China’s consumption,” says economist Baer. “But how long can China sustain an economy growing 10 percent a year?”

Haar, too, expects Latin American economies to slip – perhaps as early as this year. He says the excitement about China’s huge consumer market is overstated when “700 million of these consumers are peasants.” He also points to the volatility of commodity prices and notes that while there are big investments in mining and energy in Latin America, those investments are creating little employment. Further, what happens in the United States will also play a role in what happens in Latin America, he says.

“If there is a slowdown in the U.S. economy, China will buy fewer commodities from Latin America and prices will drop, affecting Latin America negatively,” says Haar.

Still, the Latin American nations engaged in energetic trade with China are seeing a marked result in their economies. Sixty percent of Brazil’s exports to China are commodities, triggering a $1.5 billion surplus with China in 2005. And China has propelled other nations to favorable trade balances.

At the same time, China is investing in its Latin America trade partners, boosting flagging infrastructures. Sinopec, the Chinese petroleum company, is pumping $1 billion into a joint venture with Brazilian oil giant Petrobras. The Asian country also poured $1.5 billion into Canadian energy company Encana Corp.’s assets in Ecuador. And the China Development Bank has announced a strategic mining partnership with Chile’s state-owned copper company, Codelco.

Manuel Lasaga, an economist with Strategic Information Analysis in Miami, says China is on its way to maintaining a long streak at very high economic growth rates. “At some point, China will eventually run into bottlenecks,” says Lasaga. “But for the next 15 years prospects are impressive.”

He says what might disrupt China’s massive growth are possible political modifications in the future.

“Standard-of-living improvements in China will create greater social demands for liberties, and that can cause political changes. These changes may create some bumps along the way,” says Lasaga. “Changes are unavoidable. My concern is whether if it will be a smooth transition or a bumpy road.”