Should Latin America Fear China? This presentation is partly based on my paper of the same title, available at:

Should Should Latin America Latin America

Fear China?Fear China?

This presentation is partly based on my paper of the This presentation is partly based on my paper of the same title, available at:same title, available at: http://papers.ssrn.com/sol3/papers.cfm?http://papers.ssrn.com/sol3/papers.cfm?

abstract_id=612441abstract_id=612441

Eduardo Lora Eduardo Lora Research DepartmentResearch DepartmentInter-American Development BankInter-American Development BankNovember 5, 2004November 5, 2004

Should Latin America Should Latin America Fear China?Fear China?

• Why is China raising fears?Why is China raising fears?

• Know your competitor: China´s Know your competitor: China´s strengths and weaknessesstrengths and weaknesses

• China: Friend or Foe? Trade and FDI China: Friend or Foe? Trade and FDI effects on Latin America effects on Latin America

China’s population China’s population represents 20% of the represents 20% of the world’s population…world’s population…

Total World Population (%)Total World Population (%)

00 55 1010 1515 2020

JapanJapan

UEMUEM

U.S.A.U.S.A.

Latin AmericaLatin America

ChinaChina

Source: World BankSource: World Bank

...12% of the world’s ...12% of the world’s economyeconomy(%) World GDP 2002, PPP USD(%) World GDP 2002, PPP USD

00 55 1010 1515 2020

KoreaKorea

CanadaCanada

RussiaRussia

United KingdomUnited Kingdom

GermanyGermany

Japan Japan

ChinaChina

U.S.A.U.S.A.

Source: IMFSource: IMF

LAC’s economic growth rates are LAC’s economic growth rates are minute compared to China’sminute compared to China’s

GDP per capita annual growth 1990-2002* GDP per capita annual growth 1990-2002*

-0.04-0.04 -0.02-0.02 00 0.020.02 0.040.04 0.060.06 0.080.08

HaitiHaitiVenezuelaVenezuelaParaguayParaguayJamaicaJamaicaEcuadorEcuador

HondurasHondurasColombiaColombiaSurinameSurinameUruguayUruguay

NicaraguaNicaraguaBoliviaBoliviaBrazilBrazil

GuatemalaGuatemalaMexicoMexico

ArgentinaArgentinaPeruPeru

BelizeBelizeEl SalvadorEl SalvadorCosta RicaCosta Rica

T & TT & TPanamaPanama

Dom. Rep. Dom. Rep. GuyanaGuyana

ChileChileChinaChina

Source: IDB calculations based on the World Bank´s World Development Indicators Online.Source: IDB calculations based on the World Bank´s World Development Indicators Online.

*Calculations made with 1995 US constant dollars data.*Calculations made with 1995 US constant dollars data.

China´s economy may China´s economy may be as large as the U.S. be as large as the U.S.

in 10 yearsin 10 yearsEconomic sizeEconomic size

(% world GDP)(% world GDP)

00

55

1010

1515

2020

2525

ChinaChina U.S.A.U.S.A. Latin AmericaLatin America

Share 2002Share 2002

Share 2010Share 2010

Forecast assumes constant growth rates and equal to the past decadeForecast assumes constant growth rates and equal to the past decade

Source: BBVASource: BBVA

China is rapidly gaining China is rapidly gaining importance in world importance in world

tradetradeChina’s trade (% world trade)China’s trade (% world trade)

00

0.50.5

1.01.0

1.51.5

2.02.0

2.52.5

3.03.0

3.53.5

4.04.0

4.54.5

5.05.0

19901990 19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002

Source: World Trade Organization (W.T.O.)Source: World Trade Organization (W.T.O.)

China´s export growth China´s export growth rate is astonishingrate is astonishing

• China: China: 34.1% (2003I-34.1% (2003I-2004I) 2004I)

• Latin AmericaLatin America: : 8% 8% (2003) (2003)• Brazil: Brazil: 21% (2003)21% (2003)• Colombia:Colombia: 9%9% (2003) (2003)• Mexico: Mexico: 2.5% (2003)2.5% (2003)

China´s export basket China´s export basket has become very has become very

diversifieddiversified

0

10

20

30

40

50

60

70

80

90

100

OECD LatinAmerica

China OECD Latin America China

Number of manufactured products exported to the US

19726,136 goods

200113,242 goods

China may be taking over the China may be taking over the industry in the rest of the worldindustry in the rest of the world

Manufacturing Added Value Growth Rates, 1990’s Manufacturing Added Value Growth Rates, 1990’s

00 22 44 66 88 1010 1212

Sub-Saharan AfricaSub-Saharan Africa

IndustrializedIndustrialized

LACLAC

WorldWorld

MENAMENA

South AsiaSouth Asia

DevelopingDeveloping

East AsiaEast Asia

ChinaChina

Source: Lall, et all. 2004. Latin America Industrial Competitiveness and the Challenge of Globalization. Washington D.C: IDBSource: Lall, et all. 2004. Latin America Industrial Competitiveness and the Challenge of Globalization. Washington D.C: IDB

China has overtaken LAC in China has overtaken LAC in FDIFDI

Net Foreign Direct InvestmentNet Foreign Direct Investment

-

1010

2020

3030

4040

5050

6060

7070

8080

9090

19901990 19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002 20032003

US

Dol

lars

in B

illi

ons

US

Dol

lars

in B

illi

ons

ChinaChinaLACLAC

Source: Eclac for LAC and World Bank: WDI and the Economist for ChinaSource: Eclac for LAC and World Bank: WDI and the Economist for China

China is the #1 destination for China is the #1 destination for worldwide foreign direct worldwide foreign direct

investment...investment...Foreign Direct Investment (2002 US dollars)Foreign Direct Investment (2002 US dollars)

00 1010 2020 3030 4040 5050 6060

IndiaIndia

MalaysiaMalaysia

PolandPoland

SingaporeSingapore

SwitzerlandSwitzerland

JapanJapan

MexicoMexico

BrazilBrazil

United KingdomUnited Kingdom

U.S.A.U.S.A.

GermanyGermany

LACLAC

FranceFrance

ChinaChina

Source: Unctad 2003. World Investment ReportSource: Unctad 2003. World Investment Report

Confidence Index of Foreign Direct Investment (FDI) 2003Confidence Index of Foreign Direct Investment (FDI) 2003

...and it is the country that ...and it is the country that generates the most generates the most

confidence among investorsconfidence among investors

DecreasedDecreased

ChinaChinaU.S.A.U.S.A.

MexicoMexicoPolandPoland

GermanyGermanyIndiaIndia

United KingdomUnited KingdomRussiaRussiaBrazilBrazilSpainSpain

FranceFranceItalyItaly

Czech RepublicCzech RepublicCanadaCanada

JapanJapanThailandThailandHungaryHungary

South KoreaSouth KoreaAustraliaAustralia

TaiwanTaiwanVietnamVietnam

Hong KongHong KongMalaysiaMalaysia

TurkeyTurkeyIndonesiaIndonesia

112233445566778899

1010111112121313141415151616171718181919202021212222232324242525

(1)(1)(2)(2)(9)(9)(11)(11)(4)(4)(15)(15)(3)(3)(17)(17)(13)(13)(7)(7)(5)(5)(6)(6)(14)(14)(8)(8)(12)(12)(20)(20)(16)(16)(21)(21)(10)(10)(24)(24)(33)(33)(18)(18)(42)(42)(29)(29)(31)(31)

Lower ConfidenceLower Confidence Higher ConfidenceHigher Confidence( )= 2002( )= 2002

Source: A.T. KearneySource: A.T. Kearney

Same positionSame position

IncreasedIncreased




• China: Friend or Foe? Trade and FDI China: Friend or Foe? Trade and FDI effects on Latin Americaeffects on Latin America

China vis-à-vis Latin China vis-à-vis Latin AmericaAmerica

China’s StrengthsChina’s Strengths• Market sizeMarket size• Macro stabilityMacro stability• Labor costs Labor costs • InfrastructureInfrastructure

China’s WeaknessesChina’s Weaknesses• Economic regulationEconomic regulation• Corporate governanceCorporate governance• Financial sectorFinancial sector

Common ProblemsCommon Problems• Rule of lawRule of law• EducationEducation

Market Size MattersMarket Size Matters

• Attraction to FDI oriented to home Attraction to FDI oriented to home marketmarket

• Scale economies in production, Scale economies in production, transportation and commercializationtransportation and commercialization

• Ease to develop new industrial clustersEase to develop new industrial clusters

Macroeconomic Macroeconomic StabilityStability

Country Risk RankingCountry Risk Ranking

00 11 22 33 44 55 66

ArgentinaArgentinaHaitiHaiti

NicaraguaNicaraguaEcuadorEcuador

HondurasHondurasParaguayParaguayJamaicaJamaica

VenezuelaVenezuelaBoliviaBolivia

UruguayUruguayGuatemalaGuatemala

Rep. Dom.Rep. Dom.BrazilBrazil

PeruPeruColombiaColombia

El SalvadorEl SalvadorCosta RicaCosta Rica

PanamaPanamaT & TT & TMexicoMexico

ChileChileChinaChina

Source: IDB calculations based on “the Global Competitiveness Report 2003-2004 and the WEO 2003”Source: IDB calculations based on “the Global Competitiveness Report 2003-2004 and the WEO 2003”

* Scale (median) / Scores (simple average)* Scale (median) / Scores (simple average)* A component of the macroeconomic environment index* A component of the macroeconomic environment index

China’s country risk is China’s country risk is low…low…

• Low public and external debt levelsLow public and external debt levels• Low inflation ratesLow inflation rates• Huge international reservesHuge international reserves• Strong external current accountStrong external current account• High savings levels and investment High savings levels and investment

coefficientscoefficients• High expected growth ratesHigh expected growth rates

Average Average wages in China are lower wages in China are lower than than minimum minimum wages in most of the wages in most of the

LAC countriesLAC countriesGross Minimum Wages and Average Wages for ChinaGross Minimum Wages and Average Wages for China

(2001 current dollars)(2001 current dollars)

00 2020 4040 6060 8080 100100 120120 140140 160160 180180 200200

Uruguay Uruguay

ArgentinaArgentina

NicaraguaNicaragua

BrazilBrazil

HondurasHonduras

ChinaChina

SalvadorSalvador

PeruPeru

Bolivia Bolivia

Colombia Colombia

MexicoMexico

ParaguayParaguay

VenezuelaVenezuela

ChileChile

Costa Rica Costa Rica

PanamaPanama

Effective labor costs are Effective labor costs are a fraction of those in a fraction of those in

LACLACCost of the Labor Force Including Benefits: Cost of the Labor Force Including Benefits: Clothing, 2002 (Clothing, 2002 (US$/Hr)US$/Hr)

Source: USITC (2004). Source: USITC (2004).

2.452.45

2.72.7

0.380.38

0.390.39

0.680.68

0.880.88

0.920.92

0.980.98

1.481.48

1.491.49

1.581.58

1.651.65

00 0.50.5 11 1.51.5 22 2.52.5 33

IndiaIndia

BangladeshBangladesh

China(inner-land)China(inner-land)

China(costal)China(costal)

NicaraguaNicaragua

ColombiaColombia

HondurasHonduras

GuatemalaGuatemala

El SalvadorEl Salvador

Dominican Rep.Dominican Rep.

MexicoMexico

Costa RicaCosta Rica

Key infrastructure Key infrastructure costs are lowcosts are low

Electricity Cost, 2002-2003Electricity Cost, 2002-2003

(US$ cent/KWh)(US$ cent/KWh)

Source: IDB calculationsSource: IDB calculations

17.1417.14

14.2114.21

11.7211.72

11.711.7

9.749.74

8.118.11

8.048.04

6.846.84

5.075.07

00 55 1010 1515 2020

ChinaChina

ColombiaColombia



Dominican Rep.Dominican Rep.

NicaraguaNicaragua

HondurasHonduras

GuatemalaGuatemala

MexicoMexico

……the infrastructure the infrastructure investment pace is investment pace is

impressiveimpressiveInfrastructure InvestmentInfrastructure Investment

8181 8282 8383 8484 8585 8686 8787 8888 8989 9090 9191 9292 9393 9494 9595 9696 9797 9898 9999 0000 0101 02020%0%

1%1%

2%2%

3%3%

4%4%

5%5%

6%6%

7%7%

8%8%

9%9%

10%10%

GD

P P

erce

nta

geG

DP

Per

cen

tage

Transportation

Telecommunications

Electriricity





The economic The economic regulation in China is a regulation in China is a

nightmarenightmareRegulation Quality IndexRegulation Quality Index

--1.201.20 --0.700.70 --0.200.20 0.300.30 0.800.80 1.301.30 1.801.80 2.302.30

T&TT&TMexicoMexico

PanamaPanamaUruguayUruguayJamaicaJamaica

BrazilBrazilPeruPeru

BelizeBelizeEl SalvadorEl Salvador

ColombiaColombiaGuatemalaGuatemala

BoliviaBoliviaDom. Rep. Dom. Rep. HondurasHonduras

GuyanaGuyanaChinaChina

NicaraguaNicaraguaVenezuelaVenezuelaParaguayParaguayEcuadorEcuador

ArgentinaArgentina

1998199820022002

--1.201.201.20 --0.700.700.70 --0.200.200.20 0.300.300.30 0.800.800.80 1.301.301.30 1.801.801.80 2.302.302.30

ChileChileT&T

PanamaPanamaPanamaUruguayUruguayUruguayJamaicaJamaicaJamaica

BrazilBrazilBrazilPeruPeruPeru

BelizeBelizeBelizeEl SalvadorEl SalvadorEl Salvador

ColombiaColombiaColombiaGuatemalaGuatemalaGuatemala

BoliviaBoliviaBoliviaDom. Rep. Dom. Rep. Dom. Rep. HondurasHondurasHonduras

GuyanaGuyanaGuyanaChinaChinaChina

NicaraguaNicaraguaNicaraguaVenezuelaVenezuelaVenezuelaParaguayParaguayParaguayEcuadorEcuadorEcuador

ArgentinaArgentinaArgentina

1998199820022002

Aart Kraav, y Massimo Mastruzzi, descrito en “Governance Matters III: Governance Indicators for 1996-2002"Source Daniel Kaufmann,Source Daniel Kaufmann, Aart KraavAart Kraav, y Massimo, y Massimo MastruzziMastruzzi, descritodescrito en “Governance Matters III: Governance Indicators for 1996en “Governance Matters III: Governance Indicators for 1996-2002""

Minority shareholders are Minority shareholders are unprotectedunprotected

Protection of shareholdersProtection of shareholders

00 11 22 33 44 55

HaitiHaitiBoliviaBolivia

HondurasHondurasGuatemalaGuatemalaNicaraguaNicaraguaParaguayParaguayArgentinaArgentina

ChinaChinaVenezuelaVenezuela

EcuadorEcuadorPanamaPanama

ColombiaColombiaEl SalvadorEl Salvador

T&TT&TMexicoMexico

PeruPeruUruguayUruguay

Costa RicaCosta RicaJamaicaJamaica

BrazilBrazilRep. Dom.Rep. Dom.

ChileChile

Source: The Global Competitiveness Report 2003-2004Source: The Global Competitiveness Report 2003-2004

Auditing and accounting Auditing and accounting standards are dreadfulstandards are dreadful

GuatemalaGuatemala



00 11 22 33 44 55

ParaguayParaguayHaitiHaiti

HondurasHondurasBoliviaBoliviaChinaChina

NicaraguaNicaragua

ArgentinaArgentinaEcuadorEcuador

VenezuelaVenezuelaUruguayUruguay

Rep. Dom.Rep. Dom.PanamaPanama

PeruPeruColombiaColombia

MexicoMexico

BrazilBrazilChileChile

JamaicaJamaicaT&TT&T


Auditing and AccountingAuditing and Accounting

……and the bankruptcy law is and the bankruptcy law is ineffectiveineffective

00 11 22 33 44 55 66

HaitiHaitiHondurasHondurasEcuadorEcuador

GuatemalaGuatemalaBoliviaBolivia

El SalvadorEl SalvadorNicaraguaNicaragua

ChinaChinaPanamaPanama

ParaguayParaguayArgentinaArgentinaRep. Dom.Rep. Dom.VenezuelaVenezuela

UruguayUruguayJamaicaJamaica

T&TT&TMexicoMexico

Costa RicaCosta RicaPeruPeru

BrazilBrazilColombiaColombia

ChileChile


Effectiveness of bankruptcy lawEffectiveness of bankruptcy law

Corporate governance Corporate governance will not improvewill not improve

• A means to support SOEs A means to support SOEs – Access to capitalAccess to capital– Corporatization of the largest SOEsCorporatization of the largest SOEs

• SOEs serve political objectivesSOEs serve political objectives– State control over key sectorsState control over key sectors– State control over investments State control over investments

abroadabroad– Social security (holdings)Social security (holdings)

China’s savings rates are China’s savings rates are some of the highest of the some of the highest of the

worldworld

LACLAC

National Savings Rates*National Savings Rates*

22

99

3030

2020

3434

4040

4747

6060

00 55 1010 1515 2020 2525 3030 3535 4040

Eeastern EuropeEeastern Europe

DevelopedDeveloped

Middle EastMiddle East

AfricaAfrica

Rest of AsiaRest of Asia

East AsiaEast Asia

ChinaChina

Source: The Global Competitiveness Report 2002-2003Source: The Global Competitiveness Report 2002-2003*Naional Savings Rate as GDP Percentage, 2001*Naional Savings Rate as GDP Percentage, 2001

……sustaining an also very sustaining an also very high investment ratehigh investment rate

LACLAC

Investment rate*Investment rate*

00 55 1010 1515 2020 2525 3030 3535


AfricaAfrica

DevelopedDeveloped

Eastern EuropeEastern Europe


East AsiaEast Asia

ChinaChina

Source: The Global Competitiveness Report 2001-2002Source: The Global Competitiveness Report 2001-2002*Fixed Investmen as percentage of GDP, 2000*Fixed Investmen as percentage of GDP, 2000

Capital markets play Capital markets play almost no role in the almost no role in the allocation of savingsallocation of savings


Local equity market access*Local equity market access*

1818

3131

2222

3939

3434

5858

6565

6767

00 11 22 33 44 55 66

ChinaChina

LACLAC



East AsiaEast Asia

AfricaAfrica

DevelopedDeveloped

Source: The Global Competitiveness Report 2002-2003Source: The Global Competitiveness Report 2002-2003*Raising money by issuing shares on the local stock market is (1=nearly impossible, 7=quite possible for a good company)*Raising money by issuing shares on the local stock market is (1=nearly impossible, 7=quite possible for a good company)

Savings feed the Savings feed the financial sector…financial sector…

Financial Deepening--M2 and Household DepositsFinancial Deepening--M2 and Household Deposits

0%0%

20%20%

40%40%

60%60%

80%80%

100%100%

120%120%

140%140%

160%160%

180%180%

200%200%

7878 7979 8080 8181 8282 8383 8484 8585 8686 8787 8888 8989 9090 9191 9292 9393 9494 9595 9696 9797 9898 9999 0000 0101 0202 0303

M2 / GDP

Household Saving Deposits / GDP

……but there is few but there is few credit for the private credit for the private

sectorsector

Eastern Europe

Ease of access to loans*Ease of access to loans*

1515

3232

4545

4242

4747

5555

5959

6060

00 11 22 33 44 55 66

ChinaChina

LACLAC


AfricaAfrica

East AsiaEast Asia


DevelopedDeveloped

Source: The Global Competitiveness Report 2002-2003Source: The Global Competitiveness Report 2002-2003**How easy is it to obtain a bank loan in your country with only a good business plan and no collateral? (1=impossible, 7=easy)How easy is it to obtain a bank loan in your country with only a good business plan and no collateral? (1=impossible, 7=easy)

Banks are unsoundBanks are unsoundSoundness of banks*Soundness of banks*

1313

3636

3636

5151

5454

5454

5555

6565

00 11 22 33 44 55 66 77

ChinaChina



LACLAC

East AsiaEast Asia

AfricaAfrica


DevelopedDeveloped

Source: The Global Competitiveness Report 2002-2003Source: The Global Competitiveness Report 2002-2003**Banks in your country are (1=insolvent and may require government bailout, 7=generally healthy with sound balance sheets)Banks in your country are (1=insolvent and may require government bailout, 7=generally healthy with sound balance sheets)

There are several There are several ingredients for a banking ingredients for a banking

crisiscrisis• Bad banking regulationBad banking regulation• Incentives toward excessive risk-takingIncentives toward excessive risk-taking

– Loans to state-owned companiesLoans to state-owned companies– Perception of state guaranteePerception of state guarantee– Lack of market controlLack of market control

• Bubble of assets pricesBubble of assets prices• Rapid credit growthRapid credit growth• Short-term capital flows...Short-term capital flows...• ...with a fixed exchange rate....with a fixed exchange rate.





-1.40-1.40 -0.90-0.90 -0.40-0.40 0.100.10 0.600.60 1.101.10 1.601.60 2.102.10

ChileChileUruguayUruguay

T & TT & T

BrazilBrazilMexicoMexico

PeruPeruPanamaPanama

BelizeBelizeRep. Dom.Rep. Dom.

ChinaChinaNicaraguaNicaragua

JamaicaJamaicaColombiaColombia

GuyanaGuyanaEl SalvadorEl SalvadorGuatemalaGuatemalaArgentinaArgentinaHondurasHonduras

BoliviaBoliviaVenezuelaVenezuela

EcuadorEcuadorParaguayParaguay

19981998

20022002

Control of CorruptionControl of Corruption

Source: Daniel Kaufmann, Aart Kraav, y Massimo Mastruzzi, descrito en “Governance Matters III: Governance Indicators for 1996-2002"Source: Daniel Kaufmann, Aart Kraav, y Massimo Mastruzzi, descrito en “Governance Matters III: Governance Indicators for 1996-2002"

The rule of law is weak The rule of law is weak and corruption is endemic and corruption is endemic

in Chinain China

Different symptoms, Different symptoms, different originsdifferent origins

• Homicidal rates low (2,2 vs 13 in LAC)Homicidal rates low (2,2 vs 13 in LAC)• Crime and violence is not the problemCrime and violence is not the problem• Property rights are weak Property rights are weak • The judiciary is perceived as a branch The judiciary is perceived as a branch

of the Communist Partyof the Communist Party• Law is a very new profession Law is a very new profession • Judges lack formation and Judges lack formation and

independenceindependence

Education levels like in Education levels like in LACLAC

00

11

22

33

44

55

66

77

88

99

1010

19601960 19651965 19701970 19751975 19801980 19851985 19901990 19951995 19991999

AfricaAfrica



LACLAC

East AsiaEast Asia


DevelopedDeveloped

ChinaChina

PanamaPanama

Source: Barro LeeSource: Barro Lee

Years of educationYears of education

Education levels are still Education levels are still lowlow

Higher Education Enrollment RatesHigher Education Enrollment Rates

GuatemalaGuatemala

NicaraguaNicaragua



Rep. Dom.Rep. Dom.

VenezuelaVenezuela

00 55 1010 1515 2020 2525 3030 3535 4040 4545 5050

HaitiHaitiT&TT&T

ChinaChina

ParaguayParaguay

HondurasHonduras

JamaicaJamaicaBrazilBrazil

EcuadorEcuador

MexicoMexico

ColombiaColombia

PeruPeruPanamaPanamaBoliviaBolivia

UruguayUruguayChileChile

ArgentinaArgentina


But this is changing But this is changing fastfast

• Enrollment grew 29% in 2001Enrollment grew 29% in 2001• 2,8 million new graduates in 2004, 2,8 million new graduates in 2004,

twice as in 2002…twice as in 2002…• 3,2 million graduates expected for 3,2 million graduates expected for

20052005

...and will widen the ...and will widen the knowledge gap with knowledge gap with

LACLACKnowledge Index for Latin America and Selected Countries, Knowledge Index for Latin America and Selected Countries,

1995 and 1998-20021995 and 1998-2002

Source: World Bank/KAM. Source: World Bank/KAM.

00 22 44 66 88 1010

Latin America (1995)Latin America (1995)Latin America (1998-2002)Latin America (1998-2002)

China (1995)China (1995)China (1998-2002)China (1998-2002)

Korea (1995)Korea (1995)Korea (1998-2002)Korea (1998-2002)

Taiwan (1995)Taiwan (1995)Taiwan (1998-2002)Taiwan (1998-2002)

USA (1995)USA (1995)USA (1998-2002)USA (1998-2002)

InnovationInnovation EducationEducation Information InfrastructureInformation Infrastructure




• China: Friend or Foe? Trade and FDI China: Friend or Foe? Trade and FDI effects on Latin America effects on Latin America

China imports more China imports more commodities every day...commodities every day...

Commodities imports Commodities imports (% world trade)(% world trade)

-5-5

00

55

1010

1515

2020

2525

8787 8989 9191 9393 9595 9797 9999 0101

OilOil

CopperCopperSoybeanSoybean

Source: I.M.F. WORLD ECONOMIC AND FINANCIAL SURVEYS. World Economic Outlook. Advancing Structural Reforms Source: I.M.F. WORLD ECONOMIC AND FINANCIAL SURVEYS. World Economic Outlook. Advancing Structural Reforms

...and exports more ...and exports more manufacturing products manufacturing products

every dayevery daySelected good exportsSelected good exports

(% world trade)(% world trade)

00

55

1010

1515

2020

2525

3030

8787 8989 9191 9393 9595 9797 9999 0101

MachineryMachineryElectronicsElectronics

TextilesTextiles

ToysToys

Commodities imports Commodities imports (% world trade)(% world trade)

-5-5

00

55

1010

1515

2020

2525

8787 8989 9191 9393 9595 9797 9999 0101

OilOil

CopperCopperSoybeanSoybean

Source: I.M.F. WORLD ECONOMIC AND FINANCIAL SURVEYS. World Economic Outlook. Advancing Structural Reforms Source: I.M.F. WORLD ECONOMIC AND FINANCIAL SURVEYS. World Economic Outlook. Advancing Structural Reforms

MexicoMexico loses, Venezuela wins loses, Venezuela wins… … and the rest fall somewhere in and the rest fall somewhere in

betweenbetweenExports structureExports structure

00 2020 4040 6060 8080 100100

VenezuelaVenezuelaEcuadorEcuador

NicaraguaNicaraguaParaguayParaguay

ChileChilePeruPeru

HondurasHondurasArgentinaArgentina

GuatemalaGuatemalaColombiaColombiaUruguayUruguay

T&TT&TBrazilBrazil

El SalvadorEl SalvadorJamaicaJamaica

MexicoMexicoChinaChina

FoodFood CommoditiesCommodities FuelsFuels MineralsMinerals ManufacturingManufacturing

Only Mexican and Brazilian Only Mexican and Brazilian exports compete strongly exports compete strongly

with China’swith China’sLAC-China Export Simmilarity Coefficient, 2001LAC-China Export Simmilarity Coefficient, 2001

00 . 03. 03 .06.06 .09.09 .12.12 .15.15 .18.18 .21.21

SurinameSurinameGuyanaGuyana

ParaguayParaguayVenezuelaVenezuela

BeliceBeliceChileChile

EcuadorEcuadorUruguayUruguay

NicaraguaNicaraguaPeruPeru

BoliviaBoliviaColombiaColombiaEl SalvadorEl Salvador

PanamaPanamaHondurasHondurasArgentinaArgentina

GuatemalaGuatemalaCosta RicaCosta Rica

BrazilBrazilMexicoMexico

Source: Schott (2004). The relative competitiveness of China's exports to the United Staes vis a vis Other Countries in Asia, Source: Schott (2004). The relative competitiveness of China's exports to the United Staes vis a vis Other Countries in Asia, the Caribbean, Latin America and the OECDthe Caribbean, Latin America and the OECD

However, in clothing and However, in clothing and footwear things are far footwear things are far

worseworseLAC-China Export Simmilarity Coefficient in Clothing, Footwear, Toys and Sc Eqpmt, 2001LAC-China Export Simmilarity Coefficient in Clothing, Footwear, Toys and Sc Eqpmt, 2001

00 44 88 1212 1616 2020 2424 2828 3232 3636 4040 4444 4848 5252 5656 6060 6464 6868 7272

SurinamSurinam

VenezuelaVenezuela

MexicoMexico

ArgentinaArgentina

ChileChile

GuyanaGuyana

EcuadorEcuador


BelizeBelize

BrazilBrazil

ParaguayParaguay

PeruPeru

PanamaPanama ColombiaColombia

UruguayUruguay

NicaraguaNicaragua

BoliviaBolivia

HondurasHonduras


GuatemalaGuatemala

*Manufacturing products are: clothing, footwear, scientific equipment and toys

Source: Schott (2004). The relative competitiveness of China's exports to the United States vis a vis Other Countries in Asia, the Caribbean, Latin America and the OECD

Transport costs may Transport costs may offset only a small part of offset only a small part of

the cost disadvantagethe cost disadvantageComparative Cost of Shipping, 2003Comparative Cost of Shipping, 2003Total cost of shipping a container of 40 feet (in current US dollars)Total cost of shipping a container of 40 feet (in current US dollars)

00 500500 1,0001,000 1,5001,500 2,0002,000 2,5002,500 3,0003,000 3,5003,500 4,0004,000 4,5004,500

HondurasHonduras


Dominican RepublicDominican Republic

MexicoMexico

Guatemala Guatemala

Nicaragua Nicaragua

El Salvador El Salvador

ChinaChina


Central America´s only Central America´s only real advantage is real advantage is

delivery timedelivery timeAverage number of days in water traveling by shipAverage number of days in water traveling by ship

00 1010 2020 3030 4040 5050 6060 7070

Mexico Mexico

Honduras Honduras

Colombia Colombia

CBI CBI

China, Hong Kong, TaiwanChina, Hong Kong, Taiwan

ASEAN-ASEAN-

IndiaIndia


China and LAC attract China and LAC attract FDI from different FDI from different

sourcessources

Note: FDI Source Coincidence Index: SCICh,j = 1 – 0.5*Σ|Sharei,Ch – Sharei,j|. Calculated from Note: FDI Source Coincidence Index: SCICh,j = 1 – 0.5*Σ|Sharei,Ch – Sharei,j|. Calculated from OECD FDI flows from source countries (i countries) to China and Latin American countries and OECD FDI flows from source countries (i countries) to China and Latin American countries and Korea. One less one half multiplied by the sum of the difference between the share of total flows Korea. One less one half multiplied by the sum of the difference between the share of total flows from source country i going into China and the share of total flows from source country i going into from source country i going into China and the share of total flows from source country i going into country j.country j.

Source: OECD (2002)Source: OECD (2002)

FDI Source Coincidence Index with China, FDI Source Coincidence Index with China, 1997-20011997-2001

00 0.10.1 0.20.2 0.30.3 0.40.4 0.50.5 0.60.6 0.70.7 0.80.8 0.90.9

PanamaPanamaChileChile

VenezuelaVenezuelaColombiaColombia

Costa RicaCosta RicaArgentinaArgentina

MexicoMexicoBrasilBrasilKoreaKorea

IndiaIndia

...and for different ...and for different sectors (except Mexico)sectors (except Mexico)

FDI Sector Coincidence IndexFDI Sector Coincidence Index

Note: FDI Sector Coincidence Index: SCIUS,j = 1 – 0.5*Σ|Sharei,US – Sharei,j|. Calculated from data from the Note: FDI Sector Coincidence Index: SCIUS,j = 1 – 0.5*Σ|Sharei,US – Sharei,j|. Calculated from data from the Bureau of Economic Analysis for 2001, on FDI flows from the United States to host countries (j countries: China, Bureau of Economic Analysis for 2001, on FDI flows from the United States to host countries (j countries: China, India, Korea and Latin American countries). One less one half multiplied by the sum of the difference between India, Korea and Latin American countries). One less one half multiplied by the sum of the difference between the share of total flows form the United States in sector i going into China and the share of total flows form the the share of total flows form the United States in sector i going into China and the share of total flows form the United States in sector i going into country j (India, Korea and Latin American countries).United States in sector i going into country j (India, Korea and Latin American countries).

Source: BEA (2001)Source: BEA (2001)

00 0.10.1 0.20.2 0.30.3 0.40.4 0.50.5 0.60.6 0.70.7 0.80.8

ArgentinaArgentina

LACLAC

BrazilBrazil

IndiaIndia

MexicoMexico

KoreaKorea

Are fears justified?Are fears justified?

• Fears on export and FDI diversion are Fears on export and FDI diversion are overblown...overblown...– ...export and FDI losses may be important only ...export and FDI losses may be important only

for Mexico and some sectors in Central Americafor Mexico and some sectors in Central America– ...but TOT effects are positive for the rest of ...but TOT effects are positive for the rest of

LACLAC– ...and LAC may attract important FDI flows from ...and LAC may attract important FDI flows from

ChinaChina

• However, never underestimate your However, never underestimate your enemy...enemy...

China may be a source of China may be a source of international financial international financial

instabilityinstability• Sudden stopSudden stop

– Banking fears Banking fears – Loss of investor’s confidenceLoss of investor’s confidence– Increase of Fed interest ratesIncrease of Fed interest rates

• ContagionContagion– Increase of EMBI spreadsIncrease of EMBI spreads

• If there were an Asian and an Enron effect...If there were an Asian and an Enron effect...• ...why not a Chinese effect?...why not a Chinese effect?

My conclusion:My conclusion:China is more a friend China is more a friend

than a foe...than a foe...But beware!But beware!

Documents

Should Latin America Fear China? This presentation is partly based on my paper of the same title, available at: