Sino – Latin American

Economic RelationsMain take-aways

Alicia García-Herrero

Chief Economist of Emerging Markets

BBVA Research

Beijing, May 2012

Outline

1.

Putting the book in context:• How relevant are the two regions?• far with Sino–Latin American economic

relations?

2.

Quick overview to book chapters• Brazil -

China

• Mexico - China

Page 2

How relevant are the two regions?

Page 3

The new global economic order will be Asian and specially Chinese• Emerging Asian economies to contribute close to 58% to global growth in next 10 years

• China is the highest contributor with almost 30% of global growth

Contribution to World economic growth by region between 2011-2021 (%)

Source: BBVA Research and IMF WEO

10.5

Latin America

Africa Australia + New Zealand

North America

Asia (ex.Japan)

Japan

7.8

6.0

4.1

Eastern Europe

57.91.8

1.0

5.8

Western Europe

Middle East

5.0

Page 4

Latin America is not irrelevant, even for China• Brazil and Mexico also world class players

• Brazil will contribute to global growth nearly double Japan. Mexico more than Germany.

• Argentina more than Canada, Colombia close to France. Peru and Chile more than ItalyCurrent economic size* and incremental GDP** 2011 –

2021(billion USD, adjusted by PPP)*

Current size is indicated by the size of the circle as well as the number below the country’s name ** Incremental GDP is found in the number inside the circleSource: BBVA Research and IMF WEO

Page 5

176 165 165

Brazil2,247

United Kingdom2,213

Hong Kong344

Singapore308

Canada1,367

Argentina700

Australia899

Germany3,039

Japan4,311

Mexico1,628

Saudi Arabia665 France

2,173 Spain1,385

Colombia461 South Africa

543

Peru296 Chile

275

Italy1,791

1,137

741

514456

358 347 345 343 341 322

236 229

415

198134

0

200

400

600

800

1,000

1,200

1,400

Incr

emen

tal G

DP

PP

P 2

011

-20

21 (b

illio

n U

SD)

LATAM Emerging EconomiesG6 EconomiesOther Economies

Latin American relevance more dependent on Asia,

particularly China

Page 6

Page 7

Trade between Asia and Latin America has grown nine times in last 20 years

0

20

40

60

80

100

120

140

160

1990 2000 2010

LATAM to Asia Asia to LATAM

Trade flows between Asia and LATAM 7(billion USD) Source: BBVA Research and COMTRADE

Page 8

In 2010 the three countries accounted for 84% of total exports to LATAM (114 billion USD)

Brazil and Chile

accounted for 66% of total exports to Asia which added up to 84

billion USD. Argentina, Mexico and Peru played a minor role

China is the key trading partner but also Korea and Japan are relevant

Trade flows Asia to LATAM: the big players2010

China50%

Korea18%

Japan16%

Rest of Asia16%

Trade flows LATAM to Asia: the big players2010

Brazil41%

Chile25%

Mexico14%

Rest of LATAM20%

Page 9

China top trading partner… but not only for exports, also for imports!

China’s ranking as trade partner in Latin AmericaSource: BBVA Research and COMTRADE

Country

Export to China Import from China

2000 2010 2000 2010

Argentina 6 2 4 2

Brazil 12 1 11 2

Chile 4 1 4 1

Colombia 36 2 9 2

Mexico 19 3 6 2

Peru 2 1 9 2

Venezuela 35 7 18 2

LATAM exports concentrated on commodities: iron ore, soybean, copper, paper and food for animalsAsian exports are manufactured goods, also medium and high value added ones like motor vehicles, communication devices and electronic devices.

Page 10

Comparative advantage behind trade patterns

Trade flows Asia to LATAM: commodities2010

Machinery, other than

electric17%

others47%

Electrical machinery,

apparatus and appliances

21%

Transport equipment

15%

Trade flows LATAM to Asia: commodities2010

Metalliferous ores and metal

scrap35%

Non ferrous metals13%

other commodities

42%

Oil seeds, oil nuts and oil kernels

10%

The book: 1. Seven theme chapters 2. Two case studies

Brazil Mexico

Page 11

Book thematical chapters

1.

Possibility of economic cooperation beyond resource and manufacturing complementarity. Masahiro Kawai and Fan Zhai (ADBI)

2.

Determinants of trade between two

Rolando Avendaño and Javier Santiso (OECD)

3.

Is India the next big thing for Latin America?:

China and India’s trade. Anthoni Estevadeordal, Mauricio Mésquita Moreira, Christian Volpe Martincus and Juan S. Blyde (IADB)

Page 12

4.

Production sharing in Latin America and East Asia. K.C. Fung, Alicia García-Herrero and Alan K. F. Siu BBVA & HKU)

5.

Financial access of SMEs in Latin America: lessons for China. Jing Gao (CASS)

Book thematical chapters

Page 13

6. The Latin America experience in pension system reform: coverage, fiscal issues and possible implications for China. Daniel Titelman, Cecilia Vera and Esteban Pérez Caldentey (CEPAL)

7.

A comparison of Chinese outward direct investment with its regional peers: Japan, South Korea and Taiwan. K.C. Fung, Alicia García-Herrero, Ya-Lan Liu and Alan K. F. Siu (BBVA & HKU)

Book thematical chapters

Page 14

• The impact of the emergence of China on Brazilian international trade

Enestor Dos Santos and Zoledad Zignago (BBVA)

Case Studies

Page 15

Looking at the technological dimension of the dataset we show that Brazil (increasingly) exports to China products with lower technological content and (increasingly) imports products with higher technological content.

Will China’s emergence de-industrialize Brazil?

Brazilian Exports to China by Technology-Content (share of total exports; in %)

2 2

1710

29

12

43

55

921

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1994 2007

HT MT LT PP RBSource: BACI

Brazilian Imports from China by Technology-Content (share of total exports; in %)

2535

34

32

3022

5 1

5 10

0%

20%

40%

60%

80%

100%

1994 2007

HT MT LT PP RBSource: BACI

Page 16

Incorporating the “quality”

dimension (intra-industry international trade and, thereby, competition in a process of vertical differentiation and quality

upgrading.

The quality dimension reveals that both countries export to each

other basically low-quality goods (i.e. products whose unit value are in the lower range of world’s distribution of unit-

values for the product).

More than technology: looking at quality

Brazilian Exports to China by Quality Segment (share of total exports; in %)

10 15

46

19

45

67

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1994 2007High Medium LowSource: BACI

Brazilian Imports from China by Quality Segment (share of total exports; in %)

16 19

1818

66 63

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1994 2007High Medium LowSource: BACI

Page 17

The overlapping in exports is limited and degree of competition relatively small. Furthermore, countries increased their advantage in the products

in which they already had advantage in 1994 and lost advantage in the sectors in which

they had small advantage in producing in 1994: Lots of persistance!

More specialization and in line with comparative advantages

Brazil and China: Dispersion of Revealed Comparative Advantage by Products

(2007)

-25,00

-20,00

-15,00

-10,00

-5,00

0,00

5,00

10,00

15,00

20,00

-15,

00

-10,

00

-5,0

0

0,00

5,00

10,0

0

15,0

0

20,0

0

China

Bra

zil

Comparative Advantage:Brazil (no) - China (yes)

Comparative Advantage: Brazil (yes) - China (yes)

Comparative Advantage: Brazil (no) - China (no)

Comparative Advantage: Brazil (yes) - China (no)

Brazil and China: Dispersion of Revealed Comparative Advantage by Products

(1994)

-10,00

-8,00

-6,00

-4,00

-2,00

0,00

2,00

4,00

6,00

8,00

10,00

-8,0

0

-6,0

0

-4,0

0

-2,0

0

0,00

2,00

4,00

6,00

8,00

10,0

0

China

Bra

zil

Comparative Advantage: Brazil (yes) - China (no)

Comparative Advantage: Brazil (no) - China (yes)

Comparative Advantage: Brazil (yes) - China (yes)

Comparative Advantage: Brazil (no) - China (no)

Page 18

Brazilian exports of high technological content and high quality

increased more than the average and more than low technological and low quality exports in the last years. Overall, the emergence of China has been supporting a displacement of Brazilian exports not only towards natural based products but also to goods with higher quality

and higher technological content.

Weak evidence of deindustrialization

Brazilian Exports by Technology-Content(share of total exports; in %)

4 9

3031

17 11

22 24

28 25

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1994 2007

HT MT LT PP RBSource: BACI

Brazilian Exports by Quality Segment(share of total exports; in %)

18 21

38 38

44 42

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1994 2007High Medium LowSource: BACI

Page 19

• China and Mexico in the US market: challenges and opportunities

Cecilia Posadas Pérez BBVA Bancomer

Page 20

Case Studies

China & Mexico: Trade Outlook

China & Mexico are two of the world’s most important emerging markets•

Mexico has higher income per capita, but China is quickly catching up due to its faster economic growth

China & México: GDP per capita in 2010(thousands of dollars)Source: Haver analytics

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

China Mexico

GDP per Capitas PPP USD

0

2

4

6

8

10

12

China Mexico

Average Real GDP grow th 2000-2010

China & México: Average real GDP growth between 2000 and 2010 (Annual % change)Source: Haver analytics

Page 21

China & Mexico: Trade Outlook

China & Mexico are two of the world’s most important emerging markets•

Industry, manufacturing in particular is an important part of both economies, however services are more important in Mexico.

China: Value Added by Sector(% of GDP)Source: Haver analytics

Mexico: Value Added by Sector(% of GDP)Source: Haver analytics

4%

18%

17%61%

Primary Manufacturing Rest of Industry Services

10%

32%

12%

46%

Primary Manufacturing Rest of Industry Services

Page 22

China & Mexico: Trade Outlook Trade between China & México has increased during the last 10 years •

Trade between them accounted for 8.3% of Mexico’s foreign trade in 2010

•

Mexico imported 33.2 billion and exported 3.5 billion to/from China in 2010

•

The trade is balance favors China considerably

Mexico: Foreign merchandise trade (exports+imports)(Billions of USD)Source: INEGI

Mexico: exports, imports & trade balance with China(Billions of USD)Source: INEGI

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

Balance Right Axis Exports Imports Serie5

0

100000

200000

300000

400000

500000

600000

700000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0

100000

200000

300000

400000

500000

600000

700000

Total USA China Page 23

China & Mexico: Trade Outlook About 50% of Mexico’s imports from China are electric components probably used in the production of more sophisticated products for re-exportation.

Source: ECLAC year 2010

16.8

8.6

5.4

4 .5

3 .4

3 .02 .8

2 .52 .2

51.0

P arts, and accesso ries fo r teleco munacatiuo n apparatusP arts, nes o f and accesso ries fo r generato rs and turbinesTelevis io n, radio -bro adcasting; transm itters, etcCo mplete digital data pro cessing machinesOptical instruments and apparatusP eripheral units, including co ntro l and adapting unitsChildren's to ys, indo o r games, etcOther electric po wer machinery, parts, nesElectro nic m icro circuitsRest Page 24

China & Mexico: Trade Outlook

China & Mexico are important recipients of FDI•

Together they accounted for 8.5% and 1.5% of the total FDI in the world

•

However despite signing a mutual investment protection agreement in 2009, flows towards each other remain small.

China & Mexico: Foreign Direct Investment Inflows(Billions of USD)Source: SE & UNCTAD

Mexico: FDI Inflows from China(Billions of USD)Source: INEGI

0

20000

40000

60000

80000

100000

120000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Mexico China

-5

0

5

10

15

20

25

30

35

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

-5

0

5

10

15

20

25

30

35

From China Right axis

Page 25

China & Mexico: Trade Outlook

In contrast with Mexico's main exports to the US, Chinese products tend to gain Comparative Advantage•

China has consistently gained Comparative Advantages in the main

Mexican exports to the US, while in Mexico the ratio of products with competitive advantage has remained relatively constant.

•

Chinese products are more competitive as its growing share in the US market suggests

0

10

20

30

40

50

60

2000

2001

2002

2003

2004

2005

2006

2007

2008

MéxicoChina

Products with IVCR higher than one(% of the main non-oil exports from Mexico)

0

2

4

6

8

10

12

14

2000

2001

2002

2003

2004

2005

2006

2007

2008

MexicoChina

Share in the US market(% of total)

Page 26

What China means so far for MX

•

Important Chinese competition in the US market, particularly since it joined the WTO.

•

Mexico has not been the most affected country with the arrival of China US trade. Canada has done even worse.

•

Around 40% of the non-oil exports of Mexico have lost comparative advantage between 2005-

2008 in relation to 2005-2008

•

In contrast, among the Mexican products with higher share in the

US market, China has gained advantage consistently since 2001.

•

The combination of this phenomena is correlated with the stagnancy of the Mexican market share an the raise in China's

•

In some products (29 out of 38), the loss of comparative advantage is directly linked to China's gain.

•

In determined products of sectors like road vehicles, optical instruments and mechanical devices, among others, Mexico doesn't appear to have Chinese competition.

•

In contrast, determined products like toys, textile and plastic sectors, the comparative advantage is without doubt Chinese.

•

A third group of products are those where the advantage for one

or the other is significant but weak. Among this we highlight Mexico's reduction and/or China's raise in TV's, electrical conductors, telephone devices, etc.

Page 27

A more positive view on Mexico-China relation

Page 28

Complementary schemes

FDI

Intra-industry trade

Closeness

Transport costs

Inventories (Just in Time)

Add value (complementary schemes)

In order to attract FDI, Latin American countries still has much work to do in improving their institutions and infrastructure

Latin America is and will continue to be an important market for China/HK (export diversification and provision of services).

Mexico as a regional production hub with investment from ChinaLATAM should exploit its geographical proximity to the US market

and competitive advantages to attract China’s FDI;

thus Mexico can become a not obvious winner in this relationship

Page 29

Infrastructure for trade is key

The challenge for LATAM is to identify sectors and products where distance and time are key competitive assets. In order to capitalize on these sectors improvements on infrastructure should come first

Infrastructure for Trade in Latin America Source: OECD Development Centre, 2008, based on CGLA Infrastructure Database on Global Infrastructure Competitiveness (2006) and World Economic Forum (2005) data

0

1

2

3

4

5

6

7

USA

Chi

na

Pana

ma

Arge

ntin

a

Mex

ico

Ecua

dor

Col

ombi

a

Braz

il

Cos

ta R

ica

Low

Hig

h

Ports Railw ays

Page 30

Although there are challenges Mexico is a great opportunity within Latam

• Its macroeconomic situation is among the soundest

• It is less dependent on Asia and, thus, a better diversification

of

risks

• Infrastructure projects are huge and interesting enough

• Mexico should take advantage of its geographic location. Becoming a hub for Chinese FDI is the easiest way to be part of the new value chain.

Page 31

Overall, opportunities for LATAM: beyond commodity exports

• Huge increase in middle cass in China and higher consumption to GDP will bring about huge demand for consumer products (and not only commodities)

• China will use FDI to cover some of the demand of the rest of the world in a decentralized way as Japan and Korea did. Huge opportunitiy for countries with large demand or access to large markets: Mexico –

much less engaged with China so far -

should not

miss this opportunity!

• Finally China also has the financing muscle to help Latam finance its huge infrastructure needs.

Page 32

Sino – Latin American

Economic RelationsMain take-aways

Alicia García-Herrero

Chief

Economist

of

Emerging

Markets

BBVA Research

Beijing, May 2012