Song Peiyuan , Tan Xinyue, Wang Linming , Xie Wentian ,Ye Teng

The Impact of China on LatinAmerica and the Caribbean

Introduction China’s economy GDP: 9% grown annum

Second largest economy in the world in terms of GDP.

Share of world trade: <1% in 1980 to >6% in 2004, making the second Largest economy.

The world largest exporter next decade

Major Impact LA and China Trade was limited but changed dramatically later.

China’s imports from LA increased seven-fold and exports more than tripled between 1999 and 2004.

After the Chinese President Hu Jintao visited the LA in 2004 and a number of LA leaders have been to Beijing, Chinese firms began to invest in LA.

Bilateral Economic Relations

Indirect impacts: The threat of increased competition

from China in 3rd markets.

3rd market: The same exporter market of both China and LA countries. (ex. USA)

Foreign direct investment( FDI) is being diverted from LA to China.

Indirect Impact

The rising price for primary commodities, and it has trend to push down.

Thus China’s growth can have implications for LA even in the absence of bilateral links or competition on the 3rd markets.

China’s rapid growth has also had a multiplier effect on world demand.

Trade between LA and China

Brazil: the largest LA exporter to China, 14th amongst China’s supplier, 1.5% of total imports.

Mexico: the largest LA importer from China, ranked 22nd with <1% of China’s total exports.

The whole LA accounts for only 3% of China’s exports and 3.8% of its imports.

Content

The next section focuses on the bilateral trade and investment links.

The penultimate section emphasis on the possible implications for poverty reduction in the region.

The last section identifies major policy issues which need to be faced by policymakers both in LA and in China itself.

Indirect impacts of China’s growth on LA economy

Threat to Latin America and Caribbean exports

Threat of Foreign Direct Investment diversion to China

China’s impact on term of trade and the LA economy

Bilateral economic relationship between LA and the Caribbean and China

Export Import Foreign Direct Investment (FDI)

Export to China

GRAPH

Export to China

Composition of Exports to China

¾ of total exports are primary products and resources based manufactures

Soya, iron ore, copper, pulp, fish meal and leather

Factors may influence the trade between different LA countries and China

Competitive Advantages Commodity Structure of Export Obstacles of LA Exporters: tariffs,

quotes

Imports from China

Factor in determining the impact of increased imports from China

Whether they displace local producers

Whether they simply replace imports from other countries

Supply of cheap Chinese manufactures

Foreign Direct Investment

Half of Chinese overseas investment in 2004 went to LA, but only about 0.5% of global FDI outflows

“resource seeking” kind of investment: oil and minerals

The FDI from China is very limited LA FDI in China is even less

significant

Indirect impacts of China’s growth on LA economy

Threat to Latin America and Caribbean exports

Threat of Foreign Direct Investment diversion to China

China’s impact on term of trade and the LA economy

Methodology on study export threat

Necessary to distinguish between impact in the past and that is likely to have in the future

Looking at past changes in world market shares of China and LA economy Investigate the extent to which declining shares for the

region are related to an increase in china’s market share.

Compare the current product structure of China’s exports with those of LA economies Countries with the most similar structure are likely to

face the a greater threat in the future

China’s threat on LA exports in past years

LA region is less threatened by Chinese export to third market compare to those Asian economies and transition economies of east European

It was estimated that losses to China represented only 0.7 per cent of LA countries’ exports in 2002

Not a good guide with China’s accession to the WTO in 2001 and ending of the Agreement on Textiles and Clothing at 2005

China’s future threat on LA exports

China is having comparative advantage in labor-intensive manufactures

Central American countries like Mexico were most effected in the past years. China have overtaken Mexico as the second largest source of US imports

Central American countries are likely to be negatively affected in the future because they have specialized in exports of similar products

Low-tech industries suffered the most due to Chinese competition

Table #:Brazil’s world market losses to China by technology intensity(1990 – 2004)

Source: Institute of development studies, Working Paper 281

Threat due to China’s increasing technology

Share of high technology products in Chinese exports has increase significantly since 1990 (CEPAL 2005, Grafico V.2)

Although Mexico still seems to have a higher technological level in terms of exports, China is rapidly catching up

Study shows that Mexico has lost production lines and FDI as a result of competition with Asia and particularly with China

Threat of FDI diversion to China

A concern has been raised that increased attraction of China as host for foreign investors has reduced FDI flows to LA economies

Different types of FDI according to motivation: Natural resource seeking (main part for LA

economies) Market seeking (main part for LA economies) Efficiency seeking (main part for China)

FDI diversion to China is not significant

Despite rapid growth of FDI, China only accounts for 6% of world FDI inflows

Source of FDI for LA economies mainly from US and European, while FDI for China mainly from East Asia

US FDI in China is mainly in manufacturing while other sectors dominate in LA economies

China’s impact on term of trade

China’s emergence has impacts on world price which indirectly affect LA economy through changes in terms of trade

China has accounted for a significant share of world demand for a number of the major commodities exported from LA countries

As a result, this lead to an increase in price of these primary commodities

China’s impact on term of trade

World manufacturing export price have been falling since the late 1990s due to the low price of Chinese exports

Countries which are importers of such goods will be benefited from an improvement in their terms of trade, whereas exporters will suffer

The combined effects has led to an improvement in the terms of trade of most major LA economies in recent years

Impacts of Chinese Economic Development

The impacts of Chinese economy’s global integration has a variety of impacts on LA countries:

Balance of Payments Poverty Level

Balance of Payments

Some countries have trade surpluses with China (Argentina, Brazil, Chile and Peru)

Some counties have trade deficit with China (like Mexico and Panama)

However, those with trade surplus are primary goods exporters.

Considering the effects on third market trade, the deficit is actually larger and the surplus smaller.

Primary Commodity Exporters

Manufactured Goods Exporters

Better Worse

Poverty Impact

Enterprise ChannelMore job opportunities?

Distribution ChannelCheaper goods?

Government ChannelMore welfare programs?

The Enterprise Channel

Primary Goods Market Mineral production is capital intensive and

does not create much employment Agricultural production created

opportunities, but those commercial opportunities are often benefiting only the powerful and the rich.

For example, Brazil exports soybeans to China, but those soybeans are usually produced on commercial farms which have nothing to do with the poor.

The Enterprise Chanel

Manufacturing Market There are anecdotal evidence that

China’s low labor price cost many jobs in LA.

Shoes industry were severely impacted by Chinese manufacturers.

The Distribution Channel

There are not much literature coverage on this topic.

Jenkins and Edwards found that the proportion of imports from China which can be classified as basic consumer goods (food, beverage etc.) is low.

The Government Channel The increase in primary products

especially in oil and mineral production gives the government more money to spend.

Although Chile is planning to give more money away to the poor due to its rent on booming copper industry, it is questionable whether the government will spend the money on the poor.

Data Issue

LA Countries show significant difference between their data on trade with China and those reported by Chinese authorities.

Example: Mexico case.

Lack of accurate data of foreign research would limit research and policy in LA and China

China investments are not always follow by a clear distinction needs to be drawn between planned and disbursed investment.

Research Gap

Most researches focus on competitive threats reported by China to LA and Caribbean. Relatively less attentions have given to growth of imports from China.

Lack of detailed analysis of the outcomes for Latin American of China’s growing economic significance, in term of impacts on poverty.

Conclusion

The main challenge for LA and Caribbean is growing strength of China.

The export and import between China and LA and Caribbean keep increasing in recent years, especially after China entered the WTO.

The impact of China's integration varies on LA balance of payments depends on what type of goods the country is exporting. On the other hand, China's integration does not provide significant benefit for LA economies.

The indirect impact of china's growth depending on the product structure of that country. Those who is having a similar structure (e.g. Mexico) have suffered a greater impact from China and is likely to be impact further more in the future.

China is not a significant threat of FDI diversion problem towardsthe LA economies