Rising China threatens US clout in Latin America

Largely shut out by traditional international lenders, Argentina still had a place to turn last year for the billions of dollars it needed to renovate its decrepit railway system – Beijing.

The $10bn package agreed with the China Development Bank was another clear sign of China’s surging influence in Latin America, transforming the region’s economies and undermining US dominance in its traditional “backyard.”

China looms large over President Obama’s visit to Latin America as he sends a message that Washington remains relevant to a region that owes much of its robust economic health in recent years to Chinese demand.

Even in those countries where the United States is still the dominant partner, China is catching up fast.

It has lifted growth for years in commodity producers such as Brazil, Argentina, Chile and Peru with its voracious demand for raw goods such as iron ore, copper, and soy.

More recently, it has followed up with a wave of investments and state-backed loans aimed at expanding its access to commodities and tapping demand from Latin America’s growing ranks of consumers.

In doing so, China has emerged as an alternative source of funding for Latin American countries’ development in areas such as infrastructure and energy that were long dependent on World Bank or IMF loans that came with more strings attached.

“It’s a real opportunity for Latin America if they play it right and it’s a real challenge to the US,” said Kevin Gallagher, an international relations professor at Boston University who co-wrote a book on China in Latin America.

“The Chinese are a kick in the pants for the United States to articulate a little bit more of a serious relationship with the region.”

Beginnings of a backlash
China’s growing economic stake in the region may one day raise a threat to Washington’s strategic dominance too as its deep pockets bring new friends.

US ally Colombia recently announced it is in talks with China to build a railway linking its Atlantic and Pacific oceans, a possible alternative to the Panama Canal that would boost trade flows with Asia. A network of new highways under construction are due to provide direct links to five ports on Peru’s Pacific coast in another sign of how Asian economic power is reshaping regional trade patterns.

While still largely focused on metals and agricultural goods, Chinese investments have begun to spread to the broader economy. China last year became the biggest direct investor in Brazil, the region’s largest economy, with about $15bn worth of projects ranging from a $5bn steel plant to the purchase of electricity networks for about $1bn.

It has also built relations with US nemesis Venezuela, whose firebrand President Hugo Chavez said during a 2004 visit to China he had been a Maoist since childhood. China later launched a $400m communications satellite for Venezuela, reducing its dependence on US and European satellites.

The US remains the main trade and investment partner for Latin America, accounting for about 40 percent of the region’s exports in 2009 compared to China’s seven percent, according to the United Nations’ Economic Commission for Latin America and the Caribbean.

China is rising fast, though – from virtually nowhere a decade ago – and is on course to overtake the EU as the region’s number-two trade partner by 2015.

That has also carried a cost for Latin America as cheap Chinese imports flood domestic markets, provoking a growing backlash from industries like manufacturing and textiles.

Mexico suffered the impact first and more deeply, but Brazil and Argentina are increasingly feeling the pain.

Gallagher calculated that 94 percent of Latin American manufacturing exports, worth more than $260bn, were under partial or direct threat from China.

Brazil’s new government under President Dilma Rousseff has already taken a much cooler stance toward China than her predecessor, aiming to address a lopsided relationship that has seen imports of Chinese goods quintuple since 2005.

Tensions also surfaced with Argentina last year when China, in apparent anger over protectionist moves, boycotted soy oil shipments for six months.

And Chinese companies often face challenges winning local support for their projects in Peru, which critics worry will cause pollution or use scarce water resources.

China may struggle to convert growing economic clout into political influence in Latin America, says Michael Shifter, president of the Inter-American Dialogue think tank in Washington.

“We may be entering a new phase now in the Chinese relationship with South America, where there are ongoing concerns about Chinese policies and practices and whether Latin America is getting the most favourable terms out of that relationship,” he said.

“I think that’s going to be the case for the next couple of years, which opens it up again to the United States.”