Tuesday, January 2

Frankenstein in Latin America and Caribbean: China pushes for plantation economies

"Some analysts believe that the commodities-based trade model used by China will undermine the progress that Latin America has made toward industrialization. While countries like Chile and Brazil have moved beyond raw materials exports, others with powerful presidents or ruling oligarchies may be tempted to fall back on plantation economics.(1)

"Latin American countries including Brazil, Argentina, Chile and Peru last week agreed to recognize China's "full market economy status" (FMES). So far, some two dozen countries have accepted the Middle Kingdom's FMES, and Beijing is poised to put more pressure on the European Union to do the same. Recognition of this status would enable China to better defend itself against charges of dumping that may be raised by its trading partners."(2) -- November 2004

I supply the second quote in the effort to head off Boris and other profound cynics among Pundita readers. Why, yes, in theory it is true that African and Latin American countries don't have to revert to bazaar and plantation economies if they simply refuse the Faustian bargain that China offers. In practice, China is taking measures that limit the ability of developing-world governments to stand up to China's practice of flooding their economy with dirt-cheap products.

Below are excerpts from an October 2005 paper by Stephen Hunter, Senior Policy Analyst for Latin America at The Heritage Foundation, titled Balancing China's Growing Influence in Latin America. The paper is worth reading in its entirety.

The recommendations in the paper point to the difficulties the US finds with attempting to balance China's moves in the Western Hemisphere. The truth is that the Millennium Challenge Account is a great idea that was implemented a quarter century too late. Today, China can easily undercut every US attempt to tag loans and aid to sound democratic government practices in the developing countries.

Another hard truth is that it's easier for despotic governments to deal with each other in trade matters. As the paper notes, "...authoritarian leaders and/or corrupt oligarchies control a number of governments [in Latin America]. Signing purchase agreements with them is much easier [for China] than dealing with the panoply of private corporations found in more democratic countries."

However, the hardest truth is found by studying the poverty-stricken, hopelessly backward narco-states of Burma, Pakistan, and North Korea. All three countries are testimony to what more than a decade of large-scale Chinese assistance and trade have wrought. In an uncertain world, you can be certain that China will work the same economic miracles in any country where the government is foolish enough to ignore the meaning of a Faustian bargain. It's time that US diplomats emphasize this truth to developing-world governments eager to get into China's debt.

Now to the excerpts:
In the Western Hemisphere, the Chinese are taking advantage of failures of half-hearted market reforms and Washington’s unwillingness to pursue neighborhood relations with much enthusiasm. National Defense University professor Cynthia A. Watson notes, “[T]he 1990s turned into a period of severe disappointment as free markets led to rampant corruption and unfulfilled expectations in Latin America while Washington became the world’s superpower rather than a partner for the region." [...]

In November 2004, [China's] President Hu Jintao flew to Argentina, Brazil, Chile, and Cuba, where he signed 39 bilateral agreements and announced $100 billion in investments over the next 10 years.

In May of [2005], Communist Party Chairman Jia Qinglin visited Colombia, Mexico, Uruguay, and Cuba. Building on simple commercial agreements, China has advanced to economic assistance, direct investment, a few joint ventures, and military ties.

When Argentina’s financial collapse rippled through South America’s Southern Cone, China quickly seized the chance to increase its stake in Argentina and Brazil, while U.S. investment declined by nearly half. Joint ventures include partnerships with Great Dragon Telecom in Cuba as well as Colombia.

China is partnering with Brazil to improve that country’s railways and establish a rail link to the Pacific to cut transportation costs of iron ore and soybeans. Chile’s congested port at Antofagasta may get a facelift thanks to the PRC.To meet domestic industrial needs and con­sumer demand, China has pursued investments and agreements with such oil producers as Venezuela, Ecuador, Colombia, Argentina, Brazil, and even Mexico.

The best fit is with Venezuela’s authoritarian leader Hugo Chávez, who directly controls the state oil industry. President Chávez has invited the Chinese National Petroleum Corporation (CNPC) to participate in exploring the rich Orinoco belt. Meanwhile, the CNPC has invested $300 million in technology to use Venezuela’s Orimulsion fuel in Chinese power plants.

For now, Venezuela plans to increase exports to China by 300,000 barrels per day and recently signed an agreement with Colombia to build a pipeline to the port of Tribuga on the Pacific coast, since supertankers cannot pass through the Pan­ama Canal. An additional proposal with Panama would modify a Panamanian oil pipeline to facili­tate shipping oil to the Pacific coast.

On his 2004 visit to Beijing, President Chávez said shifting exports to China will help end dependency on sales to the United States.

In 2003, China bid on concessions to Ecuador’s major oil fields. The same year, the CNPC acquired a stake in the Argentine oil and gas firm Pluspetrol, which operates fields in northern Argentina and Peru. [...]

On the military front, China has expanded ties through exchanges. It reportedly has direct military-to-military relations with Venezuela, Argentina, Chile, Peru, and Uruguay.

The PRC began collaborating with Brazil on spy satellite technology in 1999, providing rocket launch expertise in exchange for digital optical technology that would permit high resolution, real-time imaging. Moreover, access to Brazil’s space tracking facilities could give China the ability to attack U.S. satellites with a variety of technologies currently under development.

Perhaps the most fruitful collaboration has been with dictator Fidel Castro. In 1999, China was reportedly intercepting satellite signals from facilities in eastern Cuba. In 2000, it obtained access to a base outside of Havana to intercept U.S. telephony.

In 2001, Russia announced that it would abandon its extensive electronic espionage center at Lourdes. PRC personnel reportedly now occupy it. A February 2004 agreement cloaks such operations under the pretext of technical communications cooperation. In fact, Radio China International signals originate from Cuba, as does interference with U.S. East Coast radio communications and air traffic control, according to Federal Communications Commission complaints. [...]

From Latin America’s perspective, expanding relations with China might seem like a good idea. It offers the following advantages:
Prestige. Dealing with China, a major world power, elevates a small country into the big leagues of global actors. [...]

Deals with few requirements. China can bargain on the spot without a lot of caveats. Its transactions are based on simple exchanges. Their leaders have broad authority to negotiate foreign deals without worrying about legislative oversight, the rule of law, or altruistic objectives. Unlike Western leaders, Chinese leaders represent state monopolies—which mesh well with Latin American government ownership or management of telecommunications, mining, and energy industries. They do not need to build up Latin American trade capacity to deal with diverse businesses.

Leverage against Uncle Sam. China’s expanding industries are a temporary boon to resource-rich Latin America. Exports (mostly commodities) to China have grown by more than 600 percent in five years.[7] Compared with U.S.–Latin America trade ($410 billion in 2004), China’s $40 billion trade with the region might seem inconsequential.[8] However, Chinese trade and investment gives Latin politicians and business elites, who largely control commodities, a bargaining chip when dealing with the United States.

However, closer ties to China also have significant disadvantages for both Latin America and the United States:

Growing trade deficits. Latin American leaders who sign trade and investment deals with the PRC have noticed that China’s exports are more affordable than their own goods, which contributes to trade deficits. Chinese goods are made by laborers who work for one-third of the wages of Latin American counterparts and who tolerate worse working conditions.

Officials in Argentina, Brazil, and Mexico have signaled their unease about trade with such a hot competitor. In September 2005, Mexican President Vicente Fox made it clear to visiting President Hu Jintao that dumping electronics and clothing was unacceptable. For every dollar that Mexico makes from exports to China, the PRC makes $31 from exports to Mexico.[9]

Disinterest in economic reform. Some analysts believe that the commodities-based trade model used by China will undermine the progress that Latin America has made toward industrialization. While countries like Chile and Brazil have moved beyond raw materials exports, others with powerful presidents or ruling oligarchies may be tempted to fall back on plantation economics. Income gaps between the rich and poor may widen as a result. Moreover, such narrowly focused economies are vulnerable to downturns in commodity prices. Some 44 percent of Latin Americans already live below the poverty line. If these countries fail to adopt reforms, social inequality and political instability could depress U.S. exports to the region and increase migration problems.

Scramble for resources. To obtain commodities, China offers tempting investments in infrastructure. In contrast, the United States cannot offer direct tie-ins to state industries and can only offer development aid, now in decreasing amounts. Chinese competition may make Millennium Challenge Account (MCA) money a less effective incentive to democratize governments and liberalize markets. The one-to-two year lead time from proposal to disbursement of MCA aid gives volatile governments a chance to back away from market-oriented performance requirements. [emphasis mine]

Evasion of American-style bottleneck diplomacy. China’s flexibility counters more rigid U.S. approaches. Obtaining any kind of assistance from the United States requires compliance on a battery of restrictions, including observing human rights, protecting the environment, promising not to send U.S. military personnel to the International Criminal Court (ICC),[10] not assist­ing current or former terrorists, and not using U.S.-provided equipment for any other than its stated purpose. American commitments also depend on legislative approval and can be reversed if the mood in the U.S. Congress shifts.

Prying eyes on America. From electronic espionage facilities in Cuba to port facilities run by Hong Kong billionaire Li Ka-Shing’s Hutchi­son-Whampoa conglomerate in Panama, China has an eye trained on the United States. U.S. intelligence agencies are aware of this, but Washington’s penchant for focusing on one threat at a time, such as the war on terrorism, could leave America vulnerable to Chinese industrial and military espionage.
Of course the quotes are from a policy paper, which uses the careful language of academia, but it's very clear that America is already vulnerable to China's espionage. Yet the greatest threat to the US comes from instability in our region of the world; China's moves in Latin America and the Caribbean need to be studied in that light.

1) Balancing China's Growing Influence in Latin America.

2) China's Encroachment on America's Backyard by Willy Lam, The Jamestown Foundation, November 24, 2004.

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