Coface, the global credit insurer, published its latest Panorama report February 2016 which focuses on China’s growing role in Latin America. China has announced the intention to increase its investment stock in Latin America to $250 billion (USD) and hopes to attain an annual trade flow of $500 billion within the next ten years. Within the short-term, this turns out to be good news for Latin America, which suffered a recession in 2015. The region overall experienced a 0.6% drop in GDP in 2015 and is expected to show only a marginal improvement this year (-0.2%), according to Coface forecasts.
Acceleration Of Trade
After the United States, China is now the second largest source of Latin American imports and remains the third largest destination for its exports behind the United States and the European Union. In 2014, according to Coalface’s Panorama, Brazil, Mexico, Argentina, Colombia, Chile, Peru, and Ecuador, which together represented approximately 88% of the region’s GDP, exported $83.3 billion to China, against imports of $152.2 billion.
Brazil is China’s main Latin American partner in trade flow, representing approximately $78 billion in 2014. China is a major destination for Brazil´s exports, accounting for 18% of the country’s total exports, though in terms of total GDP it only represents 1.7%. In terms of trade, Chile’s dependence on China is the highest in the Latin American region. In 2014, Chile sent 24.4% of its total exports to China, equal to 7.1% of its GDP. In contrast, Mexico tends to be the least impacted by lower Chinese demand and exports to China account for just 0.5 % of its GDP. For imports, however, Mexico is one of the region’s main destinations for Chinese products.
Latin America became a major supplier of basic products to China but was, in turn, invaded by cheap manufactured imports. Between 2009 and 2013, the five main products exported from Latin American and Caribbean countries (LAC) to China were commodities. These represented 71% of total exports from the region, while the five main Chinese exports to LAC accounted for 24% of the total. LAC exports are more concentrated and based on low added-value products, while China’s exports are more diversified, with higher added-value.
Coface data forecasts that Chinese GDP growth will continue to decelerate over the coming years, with 6.2% in 2016–down from 6.9% in 2015. This is well below the annual growth average of 10% reported during the previous decade. Latin America appears to be one of the “most affected regions in the world by the Chinese slowdown, particularly with regards to its trade and also because of the low prices of raw materials, which is also partly explained by a less dynamic China,” the report concluded.
Trade Scenarios Not Too Appealing
China may also suffer a decrease in its market shares due to losses in competitiveness, which can be explained by wages increasing above productivity and the appreciation of the Yuan over recent years. China’s rising labor costs over the last ten years have reduced the advantages of manufacturing in the country.
For many years, China’s relatively cheap labor force helped to increase the competitiveness of goods, and it explains the strong increase in exports to Latin America. The situation has changed now, especially since China is not included in the Trans-Pacific Partnership (TPP), which aims to reduce trade barriers and promote trade between the countries.
Photo Credit: Courtesy of Inter-American Dialogue.