As the United States and China continue to battle on trade, one of the most critical regions to watch will be Latin America. The countries south of the Rio Grande are proceeding with caution as their two largest trading partners exchange economic blows. Even so, Beijing continues to make a strategic play in the hemisphere -- one that the United States would do well to emulate.
The recent growth of China’s commercial relationship with Latin America is remarkable. Trade ties have grown eighteen-fold since 2000, while U.S. trade with the region has grown twofold over the same period. China’s foreign direct investment flows into Latin America totaled $25 billion in 2017, more than five times what they were a decade earlier, and far outpacing U.S. FDI growth. But perhaps even more important than the magnitude of China-Latin America commercial ties is their changing face.
The Atlantic Council’s Adrienne Arsht Latin America Center recently took a close look at the evolution of the Sino-Latin American economic relationship, particularly in the context of U.S.-China trade tensions. The study laid out a number of warning signs. The changes it found reveal a fundamental understanding in Beijing: The Latin America of tomorrow will look nothing like the Latin America of yesterday, and the time to get in on the action is now.
While China’s trade relations with the region have long been by characterized by the export of Latin American commodities and the import of Chinese manufactured goods, a transition to a new phase is underway. As China shifts toward a new growth model, it’s fully intent on bringing Latin America into the fold, gradually moving the bilateral relationship toward services and value-added goods. The crux of this strategy is investment in the region, which Chinese President Xi Jinping famously pledged would total $250 billion by 2025.
Changes can already be seen. Chinese FDI in Latin America has traditionally been concentrated in just a few countries, namely Brazil, Argentina, and Peru, and in extractive industries. But Beijing is quickly expanding its investment portfolio in places such as Chile and Mexico. China is also placing a notable new emphasis on real estate, renewable energy, finance, and telecommunications.
It is also massively ramping up its M&A activity in the region and moving from mining and energy toward manufacturing and services. China is further positioning itself as Latin America’s go-to source for venture capital, taking note of the booming tech startup scenes in São Paulo, Buenos Aires, Santiago, and Medellín. The most publicized example came last year, when Chinese giant Didi Chuxing bought a majority stake in Brazilian ride-sharing app 99, valued at over $1 billion just a year after Didi invested $100 million. If the latest trends hold, the story of 99 will soon be far from unique.
While these shifts were already underway, the broad uncertainty stemming from U.S.-China trade tensions seems to be accelerating them. An unpredictable Washington is a big driver of outreach from the region to Beijing. Meanwhile, China is strategically positioning itself to be the most influential stakeholder in the increasingly prosperous, service-oriented Latin America of the future.
How should the United States respond? By seeking to emulate rather than counter.
China’s economic hold in Latin America will not soon falter. China will play an important role in Latin America’s future, and if we ditch the zero-sum thinking, we’ll have one, too. In this regard, we would do well to learn from Beijing. We should begin to see Latin America for the bastion of opportunity that it is, and treat it as such.
We can’t let a lack of engagement, or the wrong kind of engagement, lead to lost opportunities. One way to ensure that it does not is to avoid strong-arming countries in the region. Admonishments to our Latin American partners that “when China comes calling it’s not always for the good of your citizens” tend not to be well received. Adversarial actions such as threatening to expel El Salvador and the Dominican Republic from the Central America Free Trade Agreement because of their warming relations with Beijing won’t go over any better. Moving forward, tone will matter just as much as substance.
Instead we need to beef up our diplomatic networks in the region and rely on them more heavily in order to promote trade and investment ties with U.S. firms. One important development is last October’s passage of the BUILD Act, which establishes a U.S. International Development Finance Corporation that will have double the lending capacity that the United States offers today -- hopefully a good portion of that will be spent in the Americas. This would be smart thinking. Issues of security, migration, and drug trafficking, while of course important, cannot be the only lens through which Washington views Latin America. No one stands to lose more from such myopia than us.
We should look at Beijing’s positioning with our southern neighbors. The region’s economies are in a period of transformation. They are maturing, diversifying, and strengthening. A growing middle class is increasing its purchasing power, and Latin American countries are increasingly becoming outward investors and not just recipients. The United States has an incalculable amount to gain down the line from showing the region today that it is a priority. If we fail to do so now, the opportunity may not be there for long.
Jason Marczak is Director of the Adrienne Arsht Latin America Center at the Atlantic Council. He is on Twitter at @jmarczak. The views expressed are the author’s own.