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Chapter 3. Theoretical Basis
On the topic of China’s economic activities on Latin America, there is abundance of literature. First of all, I have chosen The Impact of China on Latin America and the Caribbean published by the journal World Development of 2008 to have a
comprehensive look. According to the article, there were two categories of the impacts defined by the degrees of their influences- the direct ones and the indirect ones. The direct impacts started from the contents of the products of imports and exports between the region and China. For example, most of the products exported form the region to China were primary goods such as iron ore, oil, and copper that China would need for boosting its rapid economic growth and domestic demands. On the other hand, although the amount of the imports was not as significant as the amount of the exports, most of the products imported from China to the region (85%) were non-resource based manufactures such as the manufacturing equipment. What’s more, most of the FDI from China to Latin America, especially to the main
economically cooperative countries with China (Brazil, Chile, Peru and Venezuela) was for the establishment of the infrastructure to the access of the aforementioned raw materials. Thus, as the approach of the old-fashioned resource curse or the latest theory of deindustrialization, it would raise us a question about one of the indirect impacts: due to the huge population bonus of China, the labors were really cheap, so it resulted in many relatively cheaper Chinese products, was this kind of cooperative pattern between China and the region complementary or competitive? The other impact was about the FDI flow from all over the world to China being much more than Latin America, which had been negative for the economic development of the region. The article also provided several interesting approaches for this phenomena-from the viewpoint of the producers, the consumers, and the governments. For the
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producers, it might be the economic opportunity for the huge flow of investments and demands for the raw materials of China. For the consumers, it might reduce the cost of living for the cheap and competitive prices of imported Chinese products. For the governments, there would be more revenues from taxation of trades with China.
What’s more, there was also regional disparity between Central America and South America for the political reasons (the proximity of the U.S. and the recognition of Taiwan) and the distribution of natural resources (most of the products China need are in South American countries).
Speaking of the different distribution of natural resources, to know its relevance to the decision of China’s economic policy towards the region by the public sector and of the establishment of the private firms, I chose my second paper- Firm Heterogeneity and Location Choice of China Firms in Latin America and the Caribbean: Corporate Ownership, Strategic Motives and Host Country Institutions from the journal China Economic Review of 2015. The paper tried to explain the ODI (outward direct
investment) from China was qualitatively different from the ODI from the developed countries. The author extracted the approved projects by the Chinese Ministry of Commerce from its online database between 2003-2012 for proving the hypothesis that the Chinese firms were more likely natural resource-seeking and market-seeking driven. In short, China’s ODI was characterized by the decisive role played by the Chinese SOEs (state-owned enterprises) and strategic consideration related to their resource seeking activities which led them toward the countries with high political uncertainty and weak rule of law. Although there might be inherent theoretical limitations in the approaches used for this article as the author suggested to have a multi-level framework which included institution-based view, resource-based view, and industry-based view for better understanding of the complexity, the statistical results of this article still showed that the motivation of the Chinese SOEs in Latin
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America was more resource-seeking, whereas the Chinese POEs (privately-owned enterprises) were more market-seeking. The results also proved the hypothesis that the Chines SOEs were less risk averse and tended to be attracted to countries with weak institutions when those enterprises considered to invest in LAC countries. However, the institutional effects such as the rule of law had insignificant impacts on the Chinese POEs. To summarize, compared to the Western style of technical and cost proposal, the way the Chinese preferred to apply for competitive bidding was to establish high-level government-to-government relationships. These extractive industries and projects were often secured in a non-market way and agreed by the governments, especially when the host countries which received the Chinese
investment had the government with larger capacity of economic intervention and less regulated by the rule of law.
When it comes to the heterogeneity of China’s economic activities with the LAC countries, there has been disparity among the sub-regions: the sum and the degree of the South American countries are much more than those of the Central American countries, however, located at the North America and being the seventh
technologically similar country to China, Mexico provided a very special case to study.10 In the article Trade as an Engine of Creative Destruction: Mexican
Experience with Chinese Competition from the Journal of International Economics of 2013, the authors looked at the total share of the imports first, for example, the share of the Chinese imports to Mexico had risen from 0.5% in 1994 to 8% in 2004 (nearly in a factor of 16!), while that of the Mexican imports to China had just risen
moderately from 1.9% in 1994 to 2.8% in 2004. In other words, it had been a pretty
10 Ray, R. and Kevin Gallagher. 2015. “China-Latin America Economic Bulletin 2015 Edition”
Working Group on Development and Environment in the Americas, Global Economic Governance Initiative, Discussion Paper 2015-9, Boston University. September:1.
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asymmetric trade structure. In the third-market which was very crucial target market for both China and Mexico- the United States, the increase of the share of total Chinese imports (from 6.5% in 1996 to 13.4% in 2004, more than doubled) also overtook that of the Mexican counterpart (only in a factor of 1.15). It mattered from two approaches, first of all, we would think China crowded out the share in the U.S.
of the developed countries, but it was rather a huge challenge for the share of other developing countries in the U.S. Secondly, we have to take the proximity of Mexico to the U.S. and its membership of NAFTA into consideration. Since Mexico possessed comparative advantage in the production of labor intensive industries within NAFTA (85% of Mexican exports goes to the U.S.), it shouldn’t have been overtaken by China. This defeat revealed a grandeur challenge and competition for other LAC countries as well.
Afterwards, the authors had taken three different approaches to complement the competition and made a conclusion that the competition was highly asymmetric and a kind of creative destruction that would reinforce the asymmetry itself. The first approach was the size approach, and the second approach was the product and industry approach. To sum up, it was more difficult for smaller firms and marginal product producers to survive in LAC countries facing with the competition with China because larger plants and core products benefited disproportionately from such
expanded access to imported Chinese intermediates.
Industrialization, Deindustrialization, and Interdependence
What I meant about the growth in the title is about a more positive partnership for improving the long-existing problem in Latin America- the income inequality. Being historically colonized, China had claimed the similar experience of getting rid of the dim past and boosting its economic growth in a different path from the developed
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countries when it comes to forming the foreign policies with Latin American countries. The aforementioned developed countries such as the U.S. and the U.K., they had gone through the process of industrialization earlier than China and Latin America. However, the structure of these economies now is facing a new
phenomenon called deindustrialiazation. In other words, most part of their GDP consist of the service sector rather than manufacturing as it used to. This resulted in the interdependence with the new workshop of the world, China and the huge trade deficit in terms of imports and exports of goods. Different from manufacturing, post-war global trade liberalization has not progressed in services. Almost all of the global trade in goods is included by a wide-reaching multilateral agreement overseen by World Trade Organization (WTO). By contrast, services haven’t been in
the same extent speaking of the openness of markets.
This economic phenomenon somehow aroused the doubts of some Latin American countries that China was far from an economic partner who shared the dark past of imperialism, but another new possible colonizer who was merely eager to attain the abundant natural resources for its own rapid economic growth. For example, the government of Argentina had passed a bill to regulate the amounts that a certain foreign entity could hold.
About the theoretical basis in terms of international relations behind the emerging economic ties between China and Latin America, firstly, I would like to have a brief discussion about its relevance to the realism and liberalism, which have been the two biggest theories in the discipline.
As the former United States National Security Advisor, John Bolton addressed in his latest book about his experience dealing with the U.S. foreign policy under Trump administration, China sought politico-military benefits from its economic activity that free-market societies simply do not contemplate. Since the era of Monroe Doctrine,
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Latin America had been regarded as the theater of the extension of U.S. influence.
Furthermore, according to David Ricardo’s theory, the less developed economies (in this case, Latin American countries in general compared to China) may struggle with negotiating the terms of trading with wealthier countries that provide them with aid mercantilism deployed to foster a trade surplus. Bolton’s claim could be seen as a kind of realist response to the rising Chinese influence in Latin America. In other words, it could be seen as a threat and a cause of the possible conflict. But does the Chinese influence really go so far with such ambitious moves and even ready to push the trigger of conflict? Couldn’t China be competitive but meantime cooperative?
On the other hand, if we look at this emerging relation between China and Latin America through the lens of liberalism, we would find another path to the criticism towards China, one of the traits of liberalism is that within the international system, a certain actor (normally a state) should be a democracy which China is still politically far away from, thus, it is difficult to mainly address this thesis on basis of liberalism.
However, now that China still had joined many democratic institutions and it is still inevitable to talk about the interdependence of China and other countries, including the Latin American ones, I would still use part of the theoretical basis of liberalism as complementary elements to analyze the phenomenon. Under the interdependence, citizens in each country may harbor illusions of independence, the fact is that their governments cannot conduct independent economic or foreign policies, and they are certainly incapable of initiating and conducting full-scale war on their own.
Nevertheless, there have been some criticisms from both the developed and
developing countries against China and its economic activities. Under the communist political system, China’s state-owned enterprises (SOEs) are usually holding the advantages that the companies under democracies do not have, such as the massive subsidies by the government and their huge scales and prioritized rights to do the
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business before other domestic competitors. They are always regarded as unfair competitors from the point of view of the equivalent in the developed countries. The close tie between the Chinese SOEs and Chinese government also caused the doubt of their partners about the transparency and independence of decision-making of these SOEs. The surveillance of the Chinese government is also another uncertainty once a research institution received the sponsor from the Chinese capitalists. According to the investigation by Curtis J. Milhaupt and Wentong Zheng from Paulson Institute, even among the hundred biggest privately-owned enterprises in China based on their revenue, ninety-five of them were very close to the communist authority. The
communist government could also influence the operation of the private sector through stakeholding and even launch mergers forcefully. For the political benefits, Chinese companies had already acquired not only the most advanced technologies but also the crucial natural resources. In the developing countries such as Latin American ones, China has always been an especially important source of growth for the
infrastructure and consuming resource industries. On the basis on the data of 2015, China had consumed 54% of the aluminum, 48% of the copper, 46% of the zinc, 28%
of the soybean, 12% of crude oil of the world. In short, it has been a very important trade partner of these countries rich in the natural resources. Since “the go out strategy” (走出國門) articulated by the Chinese President Jiang Zemin and Premier Zhu Rongji in 1999, Chinese companies have been encouraged to find the resources which were necessary to fuel Chinese economic growth. Both SOEs and private companies became leading investors in infrastructure throughout resource-rich countries to help ensure access to the resources that the country needed for its own development, such as copper, iron ore, and bauxite. However, different from the other main investors, China had drawn particularly serious scrutiny in various countries when it comes to the support of “rogue states”, and its disregard of international labor
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and environmental standards. The weak corporate social responsibility of the Chinese companies had been seen as a sabotage of liberalism and led to a backlash in in number of countries.
Whereas there were so many warnings of the nature of Chinese investment, it is also overestimated based on the statistics. For example, the Chinese investment in Latin America in 2016, it ranked fourth in Foreign Direct Investment (FDI) in monetary value, right after the Netherlands, the United States, and Spain.
Coexistence of China’s Huge Transformation and Its Old Mentality
Therefore, is it impossible to make China democratic to fit in the theoretical liberalist path in terms of international relation? The previous ambassador of Singapore to the United Nations- Kishore Mahbubani had provided some insights. Raised in an Indian family in a nation which consists of mostly ethnically Chinese people and was influenced by Western culture for centuries of British rule and huge American
investment, his opinions and arguments could be regarded more moderate and aiming at peace making between the two super powers.
Mahbubani mentioned about the hubris that China experienced after the 2008-2009 global financial crisis, which aroused the doubts of the Westerners if China had become more expansionist since then. Based on the description in the book The Party by Richard McGregor, what happened at the 2009 Boao Forum, China’s equivalent of the annual World Economic Davos Forum, really revealed the tone of Chinese
officials to be more confident even more assertive.
Nevertheless, the history of China shows the key factor which led to the success of China is its economic engagement with the rest of the world. Since Deng Xiaoping’s opening up decision, China’s economy has taken off and soared. On the contrary, the mentality that China was a great self-sufficient Middle Kingdom that it did not need
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to participate the world had made China fall so behind and brought about a century of chaos and humiliation.
Due to the past few decades of globalization, however, China has not only fueled its rapid economic growth (at an average annual rate of 10.29% between 2000 and 2009 according to the data of IMF) but also made over a hundred countries (most of them are developing countries) trade with China than with U.S., the biggest economy in the world and the championship of globalization. In other words, the world is more exposed to China and China is reinforcing its importance as a market, supplier, and provider of capital.
Back to the question: does the Westerner’s skepticism towards China is increasing at the same time? There could be different answers under the diverse capitalist market economies. As the governor of Kentucky state, Matt Bevin said in May of 2017 in a distinct tone from that of Washington, DC: “There’s a tremendous amount of capital in China that’s looking for a place to be deployed, in a safe, reliable environment. The United States affords that opportunity. There is a tremendous infrastructure need in this country (China). The two largest economies in the world and the most powerful are that of the United States and China. The idea that we would not work together seems inconceivable.” It reveals that China can grow its economy well on its own for the abundance capital and domestic need even without American investment in theory.
The question is: would China go in this alienated direction in practice? In the case of China, it should attract American, and even Western investments out of strategic reason- to rationally create a stabilizer in China’s relations with these investing countries.
So far, all the trade and investment that occurred in Latin America, China and the United States had all been complied through the prominent reserve currency- the U.S.
dollar. The U.S. dollar is currently well-protected by a complex global financial
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system. Most of the countries in the world do business with it for their trust on the U.S. being impartial arbiter in international issues. If China could step in, although the Chinese renminbi (RMB) is still far from replacing the U.S. dollar to be a dominant reserve currency due to the absence of an open capital account and convertibility of the currency, for example, the fact China had launched Belt and Road Initiative (BRI), as of April 2019, 125 countries had signed agreements with China on BRI. This provides a clear indication that most countries would also trust Chinese currency, no matter it is cash or cryptocurrency, that is ultimately backed by Chinese sooner or later. This also arouse a likely question: would the economic primacy of China in Latin America make the region decouple the U.S. dollar and even the U.S. firms? Are the transactions thorough RMB (the cash flow) reducing the income inequality of the region more than the U.S. dollar does?
The injection of millions of low-wage Chinese works into the global economic system also brought some influences to it. What’s more, clearly, after encouraging the entry
The injection of millions of low-wage Chinese works into the global economic system also brought some influences to it. What’s more, clearly, after encouraging the entry