Changing Asian and Latin American Relations
How did China displace Japan as Asia’s main partner in Latin America?
September 8, 2010
Relations between Latin America and Asia are changing dramatically. For decades, Japan dominated as the main commercial and financial partner in the region. Now, China is taking over. It is a further reflection of the country's new status as the second world economic power, behind the United States.
Between 1990 and 2008, trade relations between Latin America and Japan continued to expand, but the pace was much less sustained than with China.
In 2008, trade between Latin America and Japan totaled some $60 billion (about $30 billion for imports and exports each), while trade with China soared to a total of $140 billion (about $70 billion each for imports and exports).
The turning point was 2002 when China, for the first time, overtook Japan as Asia’s main trading partner in Latin America.
This difference will continue to grow in the coming years. Due to China’s economic boom, it will continue to require consumer commodities to sustain its economic take-off.
In both cases, for China as well as for Japan, the commercial relationship with Latin America is structured around raw materials. The rise of China means the emergence of another partner for Latin America in Asia, competing directly with Japan.
The same is happening with foreign direct investment (FDI) by both countries. Both China and Japan focus primarily on natural resources to fuel their economies. As a result, sectors such as energy, mining, steel and oil dominate in their direct investments.
Over the last decade, we have seen an increase in Chinese FDI in the region, exceeding in many countries the traditional leader, Japan. For now, Japanese FDI still covers a somewhat broader range, as shown by the new investment by Nissan in Mexico in 2010 to the tune of nearly $500 million.
But this is changing. In 2010, China could even become the top investor except for in Brazil, a country where Japan has historically invested strongly. Still, even in Brazil, China made investments of $12 billion in 2010 — ten times more than all foreign direct investment to date by China in this country.
Among the major business highlights last year was a contract worth approximately $3.3 billion to build a steel plant in the interior of Rio de Janeiro. But now, many more areas are covered, from the power sector to the agricultural industry, as well as the automotive and telecommunications industry.
The Chinese investment boom is obviously not specific to the region. In the first half of 2010, the total volume of overseas acquisitions by Chinese firms reached $55 billion, compared to $356 billion for the United States, according to data from JP Morgan.
China has become the second-largest global investor. Latin America is particularly important for China because, like Africa, the region is rich in raw materials.
In fact, as the International Energy Agency has pointed out, 2009 marked the first time in history that China overtook the United States as a major consumer of raw materials in the world. Venezuela has attracted the largest flow of inward Chinese investment in the oil sector.
Companies such as CNPC, Sinopec and China National Offshore Oil Corporation invested $18.2 billion in 2009, and energy investments in Venezuela were around $2.5 billion. These represent the largest investments that China has made in the energy sector in Latin America.
But the investments extend well beyond energy and raw materials. For example, China's Haier Group has entered into an agreement under which it will create joint ventures in Venezuela and a Research and Innovation Center to develop clean technology products. Both countries also agreed to create an airline company to operate in Venezuela with a $300 million initial investment.
India is also looking at the region. For Tata Consultancy Services (TCS), Latin America is in fact now a key region, where it continues to expand and is currently employing over 8,000 people. Indian investments in the region reached $12 billion.
Brazil tops the list, followed by Venezuela ($2.1 billion), Bolivia ($2.1 billion), the United States ($1.5 billion) and Argentina ($1.2 billion). In addition to India, other countries such as Singapore, Malaysia and Korea are also eager to open more inroads in the region.
For example, by mid-2010, the Singaporean sovereign wealth fund Temasek Holdings announced it reached an agreement with Mexican Real Estate Development Driving (IMDI) to establish a joint venture of $200 million that will seek business opportunities in affordable housing in Mexico, thereby opening the way to their first investments in the continent.
Meanwhile, the Thai Banyan Tree hotel chain decided to invest $180 million in the construction of two hotels in Mexico. Also, in mid-2010, Chile and Malaysia concluded a free-trade agreement after three years of negotiations. For its part, Korea pledged to provide between $122-325 million to be a (new) member of the Central American Bank for Economic Integration (BCIE).
The emergence of China in Latin America is displacing Japan as Asia’s main partner on the continent, and the Middle Kingdom’s success in Central and South America is leading to increased investment in the region on the part of other Asian countries. This flirtation between the two continents merely reflects once again how global economic relations are being reconfigured.
The rise of China means the emergence of another partner for Latin America in Asia, competing directly with Japan.
For China as well as for Japan, the commercial relationship with Latin America is structured around raw materials.
Latin America is particularly important for China because, like Africa, the region is rich in raw materials.
Director, Telefónica International and Professor of Economics, ESADE Business School. Javier Santiso is Director, Telefónica International and Professor of Economics, ESADE Business School. He is also the Chair of the OECD Emerging Markets Network (EmNet), which he created while at the OECD. Previously, he was the Director of the OECD Development Centre and as the […]