Chinese Engagement in Latin America
and the Caribbean:
Implications for US Foreign Policy
Jon Brandt
Nicole Adams
Christina Dinh
Devin Kleinfield-Hayes
Andrew Tuck
AMERICAN UNIVERSITY
SCHOOL OF INTERNATIONAL SERVICE
DECEMBER 2012
Derek Hottle
Nav Aujla
Kirsten Kaufman
Wanlin Ren
Table of Contents
I.
Introduction………………………………………………………............ 3
II.
Economic Analysis……………………..................................................... 3
A. Overview……………………………………………………….......... 3
B. China’s Trade with Latin America and the Caribbean……................. 3
C. Chinese Financing……………………………………………............ 5
D. Chinese FDI………………………………………………….............. 7
E. Energy Policies and Quest for Future Energy Security….................... 8
III.
Security Analysis……………………………………………………….... 10
A. Overview…………………………………………………….............. 10
B. Traditional Security Threats………………………………………..... 11
1b. Arms Sales……………………………………………................. 11
2b. Military Exchanges……………………………………................ 11
C. Non-traditional Security Threats…………………………………..... 13
1c. Human Trafficking……………………………………………..... 13
2c. Counter-Narcotics……………………………………………….. 13
IV.
Regional Organizations in LAC and Analysis of China’s Influence.........
A. Overview…………………………………………………………….
B. Regional Economic and Political Organizations in LAC………........
C. Fragmentation in LAC…………………………………………….....
D. China’s Increasing Role in LAC Regional Organizations……….......
V.
China’s Involvement in the Caribbean Region………………………...... 18
VI.
Conclusion……………………………………………………………….. 20
VII.
US Foreign Policy Recommendations…………………………………...
A. Economic Recommendations………………………………………...
B. Security Recommendations………………………………………......
C. Regional Recommendations……………………………………….....
14
14
14
15
16
20
20
20
21
VIII. Works Cited…..………………………………………………………...... 22
1 Executive Summary
China’s presence in Latin America and the Caribbean (LAC) has mushroomed in the last
decade. The region has experienced a dramatic increase in economic, political, military,
cultural, and diplomatic ties with China. Our research indicates that while these ties do
not pose an imminent threat to the United States’ national interest in the region, the
China-LAC relationship should be monitored closely as these ties are likely to expand
and deepen in the future.
China’s emphasis on building South-South cooperation has given governments and
businesses in the LAC region an alternative to the United States. While the United States
is still viewed as a preferred economic partner by many LAC nations, there is evidence
that US market share of LAC trade is declining while Chinese lines of credit and foreign
direct investment in LAC are growing substantially.
In addition, some LAC countries are experiencing increased military inter-action with
China. LAC’s rising number of small arms transactions, high-level defense visits, and
military student exchange programs with China should be monitored closely by the
United States.
We have also noted that China is interacting with LAC countries via other mechanisms
such as high-level visits to the region by senior Chinese officials, the establishment of
growing numbers of Confucius Institutes, the spread of Chinese media, and participation
by China in LAC several regional organizations.
With regard specifically to the Caribbean (often overlooked in analyses of LAC), China
has expanded its presence in this region as well. China’s interests in the Caribbean are
focused on acquiring raw materials, obtaining full diplomatic recognition (as opposed to
recognition of Taiwan), and seeking support in international organizations.
While we conclude that the dramatic expansion of China’s interests and presence in LAC
warrants careful monitoring, it does not significantly threaten US national security or
other interests. In our paper, we identify opportunities for trilateral cooperation among
the United States, China, and the countries of Latin American and the Caribbean.
Overall, we argue the United State should welcome China’s involvement in LAC by
encouraging it to be a responsible and productive stakeholder. While US and Chinese
interests will diverge in some sectors, this is not a cause for alarm. Engaging China
multilaterally in the region can benefit not only Latin America, the Caribbean, and China,
but also the United States.
2 I. Introduction
China’s presence in Latin America and the Caribbean (LAC) has grown dramatically in
the last decade. Its economic, political, military, cultural, and diplomatic ties with the
region have mushroomed. China has become an alternative partner (to the US and
Europe) for governments and business in the LAC region. However, the US is still a -- if
not the -- prominent actor in the hemisphere and we do not believe China’s role in LAC
threatens the US national interest. Nevertheless, there are some trends relating to China
that need to be monitored closely.
II. Economic Analysis
A. Overview
Over the past decade Chinese economic engagement with Latin America has exploded.
Today China is the top trade partner of Brazil and Chile and the second largest trade
partner of Argentina and Peru. We have also seen similar effects in financing and foreign
direct investment in energy, natural resource extraction, and commodities. These trends
should provide impetus for the US to act strategically towards China’s recent engagement
with the region. The US has the opportunity work cooperatively with the Chinese in Latin
America and the Caribbean and promote economic, financial and development norms.
B. China’s Trade with Latin America and the Caribbean
During the Obama administration, US exports to Latin America increased by more than
$200 billion to $650 billion and today comprise 42 percent of overall US exports.1 This
record-breaking level of exports supported 9.7 million exports-related jobs in 2011, an
increase of 1.2 million exports-related jobs since 2009.2 Yet despite an increase in US
exports to Latin America in dollar terms over the past decade, the US’s share of Latin
American trade declined from 53 percent to 39 percent over the same period.34
China’s market share of Latin American trade grew from less than 2 percent in 2000 to
11 percent in 2010
1
According to the World Trade Atlas, US exports to Mexico dropped from 73 percent in 2000 to 48
percent in 2009, US exports to Colombia from 34 percent to 29 percent, and US exports to Argentina from
19 percent to 13 percent.
2
Fact Sheet: President Obama to Sign the Export-Import Bank Reauthorization Act of 2012, May 30, 2012,
http://www.whitehouse.gov/the-press-office/2012/05/30/fact-sheet-president-obama-sign-export-importbank-reauthorization-act-2.
3
Eric Farnsworth. “Memo to Washington: China’s Growing Presence in Latin America,” Americas
Quarterly, Vol. 6, No. 1, (2012): 84.
4
According to the World Trade Atlas, Mexico's imports from China increased from less than 2 percent of
its total imports a decade ago to 14 percent today, Brazil's from 2 percent of Brazil's 12 percent, Argentina's
5 percent to 12 percent, Chile's from 6 percent to 13 percent, and Peru's imports from 4 percent to 15
percent.
3 Essentially, Latin American countries, which have long been big buyers of US goods, are
increasingly making a larger proportion of their purchases from China.5 Assuming this
trend continues, there are huge implications for US exporters and jobs. Although US
exports do not necessarily compete with China’s (the United States primarily sells high
technology goods such as aircraft, and medical equipment to the region, while China sells
mostly apparel and consumer electronics), US exporters face the challenge of competition
not only from China’s undervalued currency but also from China’s manufacturing
sector.6 For example, Chinese automakers are making valuable gains in emerging auto
markets by focusing less on quality and design and more on ruthless cost-cutting. These
measures significantly challenge companies like General Motors that are looking to
emerging markets for growth but have considerably higher sticker prices on their cars. 7
A trade agenda is one of the best tools that the US has not only to increase exports to
Latin America and create jobs for American workers but also to promote a trade and
investment regime that will enhance the Western Hemisphere’s economic
competitiveness. While the negotiation of a Free Trade Area of the Americas (FTAA) has
struggled to advance over the past decade,8 the United States could take the initiative to
organize the existing 12 US Free Trade Agreements (FTAs) in the Western Hemisphere
into a more coherent (and integrated) regional group. An example would be to lessen the
impact of restrictive rules of origin, which can distort trade and can increase transaction
costs, thus facilitating the movement of goods between countries with similar
agreements. Another benefit of a regional group is an increase in scale economies, which
lowers the average cost of production.9
A trade agenda also has important foreign policy implications. China’s growing
economic presence in the Americas provides Latin American and Caribbean nations with
additional trade and investment options that reduce US leverage to promote open market,
democratic values. US efforts to promote labor and environmental reforms through trade
agreements are undermined when other nations have the ability to sign similar
agreements with China that do not include similar provisions.10 For example, China’s
FTAs with Chile and Peru liberalize agriculture and markets for lower value-added
manufactured goods but do not include deregulation and liberalization of services and
investment and stronger protection of intellectual property rights.11 US FTAs seek to
5
Andres Oppenheimer. “Commentary: In Latin America, US Exports are Losing Market Share,” The
Miami Herald, September 6, 2010.
6
Farnsworth, “China in Latin America,” 86.
7
Keith Bradsher. “Valuable Gains for China in Emerging Auto Markets,” The New York Times, July 5,
2012.
8
J.F. Hornbeck. “US-Latin America Trade: Recent Trends and Policy Issues,” Congressional Research
Service, February 8, 2011.
9
Cintia Quiliconi and Carol Wise. “The US as a Bilateral Player: The Impetus for Asymmetric Free Trade
Agreements.” In Competitive Regionalism: FTA Diffusion in the Pacific Rim, edited by Mireya Solís et al.
(New York: Palgrave MacMillian, 2009), 109.
10
Farnsworth, “China in Latin America,” 84. 11
Carol Wise. “China’s Free Trade Agreements in South America,” China and Latin America Economics
Brief, November 12, 2012.
4 raise the economic competitiveness of both signatories through the harmonization and
modernization of services and investment.12
It is worth noting that the US and Brazil have shared challenges with respect to China and
can develop a common agenda on several issues.13 For example, both Brazil and the US
face the challenge of competition not only from China’s undervalued currency but also
from China’s manufacturing sector. In Brazil, for example, textiles, clothing, footwear,
industrial machinery and equipment, and office machines have been hard hit in the
domestic market. This explains the rise of anti-dumping investigations by Brazil against
Chinese imports.14 In the last two months, Brazil has initiated anti-dumping investigations
on Chinese carbon steel pipes, tires for motorcycles, basic refractories, and nylon yarn.15
This may provide an opportunity for the US and Brazil to pursue a common diplomatic
cause to press the Chinese to allow the renminbi to appreciate against the US dollar and
the Brazilian real.
C. Chinese Financing
China’s insatiable demand for natural resources has prompted its foreign and commercial
policies to be focused on ‘going out.’ Due to China’s massive population, domestic
resource constraints, environmental degradation and global creditor position, the Chinese
have set out to exchange dollars for resources and diplomacy. China has begun to make
notable inroads all around Latin America in the supply of credit and financing to
resource-rich and credit-deficient nations throughout the region. Most of China’s loans,
which have grown immensely in the past decade, are aimed at natural resource extraction.
Since 2005 China has provided approximately $75 billion in loan commitments to Latin
America. The China Development Bank (CDB) and Chinese Export-Import Bank (China
Ex-Im) are the number one and two sources of credit respectively.16 Since 2005, China
Ex-Im Bank has out-financed US Ex-Im by a factor of four, or $8 billion as opposed to
$2 billion.17 As China’s loans have continued to grow, its relative influence in the region
with respect to the US and Western lending institutions has grown alongside it. “As of
2010, China loaned more to Latin America than the World Bank, Inter-American
Development Bank and US Ex-Im Bank combined.”18
Perhaps the most intriguing trend is to whom the Chinese are lending in comparison to
western lenders’ debtors. The top recipients of Chinese loans are Venezuela, Brazil,
Argentina and Ecuador in that order. Outside of Brazil, these countries are ‘non-credit
12
Wise, “China’s Free Trade Agreement,” 3.
Farnsworth, “China in Latin America,” 86.
14
Osvaldo Rosales. “Trade Competition From China,” Americas Quarterly, Vol. 6, No. 1, (2012): 100.
15
“Brazil: Trade Remedies – New Anti-dumping Investigations and Revisions.” Accessed November 25,
2012.
http://www.mondaq.com/x/205202/Export+controls+Trade+Investment+Sanctions/Trade+Remedies+New
+Antidumping+Investigations+and+Revisions
16
Gallagher, Kevin P., Amos Irwin and Katherine Koleski. “The New Banks in Town: Chinese Finance in
Latin America.” Inter-American Dialogue (March 2012), 5. Accessed October 5, 2012.
17
Ibid, 7. 18
Ibid, 5.
13
5 worthy’ nations that are unable to obtain credit in international capital markets. There is a
visible pattern between the loans the Chinese have provided and the natural resource,
energy or other commodity extraction tied to them.
Since 2007, CDB has loaned Venezuela $42.5 billion collateralized by revenue
from the world’s largest oil reserves, according to data compiled by Bloomberg
from announcements of deals by the Chavez government. That’s around 23
percent of all overseas loans by the state-run lender and more than the $29 billion
the US spent rebuilding Iraq between 2003 and 2006. At least $12 billion was
promised in the past 15 months, when stagnant oil output and the highest
borrowing costs among major emerging markets would’ve made raising capital
more expensive.19
Earlier in the year, China and Brazil signed a massive ten-year, $10 billion loan in which
Petrobras agreed to send oil to China for a decade.20 Similar loan agreements have been
with Venezuela and Argentina as China continues to leverage its position as the largest
creditor in the world to ensure its energy security and deepen political ties within the
region. Of the $194 billion in global lending provided to Latin America from 2005-2011,
China’s contribution was just under $74 billion while the next largest contributor was the
Inter-American Development Bank at $67 billion.21
The Chinese presence in Latin America, while a catalyst for growth in countries where
concessional loans would otherwise not occur, has also created friction in the
international community. The CDB and Ex-Im Banks are subsidized by the Chinese
government, which allows them to offer credit at below market interest rates. The global
arbiter for transparent, fair lending practices is the Organization for Economic Cooperation and Development (OECD), which “promotes efficient, open, stable and sound
market-oriented financial systems, based on high levels of transparency, confidence, and
integrity.”22 The opaque financial engineering in which the Chinese have engaged in
Latin America is contradictory to OECD standards (which are largely embraced by much
of the world’s financial markets). The OECD places country-risk premiums on interest
rates for individual countries throughout the world, thus measuring a country’s financial
risk in terms of transferability and convertibility. The risk premium reflects a country’s
possibility of limiting exchange or enforcing capital controls on withdrawal or conversion
of currency. China's rates consistently fall one to two percent below US and OECD rates
in Latin America, creating a disadvantage for western lending institutions. "This
underscores China's development model of channeling 'aid' through its Ex-Im Bank by
19
Devereux, Charlie. “China Bankrolling Chavez’s Re-Election Bid with Oil Loans.” Bloomberg Finance
(September 26, 2012). Accessed October 23, 2012. http://www.bloomberg.com/news/2012-09-25/chinabankrolling-chavez-s-re-election-bid-with-oil-loans.html.
20
Huang, Zhe. “China Signs $10 billion Loan-for-Oil Accord with Petrobras, Sin.com Says”. Bloomberg
Finance (May 25, 2010). Accessed November 1, 2012. http://www.bloomberg.com/news/2010-0525/china-signs-10-billion-loan-agreement-with-petrobras-sina-com-says.html.
21
Gallagher, 4. 22 “Financial Markets, Insurance and Pernsions”. Organization for Economic Cooperation and Development (2012). Accessed November 15, 2012. http://www.oecd.org/daf/financialmarketsinsuranceandpensions/. 6 offering 'concessional interest rates' in comparison to US rates. China Ex-Im receives
subsidies from the Ministry of Finance, mixing development aid and export credits, also
against OECD regulations."23
Although China’s Export-Import Bank provides below market credit, the CDB
actually offers more expensive financing than western lending institutions. This
seemingly counter-intuitive scheme is attributed to China’s exclusive clientele of noncredit worthy nations. These loans provide an otherwise unobtainable financial solution
for the Bolivarian Alliance for the Americas (ALBA).24 This underscores China’s
strategy of taking advantage of countries that cannot access international capital markets
to leverage their own credit and therefore influence. Both the China Development Bank
and China Ex-Im have supported a wave of Chinese business interests in the region at an
essentially unbeatable cost, a major reason why Chinese trade and investment have risen
so sharply over the past decade.
Aside from the consequence of diminishing the influence of Western lending institutions
in the region, the Chinese have also undermined environmental and labor conditions in
the region by lending to and financing projects that do not meet the rigorous norms and
practices that the World Bank and other international financial institutions require. In
2007, the OECD recommended that China develop standards for more prudent regulatory
oversight and higher environmental standards in its overseas projects. China Ex-Im came
out with its own guidelines shortly thereafter; while they are less rigorous and less
comprehensive than the World Bank’s or Inter-American Development Bank's
guidelines, they nevertheless reflect a change the Chinese government’s responsiveness
to pressure (at least with regard to labor and environmental best practices). Given LAC’s
on-going ability to attract foreign investment from a variety of countries, the US should
consider launching negotiations for a hemisphere-wide agreement to establish foreign
investment-related labor, environment and perhaps other norms
D. Chinese Foreign Direct Investment (FDI)
China, despite its staggering increase in trade with Latin America, has under-invested in
the region. In fact, Chinese investment made up less than one percent of LAC FDI
inflows in 2010, despite China’s constituting 11 percent of Latin America’s trade.25 As
we have pointed out, China’s imports from Latin America are heavily weighted towards
commodities and natural resources. While LAC has benefitted from this, the region runs
the risk of an economic downturn if/when commodity and natural resource prices decline.
An increase in Chinese FDI in the region should be welcomed by both Latin America and
the US, but it is essential that this investment go toward value added, down stream
production that will underpin sustained economic growth and ameliorate LAC’s
23
Gallagher, 12.
Ibid, 12. 25
“Shaping the Future of the Asia and the Pacific- Latin America and the Caribbean Relationship”. Asian
Development Bank & Inter-American Development Bank. 2012.
http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=36836575.
24
7 dependence on commodity and raw material exports.
The Chinese economy has grown at double-digit percentages over the past three decades,
amassing enormous currency reserves and up until recently maintaining a small Outward
Foreign Direct Investment (OFDI) portfolio. The volume of Chinese OFDI is expected to
blossom over the next decade or so. However, in the near term Chinese trade has far
outpaced Chinese investment in LAC. In fact, while China accounted for nearly half of
Asia’s trade with LAC in 2010, Japan continued to lead in Asian based investments
despite only having 18 percent of the inter-regional trade.26 This statistic implies two
overarching trends in the relationship between Latin America and Asia. Firstly, the
Japanese, despite having an increasingly smaller percentage of the aggregate Asian trade
with Latin America (where they had historical precedence during the 20th century), still
maintain dominance in Asia-Latin America investment. Secondly, the Chinese have made
impressive jumps in aggregate trade with LAC, but a lack of robust investment and
preconditions for Chinese investment will hamper the development of potential new
economic partnerships.
China is at the tip of the iceberg with respect to the amount of outward FDI it will invest
in the coming decades. The Chinese central government is seeking to diversify its assets
beyond US Treasury bonds. Although Chinese OFDI remains modest with proportion to
the size of its gross domestic product, it contributes over $29 billion in OFDI to Latin
America, a similar quantity to Chinese OFDI in Asia and in Africa.27 China’s OFDI is
estimated to reach $1 trillion over the next decade and, while it is unknown exactly where
the Chinese will invest, it is important for the US to be aware of Latin America’s
potential importance in China’s long-term investment strategy.
E. Energy Policies and Quest for Future Energy Security
Resulting from three decades of continuous economic growth, urbanization and a massive
social transformation, China is one of the world’s most important players in the LAC
energy sector. However, with only one percent of the world’s proven oil reserves and the
second largest in terms of consumption, the country has no option but to secure
sustainable supply sources elsewhere. Countries in Latin America (especially Argentina,
Brazil, Colombia, Ecuador and Venezuela) are among China’s premier investment
destinations. 74% of all Chinese lines of credit to LAC is in oil loans to guarantee future
energy supply and energy security.28 While China’s quest for energy security is not a
direct threat to US energy security, the relationship between China and Latin American
oil exporters should be closely monitored.
One area of potential growth and trilateral cooperation is in renewable energy investment.
Historically speaking, the United States has led the way in renewable energy investment,
26
“Shaping the Future”, 18.
SinoLatin Capital and the Heritage FoundationGraphic, 2012. 28
Kevin Gallagher, Amos Irwin, and Katherine Koleski. "The New Banks in Town: Chinese Finance in
Latin America." Global Development and Environment Institute at Tufts University.
ase.tufts.edu/gdae/Pubs/rp/GallagherChineseFinanceLatinAmerica.pdf (accessed September 20, 2012)
27
8 but over the past several years, China has made remarkable advances with a surge of new
investment in and emphasis on renewable energy technology. Investments in renewable
energy reached new heights in 2011, topping $257 billion, up from only $39.4 billion in
2004 (552 percent increase in eight years).29 China has surpassed the US in the volume of
renewable energy investment, is second behind the EU, and is looking to expand its
markets for renewable energy.
China and other Asian countries have set ambitious targets for renewable energy as part
of their primary energy portfolios. Government grants, subsidies and other tax incentives
have prompted a wave of Chinese manufacturing in wind turbines, solar photovoltaic
panels and other renewable products. For example, Chinese solar panel production has
actually outpaced demand globally and the Chinese are aggressively trying to develop
Latin America’s market for solar panels. Latin America provides an attractive market for
Asia in the renewable sector and there is great potential to foster increased cooperation in
the energy security of both regions as they strive to become less dependent on expensive
and dwindling hydrocarbons. Alternative energy provides a green platform to promote
closer economic ties, ultimately helping to mitigate the all-inclusive threat of climate
change.
Beijing and Washington have similar concerns in their energy policies and face the same
set of challenges: high dependency on foreign sources of energy, rising energy-related
environmental impacts, how to achieve energy conservation and efficiency, and the effect
on their economies of energy price spikes. Although China and the United States do not
rely on each other for energy supplies, as the two largest oil-consuming countries they are
natural energy bedfellows in coping with similar challenges. They should cooperate,
through joint or parallel action, to keep global energy supplies open, secure, and at an
affordable price level. Both countries would win if they choose to cooperate rather than
confront each other in their pursuit of energy security and efficiency. If the US and China
can promote the expansion of renewable energy in Latin America, it will help exporters
and producers within the US and China by expanding trade and investment opportunities
throughout the LAC region. By partnering with capital-rich China and an innovative US,
Latin America has the opportunity to expand its own knowledge and manufacturing base
and grow its renewable energy market into one that can provide sustainable solutions for
the region whose diverse climate should take full advantage of the benefits of renewable
energy. The US should take the lead in coordinating trilateral trade fairs and business
forums, an initiative often pursued bilaterally or intra-regionally.
29
"Who's funding the green energy revolution?" CNN.com.
http://www.cnn.com/2012/06/12/world/renewables-finance-unep/index.html (accessed November 8, 2012). 9 III. Security Analysis
A. Overview
The last decade has witnessed substantial growth in military relations among China, Latin
America and the Caribbean region, taking the form of rising arms sales, high-level
defense visits, and military student exchanges. While these developments warrant close
future monitoring, they presently do not threaten US national security interests, and may
even represent an opportunity for trilateral cooperation among China, the United States,
and the countries of Latin America and the Caribbean.
A number of high-level defense visits have occurred between China and Latin American
nations.30 While these interactions have not resulted in groundbreaking bilateral strategic
initiatives, they serve as confidence building measures and provide openings for arms
transactions.3132
Defense visits are coupled with a rise in military personnel exchanges, which build upon
China’s objectives to establish goodwill in Latin America. Chinese entities like the PLA
Defense Studies Institute, Army Command College, and Navy Command School
welcome officers from about 18 Latin American countries, offering Spanish and English
courses on military planning, special forces operations, aerial communication, artillery
repair and security strategy.33 These exchanges are supplemented with “port visits by
military training ships and warships by each side.” 34In 2009, a Chinese naval flotilla
visited Chile, Peru, and Ecuador and, though “benign in character, such visits benefit the
PLA Navy, helping it to identify requirements for the use of Latin American ports by its
ships in the future for maintenance, resupply, or other purposes.” 35Furthermore, while
presently inconsequential to US interests, it is important to note that both China and Chile
have military facilities located next to each other in Antarctica.36
30
In 2010 “eight clusters of visits at the Minister of Defense or Chief of Staff level” occurred between
China and officials of Venezuela, Ecuador, Chile, Mexico, Brazil, Columbia, Peru, and Bolivia (Ellis
2011). In 2011, the Defense Ministers of Peru, Chile, and Bolivia traveled to Beijing.
31
For example, following the December 2011 visit to China, Bolivian Foreign Minister Carlos Romero and
planning minister Viviana Caro closed a deal to buy six Chinese H425 helicopters.
32
AGENCE FRANCE-PRESSE. "Bolivian Army Buys 6 Chinese Helicopters." Defense News, December
22, 2011. http://www.defensenews.com/article/20111222/DEFSECT01/112220302/Bolivian-Army-Buys6-Chinese-Helicopters (accessed November 21, 2012).
33
Ellis, 2011.
34
Ellis, 2011.
35
Ellis, 2011.
36
Ellis, R. Evan. China in Latin America: The Whats & Wherefores. Boulder: Lynne Reinner Publishers,
2009.
10 B. Traditional Security Issues
1b. Arms Sales
China continues to make gains in the LAC arms market. In 2004-2007, China arms
deliveries totaled $100 million. In 2008-2011, their deliveries increased to $600 million.37
Some key sales of the past decade include Karakorum (K-8) jets to Bolivia, air
surveillance systems (JYL-1 radars) to Venezuela, and WMZ-551 armored personnel
carriers to Argentina. Additionally, Bolivia and Ecuador have been the recipients of MA60 transport aircrafts. Another method the People’s Republic of China (PRC) has made
inroads into the region is through donated materiel to Bolivia, Guyana, Jamaica,
Colombia, and Peru.38
However, Chinese arms sales face certain barriers in the LAC market so that only six
percent of China’s global arms sales were to LAC during the 2007-2011 period.39 Some
militaries still consider Chinese weapons as inferior to Russian or Western arms. They
are willing to pay a premium price for the perceived higher quality or for prestige and
status considerations with non-Chinese suppliers. Additionally, many South American
countries are reluctant to switch to new arms suppliers because of compatibility
challenges as well as the need for retraining and new maintenance and logistics
procedures.40
Latin American defense spending is forecast to grow from $63 billion in 2011 to $65
billion by 2014, with a mere 20 percent being available for procurement (the bulk of the
additional funding will be going to personnel and upkeep costs).41 In this budgetary
climate, only a few countries (Chile, Brazil, Venezuela) can afford equipment
modernization so we do not anticipate that China will be able to grow its LAC arms
market significantly.
2b. Military Exchanges
The PRC’s military interests in LAC are closely aligned with its commercial objectives.
Bilateral security ties build political goodwill with regional players, thus reducing the
likelihood of actions against Chinese exports and investments.42 China’s economic
priorities are seen in its “official system of cataloguing states as cooperative, friendly
37
Richard Grimmett and Paul Kerr, “Conventional Arms Transfers to Developing Nations, 2004-2011,”
Congressional Research Service, August 24, 2012.
38
Evan R. Ellis, China-Latin America Military Engagement: Good Will, Good Business, and Strategic
Position. Strategic Studies Institute , 2011.
http://www.strategicstudiesinstitute.army.mil/pubs/display.cfm?pubid=1077.
39
Grimmett.
40
Ellis, 2011.
41
Marcella, Gabriel. China’s Military Activity in Latin America. Americas Quarterly, 2012.
42
Ellis, R. Evan. China-Latin America Military Engagement: Good Will, Good Business, and Strategic
Position. Strategic Studies Institute , 2011.
http://www.strategicstudiesinstitute.army.mil/pubs/display.cfm?pubid=1077 (accessed November 21,
2012).
11 cooperative or strategic partners—with the implication that this has for the allocation of
economic resources.”43 China’s four “strategic partners” in Latin America - Argentina,
Mexico, Brazil and Venezuela – serve as important trading partners and commodity
suppliers.
China’s strategic posture in the Western Hemisphere is consistent with its publically
stated national security priorities. The PRC’s 2010 national defense white paper
emphasizes a defensive Chinese military strategy, focusing on strengthening international
military relations and countering foreign interference in domestic affairs. The paper
highlights Chinese concerns about international military competition in the areas of
missile defense, cyberspace, outer space, and the polar regions, while simultaneously
insisting the PRC does not seek confrontation or global hegemony. While China’s ties
with LAC reflect a growing desire to protect economic and security interests, the PRC is
promoting cooperation which reflects “mutual trust and benefit,” not offensive measures
that would directly threaten the United States.
A number of high-level defense visits have occurred between China and Latin American
nations.44 While these interactions have not resulted in groundbreaking bilateral strategic
initiatives, they serve as confidence building measures and provide openings for arms
transactions.4546
Defense visits are coupled with a rise in military personnel exchanges, which build upon
China’s objectives to establish goodwill in Latin America. Chinese entities like the PLA
Defense Studies Institute, Army Command College, and Navy Command School
welcome officers from about 18 Latin American countries, offering Spanish and English
courses on military planning, special forces operations, aerial communication, artillery
repair and security strategy.47 These exchanges are supplemented with “port visits by
military training ships and warships by each side.” 48 In 2009, a Chinese naval flotilla
visited Chile, Peru, and Ecuador; and though “benign in character, such visits benefit the
PLA Navy, helping it to identify requirements for the use of Latin American ports by its
ships in the future for maintenance, resupply, or other purposes.” 49 Furthermore, while
presently inconsequential to US interests, it is important to note that both China and Chile
have military bases located next to each other in Antarctica.50
43
De Santibañes, Francisco . "An End to US Hegemony? The Strategic Implications of China's Growing
Presence in Latin America." Comparative Strategy. 28. no. 1 (2009): 23
44
In 2010 “eight clusters of visits at the Minister of Defense or Chief of Staff levels” occurred between
China and officials of Venezuela, Ecuador, Chile, Mexico, Brazil, Columbia, Peru, and Bolivia (Ellis
2011). In 2011, the Defense Ministers of Peru, Chile, and Bolivia traveled to Beijing.
45
For example, following the December 2011 visit to China, Bolivian Foreign Minister Carlos Romero and
planning minister Viviana Caro closed a deal to buy six Chinese H425 helicopters.
46 AGENCE FRANCE‐PRESSE. "Bolivian Army Buys 6 Chinese Helicopters." Defense News, December 22, 2011. http://www.defensenews.com/article/20111222/DEFSECT01/112220302/Bolivian‐
Army‐Buys‐6‐Chinese‐Helicopters (accessed November 21, 2012). 47 Ellis, 2011. 48 Ellis, 2011. 49 Ellis, 2011. 50
Ellis, R. Evan. China in Latin America: The Whats & Wherefores. Boulder: Lynne Reinner Publishers,
2009.
12 C. Non-traditional Security Issues
1c. Human Trafficking
As has been broadly reported, human trafficking in the Western Hemisphere involves
China, Latin America and the United States.51 The US should work trilaterally to offer
technical assistance and training to Chinese internal security and Latin American police
forces through workshops and training exercises. Bringing together police and tactical
units from all three countries for training and information exchange would improve
relations among all three partners, creating the likelihood of improved communication
among these agencies and disruption of the transpacific trafficking that affects all parties.
2c. Counter-Narcotics
The network among China, Latin American drug producers, and the US has been
growing consistently in recent years. The 2011 International Narcotics Control Strategy
Report (INCSR) conducted by the US Department of State pointed out that “China is a
major manufacturer of ‘dual use’ chemicals, primarily used for licit products, but also
diverted by criminals.52 In particular, China is a major source of the precursor chemicals
necessary for the production of cocaine, heroin, and crystal methamphetamine. Organized
crime or criminal brokers divert these legitimately manufactured chemicals, especially
ephedrine and pseudoephedrine, from large chemical industries throughout China to
produce illicit drugs.” In addition, the UN Office on Drug and Crime’s annual World
Drug Report 2012 states: “The problem was most acute in the United States: organized
criminal groups became involved in smuggling heroin from China and Turkey into that
country.”
The Department of Defense wrote a substantial report on Chinese shipments of meth
chemicals to the United States in September 2012. That report cites the US Drug
Enforcement Administration: “About 80 percent of the meth in the United States is now
made in Mexico mainly using Chinese ingredients shipped across the Pacific.” US
authorities believe that, due to weak Chinese government regulation of its chemical
manufacturing and export sector, traffickers have developed a production process that can
use up to 30 common chemical ingredients legally shipped from China. In fact, the
INCSR report did recognize China’s efforts to strengthen its chemical and drug control
system but they have been inadequate. We recommend that the U.S. develop with China
and Mexico a tripartite database covering Chinese chemical exports and Mexican
regulation; this should facilitate Mexican and U.S. interdiction strategies.
51
"Trafficking in Persons Report 2012." US Department of State.
http://www.state.gov/j/tip/rls/tiprpt/2012/index.htm (accessed October 6, 2012). 52
2012 International Narcotics Control Strategy Report, Volume I: Drug and Chemical Control, Bureau of
International Narcotics and Law Enforcement Affairs, US Department of State.
http://www.state.gov/j/inl/rls/nrcrpt/2012/vol1/184098.htm#China. 13 IV. Regional Organizations in LAC and Analysis of China’s Influence
A. Overview
Regional integration has long been a priority of the LAC region. However, the
proliferation of regional organizations has created overlapping objectives and conflicting
views as to how the integration process should proceed. The lack of a common strategy in
LAC coupled with the uneven pace of growth throughout the region and the increasingly
significant global role of China has weakened the role of these organizations.53 In an
effort to narrow the political differences and competing economic visions in the region,
LAC leaders joined in December 2011 to form the Community of Latin American and
Caribbean Nations, or CELAC, which excludes both the US and Canada. To better
understand why CELAC was created, it is necessary to examine these existing regional
structures in LAC, the varied economic growth among countries, and China’s expanding
role in these regional bodies.
B. Regional Economic and Political Organizations in LAC
CELAC exists among a plethora of regional entities in LAC. These regional institutions
were formed with the objective of deepening economic and political ties throughout the
region. However, as demonstrated in Table 1, intra-trade levels among these groupings
are low. These levels are low in comparison to other global intra-trading blocs, such as
the European Union (EU), of which intra-regional trade accounts for 68 percent.54
Table 1. Destination of Exports from Principal Sub-regional Integration Groups in
Latin America (% of total exports)55
Exporting Group
Latin America
MERCOSUR
CAN
Intra-regional
1995
19.3
20.5
12.1
2008
12.1
14.9
7.4
Additionally, the proliferation of these regional organizations in LAC has added to
political distrust and encouraged competing political agendas instead of uniting and
deepening political ties throughout the region. This dynamic is exemplified through
UNASUR and ALBA, which offer two different alternative regional paths to integration.
Brazil has been the driving force of UNASUR and Venezuela is the prominent actor in
ALBA, offering an alternative regional path to integration in opposition to neo-liberalism
and globalization.
53
Michael Shifter, February 2012, The Shifting Landscape of Latin American Regionalism, Current
History pp. 56-61.
54
Alejandro Foxley, 2012, Regional Trade Blocs: The Way to the Future? Carnegie Endowment for
International Peace.
55
Ibid. 14 C. Fragmentation in LAC
While it still may be premature to analyze the success of some of these newer regional
organizations, the existing regional institutions, which represent an array of competing
economic and political visions for the region, have created a fragile structure in LAC.
Coupling these existing schisms with the uneven pace of growth throughout the region
has further increased vulnerabilities.
Between 2002 and 2011, LAC experienced strong growth performance with average
GDP per capita increasing by almost 25 percent. However, countries throughout the
region have not shared this growth equally. Contributing to the pronounced differences in
economic performance were the quality of macroeconomic policies, the degree of trade
and financial integration, and the availability of natural resources.56 The economic
differences that exist between US-linked countries and the more China-influenced
countries are most notable. States like Mexico, Colombia, and Chile are forecast to enjoy
solid levels of economic growth, while both Venezuela and Argentina will likely suffer
from economic contraction.57
Chart 1. Latin America Regional GDP Growth58
Commodity price adjustments are eroding terms of trade in several LAC economies,
causing them to experience widening current account deficits. LAC commodities exports
account for 70 percent of the region’s growth in exports.59 The economies with
worsening trade positions include: Brazil, whose deficit will be $74 billion by the end of
2013; Mexico, which has yet to implement structural reforms needed to diversify fiscal
revenue sources away from oil-linked exports; Venezuela, whose oil profits account for
56
Latin American and the Caribbean’s Long-Term Growth: Made in China?, September 2011, World Bank
LAC.
57
Pablo F.G. Bréard, July 2012, Latin America Regional Outlook, Global Economic Research, Scotiabank.
58
Ibid. 59
K.P. Gallagher & R. Porzecanski, 2009, China and the Latin America Commodities Boom: A Critical
Assessment, Political Economy Research Institute, University of Massachusetts Amherst.
15 half the nation’s total revenue; Peru, Chile, and Uruguay which are sensitive to
commodity prices and experiencing increased deficits.60 Additionally, those countries
largely connected to China are experiencing capacity constraints and thus experiencing
increased inflation.61 These adverse effects are the result of the heavily commoditydependent trading relationship these LAC countries have with China. This is of concern
to the US because if the positions of LAC economies continue to worsen, LAC
purchasing power will decrease, potentially reducing demand for US goods.
Chart 2. Latin America Current Account Balance62
D. China’s Increasing Role in LAC Regional Organizations
In addition, China’s involvement with the region’s organizations has also increased. In its
policy paper on Latin America and the Caribbean, China acknowledged its strengthening
of exchanges with political parties and organizations of LAC countries and announced
China will continue this pattern of engagement in regional and sub-regional organizations
as a means for promoting “regional solidarity, development and integration.”63 In the
paper, China also stated it is ready to work with LAC countries to strengthen the United
Nations by upholding the rights and interests of developing countries.
China has maintained close contacts and dialogue with many of the regional
organizations of LAC, including the Group of Rio, the Andean Community (CAN), and
the Southern Common Market (MERCOSUR). China was admitted as a permanent
observer to both the Organization of American States (OAS) and the Latin American
Parliament in 2004. China’s financial contributions as an observer to the OAS have been
60
Pablo F.G. Bréard, July 2012, Latin America Regional Outlook, Global Economic Research, Scotiabank.
Latin American and the Caribbean’s Long-Term Growth: Made in China?, September 2011, World Bank
LAC. 62
Pablo F.G. Bréard, July 2012, Latin America Regional Outlook, Global Economic Research, Scotiabank.
63
“China’s Policy Paper on Latin America and the Caribbean Region,” November 5, 2008, Xinhua. 61
16 modest; between 2005 and 2011 China’s total contributions equaled $1,289,390. China
donates money to a number of social programs and departments; its priorities are
strengthening multi-dimensional security, protecting women’s rights, promoting
democracy and outreach activities, and advancing integral development.
In 2008, China became a member of the IDB and has contributed $350 million to various
programs. These include funds for special operations (including soft loans to some of the
region’s poorest countries), strengthening the institutional capacities of states, and equity
funds administered by the Inter-American Investment Corporation (IIC).
China and the Caribbean have hosted three meetings of the China-Caribbean Economic
and Commercial Cooperation Forum, the highest level of dialogue between the two sides
on facilitating trade and economic cooperation for common development. Additionally,
there have been six meetings of the China-Latin America Business Summit, a promotion
mechanism and platform for economic and trade cooperation focused on key issues
affecting China and LAC business. One event of the 5th China-Latin America Business
Summit resulted in $10 million worth of proposed contracts, and more than 1,100
entrepreneurs attended the 6th Summit.64 It is also worth noting that China and 18 Latin
American countries participated in the East Asia-Latin American Cooperation Forum and
that China, Mexico, Chile and Peru are members of APEC (Asian-Pacific Economic
Cooperation).65
Earlier this year Chinese Premier Wen Jiabao visited Brazil, Uruguay, Argentina and
China in an effort to boost bilateral ties and enhance South-South cooperation. During
this trip, China and Brazil signed a 10-year cooperation plan66, which will focus on
industries including innovation, space, energy, and education.67 Additionally, the premier
proposed establishing the China-Latin America cooperation forum beginning in 2013,
which would create an entity to deepen cooperation between China and the region.68
Details have not yet been developed.
China’s rising influence presents the states in the region with an alternative to the US
model and an alternative to US businesses. The 2011 creation of CELAC, which seeks to
create a united voice for LAC, is an example of this. Diplomatic links have now been
formalized between CELAC and China and China has offered CELAC $5 billion in
economic cooperation and $10 billion in loans for infrastructure development.69 As
organizations such as CELAC or UNASUR look to expand their reach, they will continue
to partner with China.
64
Business Matchmaker at the China-Lac Business Summit Estimated to Reach $10 Million, October 29,
2012, Mybusinessmatches.com.
65
China Hoy, June 2011, Greater China Latin America Global and Regional Cooperation.
66
Specific goals of this cooperation plan were not publically identified during the announcement; this is
typical of Chinese diplomacy.
67
Roundup: Chinese premier’s visit enhances China-Latin America ties, cooperation, June 28, 2012,
Xinhua News Agency – CEIS.
68
Latin American and the Caribbean Requires Quality Social and environmental Investment, October 4,
2012, ECLAC.
69
Regional Organization CELAC Forges Links with China and India, August 11, 2012, MSNBC. 17 Analysis shows that China’s influence in these organizations has been mostly benevolent
and, rather than a source of alarm, should be an area for cooperation with the United
States. Increased Chinese investment in the OAS and IDB will allow these organizations
to function more efficiently. Likewise, this will help force China into becoming a
responsible shareholder in the region; as China continues to engage with Latin America,
it will be subject to the standards already put in place by the regional organizations. .
V. China’s Involvement in the Caribbean Region
China has expanded its economic relations with the Caribbean via an increase in both
trade and development assistance.
China provided $1.5 billion in development aid to the Caribbean in 2002;70 by 2011 it
increased to $6.3 billion.71 This compares with U.S aid of $0.57 billion in 2011 and in
2013 it will decrease to $0.49 billion. There is an emerging pattern of new institutional
arrangements between China and the Caribbean region; they include the China-Caribbean
Economic and Trade Cooperation Forum (2005); consultations between the Ministry of
Foreign Affairs of China and the foreign ministers of the nine Caribbean Countries with
formal diplomatic relations with the PRC; and a potential “China-Latin American
Cooperation Forum” that is quite similar to the existing “China-Africa Cooperation
Forum.”
China’s interest in the Caribbean is based on the following national interests:
 Strengthening PRC linkages with Caribbean countries against Taiwan.
Currently the Republic of China (Taiwan) has formal diplomatic relations with
12 countries in the LAC region. Even though the cross-strait relationship has
been significantly improved since 2008, Taiwan and the PRC remain major
diplomatic competitors so Beijing pays close attention to Taiwan’s
international space.
 Acquiring raw materials such as bauxite, Trinidad Lake asphalt, and the
possibility of discovering oil and mineral deposits in the vast expanses of
Guyana as well as unexplored undersea resources of the Caribbean Sea.
[China’s largest source of asphalt is Trinidad-Tobago, in 2011 purchasing $1
billion worth.] However, access to raw materials is a secondary motivation
for China’s involvement in the Caribbean region due to the limited quantity of
those resources when compared with Chile, Venezuela and Brazil.
70
Richard Bernal, The Dragon in the Caribbean: China – CARICOM Economic Relations, The Round
Table, Vol. 99, No. 408, June 2010,p. 284.
71
New York Times, China Buys Inroads in the Caribbean, Catching US Notice, April 7, 2012.
http://www.nytimes.com/2012/04/08/world/americas/us-alert-as-chinas-cash-buys-inroads-incaribbean.html?pagewanted=all. 18 The CARICOM countries and the region as a whole have become less important to the
United States since the end of the Cold War. This is reflected in the very
substantial reduction in US development assistance to CARICOM countries. Therefore,
the Caribbean countries are more likely to seek alternative support to meet their
economic development demands, and China has stepped in at this moment.
In the Caribbean China engagement is largely driven by a search for commodities, longterm economic ventures, and potential new allies that are relatively inexpensive to win
over. Similarly, Caribbean countries’ pursuit of a greater international voice and support
in multilateral diplomacy encourages it to cooperate closely with China.
One Caribbean issue to focus on is tax havens. Some islands in the Caribbean are
renowned international offshore financial centers with low taxes and loose regulations
many Chinese companies take advantage of this. The British Virgin Islands (BVI) is a
typical example. China has become the BVI's biggest foreign investor and BVI
companies accounted for about US$10.5 billion of new foreign direct investment into
China, or 10 per cent of the total FDI in 2010. Many Chinese companies set up branches
in BVI and transfer their income from international/domestic markets to BVI, then bring
money back to China as a type of FDI from BVI. By doing so, Chinese companies can
successfully avoid higher taxation within China. The Department of State’s 2011
International Narcotics Control Strategy Report (INCSR)72 states “most money
laundering cases currently under investigation involve funds obtained from corruption
and bribery.” US law enforcement agencies note that the Government of China has not
cooperated sufficiently on financial investigations and does not provide adequate
responses to requests for financial information.
In addition, since some countries are suspicious of Chinese investment, particularly in
mining, telecommunication and infrastructure sectors, Australia and the US have rejected
some Chinese SOEs’ investment projects due to security concerns. Chinese companies
can avoid such suspicions by setting up a branch at BVI and do the same investment
under I s BVI registered name. According to a Chinese lawyer’s argument, some Chinese
SOEs are already conducting their mining investment in Australia following this method.
72
2012 International Narcotics Control Strategy Report, Volume II: Money Laundering and Financial
Crimes, Bureau of International Narcotics and Law Enforcement Affairs, US Department of State.
http://www.state.gov/j/inl/rls/nrcrpt/2012/vol2/184115.htm#China.
19 VI. Conclusion
China’s ties with Latin America and the Caribbean are likely to deepen in the future. The
US should welcome China’s involvement in the region by encouraging it to be a
responsible and productive partner. While Chinese and US interests will diverge in some
sectors, this is not a cause for alarm. The US has broad economic, security, cultural, and
historical ties with the countries of the region and it must continue to nurture these
connections in order to maintain its influence. Engaging China multilaterally in the
region can benefit not only Latin America, the Caribbean, and China, but also the United
States.
VII. US Foreign Policy Recommendations
A. Economic Recommendations
•
•
•
•
The United States should continue TPP negotiations.
The United States should seek to resume negotiations on an FTAA.
Organize the US’ existing FTAs into a more integrated bloc by reducing existing
constraints that slow the growth of trade.
Negotiate a bilateral tax treaty with Brazil and other interested countries to
encourage cross-border investment.
The United States should promote joint cooperative projects on green energy with
China and Latin America.
B. Security Recommendations
•
•
•
•
The United States should organize a joint humanitarian mission between USNS
Comfort and China’s Peace Ark to be undertaken in Latin America and the
Caribbean. This mission would build confidence between the United States and
the People’s Republic of China while also increasing transparency within the
PLAN’s activities in LAC.
The United States, China and LAC should create a joint peacekeeping research
center at the PLA National Defense University and at the US National Defense
University with Chinese and Latin American participants.
The United States should propose launching an annual U.S.-China-LAC
emergency relief exercise to organize and prepare for common disaster mitigation
efforts. This would significantly enhance LAC’s inadequate disaster management
capacity. In addition, since the PLA is directly involved in disaster response
(Chinese disaster relief teams consist of PLA personnel, medical personnel, and
earthquake experts), increased cooperation could facilitate greater military
interaction and transparency.
The United States should invite China to participate in SOUTHCOM’s Trade
Winds exercise in the Caribbean.73
73
The exercise involves OECS nations and American agencies including the Coast Guard, Marine Corps,
FBI and Air Force. The objectives of the exercise already include joint training, countering transnational
20 •
•
•
The United States should offer technical assistance and training to Chinese
internal security and Latin American police forces through workshops and
training exercises to deal more effectively with human trafficking. .
The United States should work with China and Latin American drug enforcement
counterparts to develop an improved data base and tracking system for precursor
chemicals.
The United States should develop trilateral training programs to combat drug
crime.
C. Regional Recommendations
•
•
The United States and China should create a joint investment fund for LAC
within organizations present in the region, such as the IDB.
The United States should continue to work with China on issues of money
laundering, offshore financial crimes, and anti-corruption through existing
bilateral and multilateral mechanisms. It should negotiate with China the
development of a money transfer monitoring system in order to effectively
monitor money laundering in offshore financial criminal activities. The Financial
Action Task Force (FATF) is an ideal vehicle for China and United States
cooperation in this regard.
crime, building disaster response capability, and increasing multinational security operational capacity –
underscoring areas of desired cooperation between China, Latin America, and the United States.
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