THE BENEFITS AND PERILS OF RIDING CHINA´S COAT-TAILS / THE FINANCIAL TIMES COMMENT & ANALYSIS

July 31, 2013 4:18 pm

 

The benefits and perils of riding China’s coat-tails

 

By David Pilling

 

Many Latin American nations have bet the mine on an economy that is now slowing

 

 

 

 Few parts of the world have benefited as much from China’s rise as Latin America. In 1990, China was a lowly 17th on the list of destinations for Latin American exports. By 2011, it had become the number one export market for Brazil, Chile and Peru and number two for Argentina, Cuba, Uruguay, Colombia and Venezuela. Over that time, annual trade rose from an unremarkable $8bn to an irreplaceable $230bn. Chinese leaders predict it will reach $400bn by 2017.

 

As China builds its colossal cities, constructs its networks of highways and railways, and feeds its evermore carnivorous people, Latin America has much of what it takes to keep the show on the road. Chilean copper, Peruvian zinc and Brazilian iron ore are being shipped in vast quantities.

 

The region is the Middle East of food, accounting for 40 per cent of global farming exports. It supplies water-poor China with dizzying amounts of beef, poultry, soya, corn, coffee and animal feed. If Chatinamerica rolled off the tongue as easily as Chindia or Chindonesia, someone would have coined the term long ago.

 

The speed with which economic relations have flourished raises two important questions equally applicable to other parts of the world. First, what happens when Chinese growth and investment slows, a process that has already begun? Second, how can Latin America forge an economic relationship that is more than just a rerun of its commodity dependency of eras past?

 

To work out what might happen as China slows, we should first look at how different countries fared as it took off in the 1990s. As Alfredo Toro Hardy, a Venezuelan academic and diplomat, makes clear in his book, The World Turned Upside Down, there were losers as well as winners.

Broadly, the losers were Mexico and the “Mexico-type economies” of Central America with low-cost maquiladora plants for assembly and manufacturing. For Mexico, a net importer of raw materials, including corn and soya, the rise in commodity prices accompanying China’s ascent had a largely negative impact. More important, as China’s manufacturing prowess grew, Mexico’s factories lost competitiveness. From 2001 to 2006 its share of US personal computer imports halved to 7 per cent. Over the same period China’s share more tan tripled to 45 per cent.

The winners were Brazil and the “Brazilian-type economies” of South America. Not only did China vastly increase its imports of commodities from the likes of Peru and Chile but the commodity supercycle also pushed prices of raw materials to record highs.

 

Kevin Gallagher and Roberto Porzecanski estimate in their book The Dragon in the Room that three-quarters of recent Latin American growth can be attributed to commodity exports. Growth rates in countries with the tightest trade links to China reached a rough average of 5 per cent.

  

Yet even during the bonanza years, now ending, there were concerns. Cheap Chinese imports undermined Latin American manufacturers even in countries such as Brazil with a sophisticated industrial base. The currencies of commodity exporters appreciated – a classic case of “Dutch disease” – making their manufactured goods still less competitive. Some, such as Mr Toro Hardy, worried that over-reliance on commodities might imply “going back in time” to a primary export economy. For a high-technology producer such as Brazil, he said, this smacked of neo-colonialism.
 
Such concerns, though they have particular resonance in Latin America, apply to other countries that have ridden China’s commodity train, from Australia to Mongolia. Many countries have bet the farm – or rather the mine – on everlasting demand from a China whose economy is now slowing.

As China decelerates from double-digit growth to a projected 7.5 per cent this year, the economies of some commodity exporters have stumbled. Brazil is a case in point. Partly as a result of slowing exports to China and falling commodity prices – copper, iron ore and coal are 30-50 per cent off their 2011 peaks – it registered average growth of just 1.8 per cent in 2011 and 2012, down from a roaring 7.5 per cent in 2010.

 

That process could have further to go. China’s economy may slow more sharply than expected or it may rebalance more quickly from investment-led to consumption-driven growth. The Economist, perhaps prematurely, has already declared a structural “Great Deceleration” in emerging markets.

 

In a report entitled If China sneezes, Nomura estimates the impact on several economies if 2014 growth in China’s $8tn-plus economy slips 1 percentage point below Nomura’s baseline forecast of 6.9 per cent. It finds that a 1 point fall would shave a further half-point off Latin American growth. Some countries such as Australia, down 0.7 per cent, and trade-dependent Singapore, down 1.3 per cent, would fare worse.

 

It is not all bad. Mexico may actually have benefited from the changing nature of China’s economy, where higher wages have breathed new life into the maquiladora system. Nor has it suffered from the fall in commodity prices.

 

Even in countries such as Brazil, the effects of a Chinese slowdown need not be all negative. China will continue to urbanise, putting a floor under metals prices. To the extent that its demand for hard commodities does slow, its appetite for meat and grains should rise. The key for Latin America – and for other suppliers of China’s needs – is to construct a trade relationship that maximises value added, even if that is only branding or processing raw materials. Canada, Australia and, closer to home, Chile show that being a first-rate commodity exporter does not necessarily mean having a second-rate economy.

 

Copyright The Financial Times Limited 2013.