Chinese President Xi Jinping's recent visit to Latin America illustrates that from both the economic and political viewpoint the relation between China and Latin America is increasingly becoming one of the world’s most important. Although Xi Jinping specifically used the phrase "community of shared destiny" to describe China's relations with Brazil, the term clearly applies to China’s conception of the relations between itself and the Latin American continent as a whole.
Economically a specific basis creating the basis for this relation is that China and Latin America are now regions of the developing world at similar stages of development. Adjusting for different price levels, calculating in World Bank parity purchasing powers (PPPs), Latin America's per capita GDP in 2013 was slightly under US$15,000 and China's slightly under US$12,000. Both were substantially higher than South Asia's US$5,000 or sub-Saharan Africa's US$3,400.
That China and Latin America are both at significantly higher levels of economic development than other major regions of the developing world means they have expanding and substantial areas for trade and cooperation. This also helps explain why trade between China and Latin America as a whole is almost exactly in balance – evidently substantially limiting any trade frictions.
Naturally, within that overall framework, individual issues in trade between China and Latin America remain. Manufacturing exports from China to Latin America are much more developed than those in the opposite direction. China's rapid growth in the last decade played a major role in helping most Latin American countries develop, by creating high demand and high prices for their energy and other commodity exports, but over the longer run Latin America will want to develop its own manufacturing exports to China. China's purchase of US$3.2bn of regional range aircraft from Brazil's Embraer, announced during Xi Jinping's visit, is an example of a trend with which Latin America will be concerned. Furthermore, China's relations with Latin America interrelate with a key strategic question for that continent's own development – Latin American economic integration.
China's economy is much larger than any individual Latin American countries – giving China a much larger market than theirs, and therefore creating the potential for huge developments in economies of scale and geographical specialization in different economic sectors. Measured at current exchange rates, China's GDP in 2013 was US$9.2 trillion compared to US$2.2 trillion for Brazil – Latin America's largest single economy.
This means that the question of Latin American integration is linked with its relation to China. For Latin America to develop relations firmly based on equality with China the continent as a whole has to relate to it, while China’s trade would clearly benefit from the much greater size of market and economic dynamism Latin American economic integration would create.
Simple numbers dictate this reality. China has approximately twice Latin America's population, and its economy is approximately twice as large as Latin America's, no matter how measured – in current exchange rates Latin America's GDP is US$5.6 trillion and China's US$9.2 trillion, and in PPPs China's GDP is US$16.2 trillion and Latin America's US$8.5 trillion.
If relations are only between China and one Latin American country, it is therefore objectively difficult to keep them balanced. But greater Latin American integration fits with China's own strengths. A large part of China's extraordinary economic development, an average 9% a year economic growth for over 35 years, is due to huge infrastructure investment. From 1992-2011 China spent an average 8.5% of GDP a year on infrastructure.
China has already promoted infrastructure projects as a key way of ensuring Asia's economic integration. Similarly Latin America's economic integration cannot be achieved without large scale infrastructure links. China's huge financial resources – the world's largest foreign exchange reserves and an economy generating over $4 trillion a year for capital investment compared to only $2 trillion in the United States – makes it the world's strongest economy to aid and participate in such development. China's infrastructure capabilities reach far beyond finance – its sale of ultra-high voltage transmission lines to Brazil, for example, is already important in aiding developing the hydro-electric power potential of the Amazon. Discussions between Brazil, Peru and China, during Xi Jinping's visit, on the development of a transcontinental railway indicate the scope of what is possible. On a smaller scale China is lending US$2.1bn to Argentina for railway development, and US$4.7bn for dam and power construction.
This interlinks with the considerable significance for Latin America of the announcement, at their recent summit, by Brazil, Russia, India, China and South Africa (BRICS) of the establishment of the US$50bn BRICS development bank and the US$100bn BRICS contingency fund. In terms of international finance, previously U.S. dominance of the IMF resulted in a historical record of that organization not being used in a genuinely multilateral way, as a means to allow developing economies to expand their economies, and overcome short term economic problems, but instead to impose policies which served U.S. financial interests and blocked economic growth of countries receiving loans – as writers such as Joseph Stiglitz have shown in detail. Latin American countries, as well as those in Asia, experienced this.
Despite U.S. government proposals to reform the IMF to better reflect the weight of developing economies, made during the international financial crisis, and which would have ameliorated this problem, the U.S. Congress has not passed the necessary legislation to achieve this. The BRICS countries were therefore able to agree to establish a lending mechanism which helps partially circumvent the U.S. veto in the IMF. While only an initial step China’s great financial fire power makes it the core of a trend that is likely to increasingly weaken U.S. dominance of international financial flows.
China's loan and aid policy, which is therefore likely to be influential in the new BRICS institutions, has radically differed in approach from the IMF. China has not required from those receiving loans or aid domestic economic policy conditions – China merely self-evidently required that its loans had to be repaid, receiving in a number of cases guarantees not only in cash but in commodities. But China did not specify what domestic policies should be pursued to ensure loan repayment but left this to the country concerned – a different approach to the IMF.
The BRICS development bank and contingency fund is therefore potentially significant not only for long term growth but for allowing Latin America to avoid experiences of the type seen in the continent's "lost decade" of the 1980s, when severely contractionary economic policies were imposed as part of the "Washington Consensus." In addition to the long term development from the BRICS bank, the sums available from the contingency fund will help countries avoid being forced into adopting unsuitable or damaging economic policies due to short term financial difficulties.
If the advantages of this for Latin America are evident, what are the advantages for China – because to be stable and long term any relationship has to be win-win? The answer is not only in immediate reciprocal trade and investment but the security in supply and markets Latin America can help bring to China.
China is sufficiently strong militarily that not even the most extreme U.S. neo-cons advocate a war with it. But China is conscious it is dependent on extremely internationalized sources of supply and markets – China has already overtaken the United States as the world's largest goods trading nation. Therefore, if any country wished to weaken China, it can attempt this by cutting off sources of supply or access to markets. For example, the sanctions implemented by the United States against Iran can directly put pressure on China's economy. Expanding China’s relations with Latin America allows China to diversify both its sources of supply and its markets – contributing to its economic security.
For these reasons Xi Jinping’s emphasis on the importance of China’s and Latin America’s links, its ‘shared destiny’ is unlikely to have been merely a rhetorical flourish for his hosts. It corresponded to the objective interests of both China and Latin America
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An earlier version of this article was published at China.org.cn .