Trade with China – and Beyond
China, otherwise known as the Dragon or the Sleeping Giant, has awakened. Ever since the country began to open its closed economy, it has continued to grow. Its insatiable appetite for primary products has increased equally fast. Latin America has been keeping its eye on these trends, and the region has increased its trade and investment ties with China. Nevertheless, not everything that glitters is gold. Experts warn of the danger facing Latin America if it limits its China-bound exports to primary products. They also recommend that Latin America use its position in China to advance elsewhere in Asia.
The People’s Republic of China has more than 1.25 billion people, of whom an estimated 8% are below the poverty line. Although China’s government has remained communist, as early as 1978 it announced its goal of boosting economic development through a reform program that involves profound changes. The program, which incorporated market mechanisms, has thrust the country into global trade and international financial markets.
China has experienced economic growth at an average annual rate of between 7% and 9%, a phenomenal record that has completely transformed the landscape of international trade. From the outset, the world’s developing countries raised their stakes in China by investing huge sums there. However, Latin America has only recently begun to play a modest role in China.
In place of the traditional North-South pattern of trade, a more fluid South-South exchange has emerged between various points in the developing world. In Latin America, Chile provides one of the best examples of this pattern. For at least ten years, Chile has been strengthening its ties with Asia. Using this approach, Chile has sold in China as well as in more developed Asian countries such as Japan.
“Generally speaking, Latin America has forgotten Asia because it doesn’t have strong ties with that continent. Some countries, such as Chile, have opened their umbrellas in time to arrive not only in China but also in Japan,” says Gerald McDermott, a Wharton Business School professor. “Latin America’s advance into the region does not sit well with the United States, which is worried that China will have ‘friends’ among less developed countries.”
Chinahas become a key player in the global economy, thanks to its gigantic domestic market, its abundant stock of cheap labor and its high rate of economic growth. Beyond that, Chinamaintains its currency at a rate very much below the dollar, so Chinese products can easily penetrate the United Statesand many other countries.
Several countries have attempted to find a spot on China’s busy agenda. The list includes not only Mexico, Peru and Venezuela but also Brazil and Argentina, the two leaders of Mercosur. Last March, Brazilian president Luiz Inácio Lula da Silva traveled to Beijing with a delegation of more than 500 Brazilian business people. Their goal was to promote trade between the two countries. Likewise, President Nestor Kirchner of Argentina recently visited China accompanied by 270 business executives.
Feeding 1.25 Billion Chinese
Both presidential visits generated renewed expectations. The South American leaders returned with suitcases full of promises and signed agreements that provide assurances that trade with China will grow. Two notable examples: Argentina and China have signed a memorandum on biotechnology, and China has opened its market to imports of Argentine citrus fruits. Nevertheless, how much more can we expect trade to expand – and in what ways?
According to economists, Mercosur can potentially export enough to feed three quarters of China’s population of more than 1.25 billion. The Mercosur bloc – which also includes Uruguay and Paraguay – contributes 50% of global food exports. These projections include soybeans as well as wheat, corn, meat and other products. Apart from that, Mercosur can supply China with steel, natural gas, copper and uranium, which China needs during its current stage of growth and modernization.
Unfortunately, however, the Mercosur nations are only taking advantage of a small part of available opportunities. Last year, less than 2% of all Chinese imports were derived from Mercosur. Argentina’s exports to China accounted for barely 0.8% of China’s total demand.
Moreover, more than 80% of Mercosur’s exports to China are in the farming and fishing sectors. The ties are deepening especially fast in the case of Argentina, which exported goods worth $2.35 billion to China in 2003, up 125% from 2002. According to a report by the Inter-American Institute for Cooperation on Agriculture, most of those exports were such products as vegetable oils, soybeans, skins, leathers, wood, and cereals.
On the other hand, Brazil’s exports to China amounted to $6.68 billion in 2003. China is an avid importer of Brazilian farming and fishing products “because [China] is a country with a lot of poor people. But Latin America has to try to export not only commodities, but also more shipments of finished products that have added value,” notes McDermott.
In this respect, Argentina has experienced some success, above all in the software sector, which requires long hours of programming and writing. Juan Acevedo Miño, director at the e-Learning center at Argentina’s National Technology University, has advised an Argentine company about markets in China. “My role was to guarantee the quality of their product. We did that by looking at research that showed that the Chinese are very sensitive about standards, generally speaking. That’s why it was important for us to have ISO 9000 (certification), which is an important norm for software.”
To make a hit in China, the Argentine company also took care to “introduce it in English as well as in Mandarin Chinese. Fortunately, we have excellent people in Argentina who can translate into Chinese,” Miño says. The key was to set a lower price than similar products, as well as “offer online service, 24 hours a day, 365 days a year.”
China: Portof Accessto Southeast Asia
Clearly, China also sees Latin America as a huge market where it can sell its products. “China gives nothing away. They also want to sell their products and invest in Latin America,” says McDermott.
One of China’s goals is to boost its textile exports. Mexico, which has a similar industry, has suffered from an invasion of cheaper Asian textiles. Like Mexico, Argentina is also afraid of the Chinese textile industry, although some Argentines see purchases of Chinese low-cost machinery as a key to their future growth. Thanks to a credit granted by two Chinese banks, Argentine textile makers will have access to $250 million in funding, which they will use to purchase Chinese capital goods.
Governments in South America have also tried to attract investment from China, especially for the construction of ports, railroads and roads, including trans-oceanic networks to the Pacific and even ports in both Peru and Chile. The recent agreements and the promises of future investments have generated confidence about the relationship between Latin America and China. In any case, this is just the beginning. Everyone will have to make an effort to transform this relationship into something stronger and longer term.
Like the nations of Latin America, China is still a developing country, and it is struggling to overcome shortages of technology; to combat poverty; and to acquire greater access to credit. Both Latin America and China must also learn more about each other’s cultures. María Martha Rodríguez Blanco, director of Lexor, an Argentine software firm, advises companies to pay attention to details. “For us, the Chinese market provides a great challenge. For example, the product must be finished off with Chinese characters. On the other hand, we have to learn how business is done in Asia, what the rules of conduct are. Everywhere around the world, companies of all sizes have their sights set on China, and we know there is a lot of competition. But we believe it is worth the effort.”
Latin America must also diversify its markets. “I don’t think we should emphasize China,” says McDermott. “Latin America must diversify its markets and take advantage of the Chinese platform to approach other countries in Asia.”
McDermott sees other markets for Latin American products throughout Asia – including India, Pakistan, South Korea, Japan, Singapore, and the Philippines. China’s vast potential should not distract Latin America from viewing the huge potential elsewhere in the region, McDermott says. Moreover, Argentina “must pay attention to its global image to generate more confidence, especially when people outside the country observe its scandals and political shortcomings. On the other hand, Argentina and the rest of Latin America must try to compete with Southeast Asia, differentiating itself from the competition through service and quality.”