China Promotes Trade in Latin America

China’s rise has been export-driven, like Japan’s and Korea’s before it.  China took note during the Asian Financial Crisis of the late 1990s that foreign exchange reserves are king.  By keeping its currency undervalued, China has encouraged exports (the latter helped as well by tax rebates) and amassed foreign exchange.  With the drivers of demand for Chinese goods – the US and European Union – in recession, Chinese leaders have launched a road show to open markets (and access to raw materials) among its Emerging Market brethren.  No better place to start than Latin America, in America’s backyard, where over 500 million consumers live.

 

Today, China’s State Administration of Foreign Exchange (SAFE) announced a “slowing” in the growth of the nation’s current account surplus (see press release at http://news.xinhuanet.com/english/2009-02/18/content_10840178.htm).  It is not surprising that the day before, China’s Vice President Xi Jinping hailed the importance of ties with Latin America in an appearance in Caracas, Venezuela, following a visit to Mexico and on his way to Brazil (read about it at http://news.xinhuanet.com/english/2009-02/18/content_10844156.htm).  The current account surplus (a broad measure of trade) expanded only 20% in 2008, down from 49% in 2007.  This enormous surplus has been responsible for China’s mind-numbing US$1.8 trillion in foreign exchange reserves, over 12% of US GDP.  This Great Wall of foreign exchange limits the country’s vulnerability to the global economic crisis.

 

Nevertheless, with GDP per head at under US$3,000 and a population of 1.3 trillion, China has enormous development needs.  With the engines of external demand sputtering, China needs to either jumpstart domestic demand (by loosening the fiscal purse and printing money, as well as by letting the currency rise) or find other external engines…or both.  Last November, China’s President Hu Jintao launched the country’s Latin road show with a swing through the region.  He signed a free trade agreement with Peru (China’s second in the region) and attended the Asia-Pacific Economic Cooperation forum in Lima.  This year, he sent three senior officials back to promote trade.

 

With protectionism mounting in the US and EU, both of which have huge trade deficits with China, China must diversify.  Because many Latin countries have trade surpluses with China, driven by commodity exports, the region is listening.  Latin-Chinese trade has grown, totaling an estimated US$143 billion in 2008, still dwarfed by US-China trade of US$409 billion.  With its lower labor costs, China has elbowed Latin manufactures out of the US market.  Chinese goods have begun to compete in Latin markets as well.  Witness the protests last November of Peruvians against free trade with China.  Latin textile manufacturers particularly are living on borrowed time.  In any event, this latest example of China’s economic diplomacy demonstrates that the world’s Rising Powers are not sitting idly by as the greatest financial crisis in decades grips the developed world. 

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