By Guest Coeditors:
In this special issue with a theme on “The Chinese Economy’s Comparisons and Links with Latin America,” we have seven excellent papers. The contributors are all experienced academics and researchers with impressive records of publications as well as public policy, national government and international organization experiences. The analysis covers up-to-date and critical issues on the vital role of the Chinese economy in its multifaceted relations with Latin America. Some papers also highlight the impact of such business, economic, and government policy links with Latin America on the Chinese economy itself. This Introduction attempts to provide some comments and critical summaries of these high-quality papers, with a special focus on China.
The first paper is titled “How important are Sino-Latin American Trade for Economic Growth? A Trade in Value-Added Perspective” written by Kailan Tian and Xikang Chen. The paper makes at least two important contributions. First, the authors utilize a stylized global multi-regional input-output (GMRIO) approach to provide much better estimates of the bilateral trade imbalances between China and various Latin American economies. The paper employs the most recent 2021 edition of the Trade in Value Added (TiVA) database provided by the Organization for Economic Cooperation and Development (OECD). The data covers 66 economies and the rest of the world, and the industries include 45 different industrial sectors. The years covered are from 1995 to 2018. Some of the highlighted results show that based on value-added trade, Mexico’s and Argentina’s trade deficits with China are substantially more modest than those based on gross trade terms. In 2018, Mexican deficit decreased by more than 55%, Argentia’s deficit decreased by more than 31% and for Peru, the deficit actually turned into a surplus.
The authors provide three explanations as to why in value-added terms, the bilateral Chinese-Latin American trade deficits are smaller than the gross values. First, as is well-known, much of current and recent global trade, including that associated with China, involves trade in parts and components in multiple stages of production. In an era of sequential production across countries, the country that exports the final product should not be credited with having generated all the value of the outputs. Second, China’s processing trade further lowers China’s domestic value-added content. Processing trade is mainly conducted by foreign-invested enterprises. Processing trade refers to the business activity of importing all, or a large share of raw materials, and parts and components from abroad in bond, and reexporting the finished products after processing and assembly. Productions for processing exports are duty-free and rely more on imported intermediate inputs. In general, one unit of processing export creates less domestic value-added than one unit of normal export. Third, the characteristics of trade between China and Latin America matters in the re-estimation, based on value-added terms. More than 40% of China’s imports from Brazil are agricultural products and over 30% are minerals. More than 90% of Argentina’s soy exports go to China. In general, one unit of Chinese manufacture and technology-related goods exports generate less domestic value-added than one unit of Latin American resource and mineral export to China.
The second part of this research paper focuses on estimating the contribution of trade between China and Latin America to the China’s economic growth, using the hypothetical extraction method (HEM, as embodied in Equation (5), page 8). In recent years, about 1% of China’s GDP can be attributed to its trade with Latin America. For Chile in 2018, 6.9% of national GDP was attributed to Sino-Latin American trade; for Brazil, it was 3.3%; for Peru 4.1% and for Argentina 1.3%.
Overall, the up-to-date contributions of this important paper are broadly consistent with the existing literature. The results are calculated with rigorous mainstream methodologies but at the same time, they are useful not only for academic researchers, but also for policymakers and their advisors.
The second paper by Mitsuyo Ando, Fukunari Kimura and Kenta Yamanouchi is on “Factory Asia Meets Factory North America: How Far Does Latin America Get Involved in Machinery Production Networks?”. In this excellent paper, the authors provide up-to-date information and data concerning how China (within Factory Asia) is increasingly supplying machinery and machinery parts and components to Mexico (as a member of Factory North America), and then to further export to the large markets in the United States. China is seen to be harnessing its enhanced linkages with Mexico (to gain ultimate access to the United States). These complex economic relationships can be traced to several factors. First, the continued trade tension between China and the United States, with high tariffs being maintained. Second, under the United States-Mexico-Canada Agreement (USMCA), the rule of origin for some products, including transportation equipment, has been tightened. Third, Chinese foreign direct investment (FDI) into the northern states of Mexico has also increased, even though from a relatively low base. The setting up of factories by China in Mexico will allow Chinese products manufactured in Mexico to qualify for duty-free access into the U.S. market. Lastly, during the Covid-19 pandemic, there was an increase of some work-from-home and stay-at-home products, including those supplied by China.
The paper highlights the fact that in 2021, Mexico’s imports of Chinese Electrical Machinery final products (HS85) came to 49.1%. This is a jump from 35.1% in 2010. For Mexico’s imports of Chinese Electric Machinery parts and components in 2021, the share was 27.9%, an increase from 21.5% in 2010. For the transport equipment sector, China increases its linkages with Mexico as well. In imports into Mexico, China increases the share by close to 10% from 2010 to 2021 for both parts and components as well as final products.
This interesting paper also uses a mainstream gravity model to measure levels of commitment to the international machinery production network. In the regressions, the dependent variable is the export value of machinery goods from country i to country j. On the right hand side are explanatory variables specific to export country i such as the log of gross domestic product (GDP), log of population, a dummy variable for membership in the World Trade Organization (WTO) and the log of the remoteness index of country i. Explanatory variables specific to import country j include similar variables for the exporting country. In addition, explanatory variables of the country pair i and j such as bilateral distance, a contiguity dummy, a common language dummy, a common religion index and a common colonizer dummy are also included on the right hand side. The augmented gravity equation is estimated by the Poisson Pseudo Maximum Likelihood approach (PPMI) for 177 countries. Predicted values using the estimated coefficients and the explanatory variables are then constructed and these predicted values are compared with the actual, realized values. If the ratio of the actual value to the predicted value is smaller/larger than 100%, then this indicates that the actual trade flows are smaller/larger than the standard level based on the economic and geographic factors.
Based on the results of the gravity model and the calculations of the gap ratios, actual exports of Latin America to China are no greater than half of the predicted values. For the case of Mexico, both import values and gap ratios significantly increase from 2010 to 2021 for China. Actual import values in 2021 are more than twice of the values in 2010. These import tendencies are even stronger for machinery parts and components. Gap ratios for machinery parts and components in 2021 are over 700% for China. For China, both actual values and gap ratios for machinery parts and components keep increasing, even from 2019 to 2021. In general, China is seen to be an important machinery and machinery parts and components supplier to Mexico.
For Brazil, the actual values and gap ratios increase for all periods, even for years from 2019 to 2021. In sum, machinery trade of Brazil can be viewed as mainly the typical intra-regional trade. Although Brazil’s imports from China exceed the predicted values, its link with China or the rest of the world is thinner than in the case of Mexico.
Overall, the authors point out that China seems to be utilizing Mexico as a stepping stone or a bridge to the larger North American market, particularly the United States.
Using the most up-to-date data, this paper is an important and timely contribution to the literature showing how the Chinese exports of machinery finished products as well as machinery parts and components have intensified their links with Latin America, particularly with Mexico.
In the third paper by Linda Yueh on “China’s Strategic Lending Policy: Implications for Latin America,” the author analyzes China’s overseas lending strategy and demonstrates how China has deepened its financial relationship with Latin America. The paper points out that China since 2016 has provided the Bank of International Settlements (BIS) data on its cross-border banking activities. The author shows that China is quickly becoming the largest official lender in the world, lending to 175 out of 185 borrowing jurisdictions according to the BIS database. China rivals the World Bank and the Inter-American Development Bank as the biggest holder of debt in Latin America.
The paper emphasizes that China’s overseas loans are linked to its strategic objectives, including supporting its own economic growth and extending its global influence. Latin America is estimated to have the highest level of debt service payments, about 4% of the gross domestic product (GDP) of Latin America, which is higher than those for Africa and Asia.
China’s overseas lending has long been linked to its domestic and foreign policy objectives. These goals include securing resources to drive its economic growth and to extend its international influence via the Belt and Road Initiative (BRI). Lending from China tends to be on commercial rather than concessionary terms. Typically, concessionary terms include lower interest rate and longer re-payment periods which result in lower debt burdens.
In addition, China’s approach is unlike other lenders who lend to developing countries. The United States and the Paris-Club country creditors provide aid and work alongside the World Bank. China’s global impact as a lender is a relatively recent phenomenon, even though China has had a long history of engaging other countries in the South. China also had offered loans to low-income economies even when it was a poor country prior to its economic reforms. China’s overseas loans became important to the rest of the world by the 2010s. Chinese international loans and trade credits increased from a tiny amount in 1998 to US$1.6 trillion, or 2% of world GDP by 2018.
Before the BRI, Chinese loans were often described as loans for oil. Chinese state development banks would lend billions in subsidized loans to oil-producing countries in exchange for the indebted countries’ guaranteeing that they would sell oil to China. The BRI enlarges a broader range of strategic interests for China, including the recipient economies’ adopting the Chinese standards for digital infrastructure. For China, the BRI’s reach into Latin America challenges the influences the United States has over its regional neighbors.
In the paper, the author points out that because of China’s state dominated banking system, Chinese overseas loans are almost all official lending, controlled by the government. Through two policy banks that are parts of the government, China’s Export-Import Bank and the China Development Bank, these state entities account for the bulk of overseas lending. Even though these are state policy banks, Chinese loans are usually extended at market rates. For example, in 2010, Ecuador borrowed US$1.7 billion from China’s Export-Import Bank at 7% interest to be repaid over 15 years. For low-income economies, they typically receive interest-free loans and grants from official lenders. But China usually charges 2 to 3% interest.
Chinese loans are often secured by the proceeds of the recipient countries’ resource exports. Some loans would give China the right to obtain profits from the state-owned assets of the indebted countries. As an illustration, China took over a Sri Lankan port for 99 years once Sri Lanka faced difficulty to repay the debt. According to the paper, as of 2021, Chinese banks accounted for around 7.5% of global cross border bank lending. Among emerging markets and developing economies, China is the most important source of cross-border lending and foreign direct investment (FDI).
For Latin America, China is the third largest source of foreign direct investment (FDI) after the U.S. and the European Union (EU). The author points out that in terms of loans, China has lent more than US$130 billion to the region. The biggest borrowers include Brazil, Peru, Chile and Argentina. Recently, Chinese loans have shifted its emphasis to digital infrastructure, which includes 5 G, electric vehicles and data centers.
China’s property market is facing increasing challenges. In the paper, the author points out that if a domestic Chinese financial crisis develops, China may have to recall its overseas loans. A domestic Chinese property and financial crisis can then spread to other indebted and emerging economies.
The paper provides a reasonable and balanced analysis of the prospects of a housing and financial crisis in China. It then reminds us that the financial crisis can lead to domestic economic instability and slower growth for the real economy. Withdrawal of funds by China from the indebted economies would be a likely outcome. This will also harm the recipient developing countries. In Latin America, the potential Chinese financial crisis would impact significant resource exporters like Brazil. The paper points out that due to the sizeable amounts owed to China (US$130 billion or 4% of the region’s GDP), the risk of a financial contagion to the entire Latin America can be substantial. For Venezuela, it has received commitments from China Development Bank and China’s Export-Import Bank, amounting to almost 100% of its GDP. Similarly, Ecuador has received about 20% of its GDP in commitments from China. The high degree of indebtedness makes Latin America vulnerable to a property market-induced slowdown in China.
Overall, this interesting paper makes a significant and timely contribution to the literature by highlighting the financial connectivity between China and Latin America. The analysis is sound and logical, and it complements the more international trade, business and diplomatic focus provided by other research papers in this Special Issue.
The fourth paper by Nathalie Aminian and Cuauhtémoc Calderón Villarreal is titled “China-Mexico Economic Relationship in the Context of China’s Penetration in Latin America”. This interesting paper examines in detail the recent investment, financial, industrial and trade relationship between China and Latin America, with a special emphasis on the links between China and Mexico. The paper points out that Mexico is unusual as it is the only Latin American country with no formal participation in the Belt and Road Initiative (BRI) or the Asian Infrastructure Investment Bank (AIIB). In contrast, Brazil is the only Latin American country which is a full member of AIIB but not a participant of the BRI. As of March 2022, 21 out of 24 countries in Latin America are participants of the BRI. The paper provides insights as to why China’s relationship with Mexico is different from that between China and other Latin American economies.
This insightful paper proposes a view that given the United States’ tight economic, trade and investment relationship with Mexico and given the U.S. geographic proximity to both Mexico and Central America, China’s approach to establish its economic relationship with South America is different from that with Mexico and some countries of Central America.
The authors highlight appropriately features of the recent trade agreement, The United States-Mexico-Canada Agreement (USMCA), as one of several relevant factors that from the perspective of China, makes Mexico different from other Latin American economies. The USMCA came into effect on July 1, 2020. As the paper emphasizes, the agreement tightens the rules of origin, and it increases in general the regional content required to qualify for lower tariffs. Mandated worker and environmental regulations are updated and strengthened. Greater incentives are provided particularly for North American automobile production. The Agreement also penalizes members of the bloc for entering into future trade agreement with non-market economies. Viewing these features from the perspective of China, first, there is the standard trade-diverting effects of any regional agreement. Furthermore, the non-tariff aspects of USMCA makes it even harder for China to benefit from duty-free access to the large U.S. market by developing casual economic relationship with Mexico without fully integrating into the Mexican economy. With the provision of penalizing future trade agreement with non-market economies, China is seen to have been shut out of developing future formal trade agreements with Mexico. As the paper notes, some researchers in the existing literature went so far as to call USMCA the first “Anti-China” trade agreement. With the USMCA in place, it is quite appropriate to view China’s economic relationship with Mexico as distinctive compared to China’s trade and economic relationships with other Latin American economies.
Even though the United States remains the largest source of imports for Mexico, in 2021, China provided 20.0% of Mexico imports, a substantial share. On the export side, the United States remains the largest dominant export market for Mexico. In 2021, Mexico exported more than 80% of its exports to the United States, but only 1.9% to China. As a result, Mexico ran a large trade surplus with the United States, but a deficit with China.
In the literature, as the authors point out, some researchers highlighted the fact that much of Mexico’s trade with the United States was intra-industry. So, the next step for the paper is to calculate the extent of intra-industry trade between China and Mexico, using the conventional Grubel-Lloyd Index (GLI). The paper classifies the extent of GLI into 3 categories: greater than 0.33 indicates the presence of intra-industry trade (category A); greater than 0.10 but smaller than 0.33 means moderate intra-industry trade (category B); smaller than 0.10 indicates no intra-industry trade (category C).
In terms of Chinese imports from Mexico, the two main manufacturing sectors that exhibit intra-industry trade include Motor vehicles, tractors, cycles and other land vehicles, parts and accessories (HS87, category A) and Electrical machinery and equipment and parts thereof and sound recording (HS 85, category B). Other sectors that display high intra-industry trade are related to minerals, raw materials, or agriculture. These include Fish and crustaceans, mollusks and other aquatic products (HS03, category A), Beverages, spirits and vinegar (HS22, category A) and Gums, resins, and other vegetable saps and extracts (HS13, category A), etc.
In terms of Chinese exports to Mexico, examples of manufacturing sectors that have high or moderate intra-industry trade include Motor vehicles, tractors, cycles and other land vehicles, their parts and accessories (HS87, category A), Electric machinery and equipment and parts thereof (HS85, category B) and Optical photographic or cinematographic, measuring, controlling or precision instruments and apparatus (HS90, Category b), etc. Other sectors that exhibit high or moderate intra-industry trade are in the minerals and agricultural industries. These include Mineral fuels, mineral oils and products of their instillation (HS27, category A), Aluminum and articles thereof (HS76, category B) and Rubber and articles (HS40, category B), etc.
The picture emerging from the calculations of the GLI is that most trade between China and Mexico is inter-industry. But there are sectors that provide opportunities for China and Mexico to provide both exports and imports with each other, signifying a closer within-industry trade relationship. Examples are HS87, Motor vehicles, tractors, cycles and other land vehicles and parts and HS85, Electric machinery and equipment and parts. Note also that these results are broadly consistent with the results from the previously discussed paper on international machinery production networks by Ando, Kimura and Yamanouchi.
The fifth paper by Seungho Lee and Chong-Sup Kim is on “The Impact of China on the Trade-Promoting Effects of PTAs: The Case of Korea and Japan’s PTAs with Latin American Countries”. The paper provides an econometric study of the increasingly rapid fading economic and trade effects of preferential trade agreements (PTAs). The gravity-type regressions show that the rise of China plays an important role on these properties of PTAs. The paper next provides a case study on the impact of China on the trade agreements involving Korea and Japan with various Latin American economies. The empirical results on PTAs indicate that there seems to be a nine-year phase-in period for the lowering of tariffs as economies need time to adjust. The trade promoting effects of the PTAs start to depreciate after this period of maturity. These econometric findings are consistent with the existing literature.
This interesting paper then highlights an important “China Effect” on these preferential trade deals. The modified gravity model regressions show that the larger the change in the Chinese share of total imports, the quicker the import promoting effect of a PTA decay. Thus, China’s increased penetration in these markets speeds up the decline of the potency of the trade-promoting effects of these trade agreements. Another factor that potentially explains the non-lasting effects of the PTAs (including those with Latin American countries) is the proliferation of comprehensive PTAs within the region.
Turning to the case study, the authors show that the comprehensive engagement of China in Latin America poses significant competitions to Korean and Japanese trade and investment in Latin America. In addition, China has also signed free trade agreements (FTAs) with several economies in Latin America, including the China-Chile FTA, the China-Peru FTA and China-Costa Rica FTA. The paper shows that China’s competitiveness in manufacturing has in some instances reduced the market shares of Korean and Japanese in Latin America. The authors however remind the readers that the emergence of China is not the only reason. There are other factors that are also important in explaining the erosion of the benefits of Korean and Japanese PTAs in Latin America. These include the continuing global and regional reductions of most-favored-nation (MFN) tariffs, and the spreading of trade agreements to other countries, including those between China and various Latin American economies.
The sixth paper in this Special Issue is by Daniel Agramont Lechin titled “China and the Andean Community: Opportunities and Risks of the Decoupling Process”. The author highlights the Chinese trade relations with the Andean Community (CAN) and compared that relationship with the United States. China is the first trading partner for all 4 CAN nations. China receives mostly primary products from CAN economies and exports mostly a variety of manufactured goods. China imports only very limited amount of industrial goods from the CAN nations. These results are illustrated by examining the imports and exports with China at the HS 4-digit level.
The paper then moves into an examination of trade between China and each member of the Andean Community (and compares the results with those with the United States). For China, Bolivia and Peru mainly supply minerals; Columbia exports mostly petroleum and for Ecuador, the main export to China is fish and crustaceans. The author also analyses whether exports from CAN nations to China (and the United States) are significant. A product is defined in the paper as significant if the CAN economy is among the top 5 exporters to China for that item. Looking at the comparative trade data, Peru is the only CAN country to be among the top five exporters in several of its export items to China. For example, copper from Peru amounted to 22% of Chinese imports. Similarly, Peru exported 19% of zinc, 22% of lead and 15% of precious metal ores of all Chinese imports.
The paper further utilizes a novel methodology to study the potential export opportunities of Andean countries to China, in the light of continued China-United States trade friction. To focus on value-added trade, minerals and unrefined fuels are excluded in the analysis. To get a rough estimate of the supply and demand elements, Chinese global imports for that item will be used as a proxy for demand, while global CAN export of that product will be used as supply capacity.
A country-product specific analysis shows that Columbia has the most potential opportunities. Fifty-six Columbian exports overlap with China’s main imports from the United States. The potential Chinese import market was US$10.9 billion, while the Columbian export capacity of these items was US$4.36 billion. Five sectors in China offered the most opportunities. These included medicaments, perfumery and cosmetics, insecticides, plastics and polymers, electrical machinery and equipment and motor vehicles. According to this analysis, China provided few opportunities to Peru. The potential demand in China from Peru was US$925 million, while Peru supply or export capacity was US$3 billion. Ecuador had the second largest opportunity in China, with 20 products that could reach US$6.2 billion in the Chinese import markets. Chinese opportunities even included light manufactures such as tires, tubes and pipes and insulated wires. Finally, China provided twelve product opportunities for Bolivia.
The paper then provides analysis of the potential risks to China due to a hypothetical decoupling from CAN economies. China relies heavily for imports from CAN countries for specific items. These included silver (30% of Chinese imports), copper (26%), zinc (25%) and molybdenum (16%).
The last paper by K.C. Fung, Yue Lin and Le Xia is on “Digital Trans-Pacific Silk Road and Phases of China-Latin American Connectivity: From Silver to AI”. The authors document and analyze the long arc of connectivity between China and Latin America. First, using analytical international trade and economic tools, the paper provides a new economic perspective of the First Globalization–-the Ming and early Qing China’s economic and business links with Latin America and Europe. Second, the Second China’s Globalization was ushered in with its entry to the World Trade Organization (WTO) in 2001, facilitated by the United States government trade policy. During this second phase, China exchanged manufactured goods with minerals and resources from Latin America. Finally, the tough technology and trade stance by the Trump and Biden Administrations prompted China to heighten the third phase of China interaction with Latin America. For the 2020s and beyond, one important pillar of the Third China-Latin America-Europe Globalization is expanded efforts for China to increase its digital-Artificial Intelligence (AI) and platform business presence and access into the Latin American markets. The paper provides Chinese-style digital-AI business and economic models to help illustrate the discussions. The authors point out that government policies have been instrumental in bringing forth these Three Globalizations that involve China and Latin America.
For China’s First Globalization, in Europe, there was an excess demand for Chinese Silk, but in China, there was limited or no demand for European goods. Over time, the Ming rulers changed its taxation system and required taxes to be paid in Silver. With the discovery of Silver in Latin America, the Ricardian No Trade equilibrium is shifted to a Free Trade equilibrium, with Spanish American Silver exchanged for Chinese Silk, and with the final export destinations being Spain and Europe. The authors further argue that unlike other standard consumer goods, imported Chinese Silver served as credible money. Imports of Silver-money transformed the Ming Chinese economy from a semi-barter economy to a more efficient monetized economy, increasing the long run Chinese output. Chinese contact with the New World also brought in new crops such as corn, peanuts, and sweet potatoes. These more easily cultivated crops essentially led to an expansion of food supply and an increase of the population of China.
Due to the U.S. Government trade policy of accommodating China’s entry to the WTO, China was ushered into its Second Globalization. During that period, China’s business and economic relations with Latin America changed dramatically. China became the top trading partner and largest export market for several major Latin American economies. That trend was also evident in the Latin American imports of trade of electronic parts and components such as semiconductors. Based on some regression analysis, the paper finds mixed results related to whether China had contributed to a heightened concentration of commodity exports from Latin America. In the early phase of the China-induced commodity boom starting around 2003, the main investment by China into Latin America was in sectors related to minerals and commodities. But between 2012 to 2022, such investments had diversified to include infrastructure, electricity, and some manufacturing. The latest pivot of Chinese investment into Latin America tends to be in areas of the “green” economy, including lithium, electric vehicles, and renewable energy.
The tough Biden and Trump Administrations’ technology and trade policies brought forth China’s Third Globalization, a period from the 2020s and beyond. For the ongoing Third Globalization, the paper documents a significant rise of mixed public-private ownerships of Chinese firms, including important digital-AI mixed companies (M-Firms) operating in Latin America. To enrich the analysis, the paper provides a formal business and economic model of such M-firms. The paper analyzes three policies. First, there was an examination of increased Chinese internet infrastructure investment in Latin American rural areas and an increase in Chinese government subsidies to the M-Firms. Second, the paper analyzes how a Latin American exchange rate depreciation can affect the M-Firm. Lastly, the authors consider how complementarily-built elements of layers of the Chinese tech-stack can improve cooperation between a Chinese telecommunication equipment state-owned enterprise (SOE) and a Chinese digital-AI M-Firm.
One perspective the authors emphasize is that government policies have been instrumental in shaping the China-Latin America-Europe relationships. In the early modern period, it was the policy of the Ming rulers who adopted the Silver standard. During the late 1990s, it was the U.S. government’s acquiescence of China’s joining the WTO. From 2018 to the 2020s and beyond, it was President Biden’s and former President Trump’s restrictions of the operations of Chinese AI, telecommunication, and digital companies. Thus, in conducting future research, the paper points out that researchers may want to consider all the spillover effects of various relevant government decisions.
The seven research papers in this Special Issue highlight current, up-to-date, and significant economic and business links between China, Mexico, and various Latin American economies. The authors employ an array of appropriate methods to buttress their insightful perspectives, including econometric, data-driven, case study-oriented and theoretical approaches. In addition to the high- quality academic analysis, the results of their papers yield an abundance of relevant and original policy recommendations. The combination of academic rigor and policy relevance makes these papers extremely useful not only for economic and business researchers, but also think tank fellows and policymakers.
Disclosure statement
No potential conflict of interest was reported by the author(s).