China’s Impact on Latin America

South America has so far experienced "little pain and lots of gain" from China's emergence as an economic superpower, but the continent will face growing competition from the Asian giant in the coming years.
 
This was the message associate professor of economics Christian Broda delivered in a talk on China's impact on Latin America economies as part of the Global Leadership Series, held at the Brazilian Capital Market Institute on February 21.
 
The "lots of gain" for South America identified by Broda is thanks to China’s demand boosting prices for the region's commodities while the "little pain" is a consequence of South American manufacturing having little overlap with China's, meaning little direct competition.
 
Other boons to Latin America have been low world interest rates as a result of the high Chinese savings rate and China's role in stimulating global growth. "China and India contribute 40 percent of all world growth," said Broda. "And high world growth explains about half of the region's growth."
 
But he drew a clear distinction between China's impact on South America and that on Mexico and Central America, which have faced far more direct competition from Chinese manufacturing.
 
Using the example of textiles Broda demonstrated how that region's manufacturing sector has been hollowed out by Chinese competition, especially in Mexico where the advantages of NAFTA have been eroded since China joined the World Trade Organization.
 
Much of the positive scenario for South America will remain in place in the medium run. China's growth rates will likely dampen down, but its economy is now so large that demand for South American commodities such as oil, iron ore, copper, and meat will continue to grow strongly.
 
But as China's economy evolves it will inevitably come into more direct competition with South American manufacturing, warns Broda. "As countries evolve they move into different types of products. They move away from the labor-intensive products into other products." As examples, he cited China’s developing capacity in auto parts which poses a challenge for Brazil's large auto part sector.
 
"As China becomes richer, it is normal that we will have higher levels of overlap and competition," said Broda, who pointed out that per capita GDP in Shanghai and Beijing has already surpassed the Brazilian average.
 
He noted that China has already been able to move into more capital-intensive sectors with higher quality products in such a way that they have displaced even some sectors in Germany and Spain.
 
"I have been surprised at how successful China has been at moving from low quality products into other types of products without us even noticing," Broda stated.
 
Asked what South American governments could do to minimize this coming challenge, Broda was cautious. "We should learn from our mistakes, so protecting individual industries cannot be the answer. The government should facilitate business and foster institutions that help attract investments and trade. At the macro level, the role of the government is a very simple textbook recipe: 'when things are good you save for when things are bad.' "

—Tom Hennigan