The Ongoing Strengthening of Economic Relations between China and Central and South America

|China

In recent years, China’s economic relationships with Central and South America have deepened. This is for the reason that Central and South America have risen in the rankings as stable suppliers in the urgent problems of food, energy and resources for China’s future sustained economic growth, and the trade transactions of both regions have expanded. Notably, exports to China have rapidly increased in soybeans (Brazil and Argentina), oil and natural gas (Venezuela), iron ore (Brazil) and copper, etc. (Chile and Peru).

With the total of China’s exports to Central and South America in 2007 at approximately US$51.54 billion and the corresponding total for imports back at approximately US$51.06 billion, there was a trade surplus of a little over US$0.48 billion. Although the percentage shares by region (for the world) are still small at 4.2% and 5.3%, respectively, what is worthy of notice is the export growth rate. There was a 43.1% increase from the corresponding export total for 2006 (approximately US$36.02 billion). This shows the comparative magnitude of Central and South America as rapidly-growing export markets, even when compared with the corresponding rates for the period 2006–2007 of exports to India (an increase of 64.7%) and to Africa (an increase of 39.7%).

Within this situation, what is the relationship with Mexico, the economic giant of Central and South America ranking alongside Brazil? Differing from South America which is expanding exports to China centered on the likes of natural gas and mineral resources and their related products, in Mexico a deficit with China is accumulating. According to Mexico’s central bank, the total imports from China increased approximately 68.2% from approximately US$17.69 billion in 2005 to approximately US$29.77 billion in 2007 (in its percentage share by region China comes in in third place, behind the United States and the EU, in Mexico’s import trading partners). In electronic and electrical equipment in particular, Chinese products have swept all before them in the Mexican domestic market. In contrast, the amounts are small for the total of exports to China, from the US$1.13 billion in 2005 to the US$1.89 billion in 2007, and for Mexico China has changed into a country with which it has a resounding deficit.

An additional problem is presence in the US market. After the coming into effect of the North American Free Trade Agreement (NAFTA) in 1994, Mexico, which promoted the furthering of market integration and consolidation with the United States, steadily increased its exports to the United States around a central plank of maquiladoras in bonded processing zones. In percentage share by region it was in second place behind Canada in the import trading partners of the United States (excluding oil). After China acceded to the WTO in 2001, however, China overtook Mexico to take second place. By way of an example, in labor-intensive products such as textiles, clothing and footwear, Mexico is now completely unable to match China in competitiveness.1

Needless to say because it immediately borders the United States, in terms of transport costs and times, the skill-level of the labor force and free-trade systems (being also within NAFTA), Mexico holds an advantage over China. In labor and infrastructure costs, however, it falls far behind; after 2000 many businesses and factories relocated production (or made preferential direct investments) to China from Mexico, drawn by the numerous and cheap labor force. Consequently in Mexico you can often encounter a tone where China, being a powerful competitor, is regarded as a “threat.”

Under these circumstances, Mexico’s President Calderón visited Beijing in July of this year, and had meetings in rapid succession with President Hu Jintao and Premier Wen Jiabao. The leaders of the two countries decided on the long-term actualizing of a strategic partnership with the aim of further stimulating investment and trade in the future. For China the oil-producing country of Mexico holds the potential of being a resource-supplier, and at the same time the size of its domestic market, as a destination for exports, is also large. For its part, Mexico is also eager for an increase in investment from China.

The strengthening of China’s economic relationships with Central and South America looks set to continue in the future.

  1. In recent years, however, both countries’ exports to the United States of bread-and-butter products have shifted from such light manufacturing over to high-technology goods (their components). Within these, although both countries’ products in the US market are still competing with each other in many sectors, when you do a detailed breakdown of the machinery and equipment categories (automobiles and electronic and electrical equipment, etc.), there is said to be an ongoing new separation by niche of both countries’ export products to the United States. For more information, please see Takanari Sasaki, “Competition between China and Mexico in the US market”, Institute for International Trade and Investment Quarterly (No. 72, Institute for International Trade and Investment, 2008). [in Japanese]
    Furthermore, regarding the figures in this piece, unless otherwise specified I referred to the data on the Japan External Trade Organization website (accessed October 2008).

[Translated by ERINA]