Latin America's China Strategy Needs an Overhaul

Latin America's China Strategy Needs an Overhaul

Especially in Brazil, savvy local leaders have an opportunity to turn Beijing’s Belt and Road Initiative to their advantage.

Late in September, as the novel coronavirus ripped through Latin America, the government of Sao Paulo state signed a Hail Mary agreement with Chinese biopharmaceutical lab Sinovac Biotech Ltd. The Chinese company teamed up with the biomedical research center Butantan Institute to develop a vaccine for the contagion that by last week had already killed 200,000 Brazilians. Providentially, the Coronovac shot, which cleared clinical trials last week but whose ultimate efficacy rate remains a matter of debate, is now expected to become part of the go-local treatment, in Brazil and beyond.

This local Chinese medical diplomacy reflects Beijing’s broader prescription for conquering the international marketplace. Instead of pinning its foreign policy and global outreach solely on bilateral pacts, Beijing has encouraged mainland companies, cities and provinces to prospect for subnational clients and partners across the Americas.

China began diversifying its stakes within targeted frontier markets in the early 2000s, partly to court new customers, partly as a political hedge. Latin America’s dysfunctional autocrats inadvertently hastened the trend by invoking central fiat to expedite Beijing-backed projects, only to see many go awry due to cost overruns, environmental hazards or labor unrest, according to a recent report by Margaret Myers of the Inter-American Dialogue.

Beijing has since struggled to adapt its shape-shifting Belt and Road strategy to Latin America’s mercurial political allegiances and the often fraught relations among its feuding partisans and between central governments and subnational potentates, Myers concluded. Yet especially in the post-pandemic world, China’s localization effort offers opportunities for the region’s capital-starved leaders, whether presidential or provincial.

National and local officials seeking to cash in on China’s centrifugal force must look beyond the current emergency and rethink their agenda, at home and abroad. Brazil may be best placed to take advantage of the opening. Thanks to the appetites of China’s burgeoning urban middle class, the region’s biggest economy has run trade surpluses with China for 17 of the last 20 years. However, most of Brazil’s China winnings are episodic, riding on prices for commodities, swings in Chinese demand or the vagaries of the on-off trade war between Beijing and Washington.

The current arrangement has brought Brazil profits but little trade stability, much less parity at the negotiating table. Encouragingly, all three of those benefits are within reach, despite the lopsided balance of power and assets between the two countries.

To up its China game, Brazil must explore niches, tap technology and diversify its exports. For at least the last decade, three commodities — soybeans, iron ore and crude oil — have accounted for 75% to 80% of what China buys from Brazil, Brazilian economist and diplomat Tatiana Rosito wrote in a recent study for the Brazil-China Business Council (CEBC).

Yet the exodus from the Chinese countryside and the nation’s go-go middle class are opportunities for Brazil, whose tech-driven agribusiness learned to cater to its own hungry urban demographic half a century ago. “Governments may resist, but history and geography conspire in our favor. We need to think strategically to achieve lasting gains with China,” said Marcos Jank, a global agribusiness scholar at the Sao Paulo university Insper.

While Brazilian soybeans face stiff competition from other grain exporters, the country’s farmers can climb the value chain by processing soy into feed and selling more meat instead. Brazilian farmers are 24% more efficient than their peers in China at converting feed to poultry and 38% better at converting it to pork, according to the Brazilian Animal Protein Association.

Technology can also help Brazil rise above the endowment trap. Yes, exceptionally high-grade iron ore gives Brazilian miners a natural edge over competitors. However, the dealmaker for China, which is under pressure to lighten its carbon footprint, could well be importing the ore in Brazilian mining conglomerate Vale SA’s second generation Valemax ships, the world’s largest ore carriers, which reduce greenhouse emissions by up to 41% compared with standard carriers, Rosito noted.

Brazil’s prowess in prospecting oil from ultra-deep offshore wells helps keep China in the medium grade, low-sulfur crude it covets. Petrobras has added to the haul by capitalizing on Beijing’s 2015 go-local ruling allowing private refineries to cut their own import deals; independent refineries now buy a third of the oil the Brazilian major sells to China, which now snaps up two of every three barrels Petrobras exports.

Brazil and its neighbors could do much better. Wonks and pundits regularly lament that although China has a Latin America strategy, Latin America still has little clue of what it wants in return. Mexico lacks a “short, medium and long-term agenda” to deal with China, one think tank concluded. Argentina’s unpreparedness leaves it chronically outmatched at the negotiating table. “I used to sit down with Chinese delegations with 40 translators at their disposal,” said Argentine corporate attorney Juan Uriburu Quintana, who was often the lone Mandarin speaker on the Argentine side.

The trope counts double for Brazil, which despite its intensifying relationship with China, “does not have a single document with a clear foreign policy strategy to guide this strategic planning exercise with China,” the CEBC’s Rosito concluded.

Federal and state governments have skimped on export promotion campaigns in China and dispatched few envoys from industry and commerce to break the ice on the mainland. More surprisingly, Brazilian capital investment in China has been risible: $320 million, from 2006 to mid-2019. By comparison, Brazilian foreign direct investment in the United States climbed from around $6.7 billion in 2006 to $22 billion in 2019, according to Brazilian Central Bank data. A greater presence in China, both through direct investment and official boots on the ground, could help Brazil deepen trade, open markets and combat misinformation about product safety (a major concern during China’s recent tainted meat crisis) that could threaten exports.

Yet Brazil’s homegrown challenges may be the biggest obstacle to a more effective China strategy. Last year, crucial reforms to streamline public administration, simplify the tax code and winnow the dozens of political parties that can sandbag legislation stalled as Brazil fought the Covid emergency. Nationalists and opportunist rural elites have invoked the China menace to inveigh against a potentially transformative congressional amendment easing restrictions on foreign land ownership — a measure that could attract external capital, boost agricultural productivity and raise tax revenue without jeopardizing sovereignty. Such unfinished business “generates uncertainty among investors and limits growth,” said Insper’s Jank.

A better move, he argued, would be for Brazil to negotiate preferential access to China’s closely guarded and fiercely competitive domestic markets — say for more beef, high-end textiles or e-commerce — in exchange for Chinese stakes in farms, energy or infrastructure. “China is our biggest trade partner and will likely be for the foreseeable future,” says Jank, “but if you don’t build transparency, predictability and mutual trust into the relationship, we’ll be subject to a roller coaster economy and volatility.”

A roller coaster is the last thing Latin America needs to get to a post-Covid recovery. China’s growing portfolio of local deals offers promise, yet making those opportunities flourish turns on host officials looking beyond the current crisis, acting strategically and learning to speak Beijing’s language, sometimes literally. “The Chinese think in the long term,” says Quintana. “Our long term is next week.”

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