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Latin America and China: The economic and debt situation and the U.S. discomfort

Latin American countries have no relatively good room for fiscal and monetary policy adjustment like China, and basically lack the ability for governmental countercyclical adjustment. This is mainly reflected in their room for fiscal and monetary policy.

From a fiscal viewpoint, the taxation ability of Latin American governments is generally weak. Taxation accounts for 16-18% of GDP, which is obviously lower than the 30-35% level of developed countries.

In terms of monetary policy, since the currencies of Latin American countries are directly correlated to the U.S. dollar exchange rate, the dollar fluctuation also entails the reduction of their room for monetary policy adjustment. These countries have continuously borrowed and cut interest rates. Hence there is little room for further steps.

The Federal Reserve has adopted the policy of unlimited quantitative easing which, in practical and easy-to-understand terms, is one of the unconventional ways by which a central bank intervenes in a State’s financial and economic system to increase the amount of debt money in circulation.

Although the U.S. stock market went into a slump several times, it should be noted that Nasdaq reached a new high. Ultimately, money has become more circulating. Interest rates in Latin American countries, however, have become very low and there is little room for further cuts.

At the same time, their foreign debts are also relatively high. For example, Argentina has recently approved a 70billion dollar debt restructuring plan and its debt accounted for over 50% of GDP.

The first solution to the debt crisis is to delay repayment, and the second one is to cancel interest or partly write off the debt. The creditor has no choice but to be forced to agree if one of the counterparts is unable to repay it. This is an endless cycle that, once the debt restructuring plan is approved, will only alleviate and mitigate Argentina’s crisis.

Argentina’s debt crisis occurred nine times in history, and this is the third time in the new century. Inflation in Argentina has caused its currency to depreciate by over 70%. According to statistics from the United Nations Economic Commission for Latin America, over 12 million people were jobless in Latin America in 2020. Poor people in Latin America will increase from 118 to 130 million and the extremely poor people will rise from over 60 million to over 90 million.

Faced with some new difficulties and challenges, we need to explain and assess China-Latin America relations at the current historic juncture. The development of China-Latin America relations has shifted from a period of high-speed growth to a period of stable growth. Quantitative and extensive development is shifting to a qualitative and specific one.

Initially China-Latin America relations took off suddenly and even exceeded expectations. Instead, a steady, efficient, stable and effective approach is currently preferred. The orderly progression of diplomatic and commercial relations is more advantageous than a context of actual speed.

This is especially the case in the context of intensified strategic competition between China and the United States. The political situation in Latin America, and the further impact of the Covid-19 pandemic, mean that certain changes need to be made to China-Latin America relations.

Firstly, the U.S. influence on China-Latin America relations needs to be assessed. Sino-U.S. relations are the most important, sensitive and complex bilateral relations in Chinese diplomacy.

Recently, there have been many major changes in Sino-U.S. relations, but one of them is often overlooked: from the Latin American countries’ perspective, the relationship between Latin America and the United States is the most important one. China’s interests in Latin America have not surpassed the United States’ in terms of political and economic development.

Here are some data. In the field of economy and trade, the United States is still Latin America’s main trading partner. The same applies to investment. The United States has great advantage over China.

In 2017, trade between the United States and Latin America exceeded 760 billion dollars, almost three times the volume of trade between China and Latin America. In 2019, trade between China and Latin America was about 270-280 billion dollars, while the volume of trade between the United States and Latin America was almost 800 billion dollars.

From an investment perspective, U.S.A.’s and Latin America’s direct engagement in 2017 was 45 billion dollars, almost double that of China. Therefore the United States outperforms China in terms of trade and investment.

However, benefiting from the advantage of China’s economic growth and the structural complementarity between China and Latin America, the acceleration of China’s economic and trade investment in Latin America is higher than that of the United States. Therefore, China has an incremental advantage in Latin America, but the United States enjoys an ‘equity’ primacy.

For example, outgoing President Trump has never visited Latin America, but this does not mean that the United States does not pay attention to it. Quite the reverse. If we look at the reports on Sino-Latin American relations issued by U.S. think tanks, scholars and experts are particularly worried.

The U.S. Congress holds several hearings on Sino-Latin American relations every year and invites not only local experts, but also experts from Mexico, Brazil and other countries. We can see that the United States attaches great importance to the development of China-Latin America relations.

We wonder, however, why has the United States not taken propagandistically political positions in Latin America as it does towards China, the Middle East, South-East Asia and the South China Sea.

This means that the United States still considerably trust Latin American bonhomie, good nature, patience and tolerance. The U.S. media merely claim that China’s influence in Latin America has increased and its soft power has enhanced but, overall, China’s influence in Latin America is far less than that of the United States.

If we ask in Brazil what they think of U.S.-China, U.S.-Brazil and Brazil-China relations, we get the following answers. The United States is a model for Brazil’s development and the values and ideologies of both Brazil and the United States are close. China is an important trade and investment partner for Brazil. From an economic viewpoint, Brazil’s development should seek to establish a better partnership with China, but in terms of ideology and values, the Forbidden City is further away than the White House.

For Latin America, maintaining stable relations with the United States is a primary interest. After the outbreak of the Covid-19 pandemic in Latin America, China – thanks to some of its medical equipment – did its best to help those countries mitigate the impact of the disease. A Chinese state-owned company responded to the call and promised to build a hospital with an in-patient module in a conference and exhibition centre in Panama to help infected patients, for only a small sum of money from the State.

Panamanian President Laurentino Cortizo Cohen, however, rejected the proposal outright. In the end, Panama spent 12 million U.S. dollars and built 100 hospital beds and 26 intensive care units, without taking advantage of Chinese aid.

On April 16, Cortizo presided over the hospital’s opening ceremony, announcing that it was his own decision. Conversely, when former Panamanian President Juan Carlos Varela (2014-19) was in power, he visited China, and Chinese Foreign Minister and State Councillor Wang Yi reciprocated by travelling to Panama.

At the time, President Varela said that the landmark project for the expansion of the Silk Road passed through Panama, as did the 4 billion dollar plan to expand the canal and railway from Panama to Costa Rica.  The new President in power, however, has not followed the philosophy of his predecessor, terrified of displeasing the United States. Unfortunately, this news is not reported in the Italian press.

Giancarlo Elia Valori