The paper was published on The Diplomat on March 31, 2015. To read published version which is shorter and execellently polished by my editor, please visit the following website:

http://thediplomat.com/2015/03/why-china-shouldnt-get-too-invested-in-latin-america/

China should not overestimate the strategic significance of Latin America

Xue  Li     Xu Yanzhuo

In light of scale and effectiveness, the First Ministerial Meeting of China-CELAC Forum held in Beijing in early January 2015 is undoubtedly a successful one, with the fact that more than 40 ministerial-level officials from 33 member states of CELAC participated the meeting, while the heads of Venezuela, Ecuador, Costa Rica and Panama attended the opening ceremony. The meeting has launched three outcome agreements, including China-Latin American Countries and Caribbean States Cooperation Plan (2015-2019). China signed a US$ 20 billion joint project loan agreement with Venezuela and a US$ 5.3 billion loan agreement with Ecuador. Beijing also agreed to establish special economic zones in Costa Rica. Panama president Barrera suggested elevating the next meeting to heads of state and government level. Additionally, President Xi Jinping pledged in the opening ceremony, that China will provide 6000 scholarships and 6000 training opportunities to member states of CELAC in five years, and will invite 1000 party leaders from Latin America to China, as well as train thousands of Latin American youth leaders through the "bridge of the future" project.

So far, the pledges that Chinese President Xi Jinping has made during his visit to Latin America last July has been successfully fulfilled.

Beijing puts forward “One Belt One Road” strategy (OBOR) with which the strategic targeted states are developing countries. Thus, Chinese government considers this forum as “the first international event of its all-round diplomacy” through hosting the meeting at the beginning of this year. The forum launches a new cooperative mechanism between China and developing countries, following its cooperation with Africa, the Arab League, the GCC and ASEAN.In addition, Beijing has established China-Pacific Island Countries Economic Development and Cooperation Forum with Pacific Island countries, of which majority of its member states are small developing countries, and also CSABF with SCCI. As a result, China-CELAC forum indicates that China has set up a fully covered cooperative mechanism with developing countries all round the world. The following-up measures will be to strengthen each cooperative mechanism and to enhance cooperative level, for instance, expanding business forum into comprehensive one.

Against this background, China has experienced a diplomatic transformation. The new government initiated new model of major power relationship featured by “no conflict, no confrontation, mutual respect, and win-win cooperation” and a new type of international relations with win-win cooperation at its heart. In practice, Chinese diplomacy has evolved from “Keeping a low profile while getting something accomplished” to “proactive and enterprising, striving for achievements” (Zhao, Kejin& Yan, Xuetong), from “refusal”-diplomacy to“achieving”diplomacy” (Pang, Zhongying), from the diplomacy towards great powers to the diplomacy based on self-identity of great power, (Xu, Jin). As a result, China puts forward and implements OBOR foreign strategy.

In this case, what is Latin America’s role in China’s international strategy? Will it become another important destination of maritime Silk Road in 21^st century, just like what  Africa plays?

Politically, Latin America is like most of developing countries, where left-wing politics, such as, socialism, populism and Dependence Theory is popular; diplomatically, Latin American countries divided into two camps “pro-US” and “anti US”, where the latter has stronger voice. Political strongmen, who are good at winning election and poor in economy development, emerge from time to time. Although generally Latin America has a better economy than Africa, the development is slow and fragile. Argentina even “fell” from a developed country into a developing country. Nowadays, the economic structure and industrial policy are so unbalanced in most of Latin American countries that the continent has been labeled as middle-income trap, wealth gap, inflation, high-debt ratio and industrial uncompetitiveness. In terms of social order, some countries have suffered from the spread of drug, instability and poor social welfare system. Culturally, Latin American people have received higher education than African people and Catholicism is dominant in its religion belief. The relationship between religion and economic development is a research filed in economics studies, some researchers argued, the impact of Catholicism serves as a big reason that Latin America is not as developed as US and Canada.

Culturally, Latin America has been part of western civilization; geographically it borders with US, thus its economy closely relates to US’s. Some Latin American countries rely on US for its security or are deeply influenced by US. Vice versa, US consider Latin America as its backyard and have a great impact, or to some extent dominate some Latin American countries’ domestic and foreign affairs through OAS, the Inter-American Development Bank, bilateral economic cooperation and assistance, multinational corporates, military aid and even military intervention.

African culture has not been categorized as western civilization. Geographically, Africa locates close to Europe. Economically the two continent work closely, however, in terms of national security, few African countries counts on former European suzerain. Commonwealth of Nations and the French Union cannot play the same role as OAS and Inter-American Development Bank. Most African countries have not decolonized for a long time. Since independence, they maintain good political relations with China. Majority of them have established close economic links with Beijing. As a result, these features lay a solid foundation of China-Africa relations and a bright future. In addition, Europe has much less influence on Africa than US on Latin America. China could even set up security and military allies with some African states if necessary. But regarding Latin America and Caribbean, US’s tolerance on China to expand partnership and economic interests within this region is one thing, the development of military and security ties is quite another.

Since 1990s, China has carried out partnership diplomacy and established partnership with 67 countries and 5 regional organizations at different level in various forms, which covers majority of states and areas all round the world. And the emerging “one belt and one road” strategy mainly targeted at establishing cooperative networks in Eurasia. The first step is to achieve interoperability, thus to promote the construction of economic zones and corridors.

Against this background, Latin America and Africa are not as important as Eurasia in China’s OBOR strategy. China-Latin America relation is less significance than China-Africa, when considering the fact of long distance, US’s great influence, weak economic ties, cultural differences and no land transportation.

Furthermore, as it is known the relationship between partner countries is weaker than military alliance, the establishment of diplomatic partnership indicates that China will not set up military alliance with Latin America countries. China-Brazil has just started their bilateral political ties; the political relationship with Cuba has limited effect and is not stable. Meanwhile, Chinese culture has little influence in Latin America and this phenomenon is unlikely to change in the short run. 

Additionally, Chinese culture with its core value of “courtesy” has pay great significance to friendship. As it is known, the relationship between China and Africa lasts for more than half century, while the economic ties between China and Latin America has only developed in these two decades. The ties of old friends and new friends are different, while the one that experienced hardship together and the one that mainly relies on economic relationship are different as well.

To sum up, China-Latin America relation has potentials in their economic interactions, mainly investment and trade. Since the relationship between China and Latin America focuses on economic ties, generally it should make decisions according to economic logic and pay attention to risk control. It implies that China’s investment in Latin America can be low profit, zero profit even small, but should not result in big sacrifice. Thus, Latin America strategy under OBOR can be summarized as follows:

To identify priority partner countries. CELAC has 33 member states. China neither has the capability to develop deep investment and trade relations with each member state, nor has the responsibility to do so. It can only select economic cooperation (mainly refers to investment) with key countries based on its own national interests (refer to economic interests and siding with other interests). Governance capability, economic development level, legal system in Latin American countries is different. Some countries have weak economic structure, such as, highly dependence on single production or exportation, governmental revenue cannot afford national welfare. Generally, these kinds of countries with financial black hole are not considered as key cooperation partners. Based on economic logic, Uruguay, Trinidad and Tobago should be regarded as key investment destination. Considering national comprehensive strength, it should pay attention to Argentina. If one keeps an eye on political stability, economic potential and resource reservation, it may consider Bolivia, Ecuador and Chile as targeted countries.

To identify priority cooperation fileds. Some countries are cooperator on energy supply, such as Ecuador, Venezuela, and Trinidad and Tobago; some can cooperate on mining industry, for instance, Chile and Peru; some can work together on special economic zones, like Costa Rica and Nicaragua; some can be regional trade hub, such as Mexico and Chile. Beijing can also expand political relations with Brazil, mainly through BRICS and explore the establishment of free trade zone with Mexico.

To pay attention to risk control. No single Latin American country is indispensable economic partner to Beijing, when recognizing China as a super economy. It is not necessary for China to pay too much funds and resources in any certain state. Majority of China’s oversea investment come from large state-owned enterprises who has much better capability to resist political risks than their western counterparts. Even for them, it cannot fully avoid political risk in the continent. Thus, it is necessary to conduct regular risk assessment and set up “stop-loss point” to the investment and loans in the countries. Take Venezuela as an example, the investment and loans have accounted to more than US$ 70 billion. Considering the state’s political and economic situation, it is inappropriate to further increase the amount of investment and loans. In short, China should have guarded against bad debts, as Latin America countries have a higher possibility of debt default and some of them has already too many debts.

After China’s diplomatic transformation, CELAC still cannot play a significant role in China’s global diplomatic blueprint, even less important than Africa. China-Latin America engagement mainly focused on economic aspect and has potential in bilateral trade. Along with China’s rapid growing foreign investment, Latin American countries will emerge as new destinations. However, Chinese investments in Latin America mostly come from national funds, which are implemented by state-owned enterprises, SAFE and SWF. It implies that a significant proportion of the funds come from foreign exchange reserves, thus it can never be exaggerated to emphasize economic rationality and risk control. In order to improve financial efficiency, China may also found Sino-Latin America Development funds based on market oriented operation and to increasingly support private enterprises when they go to Latin America. 

Beijing is not expecting to make a fortune on China-Latin America economic and trade relations, it neither can suffer a big loss; it can tolerate short term financial costs, but cannot ignore long term economic balance; it can properly take political consideration into account, but cannot be political-driven. In short, OBOR in Latin America can be summarized as China has sufficient funds, but it has to be cautious and not capricious of the money flows.