How is China affecting the markets in which Latin American exports have made inroads in? Recent studies, as the one this article summarizes, are revealing the extent to which China is taking a bite out of Latin America export markets. As contended, both regions have different models of integrating into the world economy. Whereas countries in Latin America have a weaker government intervention in economic affairs, China is relying on a steady government hand to guide its way into global markets. In that context, markets have decided that China’s growth is partly fuelled by primary commodities and raw materials from Latin America, and that Chinese products are more attractive in world high technology markets. At some point markets may decide that Latin America’s exchange rates have become overvalued, a phenomenon that could drag the region into a new crisis.In 2004, Carlos Zúñiga, Nicaraguan CAFTA negotiator, was quoted in the Nicaraguan paper La Prensa as saying “China is an awakening monster that can eat us”. What Mr. Zuniga didn’t realize was that, figuratively anyway, China already was.
What goes up must come down. Right now China demand and global prices are up, and therefore so are exports and growth in Latin America and the Caribbean (LAC). But what if price increases in commodity exports cause exchange rates to become overvalued, make manufacturing exports more expensive, and deter investment away from manufacturing and services? What happens if prices, as the longer-range trends suggest, go down again?
Another concern has also arisen. How is China affecting the performance of global export markets that LAC has made inroads in? Indeed, there is a burgeoning amount of research looking at the extent to which China is taking a bite out of LAC’s export markets worldwide. A recent study I conducted with Roberto Porzecanski from Tufts University’s Global Development and Environment Institute, that was published by the University of California’s Center for Latin American Studies, suggests Latin America is already falling behind when it comes to penetrating high technology export markets.
Economists agree that higher value-added, technology-laden goods are more apt to boost standards of living in developing countries. Since 1980, some Latin American countries such as Mexico, Brazil, Colombia, Costa Rica, Argentina, and others, were able to enter global high-tech markets. Our study examines whether the share of LAC countries high technology exports are growing relative to China’s. When a high technology product exported by China, say computers, is increasing its share in world export markets and when an LAC export in that same sector is on the decline, we identify that LAC export sector as “under threat.”
We find that China has climbed the high technology ladder since 1980. In 1980 China was ranked 99th of all nations in terms of the percentage of global exports in high technology. By 2005 China climbed to second place in the world, first place if high technology exports from Hong Kong are included. We also find that close to 95 percent of all of LAC’s high technology exports are under some sort of “threat” from China, comprising almost 12 percent of total exports from LAC. This is most pronounced in Mexico and Costa Rica, where over 87 percent of all high technology exports are under threat and where such exports represent over 24 percent of total exports in both countries. Most of these trends become very accentuated during the period 2000 to 2005, when one could most make the case that China is “taking away the ladder” from LAC.
One reason for these changes is the fact that China and LAC have very different models of integrating into the world economy. Whereas LAC nations have largely followed the Washington Consensus by having very little government intervention in economic affairs, China is relying on a steady government hand to guide its way into global markets. First, China’s well known policy of holding its currency below market rates is of course at play. Second, whereas in Latin America credit for domestic firms has been at rates as high as 53 percent in countries like Brazil, credit for such activities in China is 2.7 percent. Third, alongside support of domestic firms is an innovation machine that dwarfs LAC’s. Since 1980 over 40,000 patents per year have been registered and over 70 percent of those patents have been registered by domestic firms. During the same period LAC has registered just over 20,000 patents and only 20 percent are domestics. China spends 1.21% of GDP on research and development, LAC nations on average spend only 0.57%. Fourth, China has pledged to help the private sector develop “national champions” in the automotive, electronic, and software sectors. The pillar of the Washington Consensus has been to let the market, however imperfect, decide which sectors will emerge as exporters from LAC.
Markets have decided that China’s growth is partly fuelled by primary commodities and raw materials from Latin America and that Chinese products are more attractive than LACs in world high technology markets. They may soon decide that LAC exchange rates become overvalued, a phenomenon that could only accentuate the situation into a crisis. It is time for LAC to put its future in its own hands and decide whether yet again it will let unfettered global markets “eat” its countries, or whether it will put policies in place to compete with the growing Chinese threat to its development.
Kevin P. Gallagher is a professor of international relations at Boston University, where he is also a research fellow at the Pardee Center for the Study of the Longer-range Future. Link to the full version of this study: