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What China’s Rebalancing Means for Latin America

By Ding Ding and Rui Mano

(Español)

The economic linkages between China and Latin America have grown dramatically over the last 20 years. On the trade front, China has become a key partner for the region, increasingly importing commodities and exporting manufactured goods. On the investment front, China has emerged as a source of capital for Latin America, with Chinese investment expanding rapidly from natural resources to other industries.  

The drivers of China’s economic growth are shifting, however, from investment-led to consumption-led growth, from low-tech to higher-tech industries, and from manufacturing to services.

How will this ‘rebalancing’ affect the region? We explore the impact on trade and investment.

Mixed impact on trade

Overall, we expect China’s rebalancing to be positive for the region, but the impact will be different for commodity versus non-commodity exporters.

Less dependent on state-led infrastructure investment than it was a decade ago, China’s demand for materials has stabilized. Annual growth of Latin American materials exports to China is at the lowest it has ever been (though still positive).

Once China’s economy rebalances, we expect a median permanent fall in the overall level of GDP of 0.1 percent in commodities exporters. Countries that export oil or minerals such as metals will fare worse. In Bolivia, Suriname and Venezuela, for instance, GDP could fall by more than 1 percentage points, as a result of the impact on the extractive sector.

Non-commodity exporters, on the other hand, are likely to benefit. China’s move to higher-tech manufacturing opens the door for Mexico, Argentina, Uruguay, and Central American countries—which currently have some comparative advantage in goods-producing sectors such as electronics, chemicals, and textiles—to fill the gap created by China’s retreat from goods markets. Additional opportunities lie in the exports of services to China, particularly tourism, transportation, and communications.

Competitors in other regions will also vie for the same opportunities afforded by China’s rebalancing. These include emerging markets, such as Turkey, Malaysia, Vietnam, or Poland, whose exports increasingly overlap with those of Latin American countries. The most notable rising powerhouse is India, which could become a major competitor for the region—it is already the second largest competitor for Brazil and Colombia, and the third for Chile and Peru.        

Surging investment

Chinese investment in Latin America has increased substantially, from 12 percent in 2014 as a share of China’s total overseas investment stock, to over 21 percent just three years later. As it ramped-up, the composition of Chinese investment changed, shifting from fossil fuels, metals and agriculture, to manufacturing and services, such as utilities, transport, financial services, and telecommunications.

What is driving this change? As China rebalances and its domestic investment starts to peak, Chinese companies are expanding abroad, especially in sectors where domestic excess capacity has accumulated after years of overinvestment. These are often the sectors where Chinese companies are more competitive in global markets.

Consider the electricity sector as an example. The Chinese government invested heavily in electricity generation in 2008. By mid-2010s, however, the market was saturated, and the country’s large electricity companies had to look abroad for investment opportunities. At the same time, countries in Latin America were struggling to meet growing demand for energy—Chinese investment helped fill the gap.

Electricity generation and distribution became a major investment target for China. According to the latest estimation by RED ALC-China (the Latin America and Caribbean Network on China), since 2000, China’s three major electricity companies have invested in 18 projects in the region, totaling $34 billion.

Making the most of opportunities

The pandemic exposed the vulnerabilities of globalized but undiversified supply chains. Companies (including those in China) may consider ways of building resilient and more flexible supply chains, including by shifting production back home or somewhere closer. This regionalization might benefit countries that are less dependent on foreign investment as well as those better positioned to fill the gap in international trade left by China. COVID-19 may also lead to a reallocation of resources towards new-growth sectors, paving the way for countries in Latin America to become competitive in new markets.

To reap the benefits of global trade integration and foreign direct investment, Latin American countries should focus on removing impediments to growth. A stable macroeconomic environment, favorable growth outlook, and strong institutional frameworks are critical. To strengthen the region’s competitiveness in global value chains, countries should invest in infrastructure, improve governance, increase regional integration (including through lower trade barriers) and produce higher-quality products.

Countries that are most agile stand to reap the benefits and will best navigate the challenges of China’s rebalancing.