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The Asian giants and Latin America

Jorge Heine

Far from hampering growth, the rise of China and India has had a largely positive impact on Latin America and the Caribbean. And, there is great scope for expanding trade between India and countries of the region.

THE RECENT visit by Prime Minister Manmohan Singh to Brazil has brought Indo-Latin American relations into focus. The visit was the first to South America by an Indian Prime Minister in 38 years. Mr. Singh took along the largest business delegation to accompany a Prime Minister on a visit abroad. In turn, the impact of the rise of the two Asian giants, China and India, on Latin America and the Caribbean (LAC) is becoming increasingly relevant for the region's growth and development.

This, of course, is hardly limited to the LAC region. In the United States, concern over the considerable trade deficit with China ($200 billion in 2005, double the amount it was in 2002) has been an issue, as has, albeit much less so, the matter of job outsourcing to India. And although China has been extremely active in Latin America over the past 15 years or so, it is only over the past couple of years that India has started to seriously engage the region. Indian business, in the past focussed almost exclusively on the domestic market and on North America and Western Europe, is only now coming to realise the opportunities it has been missing out on. That Chinese trade with LAC reached $40 billion in 2005, whereas India's trade was only $6 billion (although growing fast) speaks for itself. In LAC, on the other hand, some have expressed concern about the effect on local jobs and industry of greater trade with the giants.

Two recent studies address the issue head on: "Latin America and the Caribbean's Response to the Growth of China and India" by the World Bank, and "China and India and its Trade Relations with Latin America and the Caribbean: Opportunities and Challenges," by the U.N.'s Economic Commission for Latin America and the Caribbean.

They make for fascinating reading, among other things, because they dispel a number of myths about the supposed displacement of jobs across the region caused by "unfair" competition from China and India.

There is little doubt China and India are emerging as forces to reckon with. Their merchandise exports reached 8.2 per cent of total world exports in 2005, almost double the 4.5 per cent in 2000. As the World Bank study points out, "today China and India's share of world exports is 50 per cent larger than LAC's share, whereas in 1990 the reverse was true. In the last 1980s, LAC had a trade-to-GDP ratio roughly equal to the trade-to-GDP ratio of China, and two times larger than the trade-to-GDP ratio of India. By 2004, the trade-to-GDP ratio of China was 35 percent larger than the trade-to-GDP ratio of LAC, and India's trade-to-GDP ratio was only 14 percent smaller than LAC's." A number of additional indicators in trade in services, FDI, and innovation show a similar upsurge of Chinese and Indian numbers.

The real issue, obviously, is whether trade and investment flows should be seen as a zero-sum game, or, under the right conditions, as a win-win situation. The most interesting thing about these studies is their finding that, "since the mid-nineties there has been a rising correlation of business cycles between LAC and the two Asian economies."

In other words, far from hampering LAC's growth, the rise of China and India has had a largely positive impact on it. The current boom that is taking place in the region, poised for its fourth consecutive year of growth, and with the world's best performing stock markets in 2006 — with a 24 per cent yield versus a world wide average of 12 per cent — is partly related to the upswing in commodity prices. South America is one of the richest regions in the world in terms of natural resources (only the Middle East and North Africa have a higher, largely oil-based, natural resource index — the standard way to measure this comparative advantage — than LAC) and both China and India, one of them "the world's factory," and the other "the world's service centre," are gobbling up mineral and agricultural resources as if there is no tomorrow.

Over the past 15 years their share of the world consumption of many commodities has doubled, reaching 25 per cent in some cases. In 2004 (the figures are higher now), China imported some $5 billion in soya, 60 per cent of its total imports, from Argentina and Brazil, $3.4 billion in copper, 25 per cent of its world imports, mostly from Chile and Peru, and $4 billion, 19 per cent of world imports, in iron from a number of South American countries. For countries such as Chile, Peru, and Argentina, exports to China represent between 10 and 11 per cent of total exports, in some of these cases up from less than one per cent in 1990.

Mexico and Central America, with a somewhat different export profile, more oriented towards manufacturing, are in a different situation, and here the competition with Chinese and Indian products is quite real. In fact, China recently replaced Mexico as the main exporting country to the United States. On the other hand, Chinese investment in Mexico is huge, reaching $28 billion in 2004. Indian companies are also moving into Latin America with great verve. Jindal Steel won the bid for the Bolivian mine El Mutún, one of the largest iron ore deposits in the Americas, in May 2006, committing an investment of $2.3 billion, in a deal still to be finalised. The Essar Group is building a $1.2 billion steel plant in Trinidad and Tobago. Tata Motors has started a joint venture with Marcopolo, Brazil's largest bus manufacturers, and Bajaj Auto has announced the opening of a factory in Argentina.

In short, the complementarity of the Chinese and Indian economies with the South American economies is quite straightforward, with the latter producing many of the commodities and raw materials the former need to sustain their 8-10 per cent growth rates, and South American markets providing a readymade outlet for Chinese and Indian manufactured goods, as well as for services and IT products. In the case of Mexico and Central America, the challenge is to tap into the FDI and innovation possibilities the two giants offer to spur their own growth.

In both cases, however, the policy implications are quite clear. The steady growth at high rates of the two most populated countries on Earth over the past quarter of a century has given a considerable impetus to the economies of quite a number of LAC countries, especially since 1990, in terms of actual export volumes and international commodity prices.

The all-time high price of copper, at more than $3 a pound for much of this year (three times what it was a couple of years ago) is only one example of this; China's and India's contribution to the growth in world demand for the "red gold" has been 25 per cent for 1990-2004, and possibly higher now. At the same time, the evidence indicates that we are only scratching the surface in terms of business opportunities.

Thus, whereas China imports a larger share of commodities from LAC than from ASEAN (13.3 per cent versus 9 per cent), the reverse is true for manufactured products based on natural resources imported from ASEAN (15.6 versus 7.8 per cent), which would seem to indicate considerable room for growth for more value-added products from LAC. Interestingly enough, India sources a larger share of its commodities from ASEAN (16.1 per cent) than from LAC (6.8 per cent), and the gap between manufactured products based on natural resources imported from ASEAN (14.5 per cent) and those from LAC (3.9 per cent) is larger than in the case of China. Again, this would seem to offer much room for expanded Indo-LAC trade.

The way forward

Which is the way forward? To reach the $10 billion in Indo-LAC trade that some have identified as a goal for 2008, and which could grow quite beyond that, two things would seem to be paramount.

1) To continue to deepen and expand trade agreements between India and LAC countries it is critical to remove extant trade barriers and facilitate the flow of goods and services. The ones signed between India and MERCOSUR in 2005 and between India and Chile in 2006 are a first step in that direction (a PTA with Peru is under consideration).

2) For private firms from all countries involved, the key would seem to lie in getting into the supply chains of production and distribution that cater to the respective markets, thus making the most of their comparative advantage. The move toward organised retail in India, to give only one example, offers enormous opportunities to LAC producers of agro-industrial goods, as do the Special Economic Zones (SEZ) that are coming up, whereas the Spanish-language market for business process outsourcing (BPO) and knowledge process outsourcing (KPO) remains to be tapped by Indian firms that could set up shop in LAC countries. Joint ventures with Latin American pharma companies is another obvious step for the Indian industry to respond to the growing demand for affordable products in LAC.

(Jorge Heine is the Ambassador of Chile to India.)

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