CHINA'S GROWING ECONOMIC RELATIONSHIP WITH LATIN

C O N F I D E N T I A L SECTION 01 OF 04 BEIJING 004253 SIPDIS E.O. 12958: DECL: 11/18/2018 TAGS: BR CN CS CU ECON ETRD MX PE PREL XM EINV SUBJECT: CHINA'S GROWING ECONOMIC RELATIONSHIP WITH LATIN AMERICA Classified By: Classified by Robert S. Forden for reasons 1.4 (b) and ( d) ¶1. (C) Summary. Chinese President Hu Jintao,s November 16-20 visit to Latin America, which includes stops in Peru for the APEC summit, Costa Rica, and Cuba, is intended to strengthen China,s rapidly growing economic relations with the region, according to Embassy contacts. To spur further trade growth, China is looking to ink Free Trade Agreements (FTAs) with Peru and Costa Rica, though these FTAs will likely be narrow in scope. Hu will use his stop in Costa Rica to emphasize China's commitment to the region and demonstrate the benefits of diplomatic ties with the mainland, sending a not so subtle signal to the remaining states that maintain formal relations with Taiwan. While Chinese investment in Latin America is growing, contacts highlighted a range of challenges, such as a disconnect between Chinese and Latin American investment priorities and the lack of cultural understanding among Chinese companies. Additionally, China has struggled to address trade frictions, such as anti-dumping suits and a lopsided trade balance with Mexico. End Summary. A Growing Economic Relationship -------------- ¶2. (C) Contacts here described China-Latin American relations as being at an all-time high and credit the rapidly growing economic relationship with playing a large role. (Note. Total China-Latin America trade in the first eight months of 2008 reached $95.6 billion, according to Chinese Customs Statistics, up 49% yoy. End note.) Peking University Latin America specialist Dong Jingsheng said that a common focus on economic development and shared values as developing world partners underlie rapidly growing trade and investment ties. In particular, China,s need for raw materials complements Latin America,s need for Chinese manufactured goods and provides a basis for continued growth. Wu Hongying, Director of the Chinese Institute of Contemporary International Relations, (CICIR) Division of Latin American Studies, said that the economic component of China-Latin America relations was the "most developed" and had the most trust. China over the past few years has benefited from the willingness of Latin American countries to open up their markets. ¶3. (C) Several Latin American contacts described China as an economic opportunity with tremendous growth potential. Peru's Economic Counselor Jorge Chian told econoff that China's "going global" policy provided an opportunity for Peru to attract investment in the mining sector and utilize local resources to finish products, helping Peru export more value added goods. Costa Rica's Commercial Counselor Carlos Martinez said Costa Rica was too small to expect significant Chinese interest, but hoped China would view Costa Rica as a platform to produce goods in Latin America destined for the United States in order to take advantage of the duty free treatment afforded such imports under the United States-Central America/Dominican Republic Free Trade Agreement (CAFTA-DR). Martinez added that Costa Rica hoped to also take advantage of its position as the only Central American country with formal diplomatic relations with China to present itself as the best place in the region for China to do business. ¶4. (C) Chinese scholars, however, were quick to point out that economic ties with Latin America were growing from a small base and had limited potential. (Note. Latin America in the first eight months of 2008 accounted for only 2.9% of China,s global trade, according to China,s trade statistics. End Note.) Peking University,s Dong said that neither China nor Latin America see the other as a top trade and investment partner and both have other higher priorities. CICIR's Wu also emphasized that geographical distance and limited cultural interaction hinder growth potential. As an example, she said that while oil imports from Venezuela were increasing, Venezuela was unlikely to become a key long-term supplier because of its distance and the fact its oil was heavy crude, which China at present does not have the capacity to process. Securing Venezuelan oil imports helped China to diversify its energy BEIJING 00004253 002 OF 004 sources, but China viewed Venezuelan oil imports primarily as a "supplement". FTAs (Light) Key to China,s Agenda -------------- ¶5. (C) According to the China Academy of Social Science (CASS) Economic Division Chief and Latin America specialist Wu Guoping, FTAs are a key tool for China to increase trade with Latin America. While China saw much potential in signing FTAs with Latin American countries, progress was often determined by the willingness of Latin American leaders to enter into negotiations with China. As examples, Wu said Chile,s president was eager to sign an FTA with China, providing the impetus behind the 2005 China-Chile FTA, and now Peruvian and Costa Rican presidents are also making an FTA with China a priority. Wu predicted that Peru and Costa Rica would sign a products FTA agreement before looking at agreements in the service and investment sectors, allowing both sides to tackle easier issues first. Asked whether China would sign additional FTAs with other Latin American countries, Wu was less optimistic, noting that many other Latin American countries, such as Brazil and Argentina, competed with China in many sectors, making FTAs more difficult. ¶6. (C) Chian said Hu's visit to Peru would include a bilateral summit prior to the APEC summit where both sides hoped to sign an FTA. However, Peruvian private sector concerns in some areas, such as textiles and shoes, were sticking points in negotiations. Chian also expected both countries to also announce several agreements, such as on trade in citrus fruit and phytosanitary standards. Martinez said Hu and Costa Rican President Arias would likely announce the beginning of FTA negotiations and he added that momentum on the Costa Rican side was strong, given that Arias was in the final year of his term and an FTA with China was a key goal. (Note. According to November 18 press reports, China and Costa Rica announced that they would begin FTA negotiations. End Note.) Martinez agreed, however, that a China-Costa Rica FTA would probably be limited in scope and only include unspecified sectors that were easier to address. Hu,s visit -------------- ¶7. (C) Speculating on China,s goals for the visit, Martinez said that it is "no secret" that China sees Costa Rica as a "hub" for Central America and China likely judged a high-level visit to Costa Rica would demonstrate the benefits of formal diplomatic ties to other Central American countries. CASS's Wu agreed, noting the significance of Hu Jintao visiting a Central American country for the first time, a region where Taiwan's presidents have made numerous visits. Costa Rica provided an economic bridge to Central America and strong trade ties with Costa Rica could allow other Central American countries better access to Chinese goods. According to Wu, China hoped growing trade would help smooth the way for closer political ties, but in the end, the decision to sever formal relations with Taiwan came down to internal political calculations that China had little control over. (Note. According to press reports, China and Costa Rica signed 11 agreements, including on trade, finance, and energy. These agreements include a Chinese commitment to build a stadium in Costa Rica and to use its foreign reserves to buy $300 billion in Costa Rican bonds. End Note.). ¶8. (C) Regarding Hu,s stop in Cuba, CASS's Wu said Hu would probably seek to introduce China's economic situation, including its transition from a socialist to market economy, but would refrain from offering suggestions that could be viewed as interfering in Cuba's affairs. According to Jiang Shixue, Deputy Director of CASS's Institute of Latin America Studies, it would be difficult to apply China's economic model to Cuba and he expected Raul Castro to be much like his brother in leading the country. However, he thought a gradual economic opening to the world was the best way forward for Cuba. Investment Ties Face Obstacles -------------- ¶9. (C) Several Chinese scholars described Latin America as BEIJING 00004253 003 OF 004 a challenging investment environment. According to CASS's Wu, Chinese companies were not familiar with local laws and did not know how to handle issues such as strikes by local workers. The difficult conditions for Chinese companies were exacerbated in some countries by poor security environments and the potential for expropriation. CICIR's Wu agreed that many Chinese businesses were reluctant to expand their presence in Latin America, noting that high hopes for a jump in investment following Hu's 2004 visit to Latin America failed to materialize. While the Chinese government encouraged companies to do business in Latin America, few companies followed through because they "were not mature" and did not fully understand Latin American laws and constitution. ¶10. (C) CASS's Wu said there was also a disconnect between Chinese and Latin American investment priorities. Chinese companies preferred projects, such as mining, that would yield quick profits, but many Latin American countries preferred longer term investment in roads, railroads, and ports. This was evident in Peru, where, according to Chian, Peru was offering BOT (build, operate and transfer) investment agreements, but China only wanted to "build", making China an unlikely candidate for investment in Peruvian railroad and infrastructure. Mexico's economic officer Jose Alberto Limas said that some small Chinese companies had asked about investing in Mexico but importing all the necessary workers from China, a non-starter from the Mexican point of view. ¶11. (C) Nonetheless, China,s investment in Latin America was growing and Latin American countries were increasingly looking to China as an investment source. Limas said that the greatest potential in Sino-Mexican economic ties lies in the area of investment. Mexico and China signed a bilateral investment treaty in July 2007, which he expected to be ratified in the near future and would provide a more reliable legal framework for each side's companies to invest in the other. As in the case with Costa Rica, Mexico could theoretically serve as a convenient base from which Chinese-invested firms could obtain duty free access to the North American market under the NAFTA. CASS's Wu also said bilateral investment treaties were a useful way to overcome investment barriers and he cited China,s treaty with Chile and subsequent joint ventures in the mining sector as an example of progress in this area. ¶12. (C) Peru's Chian pointed to investment from China as a major potential growth area, noting that Chinese investment in mining, particular copper, has boomed in the last year and a half. Separately, Martinez said Costa Rica was looking to China for help in exporting high-tech goods, such as in the pharmaceutical and business service sectors. There was also potential for investment in infrastructure, such as the construction of a railway linking the Caribbean to the Pacific. Managing Trade Frictions -------------- ¶13. (C) Despite China's almost fully balanced trade relationship with Latin America, many Latin America countries produce similar products and are therefore economic competitors. CICIR's Wu described trade frictions with Latin American countries as a "major headache", noting that Brazil, Argentina, and Mexico have all brought anti-dumping and other unfair trade suits against China in the WTO. CASS's Jiang said that Latin American countries were abusing anti-dumping mechanisms, forcing China to use legal mechanisms to fight back. ¶14. (C) According to CICIR's Wu, trade frictions with Mexico were the most troublesome due in part to the dispute over the size of Mexico,s trade deficit. (Note. Mexico and China disagree over the size of the trade imbalance. According to Chinese 2007 figures, Mexico imported $11.7 billion and exported $3.3 billion, but according to Mexican figures, Mexico imported $30 billion and exported only $2 billion. According to Limas, this was due to triangulation with the U.S. Chinese figures do not include exports to the U.S. that ultimately are sold in Mexico. End Note.) Wu said China and Mexico are using their bilateral commission to address the lopsided trade flows, and China is looking to assist Mexico in cotton and rice production to soften the trade imbalance. At the same time, Mexico is also seeking BEIJING 00004253 004 OF 004 to increase exports to China in areas such as minerals, agriculture, and specialty goods like Corona beer, but Mexican companies have been slow to take advantage of opportunities in China. ¶15. (C) Limas said Mexico ran a large trade deficit with China because both countries make essentially the same things, but China makes them more cheaply and has the advantage of economies of scale. Mexico also is not seeking to be a raw materials exporter like Brazil and therefore, the large trade deficit was something Mexico "would have to live with". Furthermore, Mexico and China signed an agreement earlier this year under which Mexico will have to reduce all its non-WTO compliant antidumping duties on Chinese goods over the next three years, a step likely to exacerbate the official trade imbalance, even as it reduces Mexican imports of illegal contraband goods. ¶16. (C) Peru in 2007 maintained a surplus of about $5 billion with China, due largely to mineral exports such as copper that have surged in the last couple years, but Chian emphasized that the trade relationship was not "optimal" because exports were highly concentrated in minerals. Peru was seeking greater balance in its exports, and agricultural products, fish meal, and wood from the Peruvian jungle all provided opportunities to balance trade. China-Latin America Regional Forum Unlikely -------------- ¶17. (C) CASS's Jiang said there were competing views among scholars whether China should have its own regional forum with Latin America where China could showcase its political and economic ties to the region. Some scholars supported the idea saying such a forum would allow China to raise its profile in the region. Jiang however opposed such a forum because, unlike the African Union, there is no Latin American regional organization that represents the whole of Latin American and the creation of such as organization would feed the "China Threat Theory" in the United States. CASS,s Wu added that there were already many countries that had forums with Latin America, such as the US, the EU, and Spain and Portugal and China would be best served by building formal and informal relations with existing regional organizations such as the Interamerican Development Bank (IADB) and the Organization of American States. China's recent membership in the IADB was an opportunity to demonstrate its commitment to the region and provided an additional avenue for China to promote economic engagement. ¶18. (C) Comment. China trade with Latin America, which will probably reach about $150 billion for 2008 and is rapidly expanding, is still tiny when compared with US trade with the region. A relationship characterized by large Latin American natural resource exports to China, particularly from Southern American and Southern Cone countries, and large consumer good imports from China would seem to be a natural fit. However, it remains to be seen whether China can adapt to the Latin American investment environment that so far is limiting its ability to realize its full potential as a natural resource importer from Latin America. End Comment. RANDT