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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
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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
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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