Statement of

Robert Evan Ellis, Ph.D

Professor, University of Miami

June 11, 2008

Before the House Committee on Foreign Affairs,

Subcommittee on the Western Hemisphere

One Hundred Tenth Congress

Second Session

Mr. Chairman, I am honored by the opportunity to testify today about the activities of the people’s republic of China in Latin America. My thinking has been greatly shaped by government officials, businessmen, and others in the region who I have had the fortune to speak with while researching a book on this topic. I would like to emphasize that the testimony I offer today is my personal opinion, based on that research and those interactions.

I had the fortune to be in Chile in November 2004, when Chinese president Hu Jintao traveled to the region in conjunction with the Asia-Pacific economic cooperation (APEC) summit in Santiago. I was particularly impressed by the enthusiasm with which Chinese initiatives were received, in a region whose foreign direct investment had fallen to a record low of $36 billion in the previous year, compounded by a perception, whether fair or not, that U.S. policymakers were not giving sufficient priority to our neighbors to the south.

The PRC’s growing relationships with Latin America may be understood in terms of economic and strategic imperatives arising from its emergence as a global power, including a worldwide search for new markets and reliable sources of supply, plus using its increasing international weight in its longstanding efforts to isolate Taiwan.

The principal challenge for the united states is to be a constructive partner to the region, as Latin America’s needs and interests evolve, and to deal with undesirable side effects of the new China ties, such as the collapse of established economic sectors and the expansion of new ones, as well as new patterns of organized crime, and the potential for US-Chinese tension due to the tumultuous way that events in the region sometimes unfold.

What is the PRC buying from the region? Great quantities of goods, but not always what the businessmen of Latin America hope to sell it.

First, the growing Chinese “middle class”…currently between 15 and 260 million people, depending on where you set the barrier, wishes to use its affluence to sample western brand-name goods. The entry of Macdonalds, Starbucks, and coca cola are well known. Latin American beneficiaries include Chilean wines, premium Mexican beers represented by Grupo FEMSA and Modelo, and Bimbo brand bakery goods. In this vein, the media outlet Televisa reportedly has plans to translate Mexican telenovelas into mandarin for broadcast in China.

Second, because so much of the new Chinese economy is based on manufacturing for export, the PRC is interested in Latin America’s primary products as one global source among many to fuel its economic base. Examples include copper and potassium nitrate from Chile, iron and other mining products from Brazil, Peru, and Bolivia, and, of course, petroleum from Venezuela, Ecuador, Brazil, and Canada.

Because the PRC has a relative shortage of cropland and water, it also buys ever greater quantities of bulk foodstuffs from Latin America, including soy products from Brazil and Argentina, as well as fishmeal from Peru and Chile. Latin America has been less successful, however, in exporting more labor intensive crops such as bananas and coffee, which are at a disadvantage against closer, cheaper suppliers.

While few of the hoped-for PRC investments in social and infrastructure projects in the region have materialized, Chinese companies have invested significantly in primary product sectors to attain secure sources of supply.

Notable examples include the $500 million agreement between China Minmetals and the Chilean national mining company CODELCO for the advance purchase of copper, joint ventures between the Chinese firm Baosteel and the Brazilian mining giant CVRD, plus the purchases of the Rio Blanco copper mine in Piura, and the Toromocho mine in Junin, involving a collective investment of almost $3 billion. They also include ongoing interest by Shandong Luneng in developing some part of the el Mutún iron fields in Bolivia. The Chinese companies CNPC and Petrochina recently invested $1.42 billion to acquire assets in the petroleum sector of Ecuador, China has also provided $4 billion in loans to Venezuela through the “heavy investment fund” with the possibility of providing up to $18 billion through this vehicle.

Latin America is also of increasing interest to the PRC as a market for its goods…particularly in light of slow economic growth by its traditional customers, such as the US, the EU, and Japan.

Inexpensive Chinese clothing, toys, and footwear, both legitimate and contraband, are increasingly prevalent in the region. Although it receives less attention, there is also a growing infrastructure in both the formal and informal sectors in the region for selling these goods. Even in small towns such as Portoviejo, Ecuador, as one of its residents notes, “you find a Chinese shop every 100 meters.”

The PRC is also moving up the value-added ladder. As it seeks to gain experience with its own national brand appliances, computers, motorcycles, and cars, the middle-income nature of Latin America makes it a very attractive market. In places such as Santiago, Lima, and Bogota, the ability to purchase a Chinese motorcycle for $500, or a Chinese automobile for $6000, makes having motorized transportation possible for an entire new class of Latin American consumers. For example, in November 2007 Mexico’s Elektra and the Chinese automaker first automobile works announced a project to sell and finance FAW cars through Elektra’s retail outlets, basically in the same way that those outlets today sell and finance washing machines and toasters.

With respect to efforts by the PRC to change the position of Latin American nations which diplomatically recognize Taiwan, China generally relies on two levers: aid projects, and implied access to its consumer markets.

As demonstrated by the PRC’s construction of a $40 million sports stadium in Grenada in 2006, modest projects can carry significant weight because of the small populations and economies of the countries of central America and the Caribbean.

By contrast to aid, market access is a subtle lever, which is as much a matter of hopes as it is of promises. Costa Rica’s recognition of the PRC in June 2007, for example, was driven in part by the desire of president arias to allow his country to more fully engage with the PRC as one of the largest, most dynamic economies in the world.

On the other hand, for countries such as Nicaragua and Honduras which do not have the capability to export significant quantities of primary products to China, the benefits of current aid and development projects from Taiwan may still outweigh uncertain future benefits from the PRC.

Paraguay will be an important test case of the balance between current benefits from Taiwan, versus hopes of exports to the PRC. Campaign statements by recently-elected president Fernando Lugo indicate an interest in recognizing the PRC. His coalition, however, is fragile and the Taiwanese have strong financial and personal bonds with key segments of Paraguayan society. Indeed, recognizing the importance of the power transition in Paraguay, Taiwan’s president Ma Ying-Jeou is also planning to visit the country in august, presumably to shore up the relationship.

Turning to energy security, declining oil production in Mexico--currently the second largest supplier to the US in the region after Canada, makes China’s involvement in the petroleum sectors of Venezuela and Ecuador somewhat more important than it might otherwise be.

The PdVSA strategic plan includes 800,000 barrels per day of new oil shipments to the PRC by 2012. To meet its new commitments to the PRC, while fulfilling existing contracts with the US and other customers, PdVSA asserts that it will raise production to 5.1 billion barrels per day. Such plans, however, conflict with industry data that shows PdVSA production down 33% since 2003 to less than half of this amount.

If PdVSA cannot fulfill its obligations to both the US and to the PRC, the combination of politics and the increasing Venezuelan dependence on Chinese companies and capital in the oil sector will weigh heavily in determining to whom that oil goes.

Beyond Venezuela. The PRC also controls a significant portion of petroleum production in Ecuador through the Andes Petroleum consortium and Petroriental. It also has a stake in natural gas production in Peru the through Sapet and Chinese interest in Pluspetrol Norte. Peru currently has plans for a liquid natural gas export terminal, which would allow it, for the first time, to ship part of its new gas resources out of the region to destinations in Asia.

As we look further at the PRC relationships with Venezuela, Bolivia, and Ecuador, although the PRC doubtlessly values the resources of these countries, and the enthusiasm with which their governments have embraced a relationship, I also believe that China has very real concerns about these regimes.

Given that the PRC is interested in reliable access to primary products, the Chinese are probably not pleased by the Ecuadorian government’s attempt to force Chinese companies represented by Andes Petroleum to renegotiate its oil holdings in the country into a service contract, just two years after it spent $1.42 billion to acquire these assets.

In Venezuela, the financial, administrative, and technical difficulties of PdVSA have undercut the ability of the PRC to exploit the country’s petroleum resources. Moreover, Chinese oil companies in Venezuela have often been treated as badly as their western counterparts. In August 2006, for example, the Venezuelan government backed out of a commitment to supply ormulsion to the PRC after the Chinese had invested $350 million in building a plant to use the fuel.

In Bolivia, although Chinese companies such as Huanji and Shengli oil expressed interest in investing in the country during the administrations of Carlos Mesa and Eduardo Rodriguez, such interest appears to have been suspended due to the climate of political and contractual uncertainty in the country, including the may 2006 nationalization of the Bolivian hydrocarbons sector and the may 2008 actions against Chaco, CHLB, Transredes, and Petroandina.

Like their western counterparts, Chinese companies are experiencing problems not only with the populist governments of Andean nations, but also with mobilized social groups. In November 2006 in Ecuador, oilfields controlled by Andes Petroleum in Tarapoa were seized by local activists, who took the oil workers hostage and shut down production. Similarly in 2007, a conflict between Petroriental and local interests fueled violent confrontations with police that ultimately forced president Rafael Correa to declare a state of emergency.

Turning to security issues, it is important to distinguish between possibilities raised by the Chinese presence in Latin America, versus events that are actually unfolding.

The PRC is gradually increasing military-to-military contacts and military equipment sales with countries of the region, yet the direct military impact of these developments is of less concern than the relationships that are being built.

Recent PRC arms transactions in the region include Venezuela’s purchase of JYL-1 mobile air defense radars, as well as current negotiations to buy two squadrons of Chinese H-8 aircraft…relatively old, low-performance trainers, but with the capacity to be equipped with air-to-air or air-to-ground munitions.

Modest quantities of PRC military goods are also going to Bolivia, including its lease of two MA-60 cargo and passenger aircraft, as well as equipment donations, such as 43 SUVs and busses delivered in August 2007, plus prior gifts of 25-person assault craft, infantry and artillery munitions, night vision goggles, and Kevlar helmets.

As we in the US focus on how narcotrafficking and other forms of transnational crime impact our national security, it is also relevant that Latin America’s expanding commercial interactions with the region are also leading to new interactions in organized crime. In 2006 in Bolivia, the Chinese group “Red Dragon,” was implicated in a high-profile visa trafficking case involving a number of current and former legislators and government officials.

With increasing frequency, law enforcement authorities throughout the region uncover the activities of Chinese human trafficking networks, who use the region as a transit zone to smuggle immigrants into the United States.

As the flow of goods, people and money between China and Latin America expand, their respective criminal organizations will both come into conflict and find new ways to work together.

With respect to possibilities for Sino-US collaboration in Latin America, I would like to make three observations.

First, the US and the PRC do directly or indirectly compete in Latin America for the markets and resources of the region. This should not surprise anyone, nor prevent us from working together.

Second, because the PRC generally does not condition its aid and commerce on its partners’ adherence to democratic practices and respect for human rights, the option of doing business with the PRC undercuts the ability of the US to apply pressure on these issues.

Third, such differences notwithstanding, the united states and the PRC have a range of shared interests and objectives in Latin America that can serve as the basis for cooperation, to the benefit of the region. These include working together to strengthen Latin American government and commercial institutions, and to help the region to maintain and modernize its infrastructure in order to facilitate efficient and reliable trade.

In addition, law enforcement may be a win-win area where China and the US can collaborate in exchanging data and personnel so that ethnic and language barriers do not create sanctuaries for Chinese criminal elements in Latin America, or vice versa.

Finally, the US and the PRC share a mutual interest in developing mechanisms for avoiding misunderstandings where the pursuits of the two nations could come into conflict. To this extent, I believe that the consultation process established during the visit by Assistant Secretary of State Shannon to China in April 2006 takes us in the right direction.

It is useful to recall that PRC is not the first country to engage Latin America by seeking to purchase its primary products and sell it high value added manufactured goods. Although China’s relationship with the region is an uncomfortable change to the historical pattern, it does create opportunities for us to build a new kind of constructive partnership, based on the imperatives and opportunities of globalization, bringing greater prosperity and equality to a region that is ultimately tied to the United States by economic relationships, by geography, and by the heritage of many of those living in this country.