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.