“The New Challenge: China and the Western Hemisphere”

Testimony before the House Committee on Foreign Affairs,

Subcommittee on the Western Hemisphere

Daniel P. Erikson

Senior Associate, U.S. Policy

Director, Caribbean Programs

Inter-American Dialogue

June 11, 2008

It is an honor for me to testify here today about China’s evolving role in hemispheric affairs and I thank the chair and members of this distinguished committee for the opportunity, as well as my fellow panelists for sharing their views. The Inter-American Dialogue has been closely following China’s engagement with the Western Hemisphere over the past several years with an emphasis on the political, economic, and security aspects of the relationship. In addition, we have actively sought to bring together top scholars and analysts from the U.S., China, and Latin America to explore the current dynamics of the relationship and identify important future trends.

Today, there is little doubt that the People’s Republic of China has moved from the periphery to become a central actor in hemispheric affairs. This development should not be viewed in a vacuum but rather as part of a broader shift in Latin America’s global relations as the region seeks to complement its strong partnerships with the United States and the European Union with new ties to Asia, the Middle East, and Africa. Still, while many Latin American and Caribbean countries enjoy long established political and economic ties with Beijing, the scope of change since 2001 has been striking. By almost every conceivable metric, including presidential visits and high level diplomacy, the pace of trade and investment, and the level of cultural exchange, China’s relations with Latin America have never been so robust. Moreover, this deepening relationship has occurred against the backdrop of three inter-related trends. First, China’s stunning rate of economic growth has driven its search for new markets as well as endowed it with greater resources to cultivate political alliances throughout the world, including Latin America. Second, Latin American and Caribbean economies are seeking to diversify their trade partners and take advantage of the economic opportunities presented by China. Third, Latin America remains an important battle ground for diplomatic recognition between China and Taiwan as Beijing attempts to pry loose Taipei’s remaining allies in the region.

President Hu Jintao’s successful visit to Latin America in November 2004, during and after the Asia-Pacific Economic Cooperation (APEC) summit, marked the moment when China’s expansion into the Western Hemisphere drew widespread notice in the United States. After the summit in Chile, President Hu traveled to Argentina, Brazil, and Cuba, and he subsequently returned the following year to visit Canada and Mexico. This spate of high level diplomacy between China and the Western Hemisphere prompted a flurry of articles and policy reports from U.S.-based institutions that sought to explain increased Chinese activity on America’s southern flank. Some observers fretted that the combination of an expanding China, the rise of the political left in Latin America, and the declining U.S. image and influence in the region would create a potentially negative situation for U.S. interests in region. A preliminary assessment of the past three-and-a-half years indicates that the more alarmist fears were unfounded but areas of concern remain. Now that President Hu Jintao plans to return to South America once again to attend the upcoming APEC summit in Peru this November, it is a particularly opportune time to explore these questions in greater depth.

China’s Economic Relationship with Latin America

China is a rising economic power. Its growth rate has exceeded 10% for the past decade and is forecast to remain strong - above 8.5% - for the next five years at least. There is little question that China’s global search for the commodities necessary to sustain its rapid economic expansion forms the bedrock of its relationship with Latin America. The pace of trade between China and the region has skyrocketed from $10 billion in 2000 to over $100 billion in 2007. This is an impressive figure, although still well below the $560 billion in U.S.-Latin American trade last year, and less than half the $250 billion in trade between Europe and Latin America. Still, China is now Latin America’s third largest trading partner after the United States and the European Union, and its clout is poised to grow.

In 2004, following Hu Jintao’s speech to the Brazilian parliament, he was widely reported to have promised that China would make $100 billion in investments in Latin America over the next decade, that is, by 2014. Given that Chinese investment in the region at that time was only $6 billion, it appeared to be a boldly ambitious vow that galvanized expectations in the region. It certainly helped China to win coveted “market economy status” from many of the fifteen Latin American and Caribbean countries that have granted this recognition to Beijing. The Chinese government now claims that Hu was misquoted and that the $100 billion figure referred to trade, not investment. Nevertheless, they allowed the initial assertion to be repeated in the Latin American press for well over a year before Chinese officials decided to walk back this figure and clarify that the objective was $100 billion in trade. Beijing now estimates that trade between China and Latin America reached $102.6 billion in 2007 – marking a 42.6% jump over the previous year – and thus claims that President Hu’s pledge has been fulfilled ahead of schedule. However, the initial confusion over what precisely China was promising to Latin America indicates the degree to which cultural differences and China’s relative lack of experience with the region has at times undercut its diplomacy.

Chinese foreign direct investment in Latin America lags far behind that of the European Union and the United States. In fact, it is the European Union that is the region’s largest investor with an estimated $620 billion in investments, followed by U.S. investment of $350 billion. By contrast, a top Chinese trade official recently estimated that about 25% of China’s total overseas investment of $90 billion went to Latin America, which would equal about $22 billion. However, official estimates of Chinese investment in Latin America often vary, and, in any case, the vast majority goes to off-shore financial havens such as the Cayman Islands and the Virgin Islands, with only about $1.9 billion accounting for non-financial direct investment in the region. Conversely, Latin American companies have made sizable investments in China with $20 billion already paid in of the $34.6 billion contracts signed.

According to the official Chinese trade figures for 2007 recently released by Xinhua Economic News Service, Brazil was China’s largest trading partner last year with two-way trade totaling $29.9 billion, followed by Mexico with $14.9 billion, Chile with $14.6 billion, Argentina with $9.9 billion, and Peru with $6 billion. Venezuela, Panama, and Colombia rounded out China’s top eight trading partners in the region. It is striking to note that Chile is on the verge of edging out Mexico to become China’s second largest trading partner, reflecting the fact that Chile became the first ever country to sign a free trade agreement with China in 2005. China is now beginning trade negotiations with Peru and Costa Rica. However, China only joined the World Trade Organization in 2001, and is still in the very early stages of plotting its long term trade strategy.

China’s growth has both positive and negative implications for Latin America and the Caribbean. It is true that the commodity exporting countries of South America have profited handsomely from their relationship with China, but Mexico, Central America, and the Caribbean have felt the sting of Chinese competition in the manufacturing sector. Moreover, there remain important concerns about whether China will be willing to adhere to basic labor and environmental standards as it deepens its engagement with Latin America. China’s focus on basic commodities, its reluctance to open some sectors of economy to competition from Latin America, and the slow pace of value-added investment are all likely to emerge as points of future contention between China and the region.

While China’s expansion into Latin America may imply a potential loss for some U.S. business sectors, it is important to note that trade is not a zero sum game. To the extent that China’s involvement is sparking economic growth in Latin America, it may contribute to economic stability and well-being in a manner that suits the U.S. desire to see a prosperous and healthy neighborhood. In any case, it is up to the Latin American countries themselves to ensure that they are reaping the benefits of China’s growth and competing effectively in the global marketplace.

Political and Security Concerns

Does China’s renewed economic presence in Latin America pose a short term or long term threat to U.S. political and security interests in the Western Hemisphere? This question defies an easy “yes” or “no” answer. While China’s engagement in Latin America appears highly dynamic at a moment when the U.S. influence has diminished sharply across the region, there are few signs of any real frictions between the U.S. and China in Latin America. Indeed, China is sensitive to U.S. perceptions of its involvement in Latin America and clearly places its highest priority on its relations with Washington. For its part, the U.S. supported China’s bid to become an observer of the Organization of American States in 2004 and recently backed its application to join the Inter-American Development Bank, although the final terms of China’s entry are still under negotiation. Still, Washington has expressed some concerns about China’s activities in the hemisphere, principally related to Venezuela and Cuba, as well as questions about the Chinese role in managing the Panama Canal. Bilateral tensions could grow over time, although it is equally possible that the economic links with China can play a positive role in helping to build a more prosperous and globally-minded Latin America. Indeed, given the rapid advancement of globalization, it is important to remember that China is just one of many non-hemispheric actors deepening ties with Latin America – a group that includes strong U.S. allies like the European Union, Japan, India, and South Korea, as well as current or potential rivals such as Iran and Russia.

The relationship between China and Venezuela’s Hugo Chavez has been the subject of substantial debate and analysis. Much of this has been driven by Chavez’s obvious interest in developing China as an export market for petroleum products, but China has shown little enthusiasm in becoming entangled in Chavez’s larger goal of counter-balancing U.S. influence in the hemisphere. In May, China and Venezuela established the first-ever refinery in China for the purpose of processing Venezuelan oil. This may help to deepen China-Venezuela trade, which currently lags behind many other countries, reaching only $5.9 billion in 2007, ranking as China’s sixth largest trading partner. Chavez has pledged to sell China 1 million barrels of oil per day by 2011, but the two countries have been slow to hit their targets. While Chavez’s own comments have sparked speculation and concern that the Venezuelan government may attempt to cut off oil supplies to the United States and sell to China instead, the logistical difficulties and transportation costs remain daunting. In any case, Venezuela is currently heavily dependent on its sales to the U.S., and since oil is a fungible commodity on the global market the U.S. could simply purchase oil from alternative sources. Thus, the existing relationship between China and Venezuela should not be a cause for immediate alarm, though its evolution does bear careful watching. The same is true for China’s energy investments elsewhere in the Andes, including Colombia, Ecuador, and Bolivia. China is an increasingly relevant factor at a time when competition for Latin America’s energy supplies will intensify as many nations are seeking to exercise greater control over their oil and gas reserves.

China is currently the second largest trading partner of Cuba, and last year trade between the two countries jumped by nearly 25% to $2.2 billion. Cuba’s main exports to China include nickel and sugar, and Havana is buying a range of Chinese consumer goods, as well as buses and trains to help alleviate the island’s transportation crisis. However, Venezuela still remains by far the island’s largest trading partner, and collectively the European Union exceeds China as an economic partner, although China outranks any single European country. Chinese officials stress that they want to maintain positive relations with Cuba and adhere to their policy of non-intervention in the affairs of other states. Still, their renewed economic engagement in Cuba has helped to revive the Cuban economy even though Cuba shows few signs of adopting the “China model” of economic development. One suspects that China is disappointed by Cuba’s resistance to undertaking more robust economic reforms, while the hard-nosed approach of Chinese investors has chastened Cuban officials who seek “socialist solidarity” from a China that is primarily driven by capitalist motivations.

China’s role in Panama has been another area of U.S. concern, driven mainly by the geo-strategic importance of the Panama Canal. Indeed, when the United States formally handed over the control of the Canal Zone to Panama on December 31, 1999, there was a swathe of commentary that the move would endanger U.S. interests due to the fact that Hutchison-Whampoa, a Hong Kong company with ties to the Chinese military, had won a contract to manage two canal ports. During the past eight years, however, trade through the Panama Canal has proceeded uninterrupted. The United States and China now rank as the two top users of the canal, and companies from the two countries have joined with a Japanese firm in a consortium to bid for a role in the expansion of the Panama Canal. Given the record of smooth cooperation, and China’s own strong interest in maintaining an uninterrupted flow of trade through the canal, it appears unlikely that China’s role in Panama will to disrupt U.S. interests there.

More broadly, China’s military relations with Latin America and the Caribbean remain underdeveloped and there are few signs that China is pursuing the goal of conventional power projection into the Western Hemisphere. The principal form of military-to-military contact between China and Latin America occurs in the form of exchanges of defense personal for professional development and the placement of military attachés in their respective embassies. There is some satellite cooperation between China and several countries in Latin America – including Brazil, Argentina, and Venezuela – although most of these ventures remain in the planning phase. Since 2004, China has deployed 125 riot police in Haiti as part of the 9,000 strong United Nations peacekeeping mission there. This is notable because it represents the first deployment of substantial Chinese security personnel in the Western Hemisphere, but China has overall been supportive of the mission’s goals and even authorized a full one-year extension for the mission last October, even though Beijing is still rankled by Haiti’s strong ties to Taiwan.

The Taiwan Factor

Latin America is half a world away from the decades-long conflict simmering in the Taiwan Strait, but the diplomatic tussle between Taiwan and China remains a red-hot issue in the Caribbean and Central America. Beijing rigorously promotes its “One China” policy, which means that non-recognition of the Taiwanese government is a prerequisite for conducting formal diplomatic relations with the People’s Republic of China—in effect forcing other governments to choose between Beijing and Taipei. Although Latin American countries involved in this geopolitical chess match have little individual clout, together they make up the most significant group of states caught in the cross-strait tug-of-war, representing 12 of the 23 countries that recognize Taiwan. Today, Taiwan preserves relations with Guatemala, Belize, El Salvador, Honduras, Nicaragua, and Panama, as well as the Dominican Republic, Haiti, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Paraguay—the lone holdout in South America.

After nearly a decade of fairly stable alliances, the battle between China and Taiwan in Latin America really began to heat up in 2004, when Dominica defected to China. Grenada followed suit in 2005, but Taiwan struck back in 2007 by wooing the newly-elected government of St. Lucia. Beijing notched a major victory later that year by winning over Costa Rica, which was the first Central American country to recognize China. For China, Costa Rica's benign image in Washington presented a huge advantage by minimizing U.S. concern about this decision. Its president, Oscar Arias, is a Nobel Prize-winner who supports free trade and has tangled publicly with Cuba's Fidel Castro. The defection of Costa Rica may mark the beginning of a domino effect that will lead all of Central America to forge ties with Beijing over the next decade. Given the change in government in Taipei, coupled with the conciliatory rhetoric of the new president Ma Ying-jeou, China hopes to seize the moment to peel off other Latin American nations—especially Guatemala, the most populous country to recognize Taiwan, and Panama, which is already a key trading partner. In addition, the recent election of left-leaning Fernando Lugo will likely put Paraguay in play and raises the risk that Taiwan will lose its last remaining ally in South America.

China is also eyeing new alliances in the English-speaking Caribbean, where Chinese trade has doubled in the in the past two years to about $4 billion. In 2007, China used the opportunity posed by the Cricket World Cup to seal a series of geostrategic alliances with the small, island countries that hosted this event in the Caribbean. Its principal method was to woo local support by building stadiums and financing infrastructure projects for the region's first major sporting event. Of the eight venues constructed or refurbished for the 2007 World Cricket Cup, China assisted in the construction of five, providing more than 1,000 workers and more than $140 million. Chinese aid also paid for roads, schools, hospitals and other infrastructure improvements in recent years, earning the allegiance of many nations in the process. The results earned China significant political capital in the Caribbean and enhanced what had been a weak to nonexistent relationship with many countries.

Today, Taiwan feels the pressure of the One-China policy and has sought to give the tiny nations of the Caribbean good reason for bucking the world trend of recognizing China. In St. Kitts, Taiwan stemmed pressure to switch allegiance to Beijing by funding the construction of Warner Park Stadium, an $8 million ''Thank you'' from Taipei. But the overall trajectory is clear. China has successfully used a combination of aid projects through dollar diplomacy and trade preferences to wean the Caribbean away from Taiwan.

Still, the diplomatic competition between China and Taiwan in Latin America and the Caribbean is rife with unintended consequences that have proven to be a double-edged sword for many countries. In the case of the UN peacekeeping mission in Haiti, fears persist that China will seek to use its troop contribution and UN Security Council veto as an instrument to pry Haiti away from Taiwan’s grasp – although this has not yet come to pass. Taiwan’s financial gifts have been at the center of several major corruption scandals throughout Central America, and communist China is hardly a force for greater transparency and good governance. Even countries that switch their allegiance to China often find that the diplomatic pressure remains intense. In Dominica, when opposition leaders flew Taiwanese flags at their political rallies, the Chinese government formally protested, raising concerns about freedom of speech. In February 2007, Grenada committed one of its most grievous errors in recent memory when officials accidentally played the Taiwanese national anthem at the inauguration of a new national stadium built by China at a cost of $40 million, much to the embarrassment of Prime Minister Keith Mitchell. Other Caribbean countries were both amused and troubled by the matter, which they viewed as a cautionary tale that reflects the region’s delicate balancing act.

If the estimation of Chinese officials is correct, Taiwanese diplomats stationed throughout Central America and the Caribbean are fighting a losing battle. For every major economy of the region, however, it is largely a settled matter, with China by far the victor. The United States finds itself in an awkward position with respect to the cross-strait dispute. The official U.S. position is, understandably, that other governments’ decisions to maintain or sever diplomatic relations with Taiwan are for those governments to make. Moreover, since Washington also officially recognizes the People’s Republic of China, it has little moral authority with which to lobby other governments on Taiwan’s behalf, and little apparent motivation to do so. At present, the United States has publicly reacted with nonchalance towards the prospect that Taiwan’s hemispheric alliances will continue to unravel. This strategic ambiguity may suit the United States, but it often leaves officials in Beijing, Taipei, and the capitols of Central America and the Caribbean scratching their heads as they try to divine Washington’s true feelings. In the final analysis, the choice between China and Taiwan will remain a highly charged foreign policy decision for a narrow swathe of vulnerable Latin American countries for many years to come.

Conclusion: From Threat to Stakeholder?

China’s emerging role in Latin America and the Caribbean is a new phenomenon that lacks easy historical parallels. On the one hand, China is a strong economic and political partner of the United States, but on the other, China is a non-democratic country that is viewed as a potential rival to U.S. influence across the globe over the long term. Clearly, the United States does not enjoy the same comfort level with China that it has with the European Union, but nor should China’s presence in Latin America be interpreted as a de facto “threat” to U.S. interests. Rather, China’s evolving role in Latin America reflects the increasingly complex mosaic of international relationships that is a product of a more globalized world. China is poised to be a major player in the Western Hemisphere for many years to come, irrespective of what actions the U.S. does or does not take in reaction to Beijing’s growing influence. The proper U.S. response will be to strengthen its ties with its neighbors in Latin America and the Caribbean, maintain an open dialogue with China on issues of U.S. concern in the hemisphere, and carefully monitor the evolution of China’s ties with Latin America and the Caribbean in consultation with countries of the region. The primary goal of U.S. policy as its relates to China in the Western Hemisphere should focus on ensuring that China acts as a responsible stakeholder that contributes to the region’s economic prosperity while respecting the democratic principles that are the guiding values of the Inter-American system.