Double Handshake

The China-Brazil trade connection has made headlines this past month as China became the South American country’s top trade partner for the month for April, and the two countries said they were looking into making some trade deals with yuan and reals instead of US dollars. Then, Brazilian President Luiz Inacio Lula da Silva visited Beijing it what was being billed as a meeting between players in the “new economic order.” So, did meeting live up to expectations? Not quite. A reality check on the flurry of China-Brazilian news comes our way from the Global Post (via the Huffington Post) Wednesday.

Seth Kugal notes that though trade volumes are indeed increasing, the variety is not. Raw commodities like iron ore and soya are still far and away the most important facet of the relationship. And this doesn’t look to change anytime soon, despite Lula’s best efforts. A major priority for Lula on his recent trip to Beijing was to diversify his country’s exports beyond raw resources.

Lula’s visit to China was in part portrayed here as a meeting of giants. “No economic discussion is possible that does not take into account China, Brazil, India and Russia,” he boasted while there, and upon his return declared it the most successful of his foreign trips. But all signs pointed to the visit not meeting expectations, at least in the short term. It broke little new ground and largely saw the signing of deals that had been virtually concluded, most notably a $10 billion loan from China to the Brazilian state oil company, Petrobras, and an agreement to allow Brazilian chicken into China.

Other efforts failed: pork exports are still halted, and Brazilian textile industry leaders were unable to squeeze any voluntary reductions in exports out of the Chinese, whose imports have flooded the Brazilian market this year. Efforts to jump-start a stalled 45 plane contract between Embraer and the Chinese were unsuccessful. The trip was shortened to three from five days, and several events were canceled.

“Lula comes home empty-handed from Beijing,” according to a Folha de Sao Paulo newspaper editorial, “without having advanced the objected to diversify bilateral trade.”

And his thorn in Lula’s side raises a very important point for most Latin American economies’ trade with China: What can they offer China in addition to natural resources? Given China’s manufacturing competitiveness, is Latin America doomed to the same role it played for the Spanish, British and US throughout history, to export their resources (and lion’s share of the profits) to be processed abroad?

Brazilian President Luiz Inácio Lula da Silva arrives in Beijing today for a three-day visit that will include face time with Chinese President Hu Jintao. A number of trade issues are expected to be discussed ranging from oil contracts to biofuel technology. China overtook the US as Brazil’s top trading partner in April. Brazilian soya products and iron ore constitute a major portion of the trade relationship. This week, Lula is expected to push to expand this, seeking to open the Chinese market to more Brazilian meat exports and negotiate the sale of Brazilian-manufactured Embraer aircraft as well.

Oil deals, however, will likely see most of the limelight. Brazil’s oil industry has found itself in a unique position: having massive reserves (much of it underwater) but without the resources to exploit it. Petrobras, the country’s state-owned oil giant, said it wants to spend US$174 billion over the next five years to become one of the world’s major oil producers, but it lacks the funding. And this is where China – a country with massive energy needs and flush with cash – can help. From Bloomberg:

If Lula’s plans pan out, he’ll return with a $10 billion credit for Petroleo Brasileiro SA, an $800 million loan for the state development bank, and financing for ports and waterways. He expects he’ll be able to open China to Brazilian poultry, (Brazilian Trade Secretary Welber) Barral said.

For the loans, Brazil, in turn, will ensure China a steady supply of oil (as much as 200,000 barrels/day) for the foreseeable future. This is one of the reasons some people describe China’s trade relationship with Brazil’s as “more complementary than with any other Latin American country.”

The Wall Street Journal’s preview of Lula’s Beijing visit raises another fascinating point about the Brazil-China oil dynamic: how state-owned enterprises are changing the world’s energy landscape.

“The U.S. has a problem,” Sergio Gabrielli, chief executive of Petrobras, said recently when asked about the loan talks. “There isn’t someone in the U.S. government that we can sit down with and have the kinds of discussions we’re having with the Chinese.”

Mr. Gabrielli was referring to the fact that Chinese government banks are willing to extend huge foreign loans to further China’s long-term energy-security goals: ensuring diverse global supplies and winning entree into competitive regions for its oil companies. A string of recent oil loans to Russia, Kazakhstan and others has pushed China’s total commitments to more than $45 billion.

Such direct government lending is an increasingly powerful tool in an era when three-quarters of the world’s oil reserves are in the hands of state-controlled oil companies. By dealing directly with governments in oil-supplier nations, China can use its wealth to reduce the role of big oil companies — the traditional intermediaries between oil producers and oil consumers.

“What you are seeing is the new geopolitics of oil, where deals start from a political understanding and cut out the international oil companies,” says Roger Diwan, a partner at PFC Energy, a Houston-based consultancy.

In fairness, the article goes on to describe how privately held international oil companies still have technological and managerial advantages over SOEs. I for one am not ready to declare the privately held oil company extinct. In addition, many SOEs everywhere operate under more free-market capitalism conditions than is popularly believed.

Still, the above WSJ selection rings true to me; how can US oil companies like Exxon and Shell compete with the financial resources, political influence and sheer magnitude of Sinopec and PetroChina, and their de facto trade representative Hu Jintao?

Image: Wall Street Journal

Chuquicamata, or Chuqui for short, in northern Chile is one of the largest open-pit copper mines in the world. It has been in operation since 1910 – first run by American mining concerns and then nationalized in 1970. It is now operated by Codelco, a government-owned entity. Twenty-four hours a day, 20,000 workers and over 100 giant German Liebher and Japanese Komatsu trucks haul rocks out of the 1-km-deep pit to be processed nearby. Explosions at the bottom happen everyday at 5pm sharp.

When writing about Chuqui, it’s tempting to just reel off statistics: the main pit is 5-km long and 3-km wide; trucks cost US$4 million each (tires alone cost US$30,000 each and last one year); 600,000 tons of rocks are transported daily. The one stat that stood out to me, though, was 22% – the percentage of the mine’s output that heads to China, the mine’s biggest buyer. I visited Chuqui last week and asked our guide about China and the global recession.

“Oh, we’re having a very difficult time!” she told me cheerfully. “But you don’t understand how much money we had been making before the recession, when we were selling cathodes for US$1000.” (current copper prices are approximately US$600 per cathode).

China was largely responsible for Chuqui’s flush years. Now, she said, Chinese demand for copper had fallen a bit, but not nearly as much as demand in other countries. This corroborates news from Peru in recent months of Chinese mining companies announcing expansion plans as other foreign interests shutter mines and smelters.

From the viewing platform above the mine, the enormous trucks hauling 400 tons per load looked like toys in a sandbox. Puffs of dust rose up as rocks were moved. Trucks emitted black diesel smoke as they climbed the packed-dirt inclines. From my vantage point, the lines cut into the side of the pit looked like dusty rice terraces.

Image: sxc.hu

Capon Street is the heart of Lima’s vibrant Chinatown, which spans a number blocks east of the city’s historic downtown. The name “Capon” is dated to colonial times, the nickname of 16th-century priest Manuel Loayza who lived there. Technically, the street is actually the 7th block of Ucayali Street.

With its walkway inlaid with Chinese Zodiac animals and brightly painted faux-Chinese architecture, Calle Capon is both a commercial walking street and tourist draw. Nicer restaurants, banks, shops and casinos run along both sides. There are also smaller booths advertising horoscope readings and Fengshui consultation.

“What we are doing hasn’t worked very well and in fact, if you look at the gains, particularly in Latin American, that Iran is making and China is making, it is quite disturbing … They are building very strong economic and political connections with a lot these leaders. I don’t think that is in our interests … I have to say that I don’t think – in today’s world that is a multipolar world where we are competing for attention and relationships with at least the Russians, the Chinese, the Iranians – that it is in our interests to turn our backs on countries in our own hemisphere.”

Words shared by Secretary of State Hillary Clinton at a town hall meeting in Washington last Friday. She went on to criticize the Bush administration’s failed attempts to isolate anti-US leaders in the region. To compensate, she said, this administration must engage with Latin American leaders – especially with ones we don’t like, like Venezuela’s Hugo Chavez and Bolivia’s Evo Morales – if the US wishes to remain a relevant power in the region.

Now, while I don’t think the above sound byte indicates anything as drastic as a New Cold War over the ideological future of Latin America, I do find the logic “quite disturbing.” A few thoughts:

I fully understand that it is precisely Secretary Clinton’s job to push her country’s political and economic agenda abroad, but I don’t think that makes foreign countries doing the same thing “disturbing.” We don’t hear much from the State Department when China, Russia and Iran make political and economic inroads in their respective neighboring countries. Although it was unsaid by Clinton (and feel free voice disagreement below), I think what is implied here is the chestnut about Latin America traditionally being in the US’s “sphere of influence.” The murky trio: China, Russia and Iran are suddenly on America’s doorstep, and we haven’t approved it.

First off, let me try to add a quick non-State Department perspective. There is no quicker way to raise the ire of someone in Latin America than to describe the region as “America’s backyard.” The paternalism implied by this Monroe Doctrine/Roosevelt Corollary-derived phrase really does not go over well. On top of this, despite the US’s enormous influence in region through decades of political and economic intervention, Latin America today is not the United States’ backyard anymore than Africa is the backyard of Europe. President Barack Obama kind of recognized this with his talk of a “new era” in relations between US and Latin America at the Summit of Americas last month, saying “there are no senior of junior partners in the Americas.”

If, then, the US follows Clinton’s calls for the US to re-engage with certain countries in Latin America (a great idea, as far as I’m concerned), it should NOT be in some kind of belief that doing so will prevent these countries from pursuing diplomatic, economic and, yes, military ties with China and other countries of the world. US negligence in Latin America during the Bush years did push countries toward China, but China was coming anyway. And its presence, however “disturbing,” is here to stay (and grow). The State Department returning to Caracas yelling “hi, remember us?” is not going to change that fact.

Clinton is right to point out that the US is “competing for attention and relationships” in Latin America, but this competition is not a zero-sum game. Just as fully developed nations across the planet seek to diversify their economic and diplomatic channels, Latin American countries are after the same thing.

Second point. I won’t pretend that I’m privy to anywhere near the intelligence info that Ms. Clinton is, but I feel confident enough to take issue with her line about “they are building very strong economic and political connections with a lot these leaders. I don’t think that is in our interests.”

Economically, yes, China’s rise in Latin America creates competition for US interests there. Yes, US companies must be fitter to survive in Latin America than before China arrived on the scene. Is competition a bad thing? Aren’t fostering adaptability and wealth creation (both in China and Latin America) ultimately positives for the US, in a global economy?

Politically, I think China’s presence in Latin America fundamentally differs from countries like Iran, who I peg as likely having a true anti-US agenda in Latin America. For all the “socialist solidarity” rhetoric between Beijing and Caracas (generally emanating from Caracas), the word “oil” appears in every news article I’ve read about China and Venezuela. China’s surging economic prominence in the region means a stronger political presence by default, I don’t see Hu Jintao staying up late into the night dreaming up ways to undermine the US’s presence in Latin America.

Image: CNN

A few noteworthy links out there:

China becomes Brazil’s top trade partner – AP reports that China has surpassed the US as Brazil’s biggest trade partner, with trade last month reaching US$3.2 billion, compared to US$2.8 billion between the US and Brazil. Brazil is China’s biggest trade partner in Latin America, with soy and iron being the top Brazilian exports.

The Beijing-Havana connection – Yinghong Cheng at the Jamestown Foundation, a Washington DC think tank, published a good piece on China and Cuba: Beijing and Havana: Political Fraternity and Economic Patronage. Cheng describes China’s investment in the island “a massive economic blood transfusion” to ensure it has a strategic partner in the region.

China: Quarantines ‘proper and necessary’ – China Daily has the country’s latest reaction in its ongoing row with Mexico over the quarantine measures it began taking over the weekend (H/t Danwei). Chinese netizens have made their opinon known on the matter:

A poll by major information portal Sina.com showed that 92.5 percent of 4,263 online users said the quarantine was “a necessary preventive method and had nothing to do with discrimination”.

Chinese-Mexican relations took a few shots on the chin over the weekend over the Asian country’s dealing with the Swine Flu threat. In China, where the memory of SARS looms large, Mexican citizens have been quarantined based on nationality and flights between the countries have been suspended. Mexican Foreign Minister Patricia Espinosa criticized China for what she called a discriminatory quarantine set up in Hong Kong as well.

I was off gallivanting in Trujillo, in Northern Peru this weekend, and am only now getting caught up to speed. Luckily, the venerable James Fallows has followed the story and has predictably added a few great insights. He relays a Wall Street Journal report filed over the weekend of Mexican citizens in Beijing also forced into quarantine:

According to accounts from Mexicans in the hotel, Mexican travelers arriving on various flights from Mexico and the U.S. were singled out by health officials who boarded the aircraft wearing white protective suits, masks and rubber gloves. They led away Mexican passport holders. Several travelers said Chinese television camera crews surprised them at the doors of their aircraft as they emerged. They said the filming continued through the windows of an isolation ward at the Beijing Ditan infectious diseases hospital.

“We felt like we were in a zoo,” said Angel Yamil Silum, a 27-year-old business student, who arrived in Beijing with his girlfriend Saturday en route to Bangkok for a holiday, and ended up at Ditan and then the Guo Men Hotel.

I think the above quote best captures the real danger of this situation: How the detainees were detained. Families were paraded out of airplanes as fellow passengers openly gawked. Business men were woken up with flashlights from their hotel beds. The conditions of the hotels used for quarantines have been described as “fairly rundown,” serving such appetizing meals as this. John Pomfret of The Washington Post wonders whether or not China would have treated people from developed countries in the same way.

I think most reasonable people are willing to put up with some amount of discomfort and illogic (ie. detainment based on one’s passport) in the face of an unfamiliar epidemic. Certainly no one would expect a stay in the Four Seasons during a quarantine, but can’t China do a little better than this? If SARS taught the country anything, shouldn’t it have been how to quarantine someone with an amount of open communication and decency?

Stop press: Just as I was set to publish this, I came across this dispatch from the Metropark Hotel in Hong Kong (quarantine site). In fairness, it looks like some of the conditions are improving there. Let’s hope they continue to do so.

Image: The Daily Mail