Double Handshake

Ever since China surpassed the US to become Brazil’s top trade partner earlier this year, the table has been set for a media-inspired heavyweight bout between the Asian country and the US for dominance in Latin America. Judging by the headlines, China is landing jabs and hooks left and right.* Take a McClatchy July 8th article, “China makes its move as the US falls back in Latin America,” for example:

China has moved aggressively to fill a vacuum left by the United States in recent years, as the U.S. focused on wars in Afghanistan and Iraq and the global economic crisis sapped its economy.

“China is rising while the U.S. is declining in Latin America,” Riordan Roett, a professor of international relations at Johns Hopkins University, said by telephone while visiting Sao Paulo. “China is all over this region. They are following a state-driven policy to expand their peaceful presence.”

It’s a fine and well-researched article, filled with good examples of China’s growing economic, political, military and cultural influence in a number of Latin American countries. In economic terms, China’s soaring trade numbers (largely reflecting Latin exports of raw commodities) over the past decade speak for themselves: US$10 billion in bilateral trade in 2000 compared to US$140 billion last year.

Ten-fold growth is stunning, but how does it compare to the champ? US-Latin American trade last year was US$560 billion, four times more than Sino-Latin trade. European-Latin American trade stood at US$280 billion, twice as much. In addition, with foreign investment in Latin America, China will not pass the US anytime soon. US companies invested US$350 billion in Latin America and the Caribbean in 2007, compared to only US$22 billion by Chinese firms.

These remaining gaps, coupled with the US’s still far-dominant technological and innovative advantages are why Miami Herald columnist Andres Oppenheimer cautions us: Don’t believe all the China-Latin America hype:

The latest figures showing that China is emerging from the global crisis sooner — and more vigorously — than anticipated is triggering speculation that China will soon overtake the United States as Latin America’s top business partner. Sounds very interesting, but don’t bet on it

…

Many economists say that’s not going to happen in their lifetimes. While China will continue to be a major Latin American economic partner, the latest trade figures have to be taken with a grain of salt because they are distorted by the sharp drop in U.S. imports due to America’s worst economic crisis since the 1930’s Depression, they say.

Oppenheimer gives a sprawling list of other reasons for US’s likely business dominance in Latin America for the forseeable future. Average incomes in China need 47 years to catch up with those in the US. Asia’s combined military budget will only equal the US’s in seven decades. American inventors filed 92,000 patents last year, while Chinese inventors issued only 1,225, a fact that presumably means the US will maintain tech-business advantages over China for a long while. China’s population is aging as well, which will negatively impact its economic prospects in the coming years.

I personally find it refreshing that Oppenheimer takes a slightly contrarian position on China’s Rise, but most of his arguments have little to do specifically with the country’s business prospects in Latin America. I also tend to shy away from arguments involving China needing x-amount of time to close any kind of economic or social gap; the country tends to beat projections.

Curiously, what I find to be the most compelling argument against China’s unbridled trade growth in Latin America is absent from Oppenheimer’s laundry list: China’s trade relationship with Latin America remains very one-dimensional (skewed toward commodities and natural resources) and thus vulnerable. China’s hunger for oil, iron ore, copper and soya is boundless now, but who’s to say which resources will be hot in ten years, and at what prices? The astonishing ten-fold trade growth from 2000 to 2008 coincided with a huge price increase in a number resources that were central to the trade relationship, and this will not always be the case going forward.

Regardless of who you have your money on, if the US and China are locked in for a title bout over Latin America, we’re only in round one.

*In some sense, this whole boxing metaphor is dumb, and I’m using it half-ironically. The two trade relationships are not mutually exclusive, and overall increased trade is good for everyone in a global economy.

One of life’s joys is the Wall Street Journal’s front-page middle column,* often quirky news stories ranging from belly-dancing to gator wrestling. Yesterday’s gem was “For Sale: One Leopard-Skin Rolex and Maybe Some Frozen Sharks,” a piece about Mexico’s Asset Administration and Disposal Service (SAE), which is tasked with getting rid of the emerald-encrusted pistols and albino tigers from the estates of Scarface-esque drug lords when they are arrested.

The article spends a number of paragraphs looking at the case of  Zhenli Ye Gon, a Chinese-Mexican businessman (born in Shanghai, Mexican citizen since 2002) who was arrested in the US in 2007 on charges on producing a precursor to methamphetamine. Ye stands accused of acquiring crystal meth ingredients through his pharmaceutical company and has been linked to the Sinaloa Cartel in Mexico. However, in January of this year, US authorities were getting ready to drop charges of Ye for lack of evidence. Ye’s lawyers are fighting to keep him from being extradited to Mexico to face similar charges.

When Ye was arrested in 2007, what did SAE find at his Mexico City house? Not as exciting as underground hot-tub lairs and exotic menageries, but lots of cash. 207 million US dollars; 18 million Mexican pesos; 200,000 euros; 113,000 Hong Kong dollars; Mexican gold bullion and “a great amount” of jewels. The picture at right is only a portion. It was hidden in a secret room behind his dressing-room mirror. Ye has claimed most of that money is part of a political party slush fund. Versace dinnerware, Baccarat wine glasses and Lalique Champagne flutes were still in boxes, having recently been shipped there.

So, how is the estate being dealt with since Ye’s arrest? From the WSJ:

His (Ye’s) lawyers also say they are pleased with the SAE’s stewardship of Mr. Ye’s property, which their client can recoup if his name is cleared. But they are less happy that the Mexican government already spent the $205 million seized from him, as is permitted under Mexican law.

The globalized drug trade can put SAE agents in tricky diplomatic situations. When a delegation of Chinese investigators interested in the case came to Mexico, Victor Aznar, a senior SAE official, said it was all he could do to keep the Chinese from pocketing dragon statuettes and other objects during a tour of the house.

“They kept pleading with me that it was evidence they needed to take back to China,” says Mr. Aznar. “I politely told them, ‘no.’ ”

Nice. “Well, you see, we need this jade dragon as, um, evidence because Mr. Ye was once a citizen of our country, and China is directly affected by a case involving an arrest of a Mexican citizen in the US.” I don’t get it. And since when is it legal for the Mexican government to spend your US$200 million before being found guilty of a crime, I wonder? If he is acquitted, the man gets to keep his dinnerware and dragon statues but not his money?

*Now more of a below-the-fold teaser under Murdoch, but same principle.

Images: WSJ, Wikipedia

“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

So, Venezuelan president Hugo Chavez surprised Barack Obama with a copy of Eduardo Galeano’s 1971 book Open Veins of Latin America at the presidents’ meeting in Port-of-Spain, Trinidad. The book is a left-wing polemic about the exploitation and suppression of Latin America by foreign powers over the last 500 years. The “gift” is part political stunt – the copy given to Obama is in a language he neither reads nor speaks – to make things a bit uncomfortable for the high-flying Obama and remind him of his country’s role in “Five Centuries of the Pillage of a Continent.”

The gift is good timing for me, though. I finished Open Veins a few weeks ago and was planning to post some thoughts on it anyhow. As I read the book, I didn’t often think of Obama and the US as much as I thought of China, which stands to be the next country to seriously impact Latin America with its hunger for natural resources. China may have played zero role in the last 500 years of pillage in Latin America, but it may well be the leader in the next 500.

Written in the early 70s, Open Veins is Galeano’s account of how the Spanish, then English and finally Americans arrived in Latin America, stole the regions’ resources, exported its wealth, and drove its people to poverty and backwardness through their greed. Since Columbus’s arrival, Latin America’s natural resources have been a continual curse, a major reason for its stunted growth.

Galaeno doesn’t much distinguish between the Spanish conquistadors who once outright stole and enslaved from 20th-century US companies in Latin America that exploited the land and exported profits back home under the guise of free trade. The pillage has taken new forms, to be sure, but the pillage is still going on.

The US comes out looking terrible in Open Veins – a paternalistic superpower openly exploiting Latin American countries and meddling in their political affairs. Corporations like US Steel and Standard Fruit Company “invested” millions in smelting plants and banana plantations, which polluted the earth, condemned locals to dangerous and low-wage jobs, and exported a lion’s share of profits north of the Rio Grande. Development banks like the IMF and IADB are mostly US pawns used to force Latin American countries to re-structure their economies for greater US manipulation. America’s only interest in a growing middle class in Latin America is that it provides a market for US exports.

Galeano is a great writer, which comes through even in translation. There are memorable anecdotes and powerful passages, but, on the whole, I found the book dogmatic and shrill as he forced his agenda into the pages. This is not objective journalism (nor does it claim to be), but rather a kind of blood-boiling invective that tears down straw-men counter-arguments. Still, there is plenty to get incensed about; it’s a moving book. I can see why Hugo Chavez likes it so much.

But I also think he gave Open Veins to the wrong president; the book should have been in his suitcase for his trip to Beijing earlier this month. There were no awkward book exchanges on Chavez’s trip to Beijing, of course, only zesty Xinhua headlines, multi-billion dollar oil investment deals and smiling photos.

For one thing, Open Veins would simply be a great read for any stalwart Communist cadre, at least in theory. There’s anti-imperialism rhetoric, scathing criticisms of the US’s political meddling, a dash of revolutionary fervor and pleas for better labor conditions. But more importantly, if any foreign country needs a cautionary tale about the fine line between “pillage” and “commodities investment” of Latin America in the 21st century, it is China. You never know how long your welcome will last.

Times are good now because China’s buying helps shore up the region’s battered economies, and its investments come without preconditions. China also provides another major trading alternative to doing business with the US. But, everything’s not perfect. Latin America’s trade deficit with China is growing, new free trade agreements have yet to reveal how much (or little) they will benefit Latin economies, and some Chinese mining companies are already getting bad reputations for their labor and environmental policies.

While none of this yet put the country in the same league with the villians in Open Veins, Spain, England and the US’s legacy in Latin America are clearly ones that China must keep in the back of its mind. If China turns out to be as greedy and exploitative as its foreign predecessors, you can be sure it will become the subject of a similarly themed book in the coming years.

I came across something that brought out my inner Hoosier some days ago over Pisco Sours at the beautiful Hotel Bolivar in central Lima. Next to our table on the restaurant’s terrace, I discovered the words “George Cutter Co. South Bend Ind” stamped on the ornamental lamps along the ledge.

A bit of internet sleuthing revealed that George Cutter, a friend of Thomas Edison, produced street lamps and other fixtures from his factory in South Bend, Indiana from 1906 until 1915. His company in South Bend was later absorbed by Westinghouse after his death. Interestingly, the George Cutter light fixtures at the hotel actually predate the historic hotel itself, which was built in 1924.

Note for Hoosier readers: Please do not go looking for the Hotel Bolivar the city of Peru (“Circus Capital of the World,” birthplace of Cole Porter). You will not find it.

Both China and the US have intitiated free trade agreements (FTA) with Peru in the last few months. Here’s a quick summary of the agreements and a few unsolicited thoughts:

The China-Peru pact was signed in November 2008, on Chinese president Hu Jintao’s visit to Lima for the Asia-Pacific Economic Cooperation (APEC) summit. Without getting too into the specific terms, there were clear incentives for big business on both sides. For China, though Peru still doesn’t amount to much in terms of an export market, 99% of Chinese goods to Peru will be untaxed in the coming years. Walk down any street in Lima, and it’s hard to miss that Chinese manufacturers are making inroads. Most immediately, the deal will help out giant state-owned mining firms as they mine and export Peru’s copper, iron and zinc.

For Peru, China is its second-largest trade partner, accounting for 9.6% of exports in 2006. All but 10% of Peruvian goods bound for China will tax-free soon.

Arriving at the terms of the China-Peru FTA seemed smooth by the accounts I’ve read. The idea for an FTA was proposed in 2006, negotiations began in early 2008, and by November of that year, Peru rolled out the red carpet for the signing. However, Peru’s textile industry did voice complaints,  fearing it would be undercut by its Chinese counterpart.

As for the US-Peru FTA, the process has been a bit rockier. The US Congress agreed to a pact as early as December 2007, but added provisions to ensure Peru fulfill certain labor, environmental and IPR requirements first. The pact, agreed to conditionally, sat on Bush’s desk as pressure (espcially from Congressional Democracts) built against it.

Fast-forward to January 2009. Days before Bush left office, with Peru’s government frantically passing 11th-hour labor and environmental regulations to appease the US, with many in Congress calling for Bush to hold off on signing the FTA, with the Sierra Club and Oxfam America issuing joint statements for the delay of the pact, and with an incoming president who would perhaps stop the FTA from happening indefinitely: Bush and Peruvian president Alan Garcia went ahead and signed the agreement anyway. For a good account of Bush, Garcia and former US Trade Representative Susan Schwab’s “dirty tricks,” click here.

Under the terms, on Sunday, February 1, Peru will expand its duty-free access to the US (which it has had in a different form since 1991), while it will halt duties on 80% of US industrial, mining equipment and farm exports. In other words, US beef, vegetables, wheat and other agricultural products will hit Peru as early as next month. Welcome, Wal-Mart.

Phew!

Now, I’m not really in a position to weigh in about the pros and cons of FTAs or free trade as a whole. What’s interesting to me, is the what these FTAs say about the state of US- and Sino-Peruvian relations.

First, witness how dramatically both countries’ political systems affected the proceedings. It’s almost impossible to imagine China going through the same motions that the US government did – agonizing debate, concerns over the labor and environmental regulatory concerns, etc. The streamlined nature of China’s government means it can hammer out FTAs in a hurry. And it is going to so.

Second, as China combs Latin America for new FTAs (Peru was its second pact, after the one it signed with Chile in 2005), how will this go down with Washington? Given Congresses wishy-washiness over the recent Peru, Colombia and Panama trade treaties, and China’s hunger for them, are we to see a new period of anti-China rhetoric in Washington over Latin America?

Third, if the underhandedness of the US-Peru FTA riles up the few US politians who really care about it, it will be interesting to see what, if anything they can do about it. Signing the FTA despite the objections was one of Bush’s eleventh-hour send-offs. Now that he’s gone, who is really responsible?

In any case, here’s hoping on Monday, I don’t find Idaho potatoes here in the land where they originated.

Images: Chinese Government, Xinhua