Double Handshake

First off, apologies for the major drop-off in posting on DH lately, things should pick up again in the fall when I’m more settled in my new home in Beijing. Nevertheless…

Latin America and Africa are often lumped together when talking about China’s interest in them – namely, as two gigantic sources for natural resources. While many of the billion-dollar trade and investment deals have been made in oil and mineral resources to keep the furnaces back in China blazing, agricultural resources are also included. China has had a national policy for 95% food self-sufficiency in place for some time, but with 22% of the world’s population (eating increasingly more and more) and only 7% of the world’s arable land, China is looking abroad as it stares down some frightening food-supply pressures.

Unlike the last wave of Chinese agriculture investment abroad (in the 1990s, largely to Southeast Asia), Chinese companies are now flocking to southern Africa to buy up and develop fertile African farmland to grow food for export. By 2007, China had 63 agricultural investment projects in southern Africa, and last year, Beijing promised US$800 million to modernize Mozambique’s agricultural sector. Loro Horta wrote a good overview of the situation for the Jamestown Foundation earlier this year.

But what about Latin America? With some of the world’s richest agricultural regions in the Argentine Pampas, is China buying up farmland there as well? Apparently not.

Reuters published an interesting article last month about China’s noticeable non-interest in buying up Latin American farmland in the same way it has in Africa.

Land prices and mature farming markets in Brazil and Argentina, the engines of Latin America’s commercial farming, make investments in big production projects less of a bargain for China.

“China’s ideas about farm prices are very different from the reality in Argentina’s Pampas. They think they can buy good farmland for $1,000 per hectare.” said Ernesto Fernandez Taboada, executive director of the Argentine Chamber of Commerce for Southeast Asia.

The best Pampas land costs up to 10 times that much.

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“They wanted to enter but couldn’t after they realized what kind of investment it would take to have their own local infrastructure and logistics to control production,” said Carlo Lovatelli, president of Brazil’s grain crushing association Abiove.

The complexity of local farm markets makes it difficult to guarantee that the products of Chinese investments in food here would make it efficiently to China’s ports.

“Today China is offering financing and access to cheap labor, neither of which Brazil especially needs,” said emerging market analysts Trusted Sources in a report.

Local growers are closely integrated with trading companies, which provide credit and inputs like seeds, agrochemicals and fuel. Producers, already carrying heavy debt loads, have little need for additional financing. They also have ample directed government credit.

In Africa, Chinese financing goes a lot farther. The Asian nation also has been allowed to deploy one of its competitive advantages in Africa – low-paid Chinese workers. Entrenched Latin American labor interests would not permit that.

Instead, China has bought Latin American agricultural products (especially Brazilian soybeans) directly. This is possible because soybeans are a major exception of the 95% food self-sufficiency policy described above. According to Reuters’ article, China buys 65% of the world’s seaborne soybean trade, making it the country’s number one import from Brazil.

So, while China may not be buying up Latin American agricultural land directly, Latin American is and will continue to play a major role in what ends up on Chinese dinner tables. Should China’s food self-sufficiency policy start causing hunger pangs (as it may already be doing) – and Beijing open up the country to more agricultural imports – look to the sprawling estancias of Brazil and Argentina to play a major role in becoming China’s “new rice bowl.”

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