Double Handshake

You may remember my sneering at the phrase describing Latin America as “the US’s backyard” a year ago. Well, now, courtesy of a recent Bloomberg article, there’s now some competition. The story is officially about Hu Jintao’s current visit to Brazil, but it’s really a News Story that we shall undoubtedly come to loathe in the coming years: BRIC-clashes. The story has some truly venomous interview quotes describing the high-level meeting as “sleeping with the enemy” and comparing China’s trade with Brazil to Portuguese colonialism in the 17th and 18th centuries. Most importantly, we get lots of territorializing.

When Brazilian President Luiz Inacio Lula da Silva hosts his Chinese counterpart today, he will welcome a leader whose economy is growing faster than his own — and whose exporters are outstripping Brazil in its own backyard.

So, Latin America is Brazil’s backyard. Well, that’s a nice twist on the usual “US’s backyard” at least. Then again, if  you’re being “outstripped” in your own backyard how long can it really stay yours? I wondered. This was cleared up later in the article:

“The world is China’s backyard and Brazilians shouldn’t be so hyped up about it,” Jim O’Neill, London-based chief global economist for Goldman Sachs Group Inc, said in an interview. “There’s a natural symbiosis in trade between the two countries despite Brazil’s legitimate desire to be a manufacturing powerhouse.”

I read this. Then, I read it again. It still doesn’t make total sense to me. I’m not sure if this is a case of sloppy editing, if he was quoted out of context or if Jim O’Neil (who coined the term BRIC in 2001, the article points out) was just speaking bombastically without meaning. I’m guessing O’Neil was arguing that since China exports more goods to other Latin American countries, Brazil “shouldn’t be so hyped about it” because it is no different than any other country whose exporters are being undermined by the Chinese.

Trouble is, the paragraphs leading up to the quote are about China-Brazil trade and investment. Also, the “symbiosis” second half of the quote seems to be about the dynamic only between the two countries – ie. Brazil produces oil and China consumes it, etc. This reading makes sense if you remove the bit about “the world is China’s backyard” first. In other words, “Don’t get worked up Brazil, in fact your trade relationship with China is largely symbiotic.”

But, what about the message: “Relax, Brazil, because the world is China’s backyard and you have a symbiotic trade relationship with it,” makes any sense – logically, geographically or economically? What am I missing?

Hugo Chavez is a blogger’s world leader. From last month:

Venezuela’s efforts to combat severe drought conditions may include President Hugo Chavez going airborne with scientists as they try to generate rain from clouds.

Chavez has said a team of Cuban scientists are in Venezuela to fly aircraft with special equipment designed to influence weather patterns, specifically to bring on much-needed precipitation.

“I’m going in a plane; any cloud that crosses me, I’ll zap it so that it rains,” Chavez said late Saturday, according to Reuters.

Brings to mind China’s cloud tinkering during the Olympics and Beijing’s most recent set of snowfalls. Not that Hu Jintao will be manning the cockpit anytime soon.

Image: Slate

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

“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

The Jamestown Foundation, a Washington DC think tank , has published a very good backgrounder on China and Latin America by R. Evan Ellis. Ellis is an associate with Booz Allen Hamilton and author of the forthcoming book China in Latin America: The Whats and Wherefores, to be published next month. Read his 2008 statement before the US House Committee on Foreign Affairs on China and Latin America for more proof that the guy knows his stuff.

The article begins in 2004, with Hu Jintao’s visit to Santiago, Chile for that year’s Asia-Pacific Economic Cooperation Forum (APEC) summit. Since then, China has burst onto the Latin American scene: bilateral trade has increased to US$102 billion by the end of 2007 from US$10 billion in 2000, three free trade agreements have been signed, and multi-billion dollar Chinese investment deals in commodities are now common place – as have official government visits between the two regions. China has wooed countries like Costa Rica to switch diplomatic ties away from Taiwan, and it has joined the Inter-American Development Bank. Military ties have quietly grown as well.

The article rightly points out that China and Latin America’s relationship has matured beyond simply commodities trade. Latin America has been and will remain a growing destination of Chinese manufactured goods.

As factories in the PRC produced more items and Latin American traders became more sophisticated in dealing with those factories, China has complimented its offering of labor-intensive manufactured goods such as clothing, toys and footwear with a broad selection of Chinese motorcycles, cars, heavy machinery, appliances, and consumer electronics.

But, when it comes to Latin American goods entering the Chinese market, things seem to be going less-than-swimmingly. Latin America’s retailers face the same trade balance headaches that foreign countries have had with China since the Opium Wars: What can we sell China in return for all that we buy?

Beyond commodities, select Latin American companies such as Grupo Modelo, FEMSA and GRUMA have made some progress building markets in the PRC, selling recognized brand name products to the growing Chinese middle class … Nonetheless those governments and producers have discovered that despite such efforts, traditional products such as coffee and fruits have not sold well in the PRC. In addition to issues of Chinese tastes, these perishable products and the labor required to harvest them makes them uncompetitive against closer, lower-cost producers such as the Philippines.

I’m a bit surprised to hear that the makers of Corona, Negra Modelo, Tecate and Dos Equis are making “some progress” in China given their products really suit a type of food largely absent on the mainland (ie. Mexican). On top of that, I’ll add that a friend/restaurant owner in Shanghai once told me that buying fake Coronas cost him about a third the price as real ones. His advice: Save your money and order Tsingtaos, because you never know.

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