China’s South America presence: challenges & opportunities amidst Belt and Road expansion

China’s Chancay port, a $3.5 billion investment, promises to transform South America’s trade with China, accelerating exports of commodities like copper and soy. As part of China’s Belt and Road Initiative, it highlights China’s expanding influence in the region, challenging traditional powers like the United States and Europe.

In September, a delegation of Brazilian farmers and officials made their way to the Peruvian fishing town of Chancay, drawn by the allure of a new Chinese mega-port emerging on the Pacific coast. This port, with an estimated cost of $3.5 billion, is poised to revolutionize South America’s trade connections with China. Scheduled to commence operations later this year, the deep-water port represents a direct gateway for China into the resource-rich region.

Over the past decade, Beijing has surpassed the United States as South America’s largest trading partner, demonstrating a voracious appetite for commodities like soy, corn, and copper.

Majority-owned by the Chinese state-owned firm Cosco Shipping, the port in Chancay marks China’s first significant foothold in South America’s port infrastructure. With the capacity to accommodate the largest cargo vessels, it offers exporters a more efficient route to Asia, slashing travel time by up to two weeks for certain shipments.

Both Beijing and Lima envision Chancay as a pivotal regional hub, facilitating the export of copper from the Andean nation and soy from western Brazil. Currently, these goods either navigate the Panama Canal or traverse the Atlantic Ocean before reaching China. Peru’s Trade Minister Juan Mathews Salazar highlighted the ambitious goal of the Chancay mega port: to position Peru as a crucial commercial and port hub bridging South America and Asia.

A key component of China’s extensive Belt and Road Initiative, this new port underscores the challenge facing the United States and Europe as they seek to counter Beijing’s growing influence in Latin America. With full construction initiated in 2018, the port, situated some 80 kilometres north of Lima, is now witnessing the meticulous groundwork of laying piles and breakwaters, with signs bearing Chinese characters.

The completion of the first phase of the Chancay port is slated for November 2024, coinciding with the expected arrival of Chinese President Xi Jinping in Peru for an Asia-Pacific Economic Cooperation (APEC) summit, potentially marking the port’s inauguration. Cosco Shipping, holding a 60% stake in the project, views it as an integral part of China’s modern Silk Road initiative, highlighting its strategic importance.

For Jose Adriano da Silva, a Brazilian farming entrepreneur, the port represents a catalyst for regional development. Talks between Peruvian and Brazilian officials are underway to address logistical challenges and streamline overland transport routes, facilitating the movement of goods to and from the port. Peru’s government plans to establish an exclusive economic zone near Chancay, while Cosco aims to develop an industrial hub to process raw materials, including grains and meat from Brazil, before exporting them to Asia.

Brazilian Ambassador Clemente Baena Soares underscored the significance of the port for Brazilian businesses, particularly in western states like Rondonia, Acre, Mato Grosso, and Amazonas. The prospect of bypassing the Panama Canal to reach Asian markets is met with enthusiasm. However, infrastructure improvements, including investments in the Interoceanic Highway and potential railway links, are necessary to optimize transport routes and maximize the port’s potential as a gateway to Asia.

BRI AND LATIN AMERICA

Six years after its launch by President Xi Jinping, China’s Belt and Road Initiative (BRI) continues to stand as the world’s most ambitious investment plan. The potential it holds for fostering prosperity through enhanced trade links and job creation is unparalleled. However, to fully realize the BRI’s ambitious goals, recipient countries in Latin America, including Uruguay, must collaborate both domestically and with China to implement complementary policies that promote long-term, responsible, and sustainable economic growth.

The BRI, a trillion-dollar global economic framework, spans more than 100 partner countries, encompassing one-third of global GDP and nearly two-thirds of the world’s population. Its objectives include coordinating policies, facilitating connectivity, promoting unrestricted trade, integrating financial markets, and building networks of multilateral and bilateral relations through people-to-people connections. Unlike traditional development models, the BRI adopts an investment-driven approach, focusing on infrastructure, trade, and job creation, often financed by money creation and low-interest rates.

Since its inception, China has invested approximately US$210 billion in BRI projects, with the World Bank recognizing the potential of this massive investment to transform the economic landscape of recipient regions.

While the initial focus of the BRI centred on the historic Silk Road and Maritime Silk Road, its scope has expanded to include regions like the Arctic and Latin America. China has pledged to invest US$250 billion in Latin America over the next decade, offering much-needed capital for infrastructure projects at a time when interest from traditional investors like the United States is diminishing.

Proposed initiatives under the BRI, such as a new port in Peru and an underwater fibre optic cable linking China and Chile, hold the promise of enhancing connectivity and prosperity for both countries. Leaders across Latin American nations have welcomed the BRI as a continuation of strong bilateral relations with China.

Since 2005, China has extended significant state-to-state financing, amounting to around US$150 billion, with investments in various infrastructure projects across the region. The BRI’s importance for future development has been underscored by officials from Bolivia, Peru, Ecuador, Argentina, Panama, Trinidad and Tobago, Antigua and Barbuda, and Uruguay. These countries express optimism about the potential benefits of increased infrastructure investment facilitated by the BRI, signalling a collective hope for enhanced economic growth and development in the region.

EVENTS LEADING TO THIS

China’s ascendancy in trade across South and Central America, surpassing the United States during the tenure of former President Donald Trump, persisted despite warnings from his administration about the risks of growing ties with Beijing. However, under President Joe Biden, efforts to reverse this trend have struggled, with the trade gap widening further.

In response, U.S. officials are shifting their approach, emphasizing that the United States offers the region more than just trade, highlighting investments in high-tech industries as an alternative avenue for collaboration. They caution against solely using trade metrics to assess China’s influence, stressing the need to consider broader aspects of engagement.

Expressing confidence in America’s ability to compete with China, officials urge regional governments to prioritize trade relationships that do not come with political conditions attached. Meanwhile, Beijing maintains that its trade and investment initiatives in Latin America are mutually beneficial, advocating for a win-win scenario.

Over the past decade, Peru, a significant copper producer, has witnessed a notable shift in its trade dynamics. Once trading slightly more with the United States than with China, the balance has now tilted decisively towards China, with a bilateral trade lead of over $10 billion, according to the latest annual data. This trend is emblematic of broader shifts in South America’s trade patterns, driven by China’s insatiable demand for key commodities like copper, lithium, soy, and corn, sourced from the Andes region and the plains of Argentina and Brazil.

China’s expanding trade dominance, surpassing $100 billion in South America alone in the most recent data, amplifies its influence in the region. In a strategic manoeuvre, Beijing has upgraded diplomatic ties with Uruguay and Colombia to “strategic partnerships,” despite the latter’s historical alliance with the United States. Even in Argentina, where criticism of China was once prevalent, President Javier Milei has adopted a more conciliatory approach since assuming office, underscoring the economic significance of China to the crisis-stricken nation.

China’s pivotal role as the primary buyer of Argentina’s soy and beef further cements its influence, exemplified by the substantial $18 billion currency swap line established with Argentina. This financial arrangement has been leveraged by Argentina’s government to manage its debt obligations, including payments to international institutions like the International Monetary Fund (IMF).

LEVERAGE POINT

In the past decade, Peru’s trade relationship with China has surged, doubling to $33 billion in 2022, propelled primarily by increased copper exports, while trade with the United States has remained stagnant. China’s investment in Peruvian mines, infrastructure, transportation, and hydroelectric power generation amounted to around $24 billion during the same period, underlining Beijing’s substantial economic footprint in the country.

Peruvian exports to China demonstrated robust growth, expanding by 9.3% in the first eleven months of the previous year, outpacing the 5.3% growth in exports to the United States. This trend has resulted in Peru boasting a significant trade surplus of $9.4 billion with China, juxtaposed against a $1.3 billion deficit with the United States.

Peruvian President Dina Boluarte’s meeting with China’s Xi Jinping at the Asia-Pacific Economic Cooperation (APEC) forum in San Francisco underscored the importance of the burgeoning economic ties between the two nations. Boluarte hailed the Chancay port project as a catalyst for advancing free trade and attracting new Chinese investments, further cementing Peru’s economic ties with China.

This meeting followed a less prominent encounter with President Biden in Washington, reflecting perceptions of China capitalizing on opportunities in Peru amid perceived American disengagement. The development of the Chancay port is seen as consolidating China’s influential position in Peru and serving as a strategic leverage point in the region.

China’s approach to engagement in Peru and the broader region has evolved into a more assertive and ambitious stance, bolstered by substantial financial resources. This contrasts starkly with historical waves of Chinese immigration to Peru, characterized by labourers and small business owners, highlighting the transformation of China’s role in the contemporary Peruvian economy. Today, Chinese business executives and financiers arrive with significant projects in tow, symbolizing China’s expanding footprint and influence in Peru’s economic landscape.

RACE FOR MINERALS

Despite China’s significant efforts with its Belt and Road Initiative (BRI), it has encountered resistance in Asia and Europe, evidenced by Italy’s recent withdrawal from the initiative and challenges with bad debts owed to China. In Latin America, various projects from Argentina to Venezuela have experienced delays and obstacles. Diplomats and trade experts caution that the success of projects like the Chancay port hinges on improvements in regional infrastructure, particularly in transportation networks like roads and railways, to facilitate the movement of goods, including grains from Brazil.

Currently, the Interocean Highway, constructed over a decade ago, connects the Pacific Coast in southern Peru to Brazil’s state of Acre, but its usage remains limited. The lack of robust regional connections poses a significant challenge to the viability of projects like the Chancay port. Nevertheless, despite these challenges, observers note that China’s influence in South America is solidifying, driven by the region’s pressing need for financing and foreign currency.

The substantial gap in infrastructure funding in the region complicates efforts by the United States to dissuade local governments from accepting Chinese investments. Moreover, there is growing global interest in South America’s abundant resources, such as lithium, copper, and grains, turning the region into a battleground for strategic mineral reserves among major powers like the United States, Europe, and China.