Commentary: Defusing the Myths about China’s Relations with Latin America

Myth 1: Deindustrialization

Karl Marx once said that what the developed countries showed the developing countries was their future success in realizing a high level of industrialization. Indeed, industrialization, also considered as the path toward modernization, is the inevitable result of the progress of human society and an important part of economic progress. Without industrialization, there would be no modernization and prosperity.

Deindustrialization is a decline of the proportion of the manufacturing sector in the gross domestic product (GDP), employment, and real value-added, and it is often caused by one or more of the following factors: rising income, technological progress, high labor costs, commodities booms, and lack of competitiveness.

1. Rising income tends to induce consumers to spend more on services, thus making it possible for the service sector to grow faster than the manufacturing sector. In a sense, this result reflects not only the transformation of the economic structure but also the progress of a society. Therefore, this kind of deindustrialization is not necessarily negative (Rowthorn and Ramaswamy, 1997).

2. As a consequence of technological progress, increase in labor productivity will inevitably lead to a decrease in the demand for labor in the manufacturing sector. Furthermore, technological progress can lower the price of manufactured goods, thereby reducing the share of the industrial sector in GDP. This type of deindustrialization is not harmful either.

3. Labor costs vary greatly in different countries. In the age of globalization, companies in the developed countries always wish to move labor-intensive manufacturing activities to the developing countries where labor costs are low. This kind of movement, known as outsourcing or offshoring, can lead to deindustrialization in the developed countries.

4. A commodities boom or rapid increase in the production of raw materials (the primary sector) is likely to bring easy money from exporting these materials and to attract investment, technology, labor, etc., neglecting the development of the manufacturing sector and perhaps even leading to a crisis of the whole economy (the so-called Dutch-disease effect). ²

5. In the age of globalization, competitiveness matters. When a country’s manufactured products cannot compete in the world market or with imports in the domestic market, local industry cannot develop and deindustrialization occurs (Dasgupta and Singh, 2006; Palma, 2005; Jenkins and Barbosa, 2012; Kim and Lee, 2014a; Rowthorn and Ramaswamy, 1997; 1999; Sachs and Warner, 1995).

For the developed countries, deindustrialization may not be a negative outcome. For example, after reaching a high degree of industrialization in the 1980s, Japan was faced with tremendous pressure from such issues as rising production costs, an aging population, labor shortages, and environmental degradation. Therefore, it initiated deindustrialization by promoting the development of the service sector (Kim and Lee, 2014b). For developing countries, however, deindustrialization may be unwelcome because of its unfavorable effects on economic growth (Palma, 2018). This is why economists argue that deindustrialization in the developing countries is “premature” (Rodrik, 2006; Dasgupta and Singh, 2006).

Is Latin America faced with deindustrialization? Quite a few researchers say yes. For instance, José Miguel Ahumada (2019: 49) believes that Latin America “is facing a growth regime that is based on an extractive and low-value-added export basket, a deep deindustrialization, and restricted policy space for states to implement pro-developmental policies.” Seungho Lee and Chong-Sup Kim (2020: 2) conclude that Latin America was undergoing a process of “premature deindustrialization” during the study period from 1990 to 2018 because “its manufacturing value-added as a percentage of GDP continuously declined from 19.1% to 13.4%.” They even point out that “the rate at which deindustrialization took place during the study period was much higher for the Latin American group than the other country groups.”

Regrettably, some people blame Latin America’s deindustrialization on China. Their conclusions are based on the following three wrong ideas: that by exporting natural resources to China Latin America can easily acquire a large amount of wealth, thus reducing its incentives to promote industrialization; that China’s exports of manufactured products, which are often labor-intensive, put Latin America’s manufacturing sector at a relative disadvantage in the Latin American market; and that Latin America’s manufactured products must compete with Chinese exports in the world market and the winner is always China.

First, as many scholars have shown, Latin America’s deindustrialization started as early as in the 1980s or 1990s, but China’s trade relations with the region started to pick up the pace only in the early 2000s. China’s imports from Latin America totaled only US$6.7 billion in 2011 and surpassed US$20 billion as late as in 2004 (National Bureau of Statistics, 2012), when deindustrialization in Latin America had already become problematic.

Second, many Latin American countries do not have proper industrial policies. Latin America implemented the strategy of import-substitution industrialization in the 1930s or 1940s. In the first few decades the governments did adopt some industrial policies that favored the development of the manufacturing sector, but since the “lost decade” of the 1980s there have been neither government-led industrial policies nor market-friendly policies supportive of the industrial sector. For instance, analyzing the four largest Latin American economies, Brazil, Mexico, Argentina, and Colombia, José Antonio Ocampo and Gabriel Porcile (2020) concluded that, after a period of state-led industrialization between the end of World War II and the debt crisis of the 1980s, the region abandoned industrial policy and embraced the structural reform agenda in the 1990s. Thanks to the commodities boom after 2004, which favored the reprimarization of its export structure, it witnessed only “a timid return” of industrial policy.

Third, for financial and cultural reasons, Latin America is notorious for its weak capital accumulation and insufficiency of investment. This is a problem not only for infrastructure but also for the manufacturing sector. Luckily, the commodities boom of the past two decades or so has offered Latin America a golden opportunity for substantial export earnings to be used for investment. Therefore, it is fair to conclude that, without Latin America’s export of its raw materials to China and other countries, deindustrialization might have been more conspicuous.

Fourth, Chinese exports of manufactured products can diversify Latin America’s market supply. On the one hand, the region’s capacity for industrial production is quite limited and requires the import of large amounts of durable and nondurable manufactured products; on the other, China’s manufactured products, which are labor- and technology-intensive and consumer-friendly, are highly competitive on the world market. This kind of complementarity can create a win-win outcome for Latin America and China.

Finally, Latin America’s comparative advantage in the world economy is its abundance of natural resources. Whether this comparative advantage is a blessing or a curse depends on Latin America’s industrial policies rather than on external factors. It is reasonable to argue that, if Latin America does not export its raw materials to China, other buyers will step in. Moreover, apart from China, other countries, such as the United States, Japan, and Korea, have also purchased large amounts of raw materials from Latin America.

Myth 2: Environmental Destruction

Since the 1990s, with the rapid development of its economy, China has been making overseas investments around the world. Therefore, apart from trade, China’s economic relations with Latin America also include two-way investment, although Latin American investment in China is much less than the other way round. In December 1992, the Chinese steel company the Shougang Group bought 98.4 percent of the shares of Hierro Perú, along with the permanent rights to explore and operate in a mining area of 670.7 square kilometers. This was China’s first large-scale direct investment project in Latin America. Since then, especially in the past 10 years or so, China’s direct investment in Latin America has increased very rapidly. According to the 2020 Statistical Bulletin of China’s Outward Foreign Direct Investment, published by China’s Ministry of Commerce, the National Bureau of Statistics, and the State Administration of Foreign Exchange, by the end of 2020 China’s direct investment in Latin America had reached US$630 billion. ³

China’s direct investment in Latin America has helped Latin American countries to make up for the shortfall of capital accumulation, create jobs, transfer technology, and promote economic and social development. However, from time to time it is falsely claimed that Chinese companies are destroying the environment in Latin America. For example, China Dialogue, a nongovernmental organization (NGO) based in London, published an article in 2015 saying that the high concentration of Chinese activity in Latin America’s agriculture and extractive sectors has placed a heavy strain on water supplies and increased deforestation and greenhouse gas emissions. ⁴ According to Max Nathanson (2018), a researcher at University College, London, “Chinese state firms are the largest financiers and builders of dams in the world. . . . In Latin America, the list of countries working with China on dams includes Argentina, Belize, Bolivia, Brazil, Colombia, Costa Rica, Ecuador, Guyana, Honduras, Peru, and Venezuela. These dams . . . have caused untold environmental harm.” Natalia Cote-Muñoz (2019), a research associate for Latin America Studies at the Council on Foreign Relations, in Washington, DC, has said,

Booming commodity trade with China has been a mixed blessing. As the U.S.-China trade war stilted Chinese consumption of U.S. soy, the bean increasingly comes from South American countries. In turn, increased soy farming is creeping into the Amazon and leading to massive deforestation and toxification of local populations from pesticides. Similarly, increased demand—in large part from China—for avocados led to drought and deforestation in Chile, Mexico, and Peru.

These Accusations are Unfair and Even Absurd

First, the Chinese government always urges Chinese enterprises to abide by the environmental laws of host countries. For instance, as early as in 2013, the Ministry of Commerce and the Ministry of Environmental Protection issued a document stipulating the guidelines for Chinese enterprises to uphold the belief in low-carbon-economy/green development and respect the environmental laws of the host countries (Ministry of Commerce, 2013). In 2017, the Ministry of Environmental Protection, the Ministry of Foreign Affairs, the National Development and Reform Commission, and the Ministry of Commerce published a document about the Belt-Road Initiative and environmental protection, adding the concept of “green development” to the initiataive to encourage Chinese investors to comply with the environmental standards of the host country (Ministry of Environmental Protection, 2017a). In the same year, the Ministry of Environmental Protection put forward a plan for cooperation between China and host countries, asking Chinese companies to develop and utilize low-carbon materials and green technologies for their projects (Ministry of Environmental Protection, 2017b).These documents have helped raise the consciousness of Chinese enterprises making overseas investments about respecting local environmental protection laws.

Second, China’s relations with Latin America are based on extensive consultation, joint contribution, and shared benefits. Indeed, how to address the relationship between environment protection and economic development is a major issue for all the countries in the world. In Latin America, different governments, companies, and environmental NGOs have different positions and attitudes on this issue. This may explain why President Bolsonaro of Brazil not only exchanged criticism with NGOs but also clashed with French President Emmanuel Macron in the media after a fire broke out in the Amazon River rain forest in Brazil in August 2019. Whether an investment can be made or a trade deal can be completed simply depends on the voluntary decisions of the host country and the investor. On the one hand, China has never compelled Latin American countries to export soybeans, avocados, or other commodities, nor has it forced them to build dams. On the other, in making outward direct investments, China always upholds the principle of extensive consultation, joint contribution, and shared benefits. In other words, in order to win the contract, Chinese investors always try their best to meet Latin America’s rising standards of environmental protection.

Third, Chinese companies have fulfilled their promise to exercise corporate social responsibility. China’s overseas investments, particularly those related to the environment, have attracted great attention from the international media and NGOs. The majority of these reports and findings are based on faulty accusations, fake news, or disinformation. For example, in February 2006, two major Chinese oil companies, the China National Petroleum Corporation and the China Petrochemical Corporation, jointly established Andes Petroleum to acquire ENCANA’s oil assets in Ecuador. Since then, the corporation has made great efforts to protect the ecologically sensitive area by adhering to the concept of “green development” and strictly following the United Nations Convention on Biological Diversity. It has designed such effective measures as establishing a hazardous-behavior-status reporting system that rewards those who report hidden “risks.” Because of the success in meeting the requirements of Ecuador’s environmental protection laws and regulations and exercising corporate social responsibility, it has won prizes from both Ecuador and international organizations. ⁵ Again, Ecuador’s Coca Codo Sinclair hydroelectric plant has enabled it not only to satisfy its own energy needs but also to export electricity. In the process of building the multiyear project, the Chinese company paid considerable attention to protecting the local environment. For instance, strict regulations to protect the environment were made for all stages of construction, and daily inspections were carried out to guarantee full implementation; all the waste from the construction site and the workers’ dormitories was collected and processed in a scientific and environmentally friendly way; and, upon completion of the hydroelectric project, the areas affected by deforestation near the dam were well repaired with replanting and reforestation (China International Constructors’ Association, 2018).

In Peru, because of its outstanding performance in meeting the environmental standards and exercising corporate social responsibility, Chinalco Peru, created in 2007 by the Aluminum Corporation of China to operate the copper project in Toromocho, was praised by President Humala as “a model of responsible mining development” (People’s Daily, 2014). Even those who tend to focus on finding fault with Chinese enterprises have offered positive evidence of their protection of the environment in Latin America. For instance, a report titled China in Latin America: Lessons for South-South Cooperation and Sustainable Development, jointly published by Boston University, the Centro de Investigación para la Transformación, Tufts University, and the Universidad del Pacífico (Ray et al., 2015: 12–13), showed that Chinese firms do not perform significantly worse than domestic or other international firms. “Our case studies found some instances of Chinese firms’ outperforming their competitors, especially with proper incentives from governments and civil society. . . . Chinese investors show an ability to exceed local standards. . . . Other positive outcomes in the case studies show that Chinese investors are capable of living up to high standards, especially when the proper incentives are in place.”As the United Nations Economic Commission for Latin America and the Caribbean (ECLAC, 2015: 62) noted, “Governments in the region [of Latin America] must build up their regulatory frameworks for investment (local and foreign alike) in extractive activities, and strengthen oversight and enforcement. They also need better coordination between the different levels of government involved in projects and better mechanisms for consultation with local communities.”

Finally, when Chinese investors think that they may not be able to meet the environmental standards, they will drop the project. For example, China’s two major steel companies, Baosteel and Wuhan Steel, withdrew their investment plans in Brazil in 2003 and 2012, respectively, and in 2014 a multibillion-dollar railroad project for linking Brazil’s Atlantic coast with Peru’s Pacific was stalled because of concerns about the possible repercussions for the environment.

Myth 3: The Debt Trap

Thanks to the rapid development of trade and investment relations between China and Latin America, financial cooperation between the two sides has also witnessed steady progress. In 2014, during his visit to Latin America, Chinese President Xi Jinping put forward a framework for bilateral cooperation that included financial cooperation. In 2015 and 2016, China set up two important investment funds: the China–Latin America Cooperation Fund and the China–Latin America Production Capacity Cooperation Fund. ⁶ In 2019, China and six Latin American countries (Argentina, Ecuador, Mexico, Peru, Panama, and Colombia), along with the Banco Latinoamericano de Comercio Exterior (BLADEX), jointly established a multilateral financial cooperation mechanism. Over the past 10 years or so, with the rapid progress of the internationalization of the RMB, the Chinese currency, China has launched currency swaps with several countries in the region.

Meeting with the visiting Argentine President Mauricio Macri in Beijing on May 17, 2017, Chinese President Xi announced that Latin America would be the natural extension of China’s “twenty-first-century maritime silk road.” It can be expected that, through this initiative, financial cooperation between China and Latin America will be further promoted and China will work with debtors to avoid defaults. This cooperation is based on market rules and international standards and has made up for the shortfall of Latin America’s capital accumulation and contributed to the region’s economic and social development. However, charges of China’s creating a “debt trap” can be heard from time to time. For instance, in 2018, then U.S. Secretary of State Rex Tillerson said, “China’s offers always come at a price—usually in the form of state-led investments, carried out by imported Chinese labor, onerous loans, and unsustainable debt.” In a speech delivered in Santiago, Chile, on April 12, 2019, kicking off a four-country tour of Latin America, U.S. Secretary of State Mike Pompeo said, “China, Russia—they’re showing up at the doorstep, but once they enter the house, we know the debt traps. They will use debt traps, they will disregard rules, and they will spread disorder in your home. Thankfully, you all, South America, is not buying it. You should know that the United States will stand behind you.” Mauricio Claver-Carone, senior director for Western Hemisphere affairs of the National Security Council, told Efe News Agency that “President Donald Trump wants Latin America to pursue strong economic and bilateral investment ties with the United States and benefit from its prosperity.” He added that Latin America “will be mired in dependency, debt, corruption if it leans on China” (Lima, 2020). These accusations are groundless.

First, the “debt trap” accusations contradict the reality. Whether one country has created a “debt trap” in another depends on the following four conditions: (1) the debtor country does not need any loans from the creditor; (2) the creditor-debtor relationship established by the two sides does not conform to international standards; (3) the creditor-debtor relationship is not win-win; and (4) the loans from the said creditor carry the genuine risk of default and a debt crisis. These conditions do not apply to China’s financial cooperation with Latin American countries. Latin American countries have a relatively weak capital accumulation capacity and are highly dependent on foreign capital. Many of them even resort to the use of highly speculative capital, also known as “hot money,” for urgent needs, thus greatly increasing financial risks. One of the main culprits of the peso crisis in Mexico in 1994 was the influx of hot money. Numerous studies undertaken by scholars in the United States, Europe, Latin America, and China have shown that inadequate infrastructure in Latin American countries is one of the important factors affecting their economic growth and that one of the main reasons for their backwardness is the lack of investment. Therefore, external capital in the form of credit and/or direct investment from China can help solve the Latin American problem of capital shortage.

Second, Chinese loans account for a small proportion of the total external debt of Latin American countries.Whereas U.S. banks have been the largest creditors for Latin America’s external debt, China contributes much less to the growth of the region’s debt burden. According to a report undertaken by Enrique Dussel Peters (2019), loans from China to Latin America (mainly to Argentina, the Bahamas, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Panama, Peru, the Dominican Republic, and Venezuela) amounted to only US$136 million in 2004 and reached a peak of US$11 billion in 2014 before leveling off to roughly US$4 billion in 2018. This means that China accounted for only 0.2 percent of the total debt (US$1.95 trillion) (ECLAC, 2022: 38). “All in all, China is not one of the main providers of external finance to Latin America and the Caribbean, so that the major developed countries, the United States and those in Europe, continue to be the main external funding sources for the region’s economic and social development” (Dussel Peters, 2019: 38). Moreover, as a responsible creditor, China has always stuck to international norms and rules in developing its economic and trade relations, including financial cooperation, with Latin American countries. Clauses for the terms of repayment and interest rates of Chinese loans have been agreed upon by the two sides through transparent consultations and negotiations.

Third, Venezuela’s economic hardships are not caused by Chinese loans. Indeed, since Hugo Chávez came to power in 1999, China’s economic relations with Venezuela have been developing rapidly. Some say that China has extended more than US$60 billion of credit to Venezuela through the oil-for-loan framework of cooperation (Ferchen, 2018). Whether this number is correct or not, China has not created a “debt trap” in Venezuela. Contrarily, China’s financial assistance to Venezuela is an example of South-South cooperation, contributing to its efforts to promote economic and social development. Moreover, the oil-for-loan framework is an innovative way of strengthening financial cooperation between two sovereign nations. Without Chinese loans, Venezuela’s economic and social crises would have been worse. For instance, the China-Venezuela Joint Fund contributed greatly to the implementation of Venezuela’s Gran Misión Vivienda Venezuela, a housing project designed by Chávez.

Finally, in contrast to the petrodollars of the U.S. commercial banks in the 1970s, Chinese loans have never generated any financial risks for Latin America.The rapid rise of oil prices after the two oil crises in the 1970s made it possible for U.S. commercial banks to lend the so-called petrodollars (dollars accumulated by oil-producing countries as revenues for oil exports) to Latin America at extremely low interest rates. As a result, Mexico’s total external debt rose rapidly from US$4 billion in 1973 to US$43 billion in 1981, an average annual increase of about 30 percent (Boughton, 2001: 282). For the entire Latin American region, the ratio of external debt equivalent to GDP and to total exports increased rapidly from approximately 18 percent and 180 percent in 1970 to approximately 45 percent and 330 percent in 1982 (Ocampo, 2014). This unsustainable debt burden, coupled with the sudden rise of the interest rate in the first half of 1981 and the fall of commodity prices at the same time, pushed Mexico into a debt crisis in 1982. ⁷ Within less than a year, most of the Latin American countries had fallen into a debt crisis that developed into a “lost decade” for the region in the 1980s.The Latin American countries used many of the petrodollars loans for consumption or other nonproductive purposes, thus making it difficult for them to increase their debt capacity. Chinese loans are totally different in the sense that they are invested in Latin America’s productive sectors at reasonable interest rates, which makes them sustainable and unlikely to be defaulted on.

As a matter of fact, even in Latin America, there are many people who do not believe that China has created a debt trap for them. For example, Eduardo Klinger Pevida (2020), director of the Center for Analysis and Studies on China and Asia and a member of the Academy of Sciences of the Dominican Republic, has said that Latin America’s debt crisis was caused not by China but by U.S. banks.

Concluding Remarks

China has not deindustrialized Latin America, destroyed its environment, or created a debt trap there. Its economic relations with Latin America are based on complementarity and comparative advantage on both sides, and its direct investment in the manufacturing sector and purchase of commodities have benefited Latin America’s industrial development. The Chinese government urges Chinese enterprises to abide by the environmental laws of host countries and exercise corporate social responsibility. The myths of deindustrialization, environmental destruction, and the debt trap, based on faulty evidence and misleading facts, have inflamed the “Chinese threat” or “fear of China” mentality, demonizing China’s international image and damaging China–Latin America relations, and they must be defused.