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China's Expanding Role in Latin America

The Dragon in Uncle Sam’s Backyard

by RYAN EUSTACE

The influence of foreign economic interests has been a crucial factor in Latin America’s development. Foreign investment, while mistrusted by many, still plays a central role in the economic development of the region, especially in today’s globalized economy. Many on the left argue that Western investment and exploitation are tools of neocolonialism and can explain many of Latin America’s societal ills. Yet, a different consensus is emerging on Chinese investment in the region. With China’s emergence on the global stage, many Latin American countries have welcomed Chinese investment with open arms, as they see China as a countermeasure to US hegemony in the region. Thus, the question inevitably arises, is the United States destined to be supplanted as the regional hegemon, and if so, is that a good thing for Latin America? This depends in large part on the United States.

China: The New Hegemony in Latin America?

China’s increasing trade and investment in Latin America is impressive. In 2011, the value of all trade between China and Latin America hit $241.5 billion USD, with Chinese exports valued at $121.7 billion USD and imports of Latin American goods valued at $119 billion USD. [1] Overall, the growth in trade between China and Latin America grew a massive 1200% between 2000 and 2009. [2] Furthermore, foreign direct investment flowing into Latin America from China was valued at $87.8 billion in 2012. [3] These figures have never been higher, and paired with the 11% decrease in U.S.-Latin American trade from 2012 to 2013, alarmists in the United States present this as evidence that U.S. hegemony is being usurped by China. [4] However, these charges are largely overblown, as these figures still only represent a small percentage of the United States’ larger economic relationship with Latin America. For example, in 2011, the United States led trade in the region at $343 billion and led FDI in the region at $173.3 billion in 2012, both significantly higher than China or any other country. [5]

What Does Increasing Chinese Investment Mean for Latin America?

There are many in Latin America who, when speaking of the region’s growing relationship with China, hail it as the first step in dismantling U.S. hemispheric hegemony. “We are advancing in the building of a civilizing, deeply human strategic alliance, which will end the time of hegemonic powers that subjugated our countries,” commented Nicolas Maduro, President of Venezuela, on his country’s deepening relationship with China. [6] This likely reflects China’s “no strings attached” policy of investment and trade, which does not concern itself with the internal affairs of a partner nation. The Chinese stance contrasts greatly with the “Washington Consensus” liberal economic reforms and democratization pushed by the United States, World Bank, and International Monetary Fund. These interests often consider internal factors, such as level of democracy, human rights, ease of doing business and labor practices as conditions for economic partnership. [7]

China’s “no strings attached” policy is often hailed as a welcome improvement to the ideological parameters of U.S. policy, yet it has its limits. In many cases there are indeed strings attached, such as revoking recognition for Taiwan. In 2007, in exchange for severing diplomatic ties with Taiwan, Costa Rica was able to benefit from a highly lucrative economic relationship with China in the form of $900 million USD for expanding an oil refinery and a $400 million USD loan for road construction, as well as an increase in bilateral trade up to $6.17 billion in 2012. [8] A 2006 incident in Zambia, where China threatened to cut diplomatic ties with the country if a candidate who was critical of China was elected, further discredits the perception of “no strings attached.” [9] Just like the major European powers and the U.S. before them, China is not afraid to pull the levers of economic power to influence the countries in which it trades and invests.

China has stressed repeatedly that its rise in Latin America is peaceful, that it aims to “maintain the status quo,” and that it wishes to avoid threatening the regional hegemony of the United States. [10] The Latin American perception of China simply as a trade partner, without imperialist tendencies (like the US), reflects naiveté and does not take into account China’s geopolitical calculations and ulterior motives. China is not only seeking out lucrative investments and trade opportunities, but it is also seeking to balance U.S. power. After more than 100 years of speculation by many companies, a Chinese company, HKND Group, plans to invest $40 billion USD to create a trans-oceanic canal in Nicaragua to rival the Panama Canal. In addition to incurring huge costs to indigenous people and the environment, the practicality and economic viability of such a project has been called into question by experts. The Panama Canal is being expanded so that it can handle all but the biggest ships. Additionally, global temperature changes will likely lead to the opening of a far shorter shipping route to the pacific, as Arctic ice melts and the much sought after Northwest passage is opened. Both the expansion of the Panama Canal and the opening of the Northwest passage considerably reduce the necessity of the Nicaragua Canal. With these facts in mind, the economic advantages of such a project are dubious at best. It is certain, though, that it would give China a strategic foothold in the Americas to rival U.S. hegemony [11]. This is not to assert that the only calculation here is to undermine the United States, as the expectation of economic gain is certainly an element. However, at the same time, China’s attempt to balance U.S. global power is clearly present in Latin America. Such geopolitical calculation, using Latin America as a proxy for a wider tension between global powers, is reminiscent of the destructive posturing of the Cold War. Unfortunately, Latin American hope for a refreshing departure from acting as a chess piece in the tension of world powers may be premature.

Ultimately, China is just another investor and is equally prone to neocolonial behavior. China’s relationship with Latin America is very similar to its relationship with Africa, the second biggest receiver of Chinese investment, suggesting that there are lessons to be drawn from its actions there. In Africa, Chinese employers frequently pay wages far below the official minimum wage, often at or below $1 a day for up to 13 hours of work. A Zambian union organizer stated, “While Western countries like to export their ideology, Chinese like to export their low labor standards”[12]. These employers also favor employing other Chinese individuals and firms to do more lucrative jobs, much to the consternation of the local population, who expected to benefit more from the presence of Chinese companies. [13] Jane Goodall, the famed primate researcher (and after spending most of her life in Africa, a reliable authority on social conditions there), decries what she sees as a repetition of the exploitation pioneered by European colonizers. She argues, “In Africa, China is merely doing what the colonialists did. They want raw materials for their economic growth, just as the colonialists were going into Africa and taking the natural resources, leaving people poorer.” [14] With the majority of exports to China from Latin America coming in the form of raw materials, Africa may provide a lesson on how easy it is for a more developed economy to exploit a less developed and resource intensive economy, no matter the rhetoric it uses in the process.

While Chinese investment tends not to concern itself with policy, it does concern itself with implementation. A threat of deindustrialization via investment is a result of Chinese loans, which often stipulate the hiring of Chinese firms and importation of Chinese industrial equipment instead of spreading the wealth to local business. This means that Chinese investment is not growing Latin American industry as much as it could. Because China both heavily invests in and competes with Latin America, the threat of deindustrialization is very real, which in turn threatens any sustainable growth. Latin American industry simply cannot compete with China’s low production costs for manufactured goods, putting pressure on Latin American economies to stay resource-export dependent.

Yet Chinese investment is not all bad. It certainly has unique risks, but it is also a very valuable opportunity for Latin America to diversify its sources of investment. Furthermore, this investment allows Latin American countries a little more freedom in pursuing their own development agendas, but they must be careful to channel this finance sustainably. If a focus is put on macroeconomic stability, economic diversification, reducing inequality and protecting the environment, this could be possible. [15] These are no easy things to achieve as such moves could prove to be very unpopular in the short term. Yet, in order to forge more sustainable growth an emphasis needs to be placed on making hard decisions.

An Abdication of US Hegemony: Good, Bad or Imminent?

The United States has not yet been supplanted as the regional hegemon. However, as growing economies like Brazil flex their muscles and China’s influence in the region grows, the future of U.S. regional hegemony is uncertain. Assuming that U.S. policy toward the region remains unchanged, given enough time, it is highly likely that China could gain more influence and inherit a larger leadership role in the region. China has already started to shape norms in the region simply by virtue of its economic power. As Chinese trade and investment account for an increasing share of Latin American GDPs and trade deficits with China grow, a natural gravitation towards Chinese foreign policy norms is starting to take place. This is particularly evident in Chinese pressure for non-intervention with respect to human rights. A surprising trend is occurring, where countries such as Costa Rica, who traditionally value human rights, have been voting against or abstaining on resolutions at the UN concerning human rights in other states. This convergence of policy preferences is not necessarily by Chinese design, but is a rational response by states that are far more dependent on China than China is on them [16]. However, this convergence to Chinese policy preferences would be a detriment to the region. Human rights abuses and undemocratic behavior should be treated as internal matters. If respect for democratic institutions is not treated as sacrosanct, coups and instability could become increasingly likely. Strict adherence to the self-determination of states and non-intervention foretell the death of international norms that are for the betterment and protection of the common citizen.

To avoid this, the United States needs to re-engage the region, not as a regional hegemon, but as a regional leader and partner. The relationship between Latin America and the United States has been historically characterized by domination rather than leadership. Domination is an imposition of will, a leveraging that exploits power asymmetries. Leadership often requires inspiring based off of example and sacrifice, it requires eschewing the current exploitative relationship and embracing what could be a lasting partnership. A reordering of priorities is in order. The United States needs to apply the principles of democracy and human rights evenly and consistently. These ideals should be sacred and not manipulated out of convenience or opportunity. Furthermore, Washington needs to stop letting the affairs of small, ideologically divisive countries characterize its larger Latin American policy. The ouster of Manuel Zelaya of Honduras in 2009 is a perfect example. President Obama labeled it a coup, but members of Congress disagreed. Ultimately the positions of Ambassador to Brazil and Assistant Secretary of State for the region were blocked for nine months [17]. This was a particularly troubling episode, as countries such as Brazil, Mexico, and Argentina, the three largest economies in Latin America, are deserving of the majority of our attention in the region. The future of Latin America will be blazed by these state-actors, not the dominating influence of an outsider. The US must recognize the new regional power distribution taking shape in Latin America and seek to encourage it, not control it.

To reengage nations like Brazil and Argentina, a renewed push for the FTAA (Free Trade Area of the Americas) should be undertaken. Not only would such a move deepen regional integration, but it would also reduce the de-industrialization of Latin America at the hands of cheaply manufactured Chinese goods. China’s advantage is low production costs that Latin American countries cannot reasonably meet yet because removing the barriers of entry to a wider hemispheric market could drive down Latin American costs. It would not be a magic bullet, but it would do more to sustain industrialization. The United States’ many smaller free trade agreements in the region should be consolidated into a larger free market and serve as the basis for the FTAA [18]. Only by truly committing to the role of regional leader, which requires making some sacrifices to form a lasting relationship and rebuild trust, would this be possible. While it is unthinkable to imagine now, U.S. subsidies for agriculture and steel would have to be up for negotiation if any free trade agreement were to be effective and prove that the desire for a strong relationship with a growing Latin America commanded importance. An even more meaningful re-ordering of priorities could involve reforming institutions such as the World Bank, IMF, OAS and UN Security Council to better reflect the interests of rising nations in Latin America. The more such nations feel these institutions do not reflect their interests, the more likely they are to abandon them. China as a regional hegemon is not in Latin America’s best interest. The United States should wake up and realize that the new Latin America is here and needs a new place among Washington’s foreign policy priorities. At its worst, the United States is inconsistent, hypocritical, exploitative and domineering. Yet at its best, it is an enforcer and supporter of laudable international norms, and Latin America and the world are better off for it.

Ryan Eustace is a Research Associate at the Council on Hemispheric Affairs.

ENDNOTES

[1] Indo-Asian News Service. “China’s trade with Latin America grew in 2011.” Yahoo News India. https://in.news.yahoo.com/chinas-trade-latin-america-grew-2011-050334275.html (accessed June 6, 2014).

[2] US-China Economic Security Review Commission, Backgrounder: China in Latin America, By Katherine Koleski, Washington, D.C., GPO, 2011, http://origin.www.uscc.gov/sites/default/files/Research/Backgrounder_China_in_Latin_America.pdf, June 6, 2014.

[3] China-Latin America cross-council taskforce, Chinese foreign direct investment in Latin America, By Taotao Chen and Miguel Perez Ludena, Santiago, Chile., United Nations, 2013, http://www.cepal.org/publicaciones/xml/1/51551/Chineseforeigndirectinvestment.pdf, June 6, 2014

[4] Estep, Chris. “How the U.S. is Losing Latin America – IVN.us.” IVN. http://ivn.us/2014/02/12/u-s-losing-latin-america/ (accessed June 6, 2014).

[5] USCB. “United States Census Bureau.” Foreign Trade. http://www.census.gov/foreign-trade/balance/c0009.html (accessed June 6, 2014); and ECLAC, Foreign Direct Investment in Latin America and the Caribbean, United Nations, 2012, http://www.eclac.cl/noticias/paginas/1/33941/2013-371_PPT_FDI-2013.pdf, June 6, 2014

[6] Embassy of Venezuela. “Venezuela-China alliance to break old hegemonies.” Embassy of the Bolivarian Republic of Venezuela in the US VenezuelaChina alliance to break old hegemonies Comments. http://venezuela-us.org/2014/04/23/venezuela-china-alliance-to-break-old-hegemonies/ (accessed June 6, 2014).

[7] Kreps, Sarah, and Gustavo Flores-Macias. “No Strings Attached? Evaluating China’s Trade Relations Abroad.” The Diplomat. http://thediplomat.com/2013/05/no-strings-attached-evaluating-chinas-trade-relations-abroad/ (accessed June 6, 2014).

[8] Tiezzi, Shannon. “Why Taiwan’s Allies are Flocking to Beijing.” The Diplomat. http://thediplomat.com/2013/11/why-taiwans-allies-are-flocking-to-beijing/ (accessed June 6, 2014).

[9] Chan, John. “Hu rejects accusations that China has colonial ambitions in Africa.” Asian Tribune. http://asiantribune.com/node/4562 (accessed June 6, 2014).

[10] Xia, Ming. “”China Threat” or a “Peaceful Rise of China”?.” . http://www.nytimes.com/ref/college/coll-china-politics-007.html (accessed June 6, 2014).

[11] Smith, Roff. “Is Nicaraguan Canal a Boon for Trade or a Boondoggle?.” National Geographic. http://news.nationalgeographic.com/news/2014/03/140329-nicaragua-canal-hknd-panama-wang-jin-world/ (accessed June 6, 2014).

[12] Vanham, Peter. “bb review: China’s sour African embrace.” beyondbrics. http://blogs.ft.com/beyond-brics/2014/05/27/bb-review-chinas-sour-african-embrace/ (accessed June 6, 2014).

[13] ibid

[14] Caulerwood, Kathleen. “Is China Colonizing Africa? Jane Goodall Thinks So.” International Business Times. http://www.ibtimes.com/china-africas-new-colonial-overlord-says-famed-primate-researcher-jane-goodall-1556312 (accessed June 6, 2014).

[15] Gallagher, Kevin. “Latin America playing a risky game by welcoming in the Chinese dragon.” theguardian.com. http://www.theguardian.com/global-development/poverty-matters/2013/may/30/latin-america-risky-chinese-dragon (accessed June 6, 2014).

[16] Krepps and Flores-Marcias

[17] Sabotini, Christopher. “Rethinking Latin America.” Global. http://www.foreignaffairs.com/articles/137101/christopher-sabatini/rethinking-latin-america (accessed June 6, 2014).

[18] ibid