China’s Economic Aggression Threatens to make South America Peripheral Again
One of Colombia’s most iconic garments is the traditional vueltiao straw hat, which is weaved and worn throughout the coastal regions of the country. In recent years, however, Chinese-made replicas have flooded the Colombian market, throwing domestic manufacturers into dire financial straits. Likewise, the market entry of cheaper Chinese-made shoes is driving a once thriving leather shoe industry, with steady domestic demand within Colombia, out of business. The recent and en masse entry of Chinese-made goods into South America comes after governments, economists, and private sector firms spent decades developing a regional industrial base that would allow the continent to diversify beyond simple commodity exports. South American governments must now look into new economic policies that ensure sustainable industrial development domestically and advantageous trade growth if they expect to further increase their role within the global economy.
Throughout the 19th and early 20th century, South America struggled to develop economically. The region relied heavily on the export of commodities to Europe and North America, while it imported all of its manufactured goods. To reverse their dependency on commodities export, the region’s leading economists and politicians spent most of the 20th century developing domestic manufacturing and regional industries. This economic agenda was championed and led by figures such as Raul Prebisch and Celso Furtado, as well as the UN Economic Commission for Latin America and the Caribbean, all of which promoted import substitution industrialization, also known as the ISI development model. These initiatives had different degrees of success throughout South America, with some economies developing larger and more significant industries than others. However, overall the southern continent achieved an unprecedented level of industrialization, even if large sectors of its economies still relied on the export of agricultural and mineral commodities.
ISI’s success was limited because it sought to cater regional industrial production towards domestic markets that were not yet fully developed, lacking the purchasing power to sustain significant growth. Even though the region still relies on imports to get most of its high-end manufactured goods, some progress has indeed been achieved towards the development of local expertise and the establishment of industries that can compete both domestically and internationally. Now, China’s aggressive economic activity in the region is undoing decades of work, driving developing countries into deeper reliance on the export of commodities, and ensuring that South America remains peripheral within the global manufacturing economy.
Increased trade with China has led to a return towards the massive export of agricultural and mineral commodities, particularly in countries such as Brazil, Chile, Peru, and Bolivia. Simultaneously, Chinese-made consumer goods with significant value added, such as computers, appliances, and cars, have flooded South American markets and driven many domestic industries out of business. In most of these countries, China has quickly risen to the rank of first or second commercial partner, displacing the European Union and, in some cases, the United States. This shift is significant because the composition of trade between Asia and South America is drastically different from the trade between South America and Europe or North America. In 2015, Brazil exported almost $36 billion worth of goods towards China and $24.5 billion towards the United States. Brazil’s exports to the United States, however, included transportation machinery, such as helicopters and turbines, goods with high value added and whose manufacture creates good paying jobs and develops local know-how. Meanwhile, in 2015, commodities, such as soybeans (44 percent), iron ore (19 percent), and crude petroleum (12 percent), dominated Brazilian exports to China. Furthermore, Chinese exports to South America consist mainly of manufactured goods, many of them created with the same commodities that China imports from South America, and this pattern is similar throughout the region.
South American policymakers should stand by as their economies are dragged into a new era of mercantilism and sacrifice the hard-earned gains of their national economies. In order not to lose ground to Chinese competition on their hard-earned economic gains, South American governments and policymakers must identify key developed markets, be they in Asia or Europe, and focus on the export of consumer goods with high value added. The southern continent must invest in the creation of a skilled labor force and protect its nascent industries. This does not mean foregoing trade or retreating from the global economy. On the contrary, South American countries should welcome and encourage foreign direct investment, yet they should insist that companies, such as those from China, manufacture locally.
Otherwise, if South America continues down its current course, its economies will remain dependent on the import of consumer goods, will not develop a skilled domestic labor force, and will remain vulnerable to the ups-and-downs of international commodity market prices. Having worked for decades to build a domestic industry and advance regional manufacturing, South American governments should not give into the quick profits of commodity exports at the expense of finding themselves once again in the periphery of the global economy during the 21st century.
Glenn Ojeda Vega is a Latin America Fellow at Young Professionals in Foreign Policy (YPFP). He is also an emerging markets consultant in Latin America. Glenn earned his BS in Foreign Service from Georgetown University.