Latin America Braces for China Trade

Latin Americans are awaiting the imminent passage of Permanent Normal Trade Relations between the US and China with some concern. In the short run, increased trade and investment flows to China are sure to cause some significant dislocations of established patterns of trade. Many observers predict an advantage for Latin America's raw material and agricultural exports, but manufactured goods are a different story. China's low labor costs and limited environmental regulations could drive Latin America and the Caribbean even further into a "race to the bottom." This trend can already be observed in the leather shoe industry in Brazil and Argentina, where dwindling export markets have left the two countries to fight over their limited domestic markets. Soon they will have to contend with competition from Chinese products, as well.

Perhaps even more than merchandise trade, direct foreign investment is a major worry for the region. Beijing is well aware that entry into the World Trade Organization (WTO) will bring a rush of foreign investment. This consideration helps explain why, after years of dragging its feet, China has in the past two years aggressively pursued WTO entry-to bring in the money needed to keep the economy growing and modernizing. The question is, at whose expense? China already absorbs 30% of the world's investment flows. The Latin American Integration Association (ALADI) and the United Nations Economic Commission for Latin America (ECLAC) report that in 1999, China received more direct foreign investment than all of South America combined. According to the Wall Street Journal, which cited a study by the Chicago management consulting firm A.T. Kearney Inc., total direct foreign investment in China was $45 billion in 1998. Last year, after the onset of the Asian financial crisis and a slowdown in the Chinese economy, the total shrank to $40 billion. Now, many economists expect investment in China to grow by as much as 15% to 20% a year. What will this mean for the high-end auto parts and electronic industries of Mexico, Brazil or even Costa Rica? Will their more advanced industrial pockets be able to keep up?

Even more troubling are the potential consequences for the smaller Caribbean Basin Initiative (CBI) economies. Recently, these nations believed themselves "saved" by NAFTA parity, but both ECLAC's 1999 Report on Foreign Investment-which has a special section on apparel manufacture in the CBI-and an Economic Policy Institute Briefing Paper by Rob Scott suggest that the benefit may be short lived. Scott predicts an "apparel shakeout" in 2005, when, under the terms of the 1995 WTO agreement, most apparel quotas will be eliminated. "The structure of the world apparel industry will be radically transformed," he argues. "A significant share of world production will move almost overnight to China, where apparel wages of 10 to 15 cents per hour are common, and to other countries in Asia where wages are quite low, such as Indonesia and Vietnam."

Given this scenario, Latin American and Caribbean countries would be wise to develop their domestic markets and consider alternative development policies.