China’s Impact on Latin America

An Angel or a Devil for Latin Emerging Economies?

Javier Santiso
Chief Development Economist & Deputy Director
OECD Development Centre

ABCDE World Bank

Tokyo  29-30 May 2006

1
1 The cognitive effect: new emerging capitalisms.

2 The trade effect: the dark side of the boom.

3 China and India as a wake up call.

2
 China: extraordinary or back to normal?

2005 - GDP in US$ (% of w orld) China GDP (% of w orld total)

35%
Canada 2.5
30%
Spain 2.6
Italy 3.9 25%
China 4.3 20%
France 4.8 ?
15%
United Kingdom 5.0
Germany 6.4 10%
Japan 10.6
5%
United States 28.4
0%
0 5 10 15 20 25 30 1500 1600 1700 1820 1870 1900 1950 2001 2045
Source: IMF Source:Angus Maddison

According to IMF estimates Chinese gross domestic product based on purchasing-power-

parity (PPP) amounts to 13.6% of 2005 world GDP (20.7% in the case of USA).

3
 The cognitive impact: The emergence of new
capitalisms. Center and Periphery rebalanced…

GDP share of world output (WEO, 2004)

Emerging Korea&Japan US EU
China
Asia
4.2% 12.7% 29.6% 30.7%
8.0%

Asia represents more than one LatAm

fifth of world output. 4.8%

4
 China has doubled its GDP in 8 years…
without the help of Money Doctors!
PPP per capita GDP in constant prices
(thousand of US$, 2004-5 estimate)
28 Japan
24
20
16 Korea
12 Mexico
8 China
4 Brazil
0
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004e
1985 1950
1988 1953
1991 1956
1994 1959
1997 1962
2000 1965
2003 1968

Source: based on WEO and PWT

Chinese growth rates has been higher than those observed in Brazil
and Mexico during their glorious years.
5
 Asia´s growth on an outward looking
strategy: a development strategy to follow.

Trade openness (X+M/GDP, 2004)

250%

200%

150%
China’s trade openness
100%
surpasses that of all Latin
Region's Average 2004
American countries …
50%

0%

Colombia
Chile

Mexico

Peru
Malaysia

Thailand

China

Indonesia

Uruguay

Brazil
South Korea

Argentina
Venezuela
India

China's share in world merchandise trade

(%, 1980-2004)
7%
Source: WTO, National Statistics
6%

5%

4%

… and its share in world 3%

merchandise trade has 2%

doubled in less than a 1%

decade. 0% 1986

1988

1990

1992

2004
1980

1982

1984

1994

1996

1998

2000

2002
Source: IMF DOTS

6
1 The cognitive effect: new emerging capitalisms.

2 The trade effect: the dark side of the boom.

3 China and India as a wake up call.

7
 Are raw material prices facing a Chinese
shock?

Com m odities Prices in real term s

140
Many economists
are putting the
120 blame on China
China? and -to a lesser
100 extent- on other
emerging
economies (India)
80
for the current
increase in raw
60 material (70% in
real terms).
40
1900 1915 1930 1945 1960 1975 1990 2005

Source: University of Oxford

8
The stars have been lined up for Latin America:
Commodity boom has been a bonanza

Wo rldwide GDP g ro wth and o il pric e

7 70
Wo rldwide GDP g ro wth
6 (in %) 60

5 50

4 40

3 30

2 20

1 Pric e o f Bre nt barre l 10

in US D (rig ht-hand s ide s c ale )

0 0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Source: BBVA from original FMI and Bloomberg data; * Projection

9
 The stars have been lined up for Latin America:
Commodity boom has been a bonanza

Exports of commodities
BBVA-MAP Index of Latin America commodity prices (100 =jan03)
170
over total exports (2004)
160
Venezuela 83.1%
150
140 Peru 70.7%
Without oil
130
Chile 59.1%
120
110 Colombia 46.3%
TOTAL
100
Argentina 38.0%
90
80 Brazil 29.6%
70
Mexico 14.6%
60
1996

1999

2003
1997

1998

2000

2001

2002

2004

2005

Latam 31.2%
Source: BBVA
Source: BBVA

10
The stars have been lined up for Latin America:
Asia is becoming a major growth pilar

Exports of agricultural, energy and minery products

(in % over the total) (2003)
100
90
Latin America
80
70
60
50
40
30
20
10
0
Colombia
Bolivia

Uruguay
Ecuador

Venezuela
Chile
Argentina

Indonesia

China
Paraguay

India
Thailand

Malaysia

UK

Italy

Germany
Singapore
Spain

Hong Kong
Brazil

Netherlands

Mexico

South Korea
Taiwan
Peru

Belgium
Canada

France

Japan
US
Source: WTO

11
The stars have been lined up for Latin America:
China became a major trading partner

Growth of GDB in China Exports to China in 2003

(Annual Percentage variation) (Percentage of total)

10 10
9 9
8 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0

Uruguay
Perú

Brasil

México
Colombia
Chile

Argentina

Venezuela
1997 1999 2001 2003 2005

Source: Based on domestic sources.

Figures for 2004 and 2005 are forecasts

12
 China´s strong demand for energy and
commodities: a bonanza or a threat?

Share of total copper exports by destination Share of total oil exports by destination
region/country, 2004 region/country, 2003 (%)
3% 1% US A
26% 6% C a na da
Am e ric a M e xic o
31% 9%
Othe rs 12% S . & C . Am e ric a

17% Euro pe Euro pe

S o uth Ko re a 2% Afric a
Asia 50%
5% C hina Aus tra la s ia
0%
Ta iwa n C hina
14%
0% J a pa n 2% J a pa n
6% 19%
Othe rs As ia n Othe r As ia P a c ific
18% R e s t o f Wo rld
28% 1%
Source: BBVA, Cochilco Source: BP

Consumption of nickel, 2004(estimate) Consumption of aluminum, 2004(estimate)

11% 20%

22%
13%
38% No rth Am e ric a
No rth Am e ric a
We s te rn Euro pe
We s te rn Euro pe
China
23% C hina
J a pa n
Othe r As ia
Othe r As ia
20% R e s t o f wo rld
Re s t o f wo rld

24%
11% 7% 11%
Source: JP Morgan estimates

13
 China’s demand for commodities: a bonanza
or a threat?

*
Asian countries competition vs. Chinese exports to Latin American countries competition* vs. Chinese
US , % main export products
70 60%
60 50%
50 40%
40
30%
30
20 20%
10 10%
0 0%

le

a
il

ay
rú
o

bi
as

el
in
ic

hi
Pe

gu
om

zu
nt
éx

C
Br

ru
ge

ne
M

ol

U
C

Ar

Ve
åa n
it a njt
1
*Value of exports to US from China in same product categories as *Arithmetic average of the following indexes: CC= n

å ( a itn ) 2 å ( a njt ) 2
and CS= 1 - å a itn - a njt
2 n
country´s exports, as % of country´s total exports to US n n

where ajt and ait equals the share of item “n” over total exports of countries j (China) and i in
time t.

Source: C.HJ.Kwan, Nomura Institute of Capital Markets Research Source: Blázquez, Rodríguez and Santiso (2006)

14
 Does China compete with Latin American
countries ?

Competencia comercial china con Argentina Competencia comercial china con Chile
11%
20% 17% 18% 17% 12% 11% 11% 11%
16% 10%
15% 9%
13% 10%
15%
8%
10% 6%
4%
5%
2%
0% 0%
1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003

Chinese commercial competition with Paraguay Chinese commercial competition with Uruguay
10% 20% 19%
8% 17% 16% 16%
8% 7% 7% 7%
15% 13% 13%
6%
6% 5%
10%
4%

2% 5%

0% 0%
1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003

Source: Blázquez, Rodríguez and Santiso, OECD Development Centre (2006)

15
 Does China compete with Latin American
countries ?
Chinese commercial competition with Costa Chinese commercial competition with El Salvador
Rica 30% 27%
40% 36% 26%
33% 23% 23% 24%
31% 31%
28% 21%
30% 26%
20%

20%
10%
10%

0% 0%
1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003

Chinese commercial competition with Guatemala Chinese commercial competition with Panama
19% 14%
18% 12% 11% 11%
12% 11%
18% 17% 10%
10%
17% 8%
16% 8%
16% 16% 16%
15%
6%
15%
4%
14% 2%
13% 0%
1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003

Source: Blázquez, Rodríguez and Santiso, OECD Development Centre (2006)

16
 Does China compete with Latin American
countries ?
Chinese commercial competition with Bolivia Chinese commercial competition with Colombia
14% 25%
12% 21%
12% 11% 11% 19%
11% 19% 19%
20% 18%
10% 16%
8% 8%
8% 15%

6% 10%
4%
5%
2%
0% 0%
1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003

Chinese commercial competition with Peru Chinese commercial competition with Venezuela
20% 17% 11%
17% 17% 12%
16%
15% 10% 9%
15% 13% 8%
8%
8% 7%
6%
10% 6%
4%
5%
2%
0% 0%
1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003

Source: Blázquez, Rodríguez and Santiso, OECD Development Centre (2006)

17
 China has become a major destination of
Brazilian exports: The bonanza.

Major countries of destination of Brazilian exports

Trade Balance with China 1999 2004
3000 United States 22,6% 1º United States 21,1%
US$ millions Argentina 11,2% 2º Argentina 7,6%
2.385
2500 Netherlands 5,4% 3º Netherlands 6,1%
Germany 5,3% 4º China 5,6%
2000 1.729 1.694 Japan 4,6% 5º Germany 4,2%
Italy 3,8% 6º Mexico 4,1%
1500 Belgium 3,8% 7º Italy 3,0%
966 United Kingdom 3,0% 8º Japan 2,9%
1000 France 2,5% 9º Chile 2,6%
574 Spain 2,4% 10º France 2,3%
500 Mexico 2,2% 11º United Kingdom 2,2%
Chile 1,9% 12º Spain 2,1%
0 Russia 1,6% 13º Belgium 2,0%
2001 2002 2003 2004 2005p Paraguay 1,6% 14º Russia 1,7%
China 1,4% 15º Venezuela 1,5%
Source: SECEX
Source: BBVA

18
 Brazilian exports of primary products: more is
not better (Dutch disease and monopsony).

Herfindahl-Hirschmann Concentration Index of Herfindahl-Hirschmann Concentration Index of

Brazilian exports by country of destination Brazilian exports by industry, 1990-2003
0.12 0,20
concentration

+ concentration
0,18
0.11
more

0,16
0.10 0,14
0.09 0,12
concentration

0,10
0.08
0,08
less

+ diversification
0.07 0,06

0.06 0,04
0,02
0.05
0,00
Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-02

Jan-03

Jan-04
Jan-89

Jan-91

Jan-92

Jan-93

Jan-00

Jan-01
Jan-90

Jan-94

2000
2001
1990
1991
1992

1993
1994
1995
1996

1997
1998
1999

2002
2003
Source: BBVA and Bradesco Source: WTO.

19
1 The cognitive effect: new emerging capitalisms.

2 The trade effect: the dark side of the boom.

3 China and India as a wake up call.

20
 China competes intensively with Mexico on
a global level

Chinese trade competition with Latin America Chinese global trade competition
0.7 T hailand
0.6
Hungary
Mexico
0.5 0.6

0.4 Mexico
Costa Rica
0.5
USA Czech R.
0.3
Brazil Japan
0.4
0.2
Argentina Colombia Poland
Peru 0.3
0.1
Venezuela
Spain
Chile
0.0 0.2
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.30 0.35 0.40 0.45 0.50 0.55 0.60

Source: Blázquez, Rodríguez and Santiso (2006)

21
Mexico’s competitive advantage: proximity to
export markets
Mexico benefits from its geographic proximity to its major export markets:

• Lower transport and communication costs

• Access to FTA
• Just-in-time delivery

24 Days 4 Days

160 Km
11,700 Km

Shipping time

Mexico is more competitive in manufacturing more sophisticated products

which require frequent communication with the client or supplier and short
reaction times.

22
 Pending reforms : the upgrade of port facilities
Cargo Container Handling Charges
Handing Mandatory Price Fixed Cooperative Median Port
Restriction Services Agreements Agreements Clearance Efficiency Crime Index World CMPCH LSU
Country Index Index Index Index time (Days) Index (1-7) (1-7) Bank Index Index
Singapore 1 0.38 0 0.33 2 6.76 6.72 US$/TEU
117 NA NA
Hong Kong 0 0.25 0 0 NA 6.38 5.46 NA NA NA
Taiwan 0.5 0 0 0 NA 5.18 4.49 140 163 NA
Japan 0.75 0.13 0.89 1 NA 5.16 5.16 250 202 NA
Malaysia 0 0.25 0 0.38 7 4.95 5.76 75 NA NA
Spain 0 0.06 1 0 4 4.88 6.08 200 105 NA
Korea 0 0.38 0 0 NA 4.12 5.22 NA NA NA
Thailand 0.5 0.63 0 0.38 4 3.98 5.12 93 NA NA
Argentina 0 0.13 0 1 7 3.81 4.52 NA 139 NA
Vietnam 0 0 0 0.5 NA 3.81 5.02 NA NA NA
Chile 0 0.25 0.43 1 3 3.76 6.05 202 100 NA
China 0.5 0 0 0 7 3.49 4.44 110 NA NA
Indonesia 1 0.06 0 0.38 5 3.41 4.06 NA NA NA
Mexico 0.5 0.38 0 1 4 3.34 2.61 NA NA NA
Venezuela 0 0 1 1 11 3.28 3.63 NA NA NA
El Salvador 0 0 0 1 4 2.95 2.3 NA NA 61
Brazil 0.5 0.75 0 1 10 2.92 4.45 328 292 NA
Peru 0.5 0 0.5 1 7 2.88 3.32 NA 142 NA
India 0 0 0 1 NA 2.79 4.28 NA NA NA
Philippines 0.5 0 0 0.38 7 2.79 3.51 118 NA NA
Ecuador 0 0 0.43 1 15 2.63 3.65 NA 139 NA
Costa Rica 0 0 0 1 4 2.46 3.28 NA NA 68
Colombia 0.5 0.13 0.5 1 7 2.26 1.88 NA NA NA
Bolivia NA NA NA NA 9.5 1.61 4.38 NA NA NA
Uruguay 0 0 0 1 5 NA NA NA NA NA
NA: Not Available
Source: Data for the first 4 columns was kindly provided by Carsten Fink, Aaditya Mattoo, and Ileana Cristina Neagu* (2002).

23
 Conclusions: A Watch List

 Africa and Latin America: Out of the Value-Chain Game?

 The share of China’s total exports produced by foreigners has risen

sharply, from 32% to 60% between 2000 and 2005.

 Foreign outsourcing is becoming a major driver of India’s and

China’s high tech exports, both countries moving up quickly in the
value added ladder.

 In 2005 for example, of China’s top 100 exporters, 53 were foreign

companies and all were electronics/information technology
companies.

24
 Thank you

Based on

Jorge Blázquez, Javier Rodríguez and Javier

Santiso, “Angel or Devil? Chinese Trade Impact on
Latin American Emerging Markets”, OECD
Development Centre, Working Paper , May 2006.

25