Over the weekend the head of the Organization for Economic Cooperation and Development analyzed China’s inroads in Latin America, a concerning trend to many. Its interests are growing exponentially and undeterred there, naturally at the expense of the US and its allies, but there’s a silver lining to consider.
“It has been the global crisis which brought a new dimension to this relationship and has strengthened the ties between both regions in a definitive way,” Angel Gurría, the OECD’s secretary general, was quoted as saying during the Iberoamerican summit in Paraguay.
To be sure, China boomeranged the crisis to its favor and within a couple of years changed the continent’s evolution forever. The rising titan is set to replace Europe as the second most important foreign power in Latin America after the United States by the middle of this decade, and it could soon rival America’s hegemony there also.
By 2014 China will replace Europe as Latin America’s second biggest trade partner after the United States, Gurría predicted. And in 2011 China will likely become the top foreign investor in Latin America, the lion share of which is directed to the energy sector.
Beijing’s inroads are mostly designed to diversify oil imports away from the Middle East, just like the US plans to do. It’s already aggressively spurring oil output out of Latin America, which will benefit the US and its allies in the short term because China is investing precisely where the US is not.
Spare capacity this decade will relax in a big part thanks to Chinese investments in Latin America, which means that the US economy could indirectly benefit from lower prices just when growth is dangerously stalling.
But US policymakers, especially the Obama administration which has not reacted to this bulldozing trend, need to calculate the implications.
So far, China has shown little geopolitical ambition, and basically no military one, but it would be naïve to think it never will. It would like buying controlling stakes in companies and never using it to exert power.
Last week, Secretary of State Hillary Clinton also highlighted official US policy about Chinese rise during an interview with TIME: “If you think of soft power as being diplomatic power and economic power, they have been very effective in spreading throughout the region, making investments, building things that countries wanted, working to create relationships to displace some of the historic animosity or suspicion.”
“Now, they have every right to do that. But I did not and do not believe we should cede that to them, that we need to be also competing for soft power influence,” Clinton said.
Unfortunately, that is exactly what the US is doing in Latin America, which will see the biggest incremental oil production gains throughout the decade and perhaps beyond. China’s inroads in the region are benign for now, but the US must reverse its two-decade old detachment from Latin America, or wait until China flexes its muscles.
A good illustration is China’s government decision last month to underwrite Venezuela’s planned investment in a Brazilian refinery geared to process extra heavy crude.
The Chinese Development Bank agreed to provide 75 percent of the loan guarantees that Venezuela’s state oil company PDVSA needs to cover its investments in the Abreu e Lima refinery in northwestern Brazil as owner of a 40 percent stake in the project. The other 60 percent in the $15 billion refinery that will process 230,000 barrels per day of mostly Venezuelan crude is owned by Brazil’s Petrobras.
For the short term, this is good. The future of the Brazilian refinery would be uncertain without Chinese financial muscle and that will only delay production from Venezuela, which has a bottleneck in refining capacity for its extra-heavy crude from the Orinoco Belt.
US companies or financers would not invest in Venezuela because they are increasingly worried that the US is in fact moving to more confrontational relations with the holder of the world’s biggest oil reserves. After all, PDVSA was recently sanctioned by the US.
China has committed some $40 billion this decade to developing Venezuela’s oil bounty through four different projects that involve oil production of about 800,000 bpd, offshore extraction of 1.2 billion cubic feet per day of natural gas, and the construction of a refinery geared for Venezuela’s heavy oil with a capacity of 200,000 bpd.
So far, less than $1 billion in Chinese cash has been invested there though, according to Derek Scissors, a research fellow in the Heritage Foundation who prepares the China Global Investment Tracker, one of the most comprehensive datasets on Chinese prowess abroad.
“Chinese find dealing with Venezuela very difficult,” Scissors said. “The Chinese government has a priority of diversifying oil supplies of the Middle East with Latin America. But companies told their government had to take the financial risk in Venezuela because they don’t think Chávez will be able to pull it off. If it works, then companies will come in with the big money.”
“So the Abreu e Lima refinery deal makes perfect sense. If you don’t want to put it in Venezuela, you put it just beside in Brazil. Again you see the clever hand of the Chinese government to spur more oil production in Latin America, although not without risk,” Scissors said.
But business ties translate into geopolitical leverage. Consider the trend: Chinese trade with Latin America has experience double digit annual growth since 2006, more than any other, although it’s still less than half of what it trades with the US. But US investment is plummeting.
In 2000 the US was responsible for 43 percent of foreign direct investment in Latin America, but by 2010 that share dropped to 17 percent, according to the United Nation’s Economic Commission for Latin America and the Caribbean.
Chinese FDI in contrast barely registered between 2000 and 2009, but in 2010 it was the third biggest with a 9 percent share, or $15 billion, compared to less than $20 billion from the US. In the first half of 2011 though, Chinese FDI was already 22 billion and it’s likely to move to top foreign investor by the end of the year.
The lion’s share of this money is going into oil and gas production in Brazil, Argentina, and Peru. This does not include more than $30 billion in oil-underwritten debts to Brazil and Venezuela or the $40 billion committed in Venezuela.
So while the US is preoccupied with containing Chinese surging ambitions in the Asia, it should not forget that some of America’s closest allies, economic partners, and certainly the biggest contributors to oil production in the future, are just south of the border.
Overlooking this trend or reacting too late can be a costly mistake to America’s security.
Andrés Cala and Michael Economides are co-authoring America’s Blind Spot: Chávez, Oil, and US Security, a book analyzing US national security and how it transits through Latin America. The book will be published later this year.