Experts question sustainability of China-South America trade

South American countries shipped more natural resources to China last year than in 2014 at vastly lower prices, incurring a loss in export revenues and raising serious questions about the sustainability of the model of economic engagement between the two sub-regions.

The volume of soybeans, iron ore, copper and oil exported to China from South America’s three largest producers of each commodity was 308.8 billion kg in 2015, up 14.63% from 269.4 billion the previous year. However, the mean price per kilogram of these products fell by 31.26% from US$0.28 in 2014 to US$0.19 last year, meaning total revenues were down 21.2%, according to customs data obtained by Diálogo Chino from a website supervised by China Customs Information Center.

While Chinese demand for commodities is still growing, albeit at a slower rate than in recent years, Latin American exporters – principally from Mercosur countries – have largely ignored the “new normal” 6-7% growth rate projections announced by Beijing, according to Enrique Dussel Peters of the National Autonomous University of Mexico. The region’s export-oriented economies have kept production levels high, contributing to a global oversupply and an attendant decline in prices.

“For at least five years, China has said that its demand for commodities and other imports would be revised, but Latin America has not been aware of this,” Dussel Peters told Diálogo Chino.

The figures are consistent with Chinese data on commodity imports worldwide. Although China’s GDP growth has slowed from double-digit territory in 2010, total iron ore imports still climbed 2.2% in 2015. According to Mei Xinyu, a researcher at China’s Ministry of Commerce, oil purchases were up 8.7% from January to November of last year, and according to Bloomberg food imports shot up 27.3% in the same period.

The crash in global commodity prices has caused significant economic turbulence in the region’s main economies, such as Brazil, a major exporter of oil, iron, and soybeans, which now finds itself in deep recession. Oil suppliers Venezuela and Colombia, soybean producer Argentina, and other countries dependent on Chinese demand, such as copper exporters Peru and Chile, are also feeling the impact.

The Primary Commodities Price Index from the International Monetary Fund (IMF) shows that product prices have slumped to levels similar to those seen shortly after the international financial crisis hit in 2008, with no immediate sign of recovering.

“Commodity prices will not return to anywhere near the peaks seen before,” said Alejandro Werner, director of the IMF’s western hemisphere division, at a lecture at Americas Society/Council of the Americas in January.

Volatile economies and environments

A study published by the Organization for Economic Cooperation and Development (OECD) highlights that in the last 15 years, commodities have accounted for 73% of exports from the Latin America region to China, while industrial products accounted for 6%.

Rhys Jenkins, an economist at the University of East Anglia, expressed concern about South America’s reliance on raw materials: “It does indeed reflect the problem of depending on very volatile commodity markets, which was reinforced by changes in the structure of Latin American exports during the commodity boom,” he said on reviewing Diálogo Chino‘s data.

Increased environmental pressures cast further doubt on the long-term viability of the model, according to Ron Pinneo, senior researcher at the Council on Hemispheric Affairs. “The emergence of a more capitalist-oriented China allowed many countries to flourish economically in recent decades, albeit in an environmentally unsustainable manner.”

New data from Glen Peters, a researcher at the International Research Center for Climate and the Environment at the University of Oslo, shows that at the peak of the commodity super cycle (2008-2013), exports from Latin America and the Caribbean to China, which consist overwhelmingly of products from the high-carbon agriculture and extractive sectors, generated an average 2 kg of CO2 equivalents for each US dollar received in revenue. Exports from the region to other destinations, which include a higher proportion of manufactures and other goods, generated 1.7 kg of CO2. Overall economic activity (the value of all goods and services) was responsible for 0.6 kg of CO2.

Water use and contamination linked to exports to China, is also a worry for experts. According to the Water Footprint Network, during the same five-year period (2008-2013), products shipped to China used an average 2.6 cubic meters of water in the production process per US dollar in revenue, while Latin American exports to other countries used 0.9 cubic meters of water. Overall economic activity accounted for just 0.2 cubic meters.

“Latin American exports to China are associated with 15% higher greenhouse gas emissions and over twice as much water use and contamination as other exports,” Rebecca Ray of Boston University told Diálogo Chino. Similarly, Latin American exports to China are associated with over three times as much net greenhouse gas emissions and ten times as much water use as the region’s overall economic activity, Ray adds.

Pinneo says that the Chinese have realised the negative implications of a trade relationship based only on raw materials and have held high-level meetings with the region’s governments to create new opportunities, including industrial partnerships and investments in infrastructure. “The Chinese are beginning to look for opportunities to join Bolivia in lithium mining and in the production of lithium batteries,” he says.

In a comprehensive study published by the London School of Economics on the crisis facing emerging economies, author Alvaro Mendez suggests that research and development complimented by a long-term geostrategic plan and greater dialogue are the keys to achieving a lower level of dependence on commodity exports.

“The China-Latin America relationship should go beyond trade,” says Dussel Peters, pointing to the importance of foreign direct investment, manufacturing clusters to allow for technological and value-added specialisation, and education and tourism.

Dussel Peters believes strengthening existing multilateral platforms, such as the China-CELAC forum, will support a more mutually beneficial partnership. He also recommends creating new national and regional bodies that can boost planning and a strategic vision.

“It is amazing how few and weak institutions we have today,” he says.