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Finally Being Seen as an Equal: Chinese Investments in Latin America

Finally Being Seen as an Equal: Chinese Investments in Latin America

In the International Trade War between the United States and China, the two nations are participating in  a geopolitical race through different agreements such as foreign investment, loans, and trade agreements in order to secure their influence across the globe. While the United States and countries in Latin America always had some form of relations, the increasing dialogue between countries in Latin America and China may change the dynamic between the US and Latin America. One way China is attempting to improve its relations in Latin America is through the Belt Road Initiative, a billion dollar investment program which helps funds infrastructure projects to enhance Chinese soft power. With countries such as Chile and the Dominican Republic as members of this initiative, could this ultimately change how Latin American states conduct relations with the United States? Or do these relations with China indicate the start of a new era for Latin America?

The most prevalent way we see the improvement of relations between China and countries in Latin America is though  Foreign Direct Investment (FDI) which is a practice used by countries to expand their values and social practices in different regions of the world such as Latin America.  FDI is when an individual or a company owns 10% or more of either a stake in a company or a set amount of money overseas. Overall, there are three general forms of Foreign Direct Investments: horizontal, vertical, or conglomerate. Horizontal forms of FDI describe investors establishing branch offices in foreign countries. A vertical FDI is when business agreements from two foreign companies are made in order for there to be a mutually beneficial result. Lastly, a conglomerate FDI is when a firm makes an investment that is unrelated to their business. All three variations of Foreign Direct Investments regardless of what form they come in benefit receiving countries in some way shape or form. Beyond establishing foreign business branches or investments overseas, FDIs include the distribution of skills and new forms of technological infrastructure that receiving nations may not have original access to. This is one of the multiple benefits that can come out of receiving foreign direct investments from foreign firms.

Over the course of ten years, China has given foreign direct investments to countries in Latin America but have only seen the results of these investments in the most recent years. The sharp increase in investments over the course of the past five years has allowed China to see the benefits of investments from the past decade. The specific case of Chinese investments in Latin America shows the lengthy process it takes for foreign firms to see any form of benefit.

The development of new sectors allows for more investments from different firms to fund innovations. One example of how foreign firms are able to see benefits from their investments from an extended period of time is through the development of infrastructure. Out of the different ways in which foreign investments can help benefit a nation, the development of infrastructure is a prime example of how investments not only improve the quality of the life of individuals in a specific nation but the general economy as well.

Infrastructure gives the basic fundamentals for an economy to function off of. According to the Brookings Institute,  infrastructure is considered to be the “heart” of the economy. Economically speaking, infrastructure allows for the flows of goods to either be increased or at least maintained. Ranging from fundamentals such as paved roads to more complex infrastructures such as telecommunication systems, infrastructure is vital and essentially affects all aspects of production from the workers to the highest level of the firms. This being said, without an established and maintained infrastructure it only makes the economy fragile and unstable. For developing nations, increasing and developing new forms of infrastructure can be quite a challenge.

Although countries in Latin America recognize the importance of infrastructure and how it will benefit their national and regional economy, many countries are still facing several obstacles. Argentina, for example, has infrastructure as their top priority and created different policies which tackle transparency, preparation, and execution. By prioritizing the fundamental planning that is needed to build infrastructure, it gives the nation a higher probability for these projects to not only be completed in a timely manner but sustainable. On one hand, economies like Argentina struggle with the foundational planning, while other countries such as Colombia struggle more on the execution aspect of developing infrastructure. Within the planning of infrastructure projects, there is a percentage that represents the amount of risk involved in developing this new infrastructure. Another important value in the planning is the expected amount of time it will take for the project to be completed. Estimated predictions and high-risk percentages are Colombia’s biggest obstacle. Whether it is a high execution risk percentage or the projects not being completed in a timely order, Peru is in a similar position to Colombia where their biggest struggle is in the execution phase of infrastructure development.

A specific way Chinese foreign direct investment in Latin American nations has attempted to increase the development of infrastructure is through the Belt and Road  Initiative which is a program that attempts to make the world more regionally connected beginning with regional cooperation and then branching out this connectivity throughout different regions. This billion dollar initiative gives money to both developing and developed nations in order to either help begin new infrastructure projects or help finish old projects that were abandoned. Recently, countries in Latin America and the Caribbean have become members of this program and as a result of the new membership, countries such as Venezuela and Chile have been able to establish new infrastructure projects due to funding from China. Although the new inflow of money coming in has given Latin American countries new opportunities that were inconceivable at the time, they come at a high cost.

Money that is given to countries from the BRI is similar to a loan in which they need to be paid back in some way. In many instances for Latin America, countries have negotiated for alternative forms of repayment. Ecuador, for example, has negotiated to give China about 80% of their revenues from oil as a form of repayment. Another way Latin American countries have attempted to repay these loans is by taking out more loans which creates a vicious cycle of repayment. It is not clear whether or not many of these newly created projects have been completed, but there are special cases such as in Ecuador where these projects are currently abandoned due to the lack of labor and thorough planning. If there are such high negative costs to these risky loans which do not confirm any infrastructure project why continue?

It is the mere principle of the bilateral negotiations between the Latin American nations and China that make Latin American countries such as Chile and Ecuador to be so willing to agree to such risky terms.  It is worth noting in 2008, China promised the governments of Latin America that they would “treat each other as equals.” This distinction of being recognized as an equal nation is a term that cannot be found in US political documents.

During a time of conflict between the United States and China, Latin America geopolitically was attractive as well as a significant location for both nations. For the United States, more mutually beneficial negotiations between them and Latin American could have possibly secured even more support than already existed. While China, on the other hand, can take advantage of the dependent relationship between the US and Latin America to forge new relationships that do not have a hierarchical underlining to it. With more and more nations joining the Belt and Road Initiative, the United States must realize that Latin America no longer the country it once was. If the United States wants to maintain the relationship or improve upon the relationship they have with countries in Latin America, the United States must be mindful of these contemporary relations and what could become of it. Whether it is revisiting old agreements that have not changed or creating new agreements, if the United States ignores the situation between countries in Latin America and China then countries in Latin America could be looking at their new loyal partner.

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