Battling for Influence

The rise of China as a trade powerhouse has had a profound impact on global commerce, with economic sectors in Latin America among the biggest beneficiaries. Between 2000 and 2020, China-LAC trade grew 26-fold from $12 billion to $315 billion.

In recent years, China has gained ground against the US in the Americas, becoming the first trading partner of almost all South American countries, granting low-interest loans and investing in energy projects, ports and infrastructure. Moving on from the disruptions of 2020, can the US counter China’s influence in the region?

The degree of political chaos in the Americas is historic: protests in Colombia, Chile revamping its constitution, Argentina’s economy once again on the brink, Nicaragua’s leader jailing political opponents and Cubans protesting their government more publicly than ever before. Latin America is currently dealing with three simultaneous crises: the COVID-19 pandemic, political division and a steep economic contraction.

“While actively preparing to Build Back Better, Biden has a big job on his hands promoting the American market as an attractive supply chain alternative to China.”

COVID-19 hit the Latin America economy particularly hard, with more than 2.1 million people in Latin America and the Caribbean dying of COVID-19. Latin America GDP fell by 7.5% in 2020, and at the start of 2021, GDP levels fell back to levels not seen since 2011. Compare that to global GDP, which fell by around 3-3.5%. The World Bank estimates that in 2020, 53 million Latin Americans saw their income fall below the region’s poverty line of $5.50 per day, pushing up the percentage of those living in poverty to 37.7%. There are no simple solutions for a region crossing 20 countries and home to 660 million people but attracting foreign direct investment will play a key role in economic recovery and sustainable growth.

Following the commodity boom in the early 2000s, China looked to develop its relationship with Latin America in other areas of cooperation. It now engages in security cooperation, technology export, cultural exchanges and military-to-military exchanges. Latin America is a robust economic alliance, with potential for significant transformation in key sectors, as markets begin to rebound. Given that the pandemic has exposed an over-dependency on supply chains in China, companies are already looking to diversify. Countries, especially developed ones, will look more inward, safeguarding supplies, and turning to self-sufficiency.

President Biden can work with South American countries and the biggest transformation could come from accelerated digitization, leading to greater dynamism in the financial sector, international trade and labour markets.  Additionally, continued growth of the region’s consumer base makes Latin America a promising host country. The young population is enthusiastic for high-quality infrastructure, more efficient services and faster technologies. The MSCI Emerging Markets Latin America Index, shows that year-to-date returns for the first half of 2021 in those markets outperform the returns in other emerging markets.

“Latin America is a robust economic alliance, with potential for significant transformation in key sectors, as markets begin to rebound.”

However, the future is still uncertain. Latin America’s physical infrastructure has suffered from chronic underinvestment and has failed to transform itself economically as East Asia has done. Biden’s newly announced ‘Root Cause’ programme – a US$4 billion investment to address poverty, violence and inequality in El Salvador, Guatemala and Honduras – will likely provide a good boost to infrastructure transactions in Central America.  By the end of 2020, more than 20 technology unicorns had emerged across Latin America. Brazil, Mexico, Chile, Colombia and Peru lead the charge, with several technology sector transactions announced in 2020 and the first half of 2021.

Expectations were high with President Biden, but frustrations remain by a US foreign policy seen as crisis-driven and China-obsessed. Mexico and the US have the most crucial and complex relationship in Latin America. Mexican president Andrés Manuel López Obrador (AMLO)enjoyed a notably transactional relationship with President Trump. There is opportunity for the Biden administration to engage with Mexico and President AMLO, and to reinforce the trade relationship between the two countries. Biden now proposes a broader agenda, encompassing not only democracy, human rights and corruption, but climate change as well.

Build Back Better World is a plan to improve global infrastructure, raise living standards and to counter China’s growing influence. It was designed to offer an alternative to China’s Belt and Road Initiative, which has been criticized for benefiting Chinese businesses only to leave local governments deeply in debt. Despite good intentions, so far, a clear focus has not emerged.

Latin America needs policies for a transformative recovery with an emphasis on investment. Biden should urge his neighbours to lower trade barriers, harmonise provisions across the hundreds of trade agreements which already criss-cross the region and clear up difficult customs procedures. This could help persuade investors to take the plunge. Greater regional integration and partnership is required, with the potential of accelerated digital transformation and the ongoing momentum for public-private collaboration in health and other services.

The international community also has a key role to play in mitigating the spill overs of an uneven global recovery. The US will host the Ninth Summit of the Americas, which will bring together the hemisphere’s heads of state. That event should compel the Biden administration to develop a more solid sense of what it seeks to accomplish in relations with Latin America. The Biden administration should move quickly to renew partnerships with select countries, emphasizing recovery from COVID-19 and restoring economic and political stability.

While actively preparing to Build Back Better, Biden has a big job on his hands promoting the American market as an attractive supply chain alternative to China. Latin America’s promising growth, fuelled by its young demographic, a growing middle-class and vast natural resources, offers opportunity for successful investments and significant profit. Until the US invests more in its Latin American strategy, the importance of the region to China’s foreign policy will remain unknown and the battle for influence will continue.