China and the Latin America Commodities Boom: A Critical Assessment

Prior to the current economic and financial crisis, there have been contradicting views on the impact of China’s trade in Latin America and the Caribbean (LAC). Some have argued China’s rise has been a blessing for Latin America, as Chinese demand boosted exports and in part caused a hike in commodities prices worldwide, while others contend China has put LAC back into a world of primary product dependency as it fiercely outperforms Latin America in global manufacturing markets. Which claim is closer to the truth? 

In a new working paper published by the Political Economy Research Institute, Kevin P. Gallagher and Roberto Porzecanski analyze the extent to which Chinese demand enhanced the performance of LAC economies in the period of economic boom from the turn of the century until the run up to the financial and economic crisis of 2008-2009. Gallagher and Porzecanski examine bilateral trade with China, analyzing the total amount and sectoral composition of such trade and the major countries involved. 

Main findings: 

• While, directly, LAC exports to China increased by 370 percent since 2000, indirectly, Chinese consumption of global commodities was making them scarcer and boosting global prices, thus leading to more LAC exports. 
  • Signs indicated China’s demand was accentuating concerns about the “resource curse” and deindustrialization in the region.
• The direct impact of Chinese trade on the region’s exports was much smaller than what was touted. 
  • LAC exports to China were only 3.8 percent of all LAC exports. In other words, 96.2 percent of all LAC exports did not go to China. 
  • LAC’s exports to China comprised 5.8 percent of Chinese imports, the same level of LAC exports to China in the 1980s. 
• China had a significant direct and indirect impact on LAC exports, but only in a handful of countries and sectors. 
  • Ten sectors in six countries accounted for 74 percent of all LAC exports to China and 91 percent of all commodities exports to China
• The latest available projected data for those sectors shows that despite pre-crisis projections to the contrary, the upward trend in prices seems to have ended. 
• China’s demand for the products LAC supplies is predicted to last at least 20 more years, but it remains to be seen how these predictions fare in light of the recent economic and financial crisis.

Contrary to past booms LAC has the mechanisms in place to transfer some of the rents from commodities boom toward poverty alleviation, environmental protection and industrial development, but unfortunately the current economic crisis makes addressing these issues harder than before. Almost all the countries that benefited have some sort of institutional structure in place for such activity, though few show signs of putting them to proper use. Gallagher and Porzecanski argue that in the current crisis environment, it is very unlikely that such funds will go toward longer-term structural development concerns, like industrial diversification.