A delicate balancing act: the impact of US-China conflict in Latin America

BRG – JPMPB – Economist Partnership – Text Alternative Script

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J.P. Morgan Private Bank.

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The role of Latin America in the U.S. - China conflict. A conversation between J.P. Morgan and the Economist Intelligence Unit.

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A bearded man with dark hair and hazel eyes, Christophe Aba, speaks from his office.

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Christophe Aba, Head of Investments, J.P. Morgan Private Bank, Latin America.

Christophe Aba:

The rise of China is arguably one of the most important geopolitical events of the 21st century. There are a few regions in the world as susceptible or impacted by the U.S.-China conflict than Latin America. To help us unpack the risks and opportunities presented to Latin America by U.S.-China conflict, I’m joined today by John Ferguson from The Economist Intelligence Unit.

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Mr. Ferguson (a man with short hair and brown eyes) appears remotely from his home.

Christophe Aba:

John, you recently authored a piece together with the J.P. Morgan Private Bank entitled “A delicate balancing act: The impact of U.S.-China conflict in Latin America.” Historically, relationships between Latin America and the rest of the world have been dominated by trade. John, how did the rise in U.S.-China tensions impact Latin America?

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John Ferguson, Global Practice Lead - Globalization, Trade, and Finance at The Economist Intelligence Unit.

John Ferguson:

Thanks, Chris. I think the U.S.-China relations are impacting Latin American countries in a number of ways. We’ve got the U.S.-China trade war, which is still ongoing. And I think we should all recognize that even though we have a new administration in the U.S., that will still keep going and evolve in certain ways. So for investors and policymakers, there’s a number of areas that they need to keep an eye on in terms of the superpower rivalry there in Latin America.

Christophe Aba:

So the prior U.S. administration definitely had a more domestic agenda, and one can say was relatively disengaged at best with the region of Latin America. We have the new president who’s recently come into office, they’re putting in place their policies. Do you think they see the rise of China and its role in Latin America as its threat?

John Ferguson:

I do. At least a key challenge and probably their main foreign policy challenge. So unlike Mr. Trump, who had a very much American-first approach, Mr. Biden, his administration, will take a much more multilateral approach to the world. And that means finding like-minded allies around the world and pushing back on China in areas like the belt and road initiative, for example.  Like in areas such as 5G and the telecoms and the infrastructure roll out there. And that’s definitely playing out in Latin America. So that’s a key area for people to watch because countries have to really walk that fine line between trying not to annoy the U.S., but keeping those good trading relationships and investment relationships with China as well.

Christophe Aba:

So I want to talk about one of the opportunities now. Near shoring is something that’s been discussed a lot. How realistic is it for companies to move their supply chains closer to Latin America? And how realistic is it for Latin America to compete with the economies of Asia?

John Ferguson:

It’s much deeper and wider. So you’ve mentioned commodities. The trade story is really important. Commodity exports have grown tremendously from Latin America to China in recent years. To the point where China is the major trading partner for many Latin American countries.  On screen:

A map appears labeled "Export destinations."

It shows different countries highlighted, including:

 - Brazil;

 - Argentina;

 - Chile;

 - Peru;

 - Columbia;

 - (and) Mexico.

An infographic shows Brazil's percentage of exports to China at 12.3 % in 2009 and at 27.6% in 2019. It shows Brazil's percentage of exports to the U.S. at 10.3 % in 2009 and at 13.1% in 2019.

Another infographic shows Argentina's percentage of exports to China at 6.6 % in 2009 and at 10.5% in 2019. It shows Argentina's percentage of exports to the U.S. at 6.6 % in 2009 and at 6.2% in 2019.

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Source - International Monetary Fund. Direction of Trade Statistics, 2019.

John Ferguson:

Mexico is an outlier there, but for many Latin American countries, China is the main source of exports. But it’s deeper than that. And wider than that. Lending. Investment from China. I’ve mentioned the belt and road.

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An infographic shows Chinese Foreign Direct Investment in Latin America at:

 - 10.5 billion dollars in 2010;

 - 11.9 billion dollars in 2011;

 - 6.2 billion dollars in 2012;

 - 14.4 billion dollars in 2013;

 - 10.6 billion dollars in 2014;

 - 12.6 billion dollars in 2015;

 - 27.2 billion dollars in 2016;

 - 14.1 billion dollars in 2017;

 - (and) 14.6 billion dollars in 2018.

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Source - Chinese Ministry of Commerce, 2018.

John Ferguson:

They also, over the last 10 years, I’ve seen a lot of investment and lending from so-called policy banks that are in China. Export import bank. China development bank.

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An infographic appears labeled State-to-state finance from China. (U.S. billion dollars; 2005 through 2020.) It reads:

 - 62.2 billion dollars: Venezuela

 - 28.9 billion dollars: Brazil

 - 17.1 billion dollars: Argentina

 - 2.4 billion dollars: Bolivia

 - zero point 5 billion dollars: Peru

 - 18.4 billion dollars: Ecuador

 - (and) one billion dollars: Mexico.

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Source - Gallagher, Kevin P, and Margaret Myers (2020) "China-Latin America Finance Database," Washington: Inter-American Dialogue.

John Ferguson:

Now that peaked around 2010, has been slowly declining, but we’re also seeing that relationship evolve. And we’re now seeing more private sector lending and private sector financial activity. So we’re seeing, for example, a lot more M&A. And then you’ve got the vaccine diplomacy and vaccine rollout. So the influence and role of China goes beyond trade, beyond investment, and now it gets into a vaccine and vaccine diplomacy as well.

On screen:

A map appears labeled "Energy exporters."

It shows different countries highlighted, including:

 - Brazil;

 - Argentina;

 - Chile;

 - Peru;

 - Columbia;

 - (and) Mexico.

Side note:

Small print text appear.

Text on screen:

Source - International Monetary Fund. Direction of Trade Statistics, 2019.

Christophe Aba:

So China recently published their new five-year plan. Sustainability is front and center in that plan. China plans to cap carbon emissions by 2030 to become net neutral by 2060. And obviously that potentially has a big impact on Latin America. How do you see China’s renewed focus on sustainability impacting Latin American supply chain?

John Ferguson:

Yeah, it’s quite a significant impact. Now I particularly thinking about energy exporters: Brazil, Venezuela, Colombia, for example. So China will be pushing hard down this road. Sustainability is a key theme, but also energy security is a key theme for the Chinese economy and Chinese policymakers. So right now they take most of their oil from Russia and Saudi Arabia, and their gas from Turkmenistan. So over the long term, it might raise questions about relationships with Latin American exporters, but I think bigger and more broadly than that—China will really push hard on renewable energies, and they have a lot of capability and capacity and opportunity to develop their own renewable energy market. So for me, there’s just a lot of questions, really, a lot of challenges for Latin American energy exporters to the Chinese economy over the medium term.

Christophe Aba:

John, thank you very much. The conflict between the U.S. and China isn’t going away. And so this is probably the first of many conversations that we’ll be having on this topic.

On screen:

Mr. Aba addresses the viewer.

Christophe Aba:

I want to thank everybody for listening, and if you have any questions at all about what we discussed today, please reach out to your J.P. Morgan representative.

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