Luis Felipe López-Calva, UN Assistant Secretary-General and UNDP Regional Director for Latin America and the Caribbean, examines how Covid-19 will impact the economic relationship between China and Latin America…
Latin America has significant economic links to China, with trade, foreign direct investment and loans skyrocketing in recent years. That means that the impact of Covid-19 in China, will have important consequences in the region.
While it is still too early to fully understand its impact on China’s growth, and how it will result in a slowdown in our region, what we know so far is that COVID-19 is spreading at an accelerated rate and has caused a disruption to China’s economy. It is very likely that the impact on China’s growth and commodity prices, besides, represents a shock to Latin America.
Latin America and the Caribbean have significant links to China, economic relations increased dramatically in recent decades, particularly through trade, foreign direct investment, and loans. Trade with China increased to $306billion in 2018 from $12billion in 2000 and is already the second trading partner. Three years ago, it represented 9% of total Latin American exports and 18.4% percent of total imports.
It is not the same in all countries, but, for example, China represents 28.1% of total Brazilian exports, as well as 10.5% of Argentina’s and 32.4% of Chile’s. Although China mainly imports primary products such as minerals and metals, agricultural products and fuels, its exports consist of machines and electrical equipment, textiles, chemicals, and metals. Its six main trading partners in the region are Brazil, Argentina, Chile, Peru, Colombia and Venezuela, whose exports are concentrated in four products, which represent 75% of Latin American exports: copper, soy, crude oil, and iron ore.
China’s growth in the first quarter of the year is expected to fall sharply and recover later in the year…
Foreign direct investment and loans from China have increased over the past decade. Between 2005 and 2017, China represented 5% of total foreign direct investment–more than $90billion. According to the Inter-American Dialogue Public Policy Center, China has placed more than $141billion in loans since 2005, which represents more than the World Bank, the Inter-American Development Bank and the Development Bank of Latin America combined. Venezuela is, by far, the largest recipient of these loans, with an amount of $67.2billion since 2005, followed by Brazil at $28.9billion, Ecuador at $18.4billion and Argentina at $16.9billion. Although the full extent of the impact of the coronavirus will ultimately depend on how well the outbreak is contained, China’s growth in the first quarter of the year is expected to fall sharply and recover later in the year. While China has estimated its 2020 growth at 6% several analysts have revised their projections down to as low as 4.5%.
These shocks will likely be translated into Latin America and the Caribbean through trade, commodity prices and foreign direct investment. In terms of trade, a slowdown in Chinese demand for goods driven by an economic slowdown will have a strong impact in countries such as Brazil, Chile, and Peru. Net exporters Argentina, Colombia, and Ecuador will also feel the impact to a lesser extent.
History shows that in Latin America and the Caribbean, volatility is the norm and not the exception, and that the development trajectories of their countries are not linear. The volatility arose with this new coronavirus testing resilience here and in China, that ability to return to a predetermined path of development in the shortest possible time. Beyond the panic that has been unleashed, COVID-19 is a call to resilience in Latin America and the Caribbean.