Mexico’s fortunes have been on the rise. Presidential elections in July 2012 were followed by a smooth transition in December to the PRI administration headed by President Enrique Peña Nieto, while steady economic growth has commentators championing the future of the “Aztec Tiger.” The swift passage of labor and education reforms within the first few months of the new administration has boosted this optimism, and bodes well for the President’s expected energy reforms this summer. Yet as panelists at the Institute of the Americas Energy Security Roundtable underscored, the health of the Mexican economy is intricately linked to its energy sector, and the oil and gas industry in particular.
LOS ANGELES – Latin America is too dependant on sales of commodities to China, relying on soaring prices of raw materials rather than innovation to boost economic growth, said José Luis Curbelo, vice president of development strategies and public policies for the Development Bank of Latin America (CAF).
Latin American countries “think this bonanza is going to last forever, so we are not making the necessary economic reforms,” Curbelo said. “The relationship must mature. Latin America must move from being a single supplier of commodities to becoming an economic and trade partner of relevance to China.”
Curbelo made his remarks during a Feb. 20 conference organized by the Institute of the Americas and the Institute of Latin American Studies of the Chinese Academy of Social Sciences (CASS) in cooperation with the Los Angeles Area Chamber of Commerce. The conference, titled, “China-Latin America Trade on the Pacific Rim: Opportunities in a New Economic Era,” was held in Los Angeles.
“The Americas must learn what to sell to China,” Curbelo told the audience of business and government leaders and scholars from the United States, China and Latin America. “For that, you have to make an effort. You have to innovate.”
Curbelo noted that while Asia will contribute 58 percent global economic growth over the next 10 years, China’s contribution will be about 30 percent. “The rest of Asia will be more relevant,” he said.
Meanwhile, the World Bank estimates that 42 percent of Latin America’s population will become put of the middle class by 2030, increasing the demand for education, health care and improved environmental conditions.
“Latin America needs to learn how to compete,” Curbelo said. “In order to do that, Latin America must make an effort to innovate. Latin America has to transform itself and become a region that produces something other than commodities.”
Latin America’s economic expectations are based, in part, on the fact that Chinese foreign direct investment in Latin America has increased significantly in the past three years.
“Since 2008, China has become one of the world’s largest sources of direct investment,” said Yong Zhang, a professor of Latin American economy and development at the Institute of Latin American Studies in Beijing. “These flows first reached significant levels in Latin America in 2010.
“By country, the main destinations for Chinese foreign direct investment are Brazil, Argentina and Peru, which all have strong trade links with China,” Zhang said. “Most of the investments have been made in natural resource extraction, but over the medium term this is expected to diversify into other sectors such as manufacturing, infrastructure and finance.”
Peru and Chile have negotiated bilateral trade agreements with China and with the United States, said Carol Wise, associate professor of international relations at USC’s School of International Relations. Colombia, which is now the third largest economy in Latin America due to recent oil discoveries, is considering a bilateral trade agreement with China. A Colombia-U.S. trade agreement went into effect in May 2012.
Still, Latin America accounts for only 10 percent of the cargo moving through the Port of Los Angeles, Jim MacLellan, director of trade development at the Port. At the same time, the Port’s trade with mainland China has skyrocketed over the past 10 years, from $10 billion in 1992 to $153 billion in 2012. Trade with China “helps keep us as the No. 1 port district in the United States,” he said.
As Latin America confronts the need for economic reform, China is acting on its plan for the Renminbi (RMB) to become an international reserve currency. Given the sheer size of China’s economy and its rising share of global output and trade, the steps being taken by China portend a rising role for the RMB in international finance and trade, said Vanessa Wu, HSBC Securities vice president of corporate and commercial sales for global markets.
“The biggest shift in the next 10 years will be the internationalization of the RMB,” said Wu.
Several of Latin America’s largest companies have succeeded in entering China’s market, said Vanina de Verneuil, senior associate with the international law firm Shearman & Sterling’s Beijing office. Vale, a Brazilian company that is a global producer of iron ore, was the first Latin American firm to open an office in Shanghai in 1973. And Mexico’s largest bakery company, Bimbo, has a significant presence in China, said de Verneuil.
Jack Bell, managing director of Pantek Partners, said every company entering the Chinese market is confronted with the “Three C’s”: confusion, conflict and cooperation.
“This is one of the most complex business relationships in the world,” he said. “You have currency fluctuations, you have geopolitical issues. There are a lot of opportunities but there are also a lot of challenges.”
Stephanie Barry, general manager of WD-40 Co.’s China operations, said her company finds itself competing again a counterfeit version of WD-40, one that is highly toxic and highly flammable. WD-40, which launched its China operation six years ago in Shanghai, has a 10 percent market penetration, compared to a 97 percent market penetration in the United States. “We sell more than Coke or Pepsi in the U.S.,” she said.
Jim Zimmerman, a partner in the Beijing office of San Diego-based law firm Sheppard Mullin Richter & Hampton, said, “to succeed in China, a company needs to find a niche market.”
Brazilian aircraft manufacturer Embraer has been successful in China by building small aircraft flying between airports in second- and third-tier cities. An engineering firm owned by a Venezuelan is one of the most successful engineering firms in Beijing, Zimmerman said. And one of the most successful IT companies in Beijing is owned by a Mexican firm.
In starting a company in China, “information is critical,” Zimmerman said. “You must do your due diligence – on partners, employees, distributors, supplies. And remember that politics trumps everything – it trumps commercial interest, it trumps the law.”