China’s Influence in Latin America: How Far Can it Go?

When Chinese oil giant Sinopec signed a $7.1 billion oil alliance with Repsol Brazil late last year, it’s a good bet that US policymakers groaned. Only the latest in a series of LatAm investments, it highlights the growing influence that China commands in the Nearshore – a region that the US has historically considered its backyard. But not anymore.

China has already usurped the US as the main trading partner of Latin America’s biggest economy, Brazil, and it aims to continue that momentum. While the trade is primarily in energy and natural resources right now, sourcing gurus are wondering whether it can expand into professional services. Read on for more.

Economic clout through a devalued currency

China’s growth this decade has been astounding. Even during the 2009 recession, the country’s GDP was increasing at 9.1%. In fact, Latin America owes much of its resistance to the recession, to trade with China. “In only four years, the region’s exports to China nearly doubled, from $22.3 billion in 2006 to $41.3 billion in 2009, representing a pace far greater than the region’s overall export growth.” says Cynthia Arnson, Director of the Latin American Program at the Woodrow Wilson International Center for Scholars. “In the midst of the international financial crisis, 2009 LAC exports to the United States fell by 26%. That same year however, exports to China grew by 5%.”

Much of China’s growth is due to its undervalued currency in order to promote cheaper trade. In recent years the country has brokered agreements and offered interest at rates much lower than the US can match, and so has become the most useful trading partner for many developing LatAm economies looking to export internationally.

But it may not be all roses for long. In a recent 60 Minutes interview, US Fed Chairman Ben Bernanke said that China is “risking inflation” in its own economy by not allowing its currency to appreciate. That view was echoed by Alsbridge CEO Ben Trowbridge in a recent Nearshore Americas interview. He told us that China is off his radar for the moment, “mainly because their currency inflation jumped. I think the cost of labor in China for BPO and IT work will rapidly become similar to the US.”

Until very recently, Latin America has been a low priority for the US, both in terms of foreign policy and commerce.

Oil, not outsourcing

In one sense, China’s interests in Latin America are all about energy – very necessary to fuel its huge economy, now second in the world only to the US. China is currently buying minerals from Peru, copper from Chile, and oil from Brazil and Venezuela. “They have an insatiable demand for natural resources” says Jerry Haar, Business Research Professor at Florida International University. “Any investments they make in the region are related to integrating their supply chains, but yes, mainly in infrastructure and natural resources.”

So will we see more bilateral investments in outsourcing between China and Latin America? Still in the early stages, we think the trade in professional services will definitely grow – already evidenced by LatAm vendors setting up in Chinese locations. Mexico’s Softtek opened its second delivery center in Wuxi, China in July 2009. CEO Blanca Treviño told us last year that China is one of the economies where she expects the most growth potential, and those centers are her early bid on the emerging domestic market there. Argentina’s Belatrix Software Factory also operates an offshore delivery center in Donghai, China.

“We think there’s a great opportunity to go beyond commodities and into new sectors like….technology products and especially services” said Fabrizio Opertti, Lead Specialist for Integration and Trade at the Inter-American Development Bank. In fact, IADB’s China-LAC Business Summit in October last year was all about this topic – increasing bilateral trade and investment in higher value services and products.

But it may be some time before we see Chinese investment turning more to high tech services in the Nearshore. As Arnson says, “The fundamental questions for the economic relationship between China and Latin America are how to improve trade quality and how to diversify direct investment beyond raw materials.”

Replacing the US in Latin America?

When Chinese President Hu Jintao visited Obama in Washington month, it’s safe to say that one item on the agenda was the trade implications of China’s increasingly influential economic footprint, especially in emerging markets. The fact that China is replacing the US as the main trading partner in countries like Brazil should make American policymakers take notice. Until very recently, Latin America has been a low priority for the US, both in terms of foreign policy and commerce. Trade agreements like DR-CAFTA have received a mixed response from Latin America, and the results are slow in coming, especially for professional services. So China has been filling the vacuum.

But will Chinese investment in the LatAm outsourcing industry replace the US? Highly unlikely. Advantages like proximity, time zone and access to technically skilled labor ensure that the Nearshore will continue to be an extremely attractive location for US buy-side clients. In turn, the US will continue to be an attractive market for LatAm vendors. But one thing is clear – as China increasingly moves into the tech services industry, its LatAm business links will increase just as they have for natural resources. In the years to come, US buyers may face Nearshore competition.