From Coolies to Patrons and Partners: The Chinese Paradigm Shift in Latin America

As the US markets lose importance for Latin American countries, China has become the most important investor and creditor. Their trade shares a symbiotic relationship.

In the second half of the 19th century, after the abolition of slavery, Latin America trafficked Chinese as coolies – indentured labourers. Between 1847 and 1874, Peru and Cuba trafficked over quarter million Chinese coolies. The Peruvian Congress passed a law to oversee the coolie system. It provided a subsidy of 30 pesos to the shipping company which brought in the coolies from China. The coolies had to be between 10 and 40 years of age and were obliged to work for eight years, after which they were free to go back or continue to live in the country. The law also had provisions for “management of the coolie”, which included teaching the Bible. It specified the number of lashes to be handed out to coolies for disobedience or indiscipline. In practice, the employers’s exploitation of coolies, was similar to slavery. Employers could auction, buy and sell the coolies.

Chinese coolies worked in plantations and mines and dug up the guano pits in Peru, then loading the fertilizer on to ships headed for the US and Europe. The strong stench of guano – droppings of birds and bats – was so nauseating that ships used for its transportation could not be used for any other purpose and had to be retired. Thousands of coolies fell sick and died due to the miserable conditions of work.

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Chinese coolie. Credit: Wikimedia

In 1874, the Chinese government signed an agreement with the government of Peru to enquire into the conditions of the coolies. A commission was formed to interview coolies.

In Mexico too, Chinese people were trafficked to work in the arid northern areas. Some were even employed as barbers and domestic help. After the end of their bondage, the entrepreneurial Chinese started their own businesses and flourished. But this attracted a backlash from the Mexicans, who accused the Chinese of “stealing Mexican jobs and businesses”. The anti-Chinese movement, which erupted in the early 20th century, saw Chinese people harassed in several ways. Shops and houses belonging to Chinese people were burnt and ransacked by civilian mobs.

The paradigm shift

Today, the Chinese have become Latin America’s single most important investor, creditor and its second largest trading partner. Chinese companies now own the mines where coolies once worked. China is now creating jobs and wealth for Latin Americans. Latin America’s mines supply ores and minerals to China, helping it continue as the global manufacturing power.

China’s investment in Latin America is estimated to be around $120 billion. Brazil has received the bulk of the investment with $61 billion, followed by Peru ($18 billion), Mexico ($6 billion), Argentina ($5 billion) and Venezuela ($2 billion). Of the investment, $27 billion has gone into mining, $25 billion into oil and $13 billion into the electricity sector. During a visit in 2015, Chinese President Xi Jingping announced that by 2025, the country would invest $250 billion in Latin America.

Chinese companies now own the mines where coolies once worked. China is now creating jobs and wealth for Latin Americans.

The estimated Chinese credit to Latin America is $150 billion dollars. Of this, Venezuela has received $62 billion, Brazil $42 billion, Argentina $18 billion and Ecuador $17 billion. Much of the earlier credit flowed into mining and oil, but recent focus has been on infrastructure and services.

The China-Latin America trade in 2017 was $257 billion, of which Chinese exports were $130 billion. China wants the trade to be $500 billion by 2025. It has overtaken the European Union as the second largest trading partner of Latin America. China is Brazil, Peru and Chile’s leading trade partner.

Trade between China and Latin America is a win-win for both parties. Latin America’s top global exports are crude oil, minerals and agro products. China is the leading importer of these items and will continue to be so. Latin America is well endowed with oil and minerals and has arable land with abundant water reserves. The region has the potential to increase the production and exports of oil, minerals and agricultural products. In contrast, China is losing millions of acres of agricultural land to urbanisation and industrialisation. The country’s water and pollution problems are also well documented. China and Latin America can share a symbiotic relationship.

Chinese President Xi Jinping has promised more investment in Latin American countries. Credit: Andy Wong/Pool/Reuters

Reducing importance of US markets

In contrast, the US has become a less important market for South America. The US was the principal market for Latin American crude oil exports. But thanks to the shale revolution, the US has become the largest producer of crude in the world, drastically reducing imports. The US does not need minerals as it has shifted its manufacturing to less expensive countries, including China. In the case of exporting agro products such as soybeans and maize, the US is a competitor to Mercosur countries.

In the 1980s, the US authorites and IMF had imposed the neo-liberalistic Washington Consensus policies on Latin American countries that were transitioning from military dictatorship to a democracy. These policies ruined the economies and pushed millions of people into poverty. The Latin Americans bitterly remember this period as the “lost decade”. In contrast, the Latin Americans celebrated the first ten years of the new millennium as the “growth decade”, thanks to the prosperity resulting from the large scale Chinese demand for commodities. The Latin American governments used the windfall from these profits for pro-poor policies, which are estimated to have pulled out 70 million people from below poverty line into middle class.

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The US had exploited Latin America as its “backyard” since the Monroe Doctrine of 1823. In the name of its wars on communism, drugs, corruption and immigration, the US has destabilised the region and undermined democracies, created and supported military dictatorships. The drug business is consumer driven. Millions of Americans pay top dollars to continue their habit of drug consumption. If this is stopped, no outsider will find any profit in supplies. But the US government wrongly blames the producers of coca and the traffickers from Latin America. The US is destroying agricultural fields in Latin America with chemical sprays in the name of eradication of coca plants.

On the other hand, the US is responsible for the killings of thousands of Latin Americans every day, using guns smuggled from or supplied by the US. Latin Americans are frustrated with this hypocrisy and the destructive and negative agenda of the US. In contrast, the Chinese agenda for Latin America is constructive and positive. The Chinese construct railways, roads, ports and power stations in the region. Latin America needs massive investment in infrastructure for its development, which China provides.

Wall Street’s vulture funds

While Washington DC politically destabilises Latin America, Wall Street and its vulture funds systematically cause havoc in Latin American markets. Wall Street brings in hot money to take advantage of the high interest rates in Latin America and make a quick buck. The money is pulled out suddenly when the interest rate goes up in the US or when other avenues open up for higher profit margins. Such large scale withdrawals cause devaluation and foreign exchange crisis in countries which have been forced to remove capital controls by the Washington Consensus.

Wall Street firms encourage and advise Latin American governments to issue dollar bonds and oversell them outside the region. When the bond issuing countries have difficulty in servicing the debt, Wall Street and Washington DC bring in IMF as rescue. IMF funds are used primarily to pay the creditors while governments are forced to cut down budgets for social welfare, education and infrastructure.

Wall Street and its vulture funds systematically cause havoc in Latin American markets.

When Argentina rejected the IMF formula and successfully restructured on its own in 2002, Wall Street and Washington DC excommunicated Argentina from the international capital market and cut off all Fund-Bank resources. The vulture funds which held out against the debt restructuring kept harassing and blackmailing the Argentine government and even threatened to seize the bank accounts of Argentine embassies. They managed to seize a prestigious Argentine naval vessel in Ghana through a fraudulent local court order. The naval ship was on a world good will tour and its seizure was a grave embarrassment for the country. President Cristina Fernandez could not travel to the US and Europe in an official Argentine plane due to the risk of the aircraft being seized.

The Chinese had come to the rescue of Argentina, Venezuela, Ecuador and Venezuela when the Washington-Wall Street nexus blocked out international capital. The Chinese provided emergency short term funds and currency swaps. But for the timely rescue, these countries might have slipped into serious economic crises.

US President Donald Trump has been known to use less than flattering words to describe Latin Americans. To add insult to this injury, the US has criticised El Salvador, Dominican Republic and Panama for their decision to recognise China in place of Taiwan. The US state department has recalled its ambassadors to the three countries to show its displeasure, threatened aid cut and has advised the other countries in the region (such as Paraguay and Nicaragua) to keep up diplomatic relations with Taiwan. This has bewildered the Latin Americans since the US, UN and over 180 countries of the world have cut off diplomatic relations with Taiwan and recognised China. These countries see this as yet another attempt to make a fool of them.

Given the historic exploitation and hegemony of the US, Latin Americans welcome China as a relief to counter the US domination, to a limited extent. They like to play the China card against the US to get the best from both. In the past, Latin American presidents craved to be invited to the White House. Now, they queue up to make pilgrimage to Beijing with business delegations to promote trade and investment.

US President Donald Trump’s derogatory comments about Latin American countries has antagonised the US. Credit: Reuters/Mike Theiler

Limitations of partnership with China

Latin America is conscious of the limitations of a partnership with China. Firstly, they see it as a purely commercial transactional partner and nothing more. They detest the communist dictatorship of China, having overcome dictatorships themselves. They are suspicious of the non-transparent nature of Chinese activities and the overwhelming role of Chinese state companies and financial organisations. There is an enormous cultural and communication gap. They are also hurt by the flooding of cheaper Chinese products in their markets, which have adversely affected the domestic manufacturing sector.

But the Latin Americans see China as a manageable risk unlike the US, whose actions are beyond control. While the US has repeatedly invaded Latin American countries and changed regimes, the Chinese are unlikely to do the same. Latin Americans have the option to stop, reduce or reject Chinese credit and investment and manage Chinese activities smartly. For example, when the Chinese wanted to buy large areas of agricultural land, the governments of Brazil, Argentina and Uruguay imposed restrictions on acquisition of agricultural land by foreigners. The Chinese backed out. It may be noted here that these restrictions are only against new investors. They do not affect large tracts of South American farmland already owned by Europeans and Americans.

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The Latin Americans would love to see an end to the unipolar world and welcome the rise of other powers to challenge the US and minimise its harm and domination. At the same time, they would also like to reduce their overdependence on China and diversify their economic partnerships. In this context, they welcome more trade, investment and involvement of India in the region.

Unfortunately, India has no plan, vision or trade target for Latin America, despite the region’s emergence as a large market for its exports and its contribution to India’s energy and food security through supply of petroleum, vegetable oil and pulses. India’s exports of $12 billion in 2017 could be increased to $25 billion by 2022.

India’s credit to the region is just barely $200 million, a tiny fraction of China’s $150 billion. India’s total trade with Latin America is just about the same as China’s trade with Chile ($36 billion). Latin Americans hope that India takes advantage of the opportunities for business in the large and growing middle-income market of Latin America.

R. Viswanathan is a Latin America expert and former ambassador to Latin American countries.