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China’s Economic Engagement in Latin America and Africa: Characteristics and Outcomes from a Comparative Perspective Economic relations, Economic cooperation

Author Seungho Lee and Munsu Kang Series 21-01 Language Korean Date 2021.12.30

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   Over the past 20 years, China has become increasingly active in engaging Latin America and Africa. Starting from the early 2000s, China has increased its regional influence in various areas such as trade, investment, policy loans, official development assistance and people-to-people exchange. It has done so under the banner of strengthening solidarity between developing countries through South-South cooperation, and has now become a major economic partner in the majority of countries across Latin America and Africa.
   We assume that there are underlying objectives behind China’s economic engagement in Latin America and Africa, given that the two regions are characterized by relatively low degrees of economic interdependence with China and present less direct geopolitical interests to China. Against this backdrop, we aim to offer a comparative analysis of what has driven China to engage Latin American and African countries with economic instruments and how its economic engagement has materialized in these regions.
   We first examine in Chapter 2 how Chinese foreign policy has changed its course in general since the foundation of PRC in 1949. We then delve into how its approach to Latin America and Africa has evolved over time, depending on its foreign policy objectives and external conditions.
   Chapter 3 shows some main trends in China-Latin America and China-Africa trade and some characteristics of Chinese investment, lending and official development assistance in Latin America and Africa and people-to-people exchanges between the two regions. In addition, we also explore how China has been strengthening its efforts for cooperation with Latin America and Africa amid COVID-19.
   We find that China’s share in Latin American and African exports and imports has rapidly increased since the early 2000s. In 2020, China’s share in total exports and imports of Latin American countries was around 20% and 13%, respectively. In Africa, exports to China captured about 18% share in the region’s total exports and 10% in its total imports in 2019. China’s imports from the two regions are comprised mostly of natural resources. We find that China has relied significantly on a number of Latin American countries for petroleum, copper, iron ore, lead ore and zinc, and a few African countries for petroleum, aluminum, cobalt and diamonds.
   China’s average yearly investments to Latin America and Africa recorded around $9 billion and $7 billion between 2005 and 2020. Although Chinese investments are still dwarfed by those from major investors in these regions, it is noteworthy that their increasing trend has continued until the mid-2010s. Chinese investments have stemmed mainly from state-owned enterprises in both regions. Investments in Latin America have been primarily through brownfield investments, whereas a large proportion of Chinese investments in Africa have been greenfield investments.
   Chinese policy banks such as the China Development Bank and Export-Import Bank of China have acted as major providers of loans to several Latin American and African countries since lending to the region took off in the early 2010s. Between 2008 and 2019, China provided $11.7 billion on a yearly average to Latin American countries, with a tendency to allocate most of its resources to the extractive sector of a small number of countries. Over the same time period, China provided a yearly average of $10.7 billion to African countries. In Africa, policy loans have been directed to a larger set of countries in the region, while focusing on infrastructure.
   In terms of executing official development assistance, Chinese activities have been far more pronounced in Africa than in Latin America. Indeed, Chinese aid flows to Latin America were almost negligible between 2000 and 2014 with the exception of the case of Cuba. In contrast, aid flows from China to Africa recorded a yearly average of $1.6 billion over the same time period, largely due to a dramatic increase beginning from the mid-2000s, mostly in the area of infrastructure projects.
   In the realm of human-to-human exchanges, we observe that immigrant flows from China to Latin America and Africa have continuously increased. However, they have been more dramatic in Africa. Across Latin America, it is primarily a small number of South American countries that have witnessed notable immigrant inflows from China. Across Africa, the inflow of Chinese immigrants has particularly been significant in the countries with ongoing large-scale construction projects by Chinese firms.
   With the outbreak of COVID-19, China’s cooperation with Latin America and Africa has entered a new phase. China has engaged Latin America through donations of medical supplies, excluding countries with diplomatic ties with Taiwan. Also, many Latin American countries have purchased large amounts of vaccines from China. Its activism has also been witnessed in Africa, where China has donated significant amounts of medical supplies and vaccines. However, among the relatively small amounts of vaccines secured by African countries through purchases, the proportion of Chinese vaccines was found to be very low.
   Chapter 4 provides a quantitative analysis of what determines the scale of China's economic engagement in Latin America and Africa, and the outcomes of this economic cooperation in the two regions. First, our Tobit estimation results find evidence that China prefers to allocate more economic resources in the form of investments, policy loans or official development aid to those with higher levels of GDP and natural resource abundance in both regions. We also find that China tends to reward those with a partnership status with China in Latin America, whereas the presence of the partnership status does not necessarily serve as an advantage in Africa. Access to sea is also found to be an important factor in attracting Chinese economic resources in Africa.
   Second, the results from dynamic panel estimation suggest that, in both regions, China’s economic engagement tends to increase imports from China and the level of indebtedness to China, either in terms of the absolute level or the ratio of debt from China to GDP. However, there is no statistically significant relationship between the scale of China’s economic engagement and exports to China from Latin American or African countries.
   In Chapter 5, we examine the implications of China’s economic engagement in Latin America and Africa for Korea’s cooperation strategy in each region. China’s growing influence in these regions, backed by economic instruments and various bilateral and multilateral cooperation frameworks, clearly presents challenges to Korea’s foreign policy, which remains relatively limited in resources that can be employed for geopolitical purposes in these regions. In this context, this study suggests that Korea engages Latin America and Africa by fully exploiting its comparative advantage in each region.
   Our findings suggest that China has been systematically approaching Latin America and Africa with disparate strategic objectives through different means to achieve them, under the grand strategy of expanding its sphere of influence across the globe. Given China’s growing influence in the two regions, it is hard to deny that China has become an important variable to consider when Korean policymakers design cooperation strategy in Latin America and Africa. The findings of this paper should help to analyze Chinese economic activities in the region and identify Korea’s comparative advantage for each region, these being a high priority task in foreign policy decision-making.

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