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China widens role in latin america { November 20 2004 }

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November 20, 2004
China Widens Economic Role in Latin America

SANTIAGO, Chile, Nov. 19 - The expected arrival here on Friday of President Bush, who personifies for Latin Americans the economic and political power of Washington, is being greeted with an uneasy mix of protests and hopes for greater growth.

But while the United States may still regard the region as its backyard, its dominance is no longer unquestioned. Suddenly, the presence of China can be felt everywhere, from the backwaters of the Amazon to mining camps in the Andes.

Driven by one the largest and most sustained economic expansions in history, and facing bottlenecks and shortages in Asia, China is increasingly turning to South America as a supplier. It is busy buying huge quantities of iron ore, bauxite, soybeans, timber, zinc and manganese in Brazil. It is vying for tin in Bolivia, oil in Venezuela and copper here in Chile, where last month it displaced the United States as the leading market for Chilean exports.

While President Bush is spending the weekend here for the Asian-Pacific Economic Cooperation forum, President Hu Jintao of China is here in the midst of a two-week visit to Argentina, Brazil, Chile and Cuba. In the course of it, he has announced more than $30 billion in new investments and signed long-term contracts that will guarantee China supplies of the vital materials it needs for its factories.

The United States, preoccupied with the worsening situation in Iraq, seems to have attached little importance to China's rising profile in the region. If anything, increased trade between Latin America and China has been welcomed as a means to reduce pressure on the United States to underwrite economic reforms, with geopolitical considerations pushed to the background.

"On the diplomatic side, the Chinese are quietly but persistently and effectively operating just under the U.S. radar screen," said Richard Feinberg, who was the chief Latin America adviser at the National Security Council during the Clinton administration. "South America is obviously drifting, and diplomatic flirtations with China would tend to underscore the potential for divergences with Washington."

Chinese investment and purchases are seen as vital for economies short on capital and struggling to emerge from a long slump. In Argentina earlier this week, for example, Mr. Hu announced nearly $20 billion in new investment in railways, oil and gas exploration, construction and communications satellites, a huge boost for a country whose economic vitality has been sapped since a financial collapse in December 2001.

China is also increasingly willing to venture outside the economic realm. In March, for example, after Dominica, in the Caribbean, severed diplomatic relations with Taiwan, Beijing responded with a $112 million aid package, which includes $6 million in budget support this year and $1 million annually for six years. In Antigua, it has pledged $23 million toward the construction of a new soccer stadium.

Political relations seem to be advancing most rapidly with Brazil, Latin America's most populous nation, where the left-leaning government has repeatedly floated the idea of a "strategic alliance" with Beijing.

The Brazilian government has made clear that it views closer ties with China as a card that can be played to offset American influence and trade dominance. While not suggesting that China could soon replace the United States as Brazil's main customer and partner, the aim is to force trade and other concessions from the United States and rich industrialized nations.

"We want a partnership that integrates our economies and serves as a paradigm for South-South cooperation," President Luiz Inácio Lula da Silva said in May during a state visit to China during which he was accompanied by nearly 500 Brazilian business executives. "We are two giants without historical, political or economic divergences, free to think only about the future."

Before his visit, Mr. da Silva even hinted at negotiating a free-trade agreement with China, a step that Chile this week announced it would take. But China's impact in Brazil is already felt so strongly that the idea was quickly shelved after São Paulo business groups expressed fears of being overwhelmed by state-owned Chinese companies in their own domestic market.

In 2003 China became Brazil's second-largest individual trading partner, and in recent months the Chinese have been seeking joint ventures that would expand trade even further and give them a significant investment stake. Brazil is one of the few countries to enjoy a trade surplus with China, and last year alone exports to China nearly doubled, to $4.5 billion.

"Over the past three or four years, the growth in trade has been explosive," said Renato Amorim, formerly a diplomat in Brazil's embassy in Beijing and now the executive director of the Brazil-China Business Council. "China is trying to assure reliable sources of supply of raw materials to deal with the shortages it faces, and since there are no conflicts on the political agenda, Brazil fits the bill."

Many of the minerals come from a part of the Amazon known as Carajas, which has the largest, purest reserves of iron ore and other strategic minerals in the world. At a complex at the mouth of the Amazon near Belém that produces alumina, the white powder that is refined from bauxite to make aluminum, production may soon double, with most of it expected to go to China over the next decade.

Farther down the coast, Baosteel of China and Companhia Vale do Rio Doce of Brazil, the world's largest iron ore producer, are partners in a $1.5 billion steel venture to produce up to eight million tons of iron a year. Upriver in Manaus, Chinese delegations are negotiating long-term deals for timber. To the south, in Mato Grosso, similar missions are trying to lock up supplies of soybeans and cotton.

The same is happening elsewhere, especially in agriculture. All across the South American heartland, from the Amazon to the pampas of Argentina, a boom in the cultivation of soybeans, used mainly as animal feed, has been propelled in recent years by the emergence half a world away of a Chinese middle-class with more income and a desire for more pork, chicken and beef.

Concerned by what they see as Chinese advances, Japan and South Korea are also stepping up their efforts to secure their own supplies of raw materials in the region. Prime Minister Junichiro Koizumi of Japan visited Brazil in mid-September. President Roh Moo Hyun of South Korea has also scheduled trips to Argentina, Brazil and Chile, planned around the Chinese visits.

"Within a few years there is likely to be a 'war' to develop raw materials," Park Yong Soo, president of the state-run Korea Resources Corporation, told Reuters last month. "China is challenging aggressively," he added, leading to supply shortages and higher prices.

The few Brazilian analysts who have experience dealing with China are also urging their government to be cautious. Ideological sympathies or some vague notion of third world solidarity, they say, should not get in the way of the national interest.

In pursuit of their "strategic partnership," Brazil and China have jointly developed a satellite program, are discussing Brazilian sales of uranium for use in Chinese reactors, and recently marked the opening of a plant in China owned by the Brazilian aircraft manufacturer Embraer.

But it is clear to most Brazilian experts that China sees their country primarily as a source of raw materials, and that bothers them. Many are encouraging the government to fight for a more equal relationship, raising concerns from trade flows to environmental damage.

"Thus far, the discourse has been much more political that pragmatic, with all this talk of a South-South alliance," said Eliana Cardoso, formerly a World Bank economist for China and now a university professor in São Paulo. She and others caution that though President da Silva has stressed that the Brazilian and Chinese economies are essentially complementary, China is also a rival.

During President Hu's visit last week, the Brazilian government agreed to recognize China as a "market economy," a step that makes it harder to impose penalties on China for dumping exports. The influential Industrial Federation of São Paulo immediately criticized the move as a "political decision" that leaves "Brazilian industry in a vulnerable position" and will bring "prejudicial consequences to various industrial sectors."

Not only are businesses concerned about China's making inroads into the domestic market; they also worry about exports of products with which Brazil has had some success abroad, from shoes and toys to chemicals and car parts. "What Brazil has to insist on is that instead of exporting raw materials, we try to export processed goods," Dr. Cardoso said.

Marcos Jank, an economist who is an adviser to the Industrial Federation of São Paulo, agreed. "China in the long term can rob markets from Brazil, because the hand of the state is still very strong in a lot of areas, including the exchange rate," he said. "It is a ferocious competitor in the things we export, as well as for markets and investments."

In fact, so much foreign investment has been going to China that Latin America is finding it difficult to obtain the capital it needs to finance its own growth. As a result Brazil, like neighboring Argentina, has been forced to court Citic, the state-controlled China International Trust and Investment Corporation, in hopes that at least a small part of China's estimated $500 billion in foreign reserves will make its way to the region.

Thus far, China has been mainly interested in infrastructure projects that would assure a more steady flow of the products it is already buying from Brazil and Argentina. In particular, railways, ports, highways, gas pipelines and other energy-related projects are being studied. Earlier this month, a Citic delegation visited two dam sites in the Amazon that would be essential to the alumina and steel joint ventures in Brazil.

Such projects have raised questions about the environment, especially in the Amazon. Environmental groups here look at China's dismal record on projects like the Three Gorges Dam and worry that the Chinese will be tempted to export their problems to Brazil.

In fact, several of the projects being considered would be highly polluting, while others would be energy-intensive and probably inflict damage to the environment similar to what occurred at Three Gorges. Of special concern are a pair of plants that would process coal in Brazil, partly for export back to China.

"It would be sad if at the moment the Chinese are beginning to worry about being green, we continue on the old path of not evaluating this criterion in our commercial transactions," the columnist Washington Novaes wrote this month in O Estado de São Paulo. Brazil must avoid falling into the trap of being "a big supplier of commodities without compensation for the high environmental and social costs" that accompany that role, he added.

Brazilian analysts agree that hard negotiations on this and a host of other issues lie ahead. Though the relationship with China is inherently unequal, they note, Brazil can get more of what it wants only if it avoids being impetuous and is as hard-nosed and pragmatic as the Chinese themselves.

"They want Brazil to continue to be a big producer of commodities so as to regulate prices, to depress them on world markets," said Gilberto Dupas, director of the Institute of Advanced Studies at the University of São Paulo. "For China, any alliance with Brazil is eminently pragmatic and opportunistic, and much more tactical than strategic."

Copyright 2004 The New York Times Company

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