China was a key factor in the recovery of Latin America after the global financial crisis of 2008-09. In fact, the country’s demand for commodities helped to spare the region, whose economies are heavily reliant on raw materials production, from the worst of that downturn. In just two years, from 2009 to 2011, the region doubled these kinds of exports to China. So it is reasonable to ask if the Chinese economy will repeat the role after the coronavirus crisis.
This time around, signs are not very reassuring, experts say. Joyce Chang, managing director and chair of Global Research at JP Morgan, says that Chinese engagement with the region is unlikely to lessen the economic downturn from COVID-19 to the same degree that it did after the 2008 global financial crisis.
The first reason is that, despite beginning its return to normalcy after almost three months of closures and lockdowns, China will continue to face economic challenges and weak exports as the rest of the world fights the pandemic. According to JP Morgan estimates, Chinese GDP will grow only 1.1 percent in 2020.
Is the forecast for Chinese GDP growth in 2020, according to JP Morgan. The IMF expects a similar rate: 1.2%. Apart from India, no other big market is expected to grow in 2020
China will be far from irrelevant, of course. And there may be a bright spot in this fact for Latin America, as the region’s economic prospects are tied to China’s in a stronger sense than the rest of the world. According to Chang, most analysts expect a rapid – or, as they say, a V-shaped – recovery for the Asian country after the worst has passed. JP Morgan reckons that every 1% decline in Chinese growth takes about 0.5% off of global growth. But for Latin America that correlation is 1 to 1, a one percentage point decline in China results in a one percentage point decline for the Latin American region, says the bank.
“Although China continues to provide some support to Latin America, such as fast tracking medical supplies to some countries, it is not the type of support that China was able to provide after the global financial crisis”, says Chang, who took part on a recent conference call hosted by the Inter-American Dialogue, a U.S.-based think tank, where it was discussed China’s role in the Latin American recovery process after the COVID-19 crisis.
Oliver Stuenkel, professor of international relations at the Getulio Vargas Foundation (FGV) in São Paulo, also says that while many in the region will look to China to play a role in recovery, China will emerge from this crisis far less capable of helping than it was in the past. To make matters worse, the economic situation in Latin America was already exceedingly delicate before the pandemic. With the worst economic performance in the world, the region has had very limited fiscal space to help mitigate the effects of the crisis. And the likelihood of growing political instability in the region will have a further dampening effect on inward investment.
This week, the International Monetary Fund (IMF) disclosed its forecasts for Latin America’s GDP as a shrinkage of 5.2% in 2020. Some recovery would come only in 2021, with a lot of financial and political support by the local governments and the international institutions.
Alberto Pfeifer Filho, professor of international relations at the Advanced Studies Institute of the University of São Paulo, told LABS that despite its GDP growth being affected, China will still be a giant economy, more than twice bigger than in 2008. According to him, multilateral organizations may not have the necessary firepower to help struggling countries in the region.
“China looks at the world in a strategic way, and it relies on raw materials provided by Latin American countries. This will not change”, says Pfeifer, adding that the Asian country will mobilize its internal savings – from government funds, state-owned enterprises and private companies – seeking opportunities, including in a cheaper Latin America.
There is also the possibility of enhanced Chinese engagement with Latin America in those industries in which China is already especially competitive or which will benefit to a degree from Chinese stimulus measures. These include artificial intelligence technologies, automation, and 5G telecommunications, among others. Chang suggests that China will also continue to focus on the provision of medical supplies, knowledge and technologies in the coming months and that we may see some lasting changes in global pharmaceutical supply as a result.
Future investment will also be shaped by the political economy in Latin America. For example, Stuenkel predicted that arguments against free trade will strengthen in Brazil post-COVID-19. Calls for greater self-sufficiency could result in a considerable resurgence of economic nationalism in Brazil and elsewhere.
Covid-19 has also had an important and probably lasting effect on the so-called US-China-Latin America triangular relationship. As China’s economy continues to recover it will be in an ever better position to lead the world in combating the pandemic.
Pfeifer adds that the U.S. and China may settle their trade differences, but Washington will continue to fight to keep its dominance in the region, especially on the technologic front.
In Latin American public opinion, as Stuenkel indicated, the US has played virtually no role in leading the response to the pandemic. There is a perception that a power shift has taken place. Despite pronounced anti-China sentiment in Brazil and some other parts of the region, China is increasingly seen as a key provider of public goods.