Angel or devil? Chinese impact on Latin America

1. Angel or devil?Chinese impact on Latin America Javier Santiso Chief Economist Latin America and Emerging Markets BBVA Research Department Annual Bank Conference on Development Economics (ABCDE) Amsterdam, May 23-24th 2005

2. INDEX China: a new global player A positive impact on trade flows with Latin America Two case studies: Mexico versus Brazil Conclusion: A “blessing in disguise”?

3. Since 1978, Chinese economy has grown at a high rate Real GDP growth rate 1978-2006f (%) Source: BBVA Economic history recalls that this situation is not new: in 1820 China represented a third of the world GDP (Maddison, 2001).

4. Growth potential is driven by high saving and investment rates... Source: BBVA, IIF

5. …low wages and competitiveness Labour Costs (USD/hour) (average 1999-2002, total industry) Wages in China are in average four times lower than in Latin America. Source: BBVA, EIU However, real wages grow at a significantly higher rate than in industrialised countries. 1 data for China until 2003; 2005-6 estimates Source: BBVA

6. …increasing economic liberalisation Source: BBVA, 2004 Trade openness and FDI inflows surpass those of all Latin American countries.

7. …and large size of its domestic market Interior Region Population: 710 MM GDP per cápita: $765 Share of national GDP: 38% Western Region Population: 83 MM GDP per cápita: $773 Share of national GDP: 4% China represents some 20% of the world´s population The middle class accounts for only 19% in year 20031. Its weight has been growing by 1% per annum since 1999. Coastal Region Population: 482 MM GDP per cápita: $2117 Share of national GDP: 58% 1Estimate of Chinese Academy of Social Sciences. Middle class: total assets of Rmb150-300K (US$18-36K)

8. How long would this growth be sustainable? Real GDP per cápita PPP in constant prices (US$, 2004-5 estimates) Growth rate of GDP per cápita in China has been higher than in the golden years for L.A. main economies. Real GDP per cápita PPP in constant prices (US$, 2004-5 estimates) Source: BBVA, 2004 However, Chinese high growth rate is not unusual in Asia. Source: BBVA, 2004

9. INDEX China: a new global player A positive impact on trade flows with Latin America Two case studies: Mexico versus Brazil Conclusion: A “blessing in disguise”?

10. China´s liberalisation has heralded fair weather for Latin America... As of latest available data, Peru, Brazil and Argentina increased their share of total exports to China . countries: Argentina, Brazil, Chile, Colombia Mexico, Peru, Uruguay and Venezuela 2 until Octubre (latest data available) Source: BBVA

11. This trade increased mainly over recent years...

12. What data has the study been based on? Panel data in 3D: 35 countries, 620 products and 5 years. The Chinese exporting and importing structures have been compared with the one of 15 Latin American countries (plus 16 other emerging countries non LatAm, Spain, Japan and USA). We have used the UNCTAD database that includes 620 different goods. This database using the one and three-digit Standard International Trade Classification. 1998-2002 is the period of time considered.

13. What is the Chinese exporting structure? Exports composition to one-digit. Over recent years the exporting structure has changed, changing from one based on miscellaneous manufactured goods in 1998 to one based mainly on machinery and transport equipment in 2003.

14. What is the Chinese importing structure? Imports composition to one-digit. China has developed a strong intra-industry trade.

15. Specialisation Index (Balassa) China Wood products 0.46 Leather products 4.53 Chemicals 0.50 Processed food 0.60 Textiles 2.48 Minerals 0.27 Basic manufactures 1.03 Non-electronic machinery 0.49 Fresh food 0.83 Miscellaneous manufacturing 1.73 Transport Equipment 0.27 Clothing 4.16 Electronic components 1.05 IT & Consumer electronics 1.72 Source: BBVA What products does China specialize in? The index measures the country's specialization index in exports according to the Balassa formula. The index compares the share of a given sector in national exports with the share of this sector in world exports. Values above 1 indicate that the country is specialized in the sector under review.

16. Does China compite with Latin American countries ? Source: Blázquez, Rodríguez and Santiso, BBVA (2005)

17. Does China compite with Latin American countries ? Source: Blázquez, Rodríguez and Santiso, BBVA (2005)

18. Does China compite with Latin American countries ? Source: Blázquez, Rodríguez and Santiso, BBVA (2005)

19. What indexes of competition have we used? We want to see if the exports of Latin American countries coincides with Chinese export, i.e. if a potential cost exists. Coefficient of specialisation = Where ajt y ait are the share of good “n” over the total exports of country j e i in time t (where j is China) Coefficient of conformity =

20. CS CC CI CS CC CI Paraguay 0.10 0.04 0.07 Singapore 0.41 0.46 0.43 Venezuela 0.11 0.08 0.10 USA 0.44 0.44 0.44 Bolivia 0.14 0.08 0.11 Malaysia 0.43 0.48 0.46 Chile 0.16 0.06 0.11 Poland 0.46 0.45 0.46 Panama 0.14 0.09 0.11 Korea 0.47 0.49 0.48 Russia 0.17 0.08 0.12 Turkey 0.46 0.52 0.49 Honduras 0.18 0.08 0.13 Mexico 0.50 0.50 0.50 Guatemala 0.23 0.10 0.16 Rumania 0.46 0.59 0.52 Uruguay 0.21 0.12 0.17 Hungary 0.52 0.57 0.55 Peru 0.22 0.12 0.17 Thailand 0.55 0.59 0.57 Argentina 0.22 0.12 0.17 Source: BBVA (2005) Colombia 0.25 0.15 0.20 El Salvador 0.31 0.19 0.25 Brazil 0.32 0.25 0.28 Costa Rica 0.32 0.26 0.29 Source: BBVA (2005) With the exception of Mexico, China does not compete with Latin America Countries less harmed by the Chinese competition Countries most harmed by the Chinese competition Among the 15 countries less harmed by Chinese competition, there are 14 Latin American countries.

21. INDEX China: a new global player A positive impact on trade flows with Latin America Two case studies: Mexico versus Brazil Conclusion: A “blessing in disguise”?

22. Mexico: Global competition with China

23. Mexico: The dragon attacks? Chinese competition with Mexico has been increasing until 2003 (latest data available).

24. Competition of exports to the US market Chinese exports to the US grew in 2002 and 2003 at an annual rate of 26% vs. 2% for Mexican exports. Although it is not clear that China has gained market share at the expense of Mexico exclusively.

25. MEXICAN PESO 14.0 12.0 PPA average 1990-2004 10.0 8.0 6.0 4.0 Estimated Observed 2.0 0.0 Source: BBVA 1987 1996 2002 2005 1984 1993 1990 1999 2008 1975 1978 1981 Long term Inflation Nominal rate Estimated PPA USA Mexico 3.64 3.67 3.45 3.4 19.2 1990-1995 8.55 8.48 7.93 2.3 22.2 1996-1999 10.11 11.58 10.82 2.5 6.0 2000-2004 12.41 11.59 2.5 3.9 2005-2008f What could Mexico do? A passive adjustment: Depreciation of nominal exchange 12,20

26. What could Mexico do? Advantages of Mexico´s Geographical Location: • Lower Transportation and Communication Costs • Access to Regional Preferential Trade Agreements (FTAs) • Short Delivery Time 24 DAYS 4 DAYS 11,700 Km 160 Km Ocean shipping times Mexico´s competitive edge may be greatest on time-sensitive exports. Proximity to US implies Latin America can use inexpensive transport by land, rather than ocean shipment.

27. What could Mexico do?

28. Brazil: an intermediate point Brazil has the third highest competition level with China, although in a decreasing trend.

29. Brazil: an intermediate point Fuente: SECEX Fuente: BBVA Brazil maintains recurrent trade surplus with China, which has become its fourth largest export market.

30. Brazil: an intermediate point Herfindahl-Hirschmann Index for Brazilian exports by country of destination 0.12 Brazil is diversifying its exports by country of destination to reduce geographical dependence. 0.11 concentration more 0.10 0.09 0.08 diversificationn more 0.07 0.06 0.05 ene-89 ene-90 ene-91 ene-92 ene-93 ene-94 ene-95 ene-96 ene-97 ene-98 ene-99 ene-00 ene-01 ene-02 ene-03 ene-04 Source: BBVA However, the composition of Brazilian exports by sectors has barely changed.

31. INDEX China: a new global player A positive impact on trade flows with Latin America Two case studies: Mexico versus Brazil Conclusion: A “blessing in disguise”?

32. Chinese booming demand of metals and other commodities Source: BBVA, World Metal Statistics

33. Source: BBVA Source: BBVA Chinese booming demand of metals and other commodities In 2003, Chinese imports of nickel were duplicated, those of copper increased 15%, of soybean 70% and of crude 30%. In addition, China consumed 50% of world cement, 30% of coal and 36% of steel. China has become the greater consumer of copper, tin, zinc, platinum, steel and iron.

34. Exports of commodities/ Total exports 2004* Venezuela 83.1% Peru 70.7% Chile 59.1% Colombia 46.3% Argentina 38.0% Brazil 29.6% Mexico 14.6% Latam 31.2% * data until Octuber Source: BBVA based on national statistics A “blessing in disguise” for Latin America? BBVA-MAP Latam index monitors the trading prices of commodities in the region. Primary products account for more than a third of Latin America exports, except for Mexico and Brazil: risk of “Dutch disease”?

35. Angel or devil?Chinese impact on Latin America Javier Santiso Chief Economist Latin America and Emerging Markets BBVA Research Department Annual Bank Conference on Development Economics (ABCDE) Amsterdam, May 23-24th 2005