Agriculture is the Hidden Secret for Latin American-China relations in a Post-COVID World

By: Diego Senior and Gina Caballero

Research Assistance: Lalitha Pamidigantam

Introduction

The COVID-19 pandemic disrupted every aspect of life, and the extent of the effect of lockdowns in a vast majority of the countries which have implemented such measures are yet to be fully understood.

International commerce may have forever changed, with deep implications for emerging economies and vulnerable societies worldwide. In a March report, the Organization for Economic Co-operation and Development (OCDE) expressed early fears about COVID’s impact on the global economy, projecting that annual global GDP would drop to 2.4% in 2020 as a whole from 2019’s already weak 2.9% growth.^[i]China’s 6.8% GDP contraction and the United States’ recession are also windows into this post-COVID-19 trade world, since both signal a possible furthering of inward-looking priorities and less outward approaches to commerce. At the same time that the United States is looking further inwards for the economic crisis from the pandemic, they are also preparing for a Presidential election that will not be postponed, fueled by racial inequalities.

Yet, a more challenging picture emerges for Latin America, which is dealing with old economic difficulties and new hardships caused by the pandemic, while also facing contrasting public measures in responding to the pandemic between countries. Even before the pandemic in March, the Economic Commission for Latin America and the Caribbean (ECLAC) updated their economic output growth projection to be 1% for the region and then readjusted it to -1.8%. Tatiana Rosito of Brazil’s Center for International Relations (CEBRI), on a more recent conference call detailing relations between China and Latin America, noted that “the World Trade Organization (WTO) had new estimates that now consider Latin America exports will go down 30%.” The downturn is harsher than expected.

Latin American countries’ inconsistent response to COVID-19 poses another risk. Countries range from being unsuccessful at managing the coronavirus outbreak, to being unwilling to reckon with the need for transparent testing. Brazil, which has downplayed possible impacts of the virus, has now become the country with the second largest number of infections. The Latin American region rivals the numbers of Europe, and even China, and an outbreak as big as the one in Brazil will ultimately affect all of the region. One of Colombia’s worst hit regions is in its southernmost province, around the Amazon forest, bordering Brazil.^[ii] The Amazon happens to be a place for indigenous people, a particularly vulnerable group when facing the COVID threat.^[iii] But a diligent response to the virus isn’t the only measure of success. In Argentina, President Fernandez collected a 70.6% approval rating for his administration’s handling of the pandemic, as Argentina imposed a lockdown very early on in the process to contain the virus.^[iv]Still, there is a reasonable hesitancy in prescribing success to the Argentine government considering that their economic state is precarious at best.

The post-COVID world in Latin America will require strategic partnerships that can foster security, equality, and economic growth. Despite possible threats to investment caused by anticipated downturns in global GDP, China’s role and its own response to its role in the coronavirus pandemic, the global turn toward more diverse supply chains due to the massive and ongoing disruptions felt from China, coupled with a nationalist turn in trade and souring relations with the US all pose opportunities for Latin America. As companies seek to diversify supply chains away from China and as countries seek to nationalize some industries, Latin American will fill this gap in possible trade. Agriculture is instrumental to this perspective, which can lead towards much needed financial solutions to Latin America’s forthcoming COVID-19 economic crisis. But in order to be effective in this strategy, Latin America needs to rethink a few of its traditional approaches to pan-regional trade.

COVID-19 will add to competing value-systems between China and the West

International criticism over the explosion of the pandemic on Chinese leadership and the increasing rhetoric of the US against Beijing have cornered Chinese diplomats into defensive stances. Even more, Chinese diplomacy after the virus has been criticized and scrutinized publicly by multiple international players, generating a need for renovated trust with formerly established partnerships (both political and or commercial) that so far have not given China a cold shoulder or have not publicly condemned the lack of information around what first happened in Wuhan.

COVID-19 will reinforce the tensions that were already underway in China’s relationship with the United States, the EU, and even Australia. The pandemic heightens the importance of China’s free supply chains, in that breaking them is difficult. The world is noticing more their dependence on China as an attractive manufacturing site and thus their reliance on China in the greater supply chain.^[v] In consequence, companies are seeking to diversify their supply chains so that shocks to individual countries don’t cause such an impact and, furthermore, certain industries (pharmaceuticals, agriculture and energy) are facing new nationalistic pressures brought on by the pandemic crisis. Though Chinese companies have “come back” from their hiatus due to the virus, they still lag behind in production capacity, thus further driving a desire for a diversification of supply chains. This playing field leveling is beneficial to Latin America countries in need of diversifying their exports and industries.

Trends in US policy and politics suggest ongoing reductions in both imports and exports to China. For example, the U.S. has seen bipartisan support for the Medical Supply Chain Security Act to reduce reliance on China for drugs and medical supplies^[vi] by requiring domestic drugmakers to provide the Food and Drug Administration (FDA) with information to determine the volume of active pharmaceutical ingredients (APIs) used in pharmaceuticals sourced from China, amongst other requirements. At the same time, breaking the trade reliance on China has been a long-term narrative in American politics, especially within the current administration.

The European Union has also taken a stance, working on proposals to give European countries powers to derail unfair competition from state-backed enterprises, nudging a possible closing door, if ever so slightly, with ample trade relations with China. The EU has had recent disputes with China at the World Trade Organization (WTO)^[vii] and is currently laying out ground rules to bolster local industries within Europe in an effort to have less foreign influence in production within the Union.^[viii] This moment of crisis has allowed the West to re-examine its dependence on China, and move forward in its anti-Chinese rhetoric by way of business deals and international trade.

The geopolitical tensions will also impact the relations between China and the Latin American region

The response from Latin American countries, where strong economic ties to China are held in common, have been varied. The Institute of International Finance (IIF) said that economic activity in Latin America will contract by 5% this year as its largest economies (Brazil, Mexico, and Argentina) weather deep pandemic downturns. Brazil has been a case where diplomatic ties with China have thinned due to Bolsonaro’s increasing reliance on the nationalist pro-Trump and anti-Chinese portion of his base, prompting a public response by Chinese diplomats.^[ix] Chinese media outlets, quoting data from their country’s Ministry of Commerce, say China has been Brazil’s largest trade partner and export market for a decade. In 2018, bilateral trade hit a record of more than $110 billion.^[x]

Of the three countries mentioned in the IIF statement, Argentina is the most cash-strapped government, trying to renegotiate repayment of 100 billion dollars in foreign debt. Again. The New York Times noted how Argentine President Alberto Fernández recently described China’s efforts to control the spread of COVID-19 as setting “an example for Argentina in the strong leadership and creativity it has demonstrated in containing the epidemic.”^[xi]In 2019, China invested about $141 billion dollars into Latin America, 90 percent of which was directed to four countries: Venezuela, Brazil, Ecuador, and Argentina.^[xii]This country’s hardship and China’s interests collide.

Trade between China and countries in Latin America reached $244 billion in 2017, more than twice what it was a decade earlier. And China has been South America’s top trading partner since 2015, eclipsing the United States.^[xiii] The trend was increasing with the US’s current political leadership, but the pandemic startled China’s progress in the continent. Trade in general has fallen in 2020’s first quarter and investments will also probably follow through.Latin America countries are in urgent need and the help is running thin.^[xiv]

The first line of financial help is within the traditional, still American-led Bretton Woods institutions, most prominently, the International Monetary Fund (IMF), the World Bank, and the Inter-American Development Bank (IDB). Jose Antonio Ocampo’s recent United Nation Development Programme (UNDP) paper on international cooperation and the current crisis in Latin American economies notes that some of the region’s countries have “benefited from improved emergency credit lines at the IMF, but these resources are still modest.”^[xv]Ocampo also notes that despite having increased its credits to the region, the “World Bank’s lending to Latin American members is still below what was given through the last financial crisis.” Additionally, regional lending institutions like IDB are reaching their limits in credit capacity.

An added hurdle is the impossibility of a one-move, regional approach to surviving the crisis for Latin America. Multilateral organizations like the IMF, IDB and World Bank have little compatibility with the current fiscal and political approaches to economic values taken by governments in Venezuela, Brazil, and Mexico, where either authoritative decisions or ideological and political motives have led to financial crises or, in Caracas’ case, an unstoppable downward spiral. Argentina’s almost imminent default puts this one country in a particularly difficult situation.

China’s possible financial aid or increased direct investment in Latin America in the same way it did after the 2008 financial crisis is unlikely because the hardship is steeper. The Chinese economy has contracted 6.8%, and like America, China will have to solve problems at home before aiding the rest. Chinese institutions won’t stop their expansion and presence in Latin American economies, but their input will slow down. Hence, China will actually have to prioritize sectors in some Latin America countries.

In a sense, China has already started this prioritization process. Chinese investments in Latin America’s service sector, for instance, have risen from 21% between 2003-2012 to over 50% between 2013-2016.^[xvi]The Mergers & Acquisitions sector hit a record 16 transactions worth $11.5 billion in 2017.^[xvii]Since a post-COVID-19 scenario is leveling playing fields in all industries, Latin American countries should seek to strengthen relationships with China in those sectors already benefiting from Chinese investment.

Agricultural exports are a promising gateway for efficient recovery and possibly the region’s reinvention. More agricultural exports from Latin America to China and stronger supply chains between the two regions could sustain and repurpose relations, but other factors should also drive Latin America’s response. Latin American agricultural output is threatened, for example, from the dynamics of climate change with estimates that 90% of its land is at risk from climate-related disasters.^[xviii]Therefore, Latin American agricultural firms must prioritize business that can survive the tides of the changing climate. If Latin America wants to successfully navigate global trade in a post-COVID-19 economic layout, its countries should seek to meet the needs of the Chinese agricultural market in a way that’s cognizant of the risks of climate change to agriculture within Latin America overall.

Some Latin American countries are at higher risk of instability for agro-industry based trade. For example, in Brazil, insolvent mills are requesting debt relief, and continuing to drop the price of sugar, thanks in part to the drop in demand from China. Sugar is a particularly insightful example to the current nature of Sino-Brazilian trade relations since mills in the South American country reached a record low cane allocation to sugar production last season at 35%, directing 65% to produce ethanol,^[xix] a far more interesting commodity for Chinese imports. Firms with large parent companies will succeed in such an environment, though perhaps those companies have always been more likely to be able to weather financial crises better, regardless.^[xx]

The ebb and flow from the US-China confrontations have so far proven resilient to the coronavirus pandemic. The handling of the early stages of the virus has been part of the White House’s narrative, and something that might increase as the US presidential election heats up, opening new spaces for further demonization of Chinese goods. Geopolitics beyond the food chain are playing, and will continue to play, a crucial role for China’s decision-making process when choosing which trade partners to focus on. Mistrust between China and the US and EU could lead China to restrict imports from these markets.

The US-China trade war also gave opportunity for growth in Latin America exports to China^[xxi]in the short term^[xxii], but analysts have explored possible negative long-term outcomes of the confrontation itself,^[xxiii]and its outcomes for countries like Brazil, Mexico, and Argentina respectively; mainly because the 200 billion dollar promise China made to the US in their deal to end their trade war will affect agricultural exports from these countries in particular. Given the uncertainty in the execution of the deal and its specifics, and how long it might last in a post-COVID world, countries in the region are presented with an opportunity to say yes to an increased and sudden production of agricultural goods. Uncertainty is, after all, the new normal.

The region & China can choose an approach to the new normal

Latin America has two opportunities given current trends in international trade. First, both China and Latin America, as well as all regions, have the need to maintain global food supply chains during pandemics and are currently seeking to diversify, and agriculture is one area where China and Latin America could become more interdependent.

China’s ongoing increase in food imports, together with pandemic-driven export bans from other countries, create the perfect opportunity for Latin America countries to step in. Despite China’s solid two-layer food reserve system, there is concern on available supply of soybean and meat in the future and an anticipated need for imports.^[xxiv]China’s dependence on international markets for some of its main agricultural consumed goods (meat, soybeans, etc) is under stress, and its connectivity within other emerging economies but with smaller, antifragile agricultural outputs like those of several Latin American countries has potential for mutual benefits. Two of the main Chinese soybean importing countries are Brazil and Argentina.

Second, Latin America should be pragmatic and strengthen its economic cooperation with China in the financial sector, both in terms of infrastructure and debt relief. The use that Latin American countries give to their existing trade instruments with China’s international financing system is a tool to be used. Of course, these instruments won’t be able to yield results before the end of the economic crisis that both regions are facing. The region should take advantage of China’s interest in its infrastructure sector, as Latin America’s own physical integration will help trade with China, U.S. and the EU. Even though China’s Belt and Road Initiative (BRI) has been both controversial and not Latin America-focused to date, China’s main financial institutions (the China Development Bank and the Export-Import Bank of China) are in place as a possibility yet to be fully explored by the region.

Debt relief is another possible area of collaboration. Time is running short and low-income countries under the BRI are asking China for debt relief.^[xxv]Still, an approach to the economic downturn brought by COVID via BRI can be achievable. A recent research paper published by the WEF reinforces a positive outlook: “The quality of BRI activity should continue to improve in the longer-term, owing to greater participation of the private sector and foreign companies, as well as BRI’s tighter alignment with global supply chains”.^[xxvi]This is an open door for Latin America countries with capacity for executing contracts generated by FDI or generating direct exports to China.

The international turmoil around COVID-19 should be taken as a sign for Latin America not to fall into the U.S. vs China dynamic, even if governments like Venezuela and Nicaragua might aim to benefit from such a narrative. China’s path towards trade agreements with either the U.S. or EU is not a short nor easy one. This balancing act of relations with the West whilst keeping a long-term perspective afloat, is Beijing’s true challenge; and at the same time, it is Latin America’s true opportunity.

Steps ahead in Agriculture

Should Latin American go in the direction of supporting an agricultural agreement with China, this external engagement must be matched by productive policies at home, which would seek to rapidly increase sophistication of the region’s agriculture sector, in hand with adaptability and sustainability to climate change.

Naturally, this comes with both challenges and opportunities. For one, the research and development in the agricultural sector is limited across the region. In the 2019 annual 10-year outlook published by the United Nations’ Food and Agriculture Organization (FAO), it is warned that though the region has increased its agricultural output, it is still unlikely that it is nearly enough to combat climate change due to lack of food security across the region.^[xxvii] Bear in mind, this was in a pre COVID-19 world. This may also apply to further incorporating the region’s agriculture into its relationship with China. Agricultural development in Latin America should coincide with Chinese interests.

As for opportunities, going beyond the current limited products and limited exporting countries will increase the interconnection between Latin America and China. While it is important to keep in mind that Latin America ought to diversify in its international trade, it may be difficult to fight a dependency on China, considering that Chinese have been increasing their presence in the region for over the past twenty years.^[xxviii]Despite US warnings that Chinese intentions are imperial, however, many analysts are skeptical that Chinese plans for the region are anything but an economic interest to invest in the region’s infrastructure.^[xxix]Should Latin America develop its agricultural output, a furthering of continuity in an already strong relationship might be guaranteed.

According to Oliver Stuenke, an Associate Professor at the Getulio Vargas Foundation, Latin America’s commodity prices have historically been low, and economic growth in the region has remained low. Diversifying both products and exports will add value, and in turn, hopefully foster a more stable region. A strengthened relationship with China may also assist in Latin America’s success outside of US intervention in the long-term, establishing stability in a region which so desperately craves it. Seeking investment from a partner that is interested in economic growth and development beyond political ideology is more pragmatic than partnering with one with strings attached to trade and investment. This path also happens to be a test to the strength of democratic values and human rights awareness within the governmental institutions in each Latin American country.

Another opportunity where the region could flourish is to invite a new generation of agro-industrial companies to participate and explore niches in the Chinese market. According to this piece on Latin America’s agricultural challenges, “The production, transformation, and marketing of agricultural products are continually improving due to enhanced coordination in supply chains.”^[xxx]Cutting edge technology with innovative methods of weathering the multiple storms facing the region will help the region weather the storms well.^[xxxi]Of course, the agricultural sector still comes with the caveat of needing to diversify.

To remain reliant on commodities is to fail to weather this storm, or any upcoming ones, and such an approach should be multi-sectorial and backed by regional organisms. Though the private industry leads the way in innovation, it would be fruitful for Latin American states to support its industry with policies at home to increase productivity growth.^[xxxii]

Conclusion

The post-COVID world is fraught with uncertainty. Right now, as the world waits and watches both China and the United States in their handling of this dynamic, the Latin American region stands to gain from its relationship with China. Moving forward, however, it is imperative for Latin American countries to stay vigilant. In a region that is plagued with instability, expanding its base of trade and focusing on its economic growth in this time period may lend to a better and more stable political sphere.

China is stepping up its game in the region, and the United States continues on its path in alienating its allies in Latin America. The Trump administration is likely to keep on their tone-deaf handling of the region, increasing support to counter-narcotics through military support, even while the cDoronavirus threatens to deepen humanitarian crises in the region.^[xxxiii]As the United States barrels towards another election with plenty of uncertainty about it and its possible outcome, the ability of Latin American leaders to guide their countries through the crises in economics and public health will impact political and social stability within their own respective borders.

The strategic partnership with an interested China might prove to be an excellent opportunity to both avoid instability and grow the region’s economic strengths in a world where the coronavirus footprint reveals the fraught nature of international trade and access to food.

Diego Senior is a Journalist and Producer based in New York. He is a New School Alumni from SGPIA and is a short documentary producer for broadcast media in the US, including NatGeo and CBS News, amongst other outlets. He also has a 15 year career in radio journalism for Latin American news outlets.

Gina Caballero is Head of Latin American Desk at TINC INTERNATIONAL. She is based between Beijing and Shanghai working on developing business partnerships between China, Europe, and Latin America, especially in the agricultural sector. She has worked as Liaison official in Beijing for CAF Development Bank of Latin America and as a Consultant for the UN’s Economic Commission for Latin America and the Caribbean.

Research Assistant: Lalitha Pamidigantam is a Ohio State University recent graduate, where she received her BA in Public Administration, Leadership, and Policy from the John Glenn College of Public Affairs, with a minor in International Relations & Diplomacy.

^[i] https://read.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2019/issue-2_7969896b -en#

^[ii] https://www.as-coa.org/articles/where-coronavirus-latin-america

^[iii] https://news.un.org/es/story/2020/05/1474662

^[iv] https://www.npr.org/sections/coronavirus-live-updates/2020/05/12/853837925/argentina-react ed-early-and-kept-the-coronavirus-largely-contained

^[v] https://www.cnbc.com/2020/04/21/supply-chains-will-move-away-from-china-after-coronavirus- mark-mobius.html

^[vi] https://www.nytimes.com/2020/03/11/business/economy/coronavirus-china-trump-drugs.html

^[vii] https://www.bloomberg.com/news/articles/2020-06-16/not-with-a-bang-china-loses-landmark-wto-dispute-against-eu

^[viii] https://www.bloomberg.com/news/newsletters/2020-06-17/supply-chains-latest-europe-flexes-its-trade-muscle-on-china

^[ix] https://foreignpolicy.com/2020/05/15/chinas-diplomats-are-going-on-the-offensive-in-brazil/

^[x] https://www.chinadaily.com.cn/a/201911/13/WS5dcaebfca310cf3e35576eaf.html

^[xi] https://www.nytimes.com/2020/04/17/world/asia/coronavirus-china-xi-jinping.html

^[xii] https://latinamericareports.com/where-china-invest-latin-america/2064/