KSC Stakeholder Meeting

1
Embracing the Dragons China and Alternative
Political Paths in Latin America
Presentation to Canning House
London, England 9 May 2007
2
Two Powerful Forces Impacting the Political and
Economic Dynamics of Latin America
China
Populism
An Expanding PRC Diplomatic and Strategic Profile
in Latin America
Electoral Victories by Populist Candidates,
Transformation of their Countries, and Influence
on the Region

• Significant Growth
• in PRC-Latin America Bilateral Trade
• From 200 mil/yr in 1975 to 70 bil/yr in 2006
• Predicted to reach 100 bil in 2010 (vs. 183.3
  bil with US currently)
• April 2006 Tom Shannon Visit to Beijing
• First trip dedicated solely to talking about
  Latin America
• Numerous high-level trips to China by Latin
  American dignitaries and Vice-versa

• Narrow Defeats by Other Strong Populist
  Contenders
• Mexico - Andres Manuel Lopez Obrador
• Peru Ollanta Humala

3
Organization

• Why China is Interested in Latin America
• Key Characteristics of the Interaction
• The Political Split of Latin America
• The Impact of China on the Political Dynamics of
  the Region

4
The Phenomenon is Both Extremely Significant and
Extremely New
PRC Imports from Latin America
PRC of LA Exports 1 in 1995 gt 10 in 2005
Mexico 13 mil in bilateral trade in 1972 -gt
11.4 bil in 2006
Source CEPAL, COMTRADE
Source PRC MOFCOM
Relationships and trade patterns are changing
faster than the perceptions of policymakers, and
involve nuances not yet well understood by
investors
5
Driving Factors Behind New PRC Initiatives in
Latin AmericaNeed to Look Abroad for Primary
Products
Rapid and Sustained Growth

• 21 2006 import growth
• 28.2 increase in primary product imports,
  including
• 58.9 ? in iron ore
• 28.9 ? in copper
• 42.5 ? in crude oil

• Almost 10 growth per year since 1978
• Growth of 10.7 in 2006, 10.6 2005 (MOFCOM)
• 10 growth forecast for 2007 and onward (BOC)

China as a large, semi-coordinated manufacturing
enterprise

• Trade / GDP ratio 70
• Focus on adding capacity 19.2 of 2006 Chinese
  imports were capital goods
• Ordering factor inputs 74.4 of 2006 PRC imports
  interim products

• PRC, with 6 of global GNP, consumes
• 7.4 of the worlds oil
• 31 of the worlds coal
• 30 of the worlds iron
• 27 of the worlds rolled steel
• 40 of the worlds cement

Limits in the Ability to Acquire the Needed
Resources in China or Asia
43 of PRC crude oil consumption was from imports
in 2006
6
Driving Factors Behind New PRC Initiatives in
Latin AmericaNeed to Diversify Export Markets

• Limits to dependence on US and EU as markets

• US ? 2.4
• EU ? 2.0
• Japan ? 2.1
• Middle income nature of many Latin American
  countries
• A logical market for inexpensive Chinese
  manufactured goods
• PRC exports to LA exceeded imports from LA in
  2006 for the first time in recent history
• 36.0 bil PRC exports to LA (? 52.1 over 2005)
• 34.2 bil PRC imports from LA (? 27.6 over 2005)

Predicted 2007 GDP Growth Rates (Morgan Stanley)
Source PRC MOFCOM 9 Feb 2007
Latin America is not just a supplier of primary
products but also an increasingly important
customer
7
Why China is Interested in Latin AmericaAdvance
Diplomatic Isolation of Taiwan in Support of
Long-Term Goal of National Reunification
Taiwan issue is central to the PRC political
dynamic Center of gravity 12/26 countries
still recognizing Taiwan concentrated in Latin
America

• 5 in Central America Panama, Costa Rica,
  Nicaragua, El Salvador, Guatemala
• 6 in In Caribbean Dominican Republic, Haiti, St.
  Kitts Nevis, St. Vincent the Grenadines

High-value targets

• One country, one vote in the UN and various other
  international bodies
• Eg. WTO Supermajority is required to bring
  certain classes of trade actions
• Small, relatively poor economies susceptible to
  PRC economic attention
• Eg. Grenada switched recognition in 2005
  Informal quid pro quo PRC aid of 112 million
  translated into 1600 per person

8
Why China is Interested in Latin America New,
More Confident Generation of PRC Leadership

• Hu Jintao leadership team consolidated after 16th
  Communist Party Congress Nov 2002
• Not as inclined to view the PRC through lens of
  weakness
• New leadership needed a major new international
  success

• Li Changchun and coming new generation of
  leadership?

9
Organization

• Why China is Interested in Latin America
• Key Characteristics of the Interaction
• The Political Split of Latin America
• The Impact of China on the Political Dynamics of
  the Region

10
Key Characteristics of the Interaction

• PRC primarily buying primary products /
  agricultural goods
• 70 of LA exports to PRC are natural resources,
  primary products or commodities
• Only .1 of products exported by LATAM to China
  are from the high technology sector (CEPAL
  2005)
• 90 of all LATAM exports to the PRC come from 6
  countries (PRC MOFCOM 2007)
• Brazil (38)
• Chile (17)
• Argentina (11)
• Peru (9)
• Mexico (8)
• Venezuela (8)
• Selling manufactured goodsSeeking to move up the
  value chain
• Exceptions to this pattern are driven by
  exceptional opportunity, pursuit of other
  strategic interests (eg. Cuba, Venezuela)

11
Key Characteristics of the Interaction

• Significant differences in performance between
  countries that are well positioned with effective
  export sectorsand those that are still working
  to do so

12
Key Characteristics of the InteractionActual PRC
Investment Limited, Focused on Primary Products

• 659 mil /6.92 bil of Chinese non-financial FDI
  went to Latin America 2005
• 41 bil total FDI to region in 2005
• Significant fraction of LA investment may have
  been pass through
• But now rising
• 1.8 bil to Ecuador 06
• 1.6 bil to Venezuela 06
• 300 bil commodity fund?

13
Key Characteristics of the Interaction (contd.)

• Brazil as a commodity source

Different Dynamics for Different Countries

• Venezuela and Ecuador as the troublesome oil
  suppliers

• Chile as the PRC gateway to South America

• Mexico as an intermediate production staging area
  serving the US market
• Cuba Proximity and Strategic branding

• Peru as the strategic crossroads the Chile of
  tomorrow

• Costa Rica (possibly) as the primary interface to
  Central America

14
Organization

• Why China is Interested in Latin America
• Key Characteristics of the Interaction
• The Political Split of Latin America
• The Impact of China on the Political Dynamics of
  the Region

15
Confidence in Democracy as a Path to Development
in Latin America is Low and Falling
Source Latinobarometro Report 2006
16
What is the new Political Path?

• Generation and use of popular support within a
  democratic political system to achieve political
  objectives
• Use of raw support and perceived popularity to
  overcome resistance by established parties and
  interests, and ultimately transform the system
  itself
• Requires one or more leaders who can frame the
  grievance and direct it against the status quo
  infrastructure
• This rhetorical bond is often an underappreciated
  continuing source of the leaders power (eg.
  Chavez and Alo Presidente)
• Grievances addressed may or may not coincide with
  an ethnic identity (eg. indigenous in Latin
  America)

Different from traditional left of center
political movements, although such movements may
channel grievances, and its failure may lead to
the new political path
17
Latin America A Region with Great InequalityBut
Then Why Did Dramatic Political Change Occur in
Bolivia Before the US and Great Britain?
18
Inequality May Exacerbate Desperation and
Alienation with the Status Quo, But is Not the Key
Important to understand how perceptions of
inequality interact with other socioeconomic and
political factors
19
The Dynamics, Rather than Conditions, are Key to
Understanding the New Politics
Institutional
Power of
Populist
Effectiveness

Leader
of Rhetoric

of Populist
Leader
Memory of

Perception of
Previous
Socioeconomic or
Conflict
Ethnic Identity
Mobilization of

Masses

-
Around

Willingness to
Populist


Leader
Unification
Support
Clarity and Historical
of
non-Civic

Rootedness of
Opposition
Solutions


Cleavages
-
-
Perceived
Feeling that

Investment
-
Differences and
System is
Coincidence of
Sense of
Desperation
and
Irreparable
Grievances with

Inequality

Economic

Cleavages

Activity


Economic and
Crime and
Civic
China
-
-

Violence
Social Family
Culture

-
Health





Corruption
Education
Relative
Jobs and

Youth
Income

-

Government
-
Social
Values
Revenues
Institutions


Imparted


Revenue Generated
by Economy
20
A Key Symptom Significant Dissatisfaction with
and Lack of Confidence in Latin American
Governments
21
Desperation Contributes to the Need and
Willingness to Tolerate Elites Espousing
Non-Traditional Alternatives
22
Challenges of Activism From Young Populations
23
Corruption May Undermine Faith in the Ability to
Change The System Through Traditional Parties and
Processes
Corruption
24
But Dissatisfaction in Countries With a Diverse
Economic Base Has Thus Far Been Accommodated
Within the Existing System
Source United Nations National Accounts Main
Aggregates Database
25
Timing of Elections is Also Important
The anti-systemic Latin American leaders have
initially come to power through electionsand
electoral events have exacerbated political
mobilization
26
The Next Round of Elections Concentrates on Some
of the Countries in Which the Health of the
Existing System is of Greatest Concern
27
Organization

• Why China is Interested in Latin America
• Key Characteristics of the Interaction
• The Political Split of Latin America
• The Impact of China on the Political Dynamics of
  the Region

28
Latin American Economic Performance Increasingly
Tied to the PRC

• PRC demand is the leading factor pushing LA
  economies forward, and could cause a significant
  boom in LA if PRC demand sustained (CEPAL, Feb
  07)
• 200-400 bil new commodity fund announced by PM
  Wen Jiabao (Mar 07)
• Iron Steel CVRD-Baosteel price negotiations,
  Growing partnerships Gerdau / CVRD-Minmetals,
  CODELCO-YCI
• Copper Banner year 06, then Jan 07 Price
  softness, then Feb 07 price spike as PRC exhausts
  reserves and enters market after banner year
• Oil with PRC filling petroleum reserves (first
  in Ningbo in 07)

• Agriculture PRC consumption to double over next
  few years from current level of 15 mil tons
• Dec 06 ? international corn prices blamed on
  Chinese decision to postpone biofuel development
  to avoid shortages of corn
• Banking system
• 1.2 billion in monetary reserves (Apr 07)--Where
  does it go, is it used to purchase commodity
  reserves?
• ? 9 PRC stock markets (Feb 07)-gtImpact on LATAM,
  world markets

29
Changing Strategic Landscape of LATAM Ports

• New role for previously low-volume pacific ports
• Tacna Shandong Luneng 2 bil Megaport with new
  highway and rail connections to La Paz and Lima
• IloPossible output destination for Bolivian
  natural gas
• Manta as strategic entry point for PRC products
  entering LATAM (vs. Guayaquil)
• Antofagasta Key role in contemplated
  interoceanic corridor from Santos contemplated
  under IIRSA
• Expansion of other Deepwater Ports
• Valparaiso, Michoacan, Ensenada
• New COSCO-operated Megaport in Panama?

Corresponding new port security challenges for
local governments
30
Corresponding Economic Shifts in Pacific Coast
Countries

• New commercial and cultural weight of Pacific
  urban hubs
• Managua ?
• San José
• Lima
• Santiago
• New importance for Pacific SLOCs
• Associated shifts in the roles and structure of
  Latin American navies

31
Chinese Communities, Corporations and Capital an
Increasing Factor in Latin American Politics

• Carobobo (during Venezuelan recall referendum)
• Ethnic tensions with an expanding Chinese ethnic
  community, perceived as more prosperous and
  culturally other
• Shougang Hierro Peru
• Differences between expectations and Chinese
  business practices
• Strikes (4 in 2006 alone), conflicts w.
  government over lack of investment, environmental
  infractions
• Tarapoa, Ecuador
• Indigenous actions against PRC holdings, testing
  the Chinese response
• COLDELCO worker protests against sale of Gaby to
  China Minmetals
• Andes Petroleum (CNPC)
• Assets purchased by the PRC affected by
  Ecuadorian action against Oxy petroleum

32
Intersection of China and the New Latin American
Political Dynamic

• China as a source of commercial competition and
  partnership
• Service industry Infrastructure Sales to PRC
  Indirect benefit to commodity prices
• China is generally agnostic in dealing with
  conservative governments (Peru, Colombia,
  Mexico), leftist governments (Brazil, Chile), or
  populist governments (Venezuela, Ecuador,
  Bolivia, Nicaragua)
• But engagement with China puts pressure on Latin
  American economic and sociopolitical systems
• Markets China import penetration, export
  displacement, and ownership practices (Shougang
  Hierro Peru, Tarapoa), fuels populism
• By propping up primary product markets, China
  promotes a dead-end statism in LA that may push
  the system toward populism rather than leftism
• Fueling the ranks of the industrial unemployed,
  the marginalized primary product workers
• Promoting corruption and delaying reform
• Synergy Chinese purchases and support sustain
  regimes pursuing the new political path
• Source of technical expertise Bolivia, Ecuador
  oilfields
• Source of capital and technology Satellite
  Simon Bolivar, Bolivarian computer en Falcon
• Reciprocally, populism benefits Chinas Business
  role by shaking up existing institutional
  relationships (eg. Bolivian oil sector, Ecuador
  with Oxy)

33
A Mixture of Winners and Losers in Trade with
PRC, A Function of Complimentarily and
Competitiveness
Source PRC Ministry of Commerce
34
China as a Re-enforcer of the Political
Bifurcation of Latin America?

• Impact of Relations with China

Pressure for Systemic Change
Based on balance of trade, according to 2006
figures from the PRC Ministry of Commerce for
2006 Bade on a weighted scale of political and
socioeconomic indicators
35
Questions?