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Pacific Alliance: New Kid on the Latin American Bloc

Pacific Alliance: New Kid on the Latin American Bloc

By Jonathan DeHart

The newly formed Pacific Alliance could be the most important point in China's pivot to Latin America. But obstacles remain. At a time when the United States is "pivoting" to Asia, China is just as much pivoting to other regions of the world. 

Since President Xi Jinping came to power he has maintained a busy travel itinerary by any standard. By and large Xi's most touted trips have been to countries in Africa and Latin America. It is towards the latter that this report turns.

Just as the European Union and the Association of Southeast Asian Nations (ASEAN) have done, a number of Latin American regional groupings are pulling their collective strengths and building bridges to other trade blocs around the globe. It all started with Mercosur and the Andean Community (Comunidad Andina in Spanish), with the Pacific Alliance (Alianza del Pacifico in Spanish) being the most recent to take shape.

Given its orientation towards Asia, the Pacific Alliance could prove to be the most relevant to China's foray into the region. If the partnership takes off, the economic results could be enormously win-win. But this outcome is far from being a given. There are a number of issues to consider when assessing what China's place will be in this newly emerging Latin American economic order.

For one, how will this work logistically? With so many countries involved, is it realistic to expect smooth exchange to take place? Perhaps the biggest question of all: will Chinese influence or that of the United States win the hearts of ordinary Latin Americans?

For the past decade or more, some argue the US has neglected its southern neighbors relative to China's level of engagement in the region, which has seen a drastic uptick since around 2000. This leads to the question that touches on the bottom line: what does China have to gain by increasing its economic activity in Latin America?

From the evolution of Latin America's various trade blocs to China's growing presence in the region, this special report will highlight the great potential economic opportunities for China inherent in the Pacific Alliance and give a glimpse of the ongoing soft power struggle for influence in the region now playing out between the two largest outside players.

Background: Latin America Rising

Although the focus of this report is on the Pacific Alliance, a bit of background knowledge of trade blocs within Latin America is in order. As ASEAN and the EU have moved towards greater integration, so too has Latin America. The three largest trade groupings within the region are the Andean Community of Nations, Mercosur, and now the Pacific Alliance.
Of these, the Andean Community has the longest history. Founded in 1969 under the Cartagena Agreement, it was initially called the Andean Pact and took its present name in 1996. The group comprises Bolivia, Colombia, Ecuador and Peru, where its headquarters is based in Lima.

All told, the member countries cover a massive swath of terrain, amounting to 4.7 million square kilometers and home to around 100 million people. As of 2005, at which point Venezuela was also a member, the combined GDP of the member states was $745.3 billion. Minus Venezuela, the group's GDP PPP in 2011 was $902.86 billion.

To the east and south of these members of the Andean Community, another grouping was formed by the nations of Argentina, Brazil, Paraguay (currently suspended), Uruguay and Venezuela. This other Latin American gathering, called Mercosur (or sometimes Mercosul), is significantly larger in terms of population and economic footprint than the Andean Community.

The group's name an abbreviated form of a title rendered differently in the trade bloc's official languages Spanish, Portuguese and Guarani translates to "Southern Common Market" in English. Its member states have inked free trade agreements and ease of movement for people, goods and currency amounting to a full customs union similar to the Andean Community. Bolivia, Chile, Colombia, Ecuador, Guyana, Peru and Suriname are associate members, which do not have full voting rights or unfettered access to Mercosur full members' markets.

All told, the combined population of Mercosur's five member nations was around 260 million as of 2011, with Brazil's195 million accounting for the lion's share. As of last year the group's collective GDP was $2.9 trillion and it is the world's fourth-largest trading bloc, trailing only the EU, North American Free Trade Agreement (NAFTA), and ASEAN.

Both of these groups are large pieces in a much bigger emerging economic jigsaw puzzle that will reveal a truly massive regional grouping once complete. In 1999 the Andean Community and Mercosur began in earnest to discuss the possibility of merging into one mega-bloc touted as the "South American Free Trade Area" (SAFTA). And in December 2004 they signed a cooperation agreement and released a joint letter of intent to push for a Union of South American Nations (USAN) modeled on the EU.

But what about Mexico and the rest of Central America not to mention Chile and Colombia? Further, what of reaching out to other major trading blocs and individual nations, most notably the massive markets of Asia? These questions were addressed in June 2012.

Pacific Alliance: Building a Bridge to Asia

On June 6, 2012, in Chile's Paranal Observatory, the newest member of the Latin American bloc was born: Alianza del Pacifico (Pacific Alliance). Much younger than its cousins in the region, this new group seek to approach business in a new way. As such, its orientation was decidedly towards the Pacific -- specifically, Asia. Or, to be even more precise, China.

A trade bloc isn't usually a hot topic of discussion, but the Pacific Alliance is bucking that trend. Felipe Larra, Chile finance minister, called the alliance "the most exciting thing going on today in Latin America."

The nations in this progressive trade union include Chile, Colombia, Mexico, Peru, and as of May 22 this year Costa Rica. All told, these nations comprise roughly 36 percent of Latin America's GDP. If these nations were viewed as a single country, it would pass India to be the world's ninth largest economy with a nominal GDP of more than $2 trillion USD.

In trade terms, the countries in this group have an equally impressive showing, exporting around $445 billion in 2010 -- exceeding the total exports of Mercosur members by nearly 60 percent over the same period.

Alongside the goal of lowering tariffs to 10 percent, member of the Alliance have put a premium on opening their borders to migration of their combined population of 215 million between member states. This would promote tourism, as well as educational and business exchange.

Likewise, financial markets would be integrated (e.g. Latin American Integrated Market, or MILA, the joint stock exchange shared by Chile, Colombia and Peru).
Looking beyond the group's formal membership, Canada has free trade agreements in place with Mexico and Chile, with potential FTAs on the table with Colombia and Peru. The government of Canada has permission to join, but they are still mulling whether to upgrade their status in the group from observer to observer-candidate.

Other nations on the periphery of the group include the United States and Panama, with the former expressing an openness to becoming an observer to the group while the latter expressing interesting in joining.

The Economist reported that the Alliance is keen for the U.S. to join their club, with the ultimate aim of creating an FTA zone that spans the Americas. The U.S. has already inked agreements with each member of the Alliance.
This brings us to Asia. This April, the People's Republic requested to become an observer in the bloc. Further, ASEAN was invited to join in November 2012. While observers do no enjoy full privileges, they do gain increased access to the trade links of the group's members.
While all of this may sound great, it is still a way to go before the group can fully begin to actualize its collective hopes.
"It has been said that the Pacific Alliance is still much more 'alliance' than 'Pacific,'" said Margaret Myers, China and Latin America program director of the Washington DC-based think tank, Inter-American Dialogue.

While Myers granted that "the member nations have made considerable progress toward reducing migration barriers in particular," removing tariffs from 90 percent of traded goods, she added, "the extent to which the Pacific Alliance will increase Asia-Latin America ties depends, however, on unified efforts among members to engage Asian nations, address broader development issues, strengthen regional production, and position themselves within global value chains."
She continued, "China has yet to focus much attention on the Pacific Alliance aside from some interest in pursuing observer status."

China's New Neighbors

Although China may at present be content to maintain observer status in the alliance, the trade and investment records of the People's Republic in the Latin American region over the past decade or so suggest that this relatively passive state of affairs will more than likely not be prolonged indefinitely.
After Beijing issued the Opening and Reform policies of the late-1970s, China first became a destination for foreign investors eager to tap into the seemingly endless opportunities. While this continued for a few decades, funds began to flow the opposite direction around the dawn of this century. Along with substantial forays into North America and Africa, China began to invest heavily in Latin America as part of its push to "go abroad".

What began as a series of cash injections into state-owned enterprises, mainly in the natural resources sector, swiftly expanded to include private industries. Mexico, in particular, has been a major source of investment for China, eager to forge ties with the southern neighbor of the United States and use its proximity to more easily access North American markets. Today, China is now the second most important source of foreign investment in Latin America.

Since 2005, China has committed to giving more than $87 billion in loan commitments to Latin America. In 2010 alone, China's loan $37 billion worth of commitments amounted to more than the combined total of loans offered by the World Bank, Inter-American Development Bank, and US Export-Import Bank.

In 2009 China surpassed the US as Brazil's largest trading partner in 2009, with trade between the two hitting more than $75 billion last year alone. In April 2011, Brazilian President Dilma Rousseff paid a visit to China, before stopping off in the U.S.

Great Breakdown of Chinese Loans in the Latin American Region
In 2004 an especially important event in the history of Sino-Latin American ties took place: then Chinese President Hu Jintao paid the region a visit. Ever since Hu's historically significant trip, China and its key regional trading partners have greatly deepened their diplomatic, cultural and economic ties, to the great benefit of both sides.
As Myers explained, "Latin America is very important to China as a source of much-needed raw materials, a market for Chinese exports, and in terms of political partnerships as China pursues a limited set of foreign policy interests."
She added, "Xi Jinping fs 2013 trip to Costa Rica, Trinidad and Tobago, and Mexico was intended to strengthen China fs relations with these countries in particular, as well as with the region more broadly."
While great progress has been made, as the Inter-American Dialogue website notes, "Chinese and Latin American governments have yet to satisfactorily understand one another's interests or to fully determine the implications of increasingly complex Sino-Latin American relationships. Nor have Latin American countries taken full advantage of the range of opportunities emerging from enhanced relations with China."

At the simpler end of the spectrum, these challenges include things like trade imbalances. For example, Mexico imported $57 million worth of goods from China in 2012, while exporting a mere $5.7 million worth to China.
Perhaps the larger question is the form China's engagement in the region will likely take shape over time vis-a-vis its biggest competitor, the United States.
Myers said, "China presence ?economic, political, and otherwise ?has certainly strengthened over the past decade. China is now the top trade partner for Brazil, Chile, and Peru, for example. It is projected to soon become the top trade partner for a few other countries in the region. Overall U.S. trade with Latin America still surpasses that of China, however."
Myers added, "U.S. investment is also much higher than China fs. Japanese investment is still higher than China, for that matter."

Soft Sell: Chinese vs. U.S. Influence

While it is important to take note of the facts that both the U.S. and Japan still invest more heavily in Latin America than China does, money is not the only thing that talks. If the diplomatic efforts of the U.S. and China in Latin America are compared, the former seems to be letting the line go slack, while the latter is pulls it tighter. When Xi Jinping and Barack Obama met in California this June, competition in Latin America was clearly on their minds.

"From a diplomatic standpoint, the U.S. has by no means abandoned Latin America, but China is seen as an increasingly important partner that has helped several countries in the region to maintain relatively high rates of economic growth even in the aftermath of the 2008 financial crisis," Myers said. "The trend in the region is toward diversification of partnerships. This will happen regardless of U.S. policy."
One thing in China's favor is that the U.S. relationship with Latin America carries baggage left over from the Monroe Doctrine of 1823 and its history of mixing business with policy. By contrast, Chinese loans come with fewer policy-related conditions than do ones given by the U.S. Further, Chinese funds tend to flow into energy and infrastructure projects -- Latin America has an infrastructure gap of $260 billion These factors predispose the region to accepting China's help.

On the flipside, Chinese loans tend to come with the expectation that Chinese firms and equipment be used in the projects signed on for. Agreements regarding oil sales in place of local currency often enter the equation as well.
A recent Pew Research Study Center poll of 6,100 people in Argentina, Bolivia, Brazil, Chile, El Salvador, Mexico and Venezuela, found that when it comes to economics, "While the U.S. is generally stated to have greater impact than China, China influence is seen more positively in most countries."

But the story does not end with economic impact. Referencing the Pew Center poll, Myers said, "It is unlikely that China will win out in terms of 'soft power.' Although many Latin Americans respect China fs scientific and technological development, very few like Chinese ideas and customs, pop culture, or ways of doing business."
She added, "This could change over time, of course, but for the time being China is seen primarily as an economic partner, albeit a very important one."
As it stands, this seems to be the primary distinction made between the U.S. and China among Latin Americans. From an economic perspective, China seems to lead. From a "soft power" perspective the U.S. currently exerts more pull. How these competing forces play out over time is yet to be seen.
Regardless of who is emerges as the preeminent influence in the region, the importance of Latin America for China and vice versa is beyond question and will continue to grow. 

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