Asia-Latin America trade ties: An ancient tradition restored

The relationship between China and Latin America has changed radically since the Asian giant opened up to the world. There’s been an explosion in trade that soared by 2,000% in the last 15 years. Today, China is the largest or second largest trading partner of the main countries in Latin America, and the connection gets larger and more complex, despite the fall in the price of commodities resulting from slower Chinese growth that’s negatively affected its suppliers from the region.

The key features of the trade relationship between China and Latin America are the following:

• In the 1990s trade with China started growing fast. By 2014 China represented 12% of Latin America and the Caribbean’s global trade, only because its trade with Mexico, the region’s largest trader by far, is relatively small. Between 2000 and 2014 exports to China increased from 2% to 9% of the region’s total, while imports from China grew from 2% to 16%. Latin America is China’s fourth largest trading partner, coming only after the United States, Japan, and South Korea, according to Chinese statistics (figure 1), but these numbers vary widely depending on their source and it’s difficult to gauge their reliability.

  

• Statistics from Latin America show that the region’s trade deficit with China jumped from below $20 billion until the mid-2000s to over $75 billion since 2012. Mexico represented 87% of this figure last year. Trade with South America is far more balanced. Since 2014, the value of trade fell for the first time since 2009, mainly due to the drop in raw material prices and the depreciation of the region’s currency with respect to the yuan.
• Commodities with relatively low-value added dominate Latin American exports to China. Medium and high-technology trade with China is very biased: barely 5% of the region’s exports were products in this category, compared to 30%-40% of total Latin American exports in the last two decades. This again is highly skewed due to very small exports from Mexico, by far the largest exporter of medium and high technology products. Meanwhile, Chinese exports in this category accounted for over 60% of its total exports to Latin America in the last decade.

This gap has created a strong political backlash in some countries against China. In Argentina, Brazil, Peru, and Mexico business organizations and unions have protested loudly what is seen by them as an unfair Chinese competition in their own and global markets.

• Latin American exports to China are more concentrated than with any other trading partner. The top-three export categories to China— minerals, oil seed, and copper, followed by oil and pulp of wood, increased from 50% to 72% of total exports from 2000 to 2014. Over the same period, Latin America’s exports to the world in these three categories fell from 42% to 32%.

This new and closer China-Latin America link, that’s taken many by surprise and worried others which see it as a displacement of the US as the key power in the region. However, it has an ancient and alluring history that is very little known these days. What’s more, these ties are witnessing its exceptional and unexpected revival.

Historic ties

The story began in 1519 with the first circumnavigation of the earth by Ferdinand Magellan’s Spanish fleet and the discovery of a sea route from the Americas to Asia.

King Charles I of Spain wanted to find a direct way to travel by sea to the Spice Islands and sent his fleet under Magellan’s command through the Southern-most strait in the American Continent, that now bears his name, where he discovered what he christened as the Pacific Ocean, and proceeded to claim for Spain the many lands that he encountered, including what was to be called the Philippines, where he died.

That extraordinary voyage finally returned to Spain through the Indian Ocean and the strait of Good Hope, arriving almost three years after its departure. It was clear from the surviving –only 17 out of 241– sailor’s tales that the claims of Spain of the territories which Magellan had discovered were being challenged mostly by the Portuguese, and that the return route through the Indian Ocean was too dangerous.

Thus, Charles I ordered Hernán Cortés, who had just conquered what is now Mexico in 1519, to build a fleet and launch and expedition in 1527 to consolidate their claims of possession of the Spice Islands and the Philippines, since the king believed that the Treaty of Tordesillas, by which the Pope had divided the territories of the Americas between Portugal and Spain, also applied to their Asian possessions.

The trip west was relatively uneventful and reached its destination fairly fast –only 3 months- allowing the consolidation of the Philippines as Spain’s colony. The problem was returning to America because the prevailing winds and sea streams of the known routes would not allow it. It took another 40 years after the 1527 voyage, and many failed attempts, to find to find the return route, sailing north, to China and Japan.

Once that discovery was made, trade flows began in earnest and a virtual free trade deal between Latin America and Asia began, which China joined by a lucky accident. A Spanish ship near Manila rescued Chinese castaways from a ship-wreck, and their return home was helped by the government, which convinced China that Spain was well disposed towards them. Soon after Chinese vessels loaded with merchandise started arriving in Manila and in 1573 the first Chinese products reached Mexico.

For the next 250 years, mutually beneficial trade flowed between the ports of Manila via China, Korea and Japan, to cross the Pacific and arrive in upper California, not far from San Francisco, and then sail down along the coast until reaching Acapulco, in fleets that would go back and forth once a year in each direction. The merchandise was unloaded, transported by land through Mexico City to the port of Veracruz in the Gulf of Mexico, where it was uploaded for the trip to Spain.

Soon the trade flows extended to South America when the Spanish authorities realized that the commodities from the countries they controlled on its Pacific basin — basically what are now Chile, Peru and Colombia- was more economically transported via Mexico than crossing the Andes to the Atlantic. Thus, this area was integrated to the free trade flows with Asia as well.

The list of products exported by China at that time appears out of the Arabian Nights: Silk in all its forms and textures: velvet, satin, damasks, taffeta, plush and brocade; clothes like shirts, bathrobes, kimonos, capes, dresses, quilts, handkerchiefs, tablecloths and tapestries; porcelain crockery, furniture and art objects made of wood, ivory and bone; and products like musk, benzoin, amber and civet. Of course, just as other American nations joined in the free trade, this extended too to China’s neighbors: fine cottons from India; carpets and rugs from Persia; and jewels and precious stones from the entire region: diamonds, rubies and jades.

The flow of America’s trade with the Orient had two additional features: they were for the most part peaceable, since unlike trade on the Atlantic, it was virtually free of English pirates and French corsairs, which saved a lot of resources since it was not necessary to send armed ships with the convoys. And it became so important than it surpassed the Atlantic trade with Spain, which even tried to ban trading with Asia.

For the most part the merchandise bought in Asia from Mexico and the rest of the area was paid for with coined silver and gold from the region, but many other products, like cocoa and cochineal, found their way to the Orient. All chilies originated in Mexico but judging by the enormous impact that they had on the cuisines of all of the Asian countries, it is clear that large amounts of chilies were exported until they started being grown in the fertile fields of the region.

This trade arrangement came to an end when Mexico and the rest of Latin America’s countries became independent around the 1820s, and it has not been until recently, when China decided to join the rest of the world, that this relationship restarted in a serious way, which is precisely the aim of this column, being launched today with this historical recount that I hope my esteemed readers found interesting.

Manuel Suarez-Mier is a Washington, D.C.-based independent consultant on economic and financial issues. He has taught economics and international finance at various universities in the US and Mexico and was Director of the Center for North American Studies at American University 2014-2015. His numerous posts include chief of staff of the Governor of the Bank of Mexico. He also was Mexico’s top economic diplomat in Washington at the time of the negotiations of the North American Free Trade Agreement (NAFTA) between the U.S., Canada and Mexico.