Introduction

Rapid integration with the global economy has been a leading feature of the economic rise of the People's Republic of China (PRC) over the past two decades. In 2007, the PRC's trade (the sum of merchandise exports and imports) to gross domestic product (GDP) ratio reached 66.3%, more than double the 1990 level of 32.6%. Its share of world merchandise trade rose from 1.6% to 7.2% over the same period. Its share of world stock of inward foreign direct investment (FDI) rose from 1.1% in 1990 to 2.2% in 2007.¹ The PRC is now the world's third largest merchandise exporter after Germany and the United States (US), and the largest FDI recipient in the developing world. Facilitated by favorable policy reforms, improvements in transportation and communication infrastructure, low labor costs, and massive FDI inflows, the PRC has emerged as the center of global manufacturing production, serving as an important conduit for exporting manufactured products from Asia to the North American and European markets.

Partly as a consequence of the dominance of this “triangular” trade pattern, the PRC's trade has been heavily oriented toward neighboring Asian economies and affluent western Organisation for Economic Co-operation and Development (OECD) markets. However, in recent years, the PRC's trade linkages with emerging, non-traditional trading partners, such as Latin America, Africa, and the Middle East, have increased significantly. During 2000– 2007, the PRC's exports to Latin American and Caribbean (LAC) countries grew sevenfold, and imports from this region jumped more than twelvefold. In 2007, the trade volume between the PRC and the LAC region exceeded US$100 billion, making the PRC the second largest trading partner of this region (International Monetary Fund [IMF] 2008).

The increased economic linkages between the PRC and Latin America reflect the PRC's growing prominence in the world economy and its structural complementarity with many LAC economies. With explosive economic growth, a rapidly expanding manufacturing sector, and growing scarcity of land and natural resources, the PRC developed a huge appetite for commodity imports, in which most LAC countries possess a strong comparative advantage. The PRC is now the world's largest importer of copper and soybeans and the second largest importer of oil. In 2006, the PRC imported 11.6 million tons of soybeans from Brazil, a 46% increase over the previous year. Imported soybeans from Brazil and Argentina accounted for 63% of the PRC's total soybean imports. Chile and Peru, the world's two leading copper producers, accounted for 50% of the PRC's total copper imports (General Administration of Customs of the People's Republic of China 2007). The demand from the PRC contributed to the recent strength in world commodity markets—at least until the outbreak of the global financial crisis in 2008—and brought important gains to commodity exporters in Latin America.

Aside from these benefits, the rapid development of PRC-Latin America economic relations has triggered concerns about possible adverse impacts on LAC economies. The PRC's rise as a manufacturing power has exerted competitive pressure on both the home and export markets for LAC manufacturing sectors, especially among Mexican and some Central American manufacturers. For commodity exporting countries, their booming commodity exports have led to worries about Dutch Disease effects—i.e., the loss of export competitiveness of manufacturing sectors resulting from a real exchange rate appreciation associated with a surge in exports of natural resources—and other negative effects due to the specialization in natural resources.²

Despite the recent rapid expansion of trade, PRC-Latin America economic cooperation is still at an early stage. How much potential is there for expanding and deepening economic cooperation between the two regions? How should both parties work to achieve a win-win outcome from further intensified trade and investment linkages? This paper attempts to answer these questions by examining the recent trade performance of the PRC and LAC economies, and simulating alternative scenarios for their future economic opening and cooperation. We argue that the strong complementarity between the PRC's—and more broadly East Asia's—and Latin America's economic structures would lay a sound foundation for enhancing future cooperation in trade and investment. However, to make such economic cooperation sustainable, both sides need to move beyond the traditional focus on complementarity of endowments. Policies that encourage deep economic integration would help Latin American firms integrate into the value chains of global production, and enable Chinese and other East Asian firms to have greater and more stable access to resources and markets. Further liberalization in trade and FDI regimes and regulatory policies would be of high priority for most LAC countries, while the PRC and other East Asian economies can make a great contribution by investing in manufacturing sectors and infrastructure in Latin America.

This paper is organized as follows. Section 2 is an overview of trade development in the PRC and Latin America over the past decade. Section 3 uses a gravity model to examine the trade performance of the PRC and Latin America and assesses the trade potential between the two regions. Section 4 then uses a global computable general equilibrium (CGE) model to estimate the economic effects of East Asia-Latin America trade cooperation. Section 5 offers conclusions.

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