China is the dragon at Latin America’s door

Turning 15 is a big deal in Latin America — the moment when girls come of age, often to extravagant fanfare. So imagine the disappointment in Beijing, Latin America’s newest best friend, when the region met the 15th anniversary of China’s entry into the World Trade Organization with conspicuous silence and awkward shrugs instead of a gala quinceañera.

Here’s the problem: In 2001, China joined the WTO on the understanding that over the ensuing 15 years it would strive to abide by the rules of free commerce by lowering trade barriers, freeing up its currency and pricing its exports according to supply and demand. In return, member states would implicitly agree to recognize China as a grown-up market economy, a crucial upgrade for the world’s second-richest nation.

That probationary period ended on Dec. 11. Now Latin America faces something of a diplomatic bind: China is the biggest trading partner for many Latin nations and one of the region’s biggest investors; it’s also a fierce competitor whose export juggernaut has steamrolled inefficient Latin firms. Granting China market economy status will in many respects make Latin economies more vulnerable to such pressures. Failing to do so risks damaging a relationship that fueled the region’s growth, which the World Bank estimates will eke along at a paltry 1.8 percent next year.

Since a super economy scorned is a problem foretold, what happens now is unclear. It’s a dynamic playing out across the world stage. Beijing is pressing its claim for full recognition, and this month complained that the United States and European nations were maligning its status by skirting the Geneva-based organization’s rules. Calls for protectionism are on the rise across Europe, and President-elect Donald Trump has yet to walk back his campaign bravado that China is a currency manipulator, stoking fears of a global trade war. That would spell trouble in a time of global turmoil and wavering commitments to trade, especially so for Central and South America.

Complicating the picture is a tricky bit of fine print in China’s accession agreement. The legalistic tangram goes roughly like this: By joining the WTO, member states generally subscribe to a gentleman’s agreement not to barrage each other with anti-dumping complaints, on the argument that proper market economies play by the rules. However, China was different: Part market, part command economy, its domestic manufacturing costs have always been something of a mystery. The WTO acknowledged this by allowing member states to calculate the fair price of China’s exports based on prices in a third country (say India). The loophole, embedded in a subparagraph of the accession agreement, essentially placed the burden of proof on China to show that it was trading fairly.

Not anymore. As of Dec. 11, each member state must decide for itself whether China is behaving as a market economy. Those who do but also claim that China is breaking the WTO rules now must unpack China’s manufacturing costs, a vexing task in a land where the state also doubles as corporate CEO.

So what will Latin America do? This is no trifling detail. Latin America and China have grown ever closer over the past two decades, and Beijing has made its advances explicit in two major policy statements in 2008 and again just last month. Total trade between China and the region has risen 24-fold between 2000 and 2013. However, Latin America has paid a price as cheap Chinese consumer goods have undercut less competitive local industries. Critics claim this has hastened deindustrialization in Brazil, Mexico and especially Argentina, which has seen a “shocking increase” in China’s share of domestic production, according to a study by the Atlantic Council. At the same time, China’s demand for minerals and grains has made Latin America even more reliant on the export of raw materials, a throwback to colonial times.

Latin America’s hands aren’t completely tied. Several regional governments (Chile, Costa Rica, Peru) tacitly recognized China as a market economy by signing bilateral free-trade agreements over the past decade, and yet that has not cowed them into submission. Consider Brazil and Argentina, whose diplomats agreed to China’s market status in 2004: From 2001 to 2013, Brazil filed 55 anti-dumping actions against China, while Argentina filed 58.

Other countries, such as Mexico, Panama and Paraguay, whose fortunes are more closely braided with the U.S. economy or compete directly with China, have been more reticent. “Brazil and Argentina may be in a stronger position, but I’m really concerned for other countries with less solid institutions,” said the Atlantic Council’s Peter Schechter. “It’s not just that local industries get weakened, but local employment as well, and that could lead to deindustrialization.”

Argentina alone has petitioned Geneva 11 times this year against alleged Chinese dumping, the last on Dec. 7. That drew a rebuke from Beijing authorities, who — in what could be a teaser for the tensions to come — warned the Argentines to stick to the WTO rules for trade disputes.

Many of Latin America’s worst problems are self-made, of course. Decrepit infrastructure, rigid labor laws, modest public investment and dismal public education have conspired to stifle productivity and innovation.

Ultimately, Latin America’s economic problems have less to do with the dragon at their door than with the diablos at home.

© 2016 Bloomberg L.P.

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