By Daniel Remler
Earlier this month, Japanese prime minister Shinzo Abe wrapped up his first visit to Latin America since returning to the premiership in 2012, making stops in Mexico, Brazil, Colombia, Chile, and Trinidad and Tobago. The visit came hot on the heels of a much-touted tour of the region by Abe’s Chinese counterpart, President Xi Jinping, which saw the Chinese president greeted with all the fanfare one might expect for the leader of Latin America’s second-largest trading partner and its most rapidly growing source of investment. But reports characterizing Abe as “following” Xi are grossly overestimating China’s advantages in the region: the shrewdness of Japan’s investment strategy and its choice of partners have allowed it to build durable and mutually beneficial economic relationships that China’s resource-driven approach will struggle to match going forward.
For a start, consider Xi and Abe’s respective itineraries. Xi began his trip with a bang at the 6th BRICS leaders’ summit in Brazil, the region’s largest economy and arguably the biggest economic prize for foreign investors, before moving on to visit Argentina, Venezuela, and Cuba. This generally follows the pattern of Chinese investment in the region, but while these countries are all grateful recipients of large and growing Chinese investment flows, they are far from ideal partners. Brazil’s vast consumer market, natural resource wealth, and sheer size are long-term attractions, but the country is currently firmly stuck in the middle-income trap and facing a difficult near-term struggle to combat rising stagflation. Meanwhile, Xi’s other destinations – Argentina, Venezuela and Cuba – all have a long history of economic mismanagement , typified by Argentina’s recent decision to default yet again on its sovereign debt.
Abe took a drastically different route, traveling through Latin America’s most dynamic and free market-friendly economies, beginning with Mexico, and passing through Trinidad and Tobago, Colombia, Peru, and Chile, before ending in Brazil (his only overlap with Xi’s itinerary). This shows smart trip planning: Peru and Chile are TPP negotiating partners that reached near-East Asian levels of growth over the past decade, while Colombia has recently vaulted past Peru to become the region’s fastest growing economy. Mexico, also a TPP negotiating partner, is an underrated manufacturing powerhouse and, most importantly, deeply plugged in to the North American consumer market thanks to NAFTA. All four are also members of the Pacific Alliance, a relatively new trade bloc established in 2012 to advance economic integration and promote free trade. In short, these countries appear committed to reform and long-term growth.
In fact, Abe’s itinerary closely matches the pattern of Japanese FDI in Latin America, focusing on countries with long-term investment potential. As Japan matured into a high-income economy during the 1980s, its firms invested in Latin America in order to escape rising production costs and a shrinking labor force at home, issues exacerbated by a greatly appreciated yen. Japanese firms also recognized that shifting production overseas not only lowered input costs, but also placed their production next to emerging sources of demand for Japanese products. Investment in the Mexican automobile industry provides an instructive example of this phenomenon at work. As of 2012, Japanese car companies invested in Mexico employed thousands of skilled Mexican workers, produced 28 percent of total national car production, and over 40 percent of automobiles sold domestically were Japanese brands.
This reflects the success of Japan’s strategy from a corporate perspective, but also highlights a broader strength of Japan-Latin America relations. Japanese firms’ focus on commercial returns have caused them to reinvestment much of their earnings, while increasingly emphasizing worker training, local market research, and building strong domestic supply networks – all of which have endeared them to local populations. By comparison, a close look at China’s investments in the region reveals myriad long-term weaknesses. Chinese state-owned enterprises, which have led the country’s corporate charge abroad, have invested primarily in strategic sectors, such as energy, mining, and infrastructure. These have generated comparatively few jobs, while common practices, such the importing of Chinese workers and a relative inattention to human rights, have fuelled local resentment. Added to this, Chinese firms have frequently overpaid for the right to develop resources difficult to exploit commercially, and continue to face enormous obstacles to realizing either their corporate or strategic objectives, as the experience of the China Railway Group in Venezuela illustrates.
Of course, it is important not to ignore the sheer scale of China’s trading relationships: its hunger for resources has made it the largest trading partners of many Latin American countries, including both Peru and Chile. And over the long term, it is possible that the pattern of China’s investments in Latin America will transition to more closely resemble Japan’s, as rising domestic labor costs, a shrinking labor force, and a slowly appreciating yuan – combined with greater political pressure to maintain profitability – factor into Chinese firms’ calculus. But in the meantime, it will take a much greater commitment than Baidu Brasil for the sophistication of China’s investment strategy to catch up with that of Asia’s second-largest economy.
There is some evidence that the Chinese leadership recognizes this. For example, during his first trip to the region last year, Xi did visit Mexico, but Chinese investments in that country remain paltry when compared to those of the more proactive Japanese. Japan and its firms have chosen winners that have paid off enormously. Chinese firms will not be able to depend on the countries Xi visited in July for future growth, nor can those countries count on another historic commodity boom saving them from the consequences of their economic mismanagement. In terms of efficiency, profitability and long-term viability, Japan and its Latin American partners are still miles ahead, while China is not yet heading in the right direction.