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C O N F I D E N T I A L SECTION 01 OF 04 BEIJING 004253 
 
SIPDIS 
 
E.O. 12958: DECL: 11/18/2018 
TAGS: BR CN CS CU ECON ETRD MX PE PREL XM EINV
SUBJECT: CHINA'S GROWING ECONOMIC RELATIONSHIP WITH LATIN 
AMERICA 
 
Classified By: Classified by Robert S. Forden for reasons 1.4 (b) and ( 
d) 
 
¶1. (C) Summary. Chinese President Hu Jintao,s November 
16-20 visit to Latin America, which includes stops in Peru 
for the APEC summit, Costa Rica, and Cuba, is intended to 
strengthen China,s rapidly growing economic relations with 
the region, according to Embassy contacts.  To spur 
further trade growth, China is looking to ink Free Trade 
Agreements (FTAs) with Peru and Costa Rica, though these 
FTAs will likely be narrow in scope.  Hu will use his stop 
in Costa Rica to emphasize China's commitment to the region 
and demonstrate the benefits of diplomatic ties with the 
mainland, sending a not so subtle signal to the remaining 
states that maintain formal relations with 
Taiwan.  While Chinese investment in Latin America is 
growing, contacts highlighted a range of challenges, such 
as a disconnect between Chinese and Latin American 
investment priorities and the lack of cultural 
understanding among Chinese companies.  Additionally, China 
has struggled to address trade frictions, such as 
anti-dumping suits and a lopsided trade balance with 
Mexico.  End Summary. 
 
A Growing Economic Relationship 
------------------------------- 
¶2. (C) Contacts here described China-Latin American 
relations as being at an all-time high and credit the 
rapidly growing economic relationship with playing a large 
role. (Note. Total China-Latin America trade in the first 
eight months of 2008 reached $95.6 billion, according to 
Chinese Customs Statistics, up 49% yoy. End note.) Peking 
University Latin America specialist Dong Jingsheng said that 
a common focus on economic development and shared values as 
developing world partners underlie rapidly growing trade 
and investment ties.  In particular, China,s need for raw 
materials complements Latin America,s need for Chinese 
manufactured goods and provides a basis for continued 
growth.  Wu Hongying, Director of the Chinese Institute of 
Contemporary International Relations, (CICIR) Division of 
Latin American Studies, said that the economic component of 
China-Latin America relations was the "most developed" and 
had the most trust.  China over the past few years has 
benefited from the willingness of Latin American countries 
to open up their markets. 
 
¶3. (C) Several Latin American contacts described China as 
an economic opportunity with tremendous growth potential. 
Peru's Economic Counselor Jorge Chian told econoff that 
China's "going global" policy provided an opportunity for 
Peru to attract investment in the mining sector and utilize 
local resources to finish products, helping Peru export 
more value added goods.  Costa Rica's Commercial Counselor 
Carlos Martinez said Costa Rica was too small to expect 
significant Chinese interest, but hoped China would view 
Costa Rica as a platform to produce goods in Latin America 
destined for the United States in order to take advantage 
of the duty free treatment afforded such imports under the 
United States-Central America/Dominican Republic Free Trade 
Agreement (CAFTA-DR).  Martinez added that Costa Rica hoped 
to also take advantage of its position as the only Central 
American country with formal diplomatic relations with 
China to present itself as the best place in the region for 
China to do business. 
 
¶4. (C) Chinese scholars, however, were quick to point out 
that economic ties with Latin America were growing from a 
small base and had limited potential. (Note. Latin America 
in the first eight months of 2008 accounted for only 2.9% of 
China,s global trade, according to China,s trade 
statistics. 
End Note.) Peking University,s Dong said that neither China 
nor Latin America see the other as a top trade and investment 
partner and both have other higher priorities.  CICIR's Wu 
also emphasized that geographical distance and limited 
cultural 
interaction hinder growth potential.  As an example, she said 
that while oil imports from Venezuela were increasing, 
Venezuela 
was unlikely to become a key long-term supplier because of 
its 
distance and the fact its oil was heavy crude, which China 
at present does not have the capacity to process.  Securing 
Venezuelan oil imports helped China to diversify its energy 
 
BEIJING 00004253  002 OF 004 
 
 
sources, but China viewed Venezuelan oil imports primarily 
as a "supplement". 
 
FTAs (Light) Key to China,s Agenda 
---------------------------------- 
¶5. (C) According to the China Academy of Social Science 
(CASS) Economic Division Chief and Latin America specialist 
Wu Guoping, FTAs are a key tool for China to increase trade 
with Latin America.  While China saw much potential in 
signing FTAs with Latin American countries, progress was 
often determined by the willingness of Latin American 
leaders to enter into negotiations with China.  As examples, 
Wu said Chile,s president was eager to sign an FTA with 
China, providing the impetus behind the 2005 China-Chile 
FTA, and now Peruvian and Costa Rican presidents are also 
making an FTA with China a priority.  Wu predicted that Peru 
and Costa Rica would sign a products FTA agreement before 
looking at agreements in the service and investment 
sectors, allowing both sides to tackle easier issues 
first.  Asked whether China would sign additional FTAs with 
other Latin American countries, Wu was less optimistic, 
noting that many other Latin American countries, such as 
Brazil and Argentina, competed with China in many sectors, 
making FTAs more difficult. 
 
¶6. (C) Chian said Hu's visit to Peru would include a 
bilateral summit prior to the APEC summit where both sides 
hoped to sign an FTA.  However, Peruvian private sector 
concerns in some areas, such as textiles and shoes, were 
sticking points in negotiations.  Chian also expected both 
countries to also announce several agreements, such as 
on trade in citrus fruit and phytosanitary standards. 
Martinez 
said Hu and Costa Rican President Arias would likely 
announce the beginning of FTA negotiations and he added 
that momentum on the Costa Rican side was strong, given 
that Arias was in the final year of his term and an FTA 
with China was a key goal. (Note. According to November 18 
press reports, China and Costa Rica announced that they 
would begin FTA negotiations. End Note.)  Martinez agreed, 
however, that a China-Costa Rica FTA would probably be 
limited in scope and only include unspecified sectors that 
were easier to address. 
 
Hu,s visit 
---------- 
¶7. (C) Speculating on China,s goals for the visit, Martinez 
said that it is "no secret" that China sees Costa Rica as a 
"hub" for Central America and China likely judged a 
high-level visit to Costa Rica would demonstrate the 
benefits of formal diplomatic ties to other Central 
American countries.  CASS's Wu agreed, noting the 
significance of Hu Jintao visiting a Central American 
country for the first time, a region where Taiwan's 
presidents have made numerous visits.  Costa Rica provided 
an economic bridge to Central America and strong trade ties 
with Costa Rica could allow other Central American 
countries better access to Chinese goods.  According to Wu, 
China hoped growing trade would help smooth the way for 
closer political ties, but in the end, the decision to 
sever formal relations with Taiwan came down to internal 
political calculations that China had little control over. 
(Note. According to press reports, China and Costa Rica 
signed 11 agreements, including on trade, finance, and 
energy.  These agreements include a Chinese commitment to 
build a stadium in Costa Rica and to use its foreign 
reserves to buy $300 billion in Costa Rican bonds. End 
Note.). 
 
¶8. (C) Regarding Hu,s stop in Cuba, CASS's Wu said Hu would 
probably seek to introduce China's economic situation, 
including its transition from a socialist to market 
economy, but would refrain from offering suggestions that 
could be viewed as interfering in Cuba's affairs.  According 
to Jiang Shixue, Deputy Director of CASS's Institute of 
Latin America Studies, it would be difficult to apply 
China's economic model to Cuba and he expected Raul Castro 
to be much like his brother in leading the country. 
However, he thought a gradual economic opening to the world 
was the best way forward for Cuba. 
 
Investment Ties Face Obstacles 
------------------------------ 
¶9. (C) Several Chinese scholars described Latin America as 
 
BEIJING 00004253  003 OF 004 
 
 
a challenging investment environment.  According to CASS's 
Wu, Chinese companies were not familiar with local laws and 
did not know how to handle issues such as strikes by local 
workers.  The difficult conditions for Chinese companies 
were exacerbated in some countries by poor security 
environments and the potential for expropriation.  CICIR's 
Wu agreed that many Chinese businesses were reluctant to 
expand their presence in Latin America, noting that high 
hopes for a jump in investment following Hu's 2004 visit to 
Latin America failed to materialize.  While the Chinese 
government encouraged companies to do business in Latin 
America, few companies followed through because they "were 
not mature" and did not fully understand Latin American 
laws and constitution. 
 
¶10. (C) CASS's Wu said there was also a disconnect between 
Chinese and Latin American investment priorities.  Chinese 
companies preferred projects, such as mining, that would 
yield quick profits, but many Latin American countries 
preferred longer term investment in roads, railroads, and 
ports.  This was evident in Peru, where, according to Chian, 
Peru was offering BOT (build, operate and transfer) 
investment 
agreements, but China only wanted to "build", making China an 
unlikely candidate for investment in Peruvian railroad and 
infrastructure. Mexico's economic officer Jose Alberto Limas 
said that some small Chinese companies had asked about 
investing in Mexico but importing all the necessary workers 
from China, a non-starter from the Mexican point of view. 
 
¶11. (C) Nonetheless, China,s investment in Latin America 
was growing and Latin American countries were increasingly 
looking to China as an investment source. Limas said that 
the greatest potential in Sino-Mexican economic ties lies 
in the area of investment. Mexico and China signed a 
bilateral investment treaty in July 2007, which he expected 
to be ratified in the near future and would provide a more 
reliable legal framework for each side's companies to 
invest in the other.  As in the case with Costa Rica, Mexico 
could theoretically serve as a convenient base from which 
Chinese-invested firms could obtain duty free access to 
the North American market under the NAFTA.  CASS's Wu also 
said bilateral investment treaties were a useful way to 
overcome investment barriers and he cited China,s treaty 
with Chile and subsequent joint ventures in the mining 
sector as an example of progress in this area. 
 
¶12. (C) Peru's Chian pointed to investment from China as a 
major potential growth area, noting that Chinese investment 
in mining, particular copper, has boomed in the last year 
and a half.  Separately, Martinez said Costa Rica was 
looking to China for help in exporting high-tech goods, 
such as in the pharmaceutical and business service sectors. 
There was also potential for investment in infrastructure, 
such as the construction of a railway linking the Caribbean 
to the Pacific. 
 
Managing Trade Frictions 
------------------------ 
¶13. (C) Despite China's almost fully balanced trade 
relationship with Latin America, many Latin America 
countries produce similar products and are therefore 
economic competitors.  CICIR's Wu described trade frictions 
with Latin American countries as a "major headache", noting 
that Brazil, Argentina, and Mexico have all brought 
anti-dumping and other unfair trade suits against China in 
the WTO.  CASS's Jiang said that Latin American countries 
were abusing anti-dumping mechanisms, forcing China to use 
legal mechanisms to fight back. 
 
¶14. (C) According to CICIR's Wu, trade frictions with 
Mexico were the most troublesome due in part to the dispute 
over the size of Mexico,s trade deficit. (Note. Mexico and 
China disagree over the size of the trade imbalance. 
According to Chinese 2007 figures, Mexico imported $11.7 
billion and exported $3.3 billion, but according to Mexican 
figures, Mexico imported $30 billion and exported only $2 
billion.  According to Limas, this was due to triangulation 
with the U.S.  Chinese figures do not include exports to the 
U.S. that ultimately are sold in Mexico. End Note.)  Wu said 
China and Mexico are using their bilateral commission to 
address the lopsided trade flows, and China is looking to 
assist Mexico in cotton and rice production to soften the 
trade imbalance.  At the same time, Mexico is also seeking 
 
BEIJING 00004253  004 OF 004 
 
 
to increase exports to China in areas such as minerals, 
agriculture, and specialty goods like Corona beer, but 
Mexican companies have been slow to take advantage of 
opportunities in China. 
 
¶15. (C) Limas said Mexico ran a large trade deficit with 
China because both countries make essentially the same 
things, but China makes them more cheaply and has the 
advantage of economies of scale.  Mexico also is not seeking 
to be a raw materials exporter like Brazil and therefore, 
the large trade deficit was something Mexico "would have to 
live with".  Furthermore, Mexico and China signed an 
agreement earlier this year under which Mexico will have to 
reduce all its non-WTO compliant antidumping duties on 
Chinese goods over the next three years, a step likely to 
exacerbate the official trade imbalance, even as it reduces 
Mexican imports of illegal contraband goods. 
 
¶16. (C) Peru in 2007 maintained a surplus of about $5 
billion with China, due largely to mineral exports such as 
copper that have surged in the last couple years, but Chian 
emphasized that the trade relationship was not "optimal" 
because exports were highly concentrated in minerals.  Peru 
was seeking greater balance in its exports, and 
agricultural products, fish meal, and wood from the 
Peruvian jungle all provided opportunities to balance 
trade. 
 
China-Latin America Regional Forum Unlikely 
------------------------------------------- 
¶17. (C) CASS's Jiang said there were competing views among 
scholars whether China should have its own regional forum 
with Latin America where China could showcase its political 
and economic ties to the region.  Some scholars supported 
the idea saying such a forum would allow China to raise its 
profile in the region.  Jiang however opposed such a forum 
because, unlike the African Union, there is no Latin 
American regional organization that represents the whole of 
Latin American and the creation of such as organization 
would feed the "China Threat Theory" in the United States. 
CASS,s Wu added that there were already many countries that 
had forums with Latin America, such as the US, the EU, and 
Spain and Portugal and China would be best served by 
building formal and informal relations with existing 
regional organizations such as the Interamerican 
Development Bank (IADB) and the Organization of American 
States.  China's recent membership in the IADB was an 
opportunity to demonstrate its commitment to the region and 
provided an additional avenue for China to promote economic 
engagement. 
 
¶18. (C) Comment. China trade with Latin America, which will 
probably reach about $150 billion for 2008 and is rapidly 
expanding, is still tiny when compared with US trade with 
the region.  A relationship characterized by large 
Latin American natural resource exports to China, 
particularly from Southern American and Southern Cone 
countries, and large consumer good imports from China would 
seem to be a natural fit.  However, it remains to be seen 
whether 
China can adapt to the Latin American investment 
environment that so far is limiting its ability to realize 
its full potential as a natural resource importer from 
Latin America.  End Comment. 
RANDT