Is China reconfiguring the political relationship between the European Union (EU) and the Community of Latin American and Caribbean States (CELAC)?

• Willem Lijnders (The Netherlands) and Jevon Minto (Jamaica)
• 18. August 2020

This article discusses whether the current partnership between China and CELAC is displacing or weakening the European Union (EU) in Latin America and the Caribbean (LAC). Although the EU is still the most important provider of development assistance and FDI to the region, China has displaced the EU in terms of imports and exports. Therefore, the article argues that further action is needed in order to rebalance relations between the CELAC states and the EU. Four ways are identified in which the EU can strengthen the partnership to assert its role as a strategic partner to the region.

China in LAC & the framework of the bi-regional Forum

Six years before the establishment of the China-CELAC Forum (CCF), a 2008 strategy paper released by the Chinese Government stated that one of the main goals in its engagement with LAC was to strengthen coordination and cooperation on international issues to make the global political and economic order more fair and equitable, in upholding the rights and interests of developing countries.[i] This is a pronouncement that harks back to the 1960-70s when the Chairman of China’s Communist Party, Mao Zedong, elevated the “Third World” in Chinese Foreign Policy.[ii] Though that policy would later fall into dormancy as China was preoccupied with internal matters and reform, it resurged with more vigour at the beginning of the current century, as China, now emboldened by its notable economic growth, is actively seeking allies to forge a new, multipolar world order.[iii] The establishment of the CCF on July 17, 2014, is a testament to this.

With the establishment of the CCF, Beijing brought an extensive agenda to CELAC and USD $38.5 billion to bolster and tackle key regional challenges, ranging from infrastructure to innovation and trade competitiveness. It is estimated that both sides met on 28 different occasions between 2014 and January 2018. These meetings are guided by the 2015-2019 Cooperation Plan, also known as “1+3+6”, which outlines thirteen priority areas and specific measures for China-LAC overall cooperation.[iv] Additionally, the plan seeks to increase bilateral trade to USD $500 billion and raise investments to USD $250 billion in 10 years.[v]

The 2016 policy document on LAC and the January 2018 China-CELAC Forum in Chile highlighted how Beijing is strategically positioning itself in the region. At the end of the forum, the region was openly invited to participate in the One Belt, One Road Initiative (BRI) by the Chinese Foreign Minister, who told his counterparts that “China wants to be the region’s most trusted partner.”[vi] Chilean Foreign Minister Heraldo Muñoz responded with earnestness, remarking that such a declaration is “something that the region values greatly,” a response that reflects a long-held pursuit within the region for a partnership that considers CELAC states not as nations of the periphery, but as equals in the centre.[vii] As current global political and economic events are challenging the foundations of the globalized world order, the CCF presents a unique moment that could lead to a further consolidation of political and economic ties between China and CELAC states, unless concrete action is taken to reinforce the importance of the liberal world order.[viii]

EU-CELAC relations

The bi-regional strategic partnership between the EU and LAC dates to 1999. The EU and CELAC together represent 61 countries, or 15% of the world population. Like the CCF, the bi-regional forum seeks to deepen relations based on mutual interests and a common strategy on global governance. The EU-CELAC relationship also serves to deepen EU cooperation with other sub-regional or regional groups such as Mercosur, CARICOM/CARIFORUM and the Pacific Alliance. In recent years, the bi-regional agenda has been enhanced with some €2.68 billion to fund key programs and projects, in addition to more than 30 meetings.[ix] Over time, the CELAC-EU agenda has evolved to include new chapters on citizens’ security and higher education.

But almost two decades later, the EU-MERCOSUR free trade negotiations are still stalled, despite numerous strategic geopolitical events such as the US Asia Pivot which left a void in the region and the subsequent declaration of the end of the Monroe Doctrine. Though these negotiations are intrinsically complex, over the same period China has increased its influence in the region by working with multilateral institutions such as CELAC, presenting the region with options and a stronger bargaining power and it has negotiated several bilateral free trade agreements. The establishment of China as a dominant economic power has had an extensive effect on the nature of global competition and reshaped international trade. Dita Charanzová, a member of the European Parliament delegation to the Euro-Latin American Parliamentary Assembly and to Mercosur writes that “China’s influence in the region has increased at EU’s expense.[x]” Indeed, China has displaced the EU to third place in both regional imports and exports and for some countries such as Chile, Peru and Brazil, it has even become the main trading partner.[xi] While Europe has always been an important player in Latin America, with a market share that has remained stable at approximately 14% for the past fifteen years, China experienced an impressive growth in the region. While China only accounted for 3% of Latin American countries’ imports from outside Latin America in 2000, their market share grew impressively to 18.3% in 2016 (Figure 1)[xii]. Before 2007, competition between China and the EU was lower, partly due to the fact that China was mostly exporting low-quality products, whereas the EU focused on a higher-end market. However, with China gradually progressing in the value-added chain, it has also started to produce more high-quality products. This has led to fiercer competition between the two in some high-end products, especially electrical machinery and road vehicles. This shift diminishes the EU’s ‘soft power’ in the region and undermines its capacity to influence the trade and wider economic agenda.

Figure 1: Share of Latin American imports from 1998 to 2015 (in %)

Sources: WITS

While China has displaced Europe as the second-most important trade partner of Latin America, the EU still holds the upper hand on two fronts: development finance[xiii] and foreign direct investment (FDI)[xiv]. In 2015 the accumulated stock of European FDI in Latin America was nearly €1.3 trillion compared to an investment stock of nearly €168 billion by China. Similarly, EU Official Development Assistance (ODA) flows to the region are set to reach €3.6 billion for the period of 2014-2020. These developments, however, are threatened as more CELAC states are transitioning to middle income countries and are being provided with less development assistance and concessional loans under OECD/DAC guidelines[xv].

What Does China Want?

 China’s arrival in Latin America is both a search for resources and markets as it is a quest to shape regional norms, gain experience playing a leadership role in the region and to influence the policies of CELAC member states, with a long-term goal to gain the region’s support in the building of a multipolar world order. These goals are intertwined with China’s massive regional economic agenda[xvi]. Key aspects of this agenda such as FDI will see Chinese companies and their footprints all over regional industrial policies. Much more so than bi-regional trade, FDIs exert pressures that will test the foundations of regional labour norms, and human rights issues. Chinese firms are increasingly acquiring key country assets, which gives them majority control over key industries. In the process, labour conditionalities are granted through policy concessions arranged with Chinese firms, which leads to a reduction in unionization and the subsequent importation of Chinese workers to replace local workers.

The trajectory of Chinese FDI also challenges western intelligence as Chinese telecommunications firms such as Huawei and ZTE are seen as advancing Beijing’s strategic geopolitical interests as they build more and more of the region’s telecommunications and information networks. Any inroads made by these companies in LAC will thrust China in a position of controlling the heart and soul of the region, as more CELAC states dash towards building digital economies.

While China embarks on the promotion of the Belt and Road Initiative – one of the biggest global infrastructure projects yet – it promises to bring benefits to CELAC states but is also intrinsically fraught with sustainability risks.[xvii]These include “a problematic increase in debt, potentially limiting other spending as debt service rises, and creating balance of payments challenges.”[xviii] That challenge is further complicated with China‘s non-accession to the Paris Club of creditors, making it more difficult for the international community to fully understand the debt implications of CELAC states participation in this trillion-dollar infrastructure plan. [xix] [xx] These are developments that will strengthen Chinese influence in the region at the expense of traditional partners such as the EU, as Chinese loans are usually processed faster (although the interest rates tend to be higher than those of other multilateral or bilateral development banks; and sometimes are tied to Chinese providers or even the use of Chinese labour). To date, the EU is the region’s largest FDI investor – it accounts for more than half of FDI in CELAC countries – but as China ramps up plans to raise bi-regional investments in the next decade, it will test the foundations of EU-CELAC relations and could weaken the main pillar of EU regional influence. Unlike the EU, CELAC states are not enacting legislation to scrutinize Chinese investments: they welcome them with open arms.

Where Does the EU Stand?

One of the big questions that the EU will have to answer is whether China’s vision and intention to create a multipolar global order, using CELAC states as key allies, is antithetical to the global democratic values that it has helped to build over the last 50 years. After all, multipolarity is fundamentally a theory of rivalry and of competing values. China’s policy of non-interference translates to non-action in advocating and championing transparency, the rule of law, representative government, free markets, promoting the building of institutional capacity to facilitate competent government, etc. These present the fundamentals of the democratic values that the EU together with the US has championed over the last five decades.

Moving forward, several cracks have emerged in the EU-CELAC partnerships. Chief among them is the low-participation rate among Caribbean states. While it is difficult to assess what the main cause of this is, there are some suggestions that some Caribbean countries feel affected by a wider OECD framework that designates some Caribbean countries as tax havens, effectively imposing more thorough controls on financial transactions leading to reputational damage.[xxi] As tensions escalate over these issues, it provides an opening for China to deepen ties with these states, thus consolidating its bid to win them over as allies in an eager push to reform the international system.With the foregoing, the Caribbean Development Bank suggested that Caribbean nations should explore the use of the Chinese Renminbi to ease the stress resulting from these policies.[xxii] At the same time, Chinese correspondent banking relationships have surged by 3355% between 2009 and 2016 due to these regulatory crackdowns, further diverting trade relations towards its borders.[xxiii] However, recent developments show the EU is undertaking renewed efforts to engage with the Caribbean countries, with the introduction of the ‘Facility for Development in Transition’ initiative in cooperation with the OECD Development Centre and ECLAC.[xxiv] The initiative will support the design and implementation of public policies to achieve the SDGs for LAC countries. The EU, ECLAC and the OECD have allocated an amount of 16 million EUR to the instrument.

Conclusion

Can the EU effectively respond to China’s pitch in Latin America and the Caribbean? It’s a difficult question, but one worth exploring. More and more CELAC states are becoming middle-income countries and thus are demanding less aid from the EU, which erodes the Union’s influence in the region and in country-level policies. This, in addition to an already weakened position to influence the trade agenda. But the EU can reinvigorate the partnership to assert its role in the region as a strategic partner in four ways: (i) raise the stock of FDI volume in micro, small and medium-sized enterprises; (ii) encourage the transfer of technology and innovation and assist in accelerating the pace of digital transformation in the economies of the region;[xxv] (iii) maintain a dialogue with China in the region through existing multilateral frameworks such as the World Bank or the Inter-American Development Bank (IDB) in understanding the moral hazard that comes with a passive policy of not promoting democratic values in its development projects and (iv) expand the Development in Transition programme to explore the proposition of some CELAC states, to have their climate-vulnerability tied to the rate at which they can access concessional development finance, in addition to their income categorisation[xxvi]. While these actions are not likely to disrupt China’s push to create a multipolar world order, they could rebalance relations between the region and the EU and would likely reinforce both the inherent values of the liberal world order and the importance of long-term planning towards sustainable development.

References

[i] COHA. (2009). China’s Policy Paper on Latin America and the Caribbean. Washington D.C: Council on Hemispheric Affairs (29 June 2009). http://www.coha.org/china%E2%80%99s-policy-paper-on-latin-america-and-the-caribbean/. (Accessed 18 July 2018).

[ii] Yu, G. (1977). China and the Third World.  Asian Survey, Vol. 17 (11), 1036-1048. doi:10.2307/2643352. (Accessed 10 July 2018).

[iii] Kuhn, A. (2018). Emboldened by A Strengthening Economy, China Flexes Its Diplomatic Muscles. National Public Radio (01 January 2018). https://www.npr.org/sections/parallels/2018/01/01/573773442/emboldened-by-a-strengthening-economy-china-flexes-its-diplomatic-muscles. (Accessed 19 July 2018).

[iv] The “1” means one plan for the entire region, with a single goal: inclusive and sustainable development. The “3” refers to the three engines of regional cooperation: trade, investment, and financial cooperation. The “6” refers to the six specific fields that China sees as priorities.

[v] Rosales, O. (2015). First Forum of China and the Community of Latin American and Caribbean States (CELAC): Exploring opportunities for Cooperation on Trade and Investment. Santiago, Chile: ECLAC https://repositorio.cepal.org/bitstream/handle/11362/37578/1/S1421103_en.pdf.  (Accessed 23 April 2018).

[vi] Cambero, F., and Sherwood, D. (2018). China invites Latin America to take part in One Belt, One Road. Santiago, Chile: Reuters News Agency. Retrieved from https://www.reuters.com/article/us-chile-china/china-invites-latin-america-to-take-part-in-one-belt-one-road-idUSKBN1FB2CN. (Accessed 8 MAY 2018).

[vii] Ibid.

[viii] Prasad, E. (2018). Opinion | How China Aims to Limit the West’s Global Influence. New York Times (1 September 2017) https://www.nytimes.com/2017/09/01/opinion/china-west-democracy.html. (Accessed 23 Jul. 2018).

[ix] Sanahuja, J. (2015). The EU and CELAC: Reinvigorating a Strategic Partnership. Hamburg: EU-LAC Foundation. http://dx.doi.org/10.12858/0115en1. (Accessed 5 May 2018).

[x] Charanzová, D. (2015). Reaching greater summits. EURACTIV.COM (11 June 2015). https://www.euractiv.com/section/global-europe/opinion/reaching-greater-summits/. (Accessed 18 July 2018).

[xi]  Freitas, A. (2015). China in Latin America – a new force for the EU to reckon with. Borderlex. (05 June 2015) http://www.borderlex.eu/china-latin-america-new-force-eu-reckon/. (Accessed 22 July 2018).

[xii] Herrero, A. and Marbach, T. (2018). European and Chinese Trade Competition in Third Markets: The Case of Latin America. Brussels: Bruegel (7 June 2018). http://bruegel.org/wp-content/uploads/2018/06/WP-2018-06_-060618.pdf. (Accessed 14 August 2018).

[xiii] European Commission. (2018). EU remains the world’s leading donor of development assistance: €75.7 billion in 2017. (April 10 2018). https://ec.europa.eu/europeaid/news-and-events/eu-remains-worlds-leading-donor-development-assistance-eu757-billion-2017_en. (Accessed 18 August 2018).

[xiv] Nolte, D. (2018). China Is Challenging but (Still) Not Displacing Europe in Latin America. Hamburg: GIGA German Institute of Global and Area Studies. https://www.ssoar.info/ssoar/bitstream/handle/document/55989/ssoar-2018-nolte-China_Is_Challenging_but_Still.pdf?sequence=1. (Accessed 24 April 2018).

[xv] Anders, M. and Edwards, S. (2017). UK proposal on aid for overseas territories withdrawn at DAC, but sparks debate. Paris: DEVEX (1 November 2017) https://www.devex.com/news/uk-proposal-on-aid-for-overseas-territories-withdrawn-at-dac-but-sparks-debate-91438. (Accessed 7 MAY 2018).

[xvi] Piccone, T. (2016). The Geopolitics of China’s Rise in Latin America. Geoeconomics and Global Issues, Paper 2. Washington D.C: Brookings Institution. 1-29 https://www.brookings.edu/wp-content/uploads/2016/11/thegeopolitics-of-chinas-rise-in-latin-america_ted-piccone.pdf. (Accessed 23 July 2018).

[xvii] Kawashima, S. (2018). The Risks of One Belt, One Road for China’s Neighbours. Tokyo: The Diplomat (23 April 2018). https://thediplomat.com/2018/04/the-risks-of-one-belt-one-road-for-chinas-neighbors/. (Accessed 14 July 2018).

[xviii] Clover, C. (2018). IMF’s Lagarde warns over debt of China’s Belt and Road. Beijing: Financial Times (12 April 2018). https://www.ft.com/content/7b7f9db2-3dec-11e8-b7e0-52972418fec4. (Accessed 15 July 2018).

[xix] Hurley, J. et al. (2018). Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective. Washington D.C: Center for Global Development (March 2018). https://www.cgdev.org/sites/default/files/examining-debt-implications-belt-and-road-initiative-policy-perspective.pdf. (Accessed 22 July 2018).

[xx] Ibid.

[xxi] Guarascio, F. (2018). EU set to add Bahamas, U.S. Virgin Islands to tax haven blacklist. Brussels: Reuters News Agency (9 March 2018). https://www.reuters.com/article/us-eu-tax-blacklist/eu-set-to-add-bahamas-u-s-virgin-islands-to-tax-haven-blacklist-idUSKCN1GL1A4.  (Accessed 18 July 2018).

[xxii] Collinder, A. (2017). CDB Sees Solution to Correspondent Worries in Rise of Chinese Renminbi. Kingston: Jamaica Gleaner (1 September 2017). http://jamaica-gleaner.com/article/business/20170901/cdb-sees-solution-correspondent-worries-rise-chinese-renminbi. (Accessed 21 July 2018).

[xxiii] Price, M; Coates, S. (2017). Chinese bank payment networks surge as Western lenders cut ties – study. Hong Kong: Reuters News Agency (8 May 2017)). Https://www.reuters.com/article/china-banks/chinese-bank-payment-networks-surge-as-western-lenders-cut-ties-study-idusl4n1ia1og. (Accessed 23 July 2018).

[xxiv] Mead, L. (2018). EU, ECLAC and OECD launch regional facility for LAC countries in transition. Winnipeg: International Institute for Sustainable Development (17 May 2018). http://sdg.iisd.org/news/eu-eclac-and-oecd-launch-regional-facility-for-lac-countries-in-transition/. (Accessed 17 August 2018).

[xxv] CEPAL. (2018). ECLAC Advocates for a Renewed Strategy of Dynamic Cooperation Based on Multilateralism between Latin America and the Caribbean and the European Union. Economic Commission of Latin America and the Caribbean (17 JULY 2018). https://www.cepal.org/en/pressreleases/eclac-advocates-renewed-strategy-dynamic-cooperation-based-multilateralism-between. (Accessed 21 July 2018).

[xxvi] Campbell, E. (2018). CARICOM Chairman Lobbies Chile For Development Financing. Montego Bay: Jamaica Gleaner. (7 June 2018). http://jamaica-gleaner.com/article/lead-stories/20180707/caricom-chairman-lobbies-chile-development-financing. (Accessed 23 July 2018).