China Obscuring Brazil’s Lula Charm

As the economic importance of the countries situated around the Pacific Rim has grown, the annual meetings of the heads of state of Asia-Pacific Economic Cooperation (APEC) have acquired increased visibility. This year, the summit was held in Santiago, Chile from November 19-21.

The event provided the government of Chilean President Ricardo Lagos with the opportunity to showcase its economic successes and that it is a good place to do business.

In many ways, Chile seems to be a model APEC member. It was invited to join the forum in 1994 in recognition of its strong support for foreign investment and its pro-business economic environment.

A series of Concertación coalition governments have continued to embrace free trade and liberal policies regarding foreign investment, signing free trade agreements with the United States, Canada, Mexico and the European Union and pursuing similar agreements with South Korea, China, Singapore, New Zealand and Japan.

Chile also has achieved the not small distinction of being the least corrupt country in Latin America, according to Transparency International’s 2004 report, and also was acclaimed for going to unprecedented lengths to provide security for the delegations from the twenty-one countries which attended the summit, further shoring up its reputation as a safe, stable country.

At the same time, however, Chile faces conflicting pressure and resentment from its South American neighbors, who would like to integrate Chile more closely into a Latin American bloc that could negotiate from a position of greater strength in regional and international settings.

Though Chile’s economic ties to Asia are large and growing, Santiago is also linked politically, economically and culturally to its South American neighbors on the other side of the Andes.

As an associate member of Mercosur and the newly launched South American Community of Nations, Chile has recognized the importance of its ties to the rest of Latin America.

Although the government of President Ricardo Lagos hopes that Chile will be able to serve as a bridge between APEC and Mercosur, it may well find itself forced to choose between the two if APEC fails to achieve its goal of creating free trade and open investment among all twenty-one members and instead is replaced by a Free Trade Area of the Americas (FTAA) and an East Asian Free Trade Area.

Indeed, proponents of free trade worry that APEC may separate into two geographic blocs, with a dividing line running through the middle of the Pacific.

China’s Irresistible Sugar Cube

Despite the strong appeal of hitching Latin America’s economic wagon to the burgeoning economies of China and other Asian economic powerhouses, there is a strong underlying concern that regional countries may find themselves having to deal with the threat of the newly industrializing, low-wage economies in Asia that are beyond Chile’s ability to compete.

Brazil’s unexpected decision to grant China market economy status, announced during Chinese President Hu Jintao’s stop-over on his way to the APEC summit, triggered criticism by local business groups.

These groups have argued that the recognition of China as a free market economy would put Brazilian industry in a vulnerable position, since it would become much more difficult to prevent China from ‘dumping’ goods at below market prices.

In Argentina, Hu’s next stop on his way to Santiago, wild speculations circulated about the bounty of investment that could be had by Buenos Aires through closer economic ties with China, but more sober analyses urged caution.

As in Brazil, business groups have expressed concern over Argentina’s subsequent decision to recognize China as a free market economy; the Kirchner government’s promises to protect vulnerable sectors of Argentine life were greeted with skepticism, as industry spokesmen worried that China would obtain an unfair competitive advantage.

Despite the enticing prospect of winning favorable treatment in trade and investment from one of the largest and fastest growing economies in the world, influential sectors throughout Latin America worry that local industries and workers eventually will be at a disadvantage if forced to compete head to head with countries where workers earn extremely low salaries and the state wantonly subsidizes production.

Such concerns have prompted Latin American countries to work to forge closer economic and political relations among themselves.

Until the recent spate of agreements with China, the Mercosur countries had focused on promoting hemispheric integration and development, incorporating Mexico, Bolivia, Peru and Venezuela as associate members and inviting Colombia and Ecuador to follow suit.

Such integration has been motivated by the desire to build a stronger presence in world markets as well as to speak with a more profound voice in political and diplomatic affairs.

It reflects a strategy advocated by Brazilian President Lula da Silva, who has called for a ‘building bloc’ approach to regional integration, progressively expanding relations by connecting sub-regional groupings.

Such efforts at regional integration, in turn, are seen as vital to broader efforts to influence the rules of global economic governance ”“ whether in negotiations with the European Union over better access for Latin America’s agricultural products or in the current round of WTO negotiations, where developing countries have taken a tough stance on agricultural protectionism by advanced industrial nations.

Underlying this position is a basic assumption that developing countries in Latin America and across the globe must work together in order to magnify their ability to help shape the emerging international order in ways harmonious to their own views and interests.

While these nations support trade liberalization, they are equally determined to demand greater market access in developed countries. The United States, in contrast, has advocated a strategy of ‘competitive liberalization,’ which in theory promotes liberalizing trade through multilateral, regional and bilateral negotiations, but in practice has revolved around striking separate free trade deals on a country-by-country basis, all the while protecting domestic producers from undue foreign competition.

A Foot in Both Groups 

Chile has a foot nailed to both polarities. On the one hand, it negotiated a free trade agreement with the United States that went into effect in January of this year, becoming the first country in South America to be incorporated into an expanded NAFTA.

On the other hand, Chile supports the extension of multilateral economic agreements throughout Latin America, even when this goes against U.S. desiderate.

President Lagos has eagerly supported the incorporation of Venezuela as an associate member of Mercosur, lavishing praise on President Hugo Chávez.

This comes in spite of the fact that Chávez endorsed Bolivia’s demand for an outlet to the Pacific through what is currently Chilean territory and even though Washington has tried to isolate Caracas by pursuing agreements with all members of the Andean Community trade bloc except Venezuela.

In addition, even though Chile had worked for a decade for a trade pact with the United States, it nonetheless broke ranks with the Bush administration during the run-up to the war in Iraq, paying dearly for this in terms of White House snubs.

As a rotating member of the UN Security Council, Chile was fiercely lobbied by U.S.authorities and threatened with the possibility that the United States might delay or even abandon the free trade agreement unless Chile voted in favor of a resolution authorizing the use of military force against Iraq.

Nonetheless, Santiago chose to oppose the U.S.-backed resolution, siding with an overwhelmingly anti-U.S. public opinion at a time when domestic problems had weakened the Lagos administration and made it particularly reluctant to be seen as kowtowing to White House dictates.

In short, while Chile has not only embraced free trade with the United States and the rest of the world, it also has sought to retain and even broaden a distinct Latin American identity.

Increasingly, however, these two goals seem to be moving in different directions. On the one hand, Washington’s hopes to promote free trade largely on its own terms through a combination of bilateral agreements and multilateral negotiations designed to protect the status quo.

APEC is especially attractive from this perspective, since the agreements reached by APEC leaders are non-binding and the organization does not have any enforcement mechanisms capable of mandating that members must abide by formal agreements.

As a small country whose economic growth depends largely upon expanding export markets, Chile obviously wants to garner the goodwill of powerful trading partners like the United States. More generally, APEC also holds considerable appeal, since its combined economies generate over half of the world’s GDP.

The Rich and the Poor

Yet Chile also identifies with other developing nations who aim to enhance their economic position by pushing for greater access to developed markets.

Santiago is also keenly sensitive to appearing as Washington’s water carrier when it comes to such political issues such as Cuba.

Here, the focus is on working through supranational organizations like the WTO, which have greater power to force powerful members to comply with agreements.

In this context, Chile has joined developing nations such as Brazil, India and South Africa (all members of the so-called G-21 alliance formed just prior to the last meeting of world trade ministers in Cancún in September 2003), who are pushing for the elimination of agricultural subsidies by the United States and other advanced industrial nations as the price for any free trade agreement.

In addition, even though APEC has traditionally concentrated on economic matters, political and security issues can no longer be excluded from the agenda. If anything, this threatens to introduce additional sources of division among the members.

Although APEC summit organizers agreed beforehand not to take up the divisive issue of Iraq (with Chilean authorities letting it be known to Washington that it would not bring up its disagreements with the U.S. on this subject), differences over America’s war on terrorism cannot be so easily swept aside.

Although vast numbers of security personnel were deployed to cordon off thousands of anti-globalization protestors and anti-Bush activists, the resulting demonstrations cannot but help reinforce the precise image that U.S. policy is vehemently opposed by most Chileans as well as the majority of other Latin Americans.

Such opposition forced Chilean authorities to go to special lengths to assure President Bush that he would be guaranteed legal immunity for his visit to Chile, given that a case was making its way through the Chilean court system that called for the U.S. president to be detained and interrogated for war crimes and torture of prisoners in Iraq.

In light of these tensions, it seems much too simplistic to praise Chile as a model economic ally and contrast it with more obstructionist Latin American countries like Brazil, as U.S. Trade Representative Robert Zoellick tended to do on the eve of the APEC summit. In fact, such lachrymose sentiments may do Chile far more harm than good.

While Chile is committed to trade liberalization and eager to maintain its close economic relationship with Washington, it is also interested in working together with Brazil and other Latin American countries in trying to build an alternative voice to replace U.S. regional leadership.

Given the economic and political rivalries among the Latin American nations themselves, and the coolness that many Latin American nations have towards Santiago due to Chile’s close ties with Washington, Latin American integration may have to proceed in fits and starts.

But it would be foolish on the part of the United States to assume that, this being the case, it will be able to divide and conquer.

This analysis was prepared by Rebecca Evans, Ph.D, COHA Senior Research Fellow.


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