Trade Relation within China and Latin America - Literature review Example

Analysis of China’s role and impact in Latin America with emphasis on Peru Table of Contents Introduction 3 Trade relation within China and Latin America 3 Dependency Perspectives 5 National and International Development 8 Foreign Investment for Development 9 Market Reform Strategies 10 Focus on International Political Economy 11 Conclusion 12 Reference list 13 Introduction The rapid growth of China has made the country a key player within the global economy and it has landed into competition with other developed countries. The relationship of China with Latin America has intensified over the past decade due to the import and export of raw materials and the finished goods within the economy (Jenkins, et al. 2008). However, in the last decade the relation between Peru and China had some uneven impacts in the area of industrial development. China is considered to be Peru’s second largest trade partner but Peru does not represent a significant number of economic relations with other countries. The volume of trade between China and Latin America rose from $2 billion in 1990 to $15 billion in 2001 as per Chinese statistics (Sara Calvo and Carmen Reinhart 1996). However, there is a possibility that the Latin American countries face a challenge related to their trade specialization towards the goods in the presence of strong price instability within the countries. In 2003, it was seen that the delivery bottlenecks and the demands that rose in China have increased the prices of raw materials as well as the finished goods and the Chinese industry was highly susceptible to recession as well as the boom (Moreira, Mauricio Mesquita 2007). Hence, the research would offer a scope to the researcher to identify the pattern of economic exchange between China and Latin America. It also allows the researcher to study the impact of china’s growth on Peru’s industrial development. The aim of this paper would be to analyze the impact of growth rate of China on Latin America as well as the case of Peru. Trade relation within China and Latin America While the economic growth in China had a negative impact on Latin American export of goods to other countries within the economy, it has a positive impact on the export of goods and services. According to the researcher, it was a good signal as it indicates a rise in outward growth of Chinese economy which in turn creates job opportunities and economic growth in the recipient economy (Moreira, Mauricio Mesquita 2007). However, the trade among China and the other regions has been limited for a decade and the situation has improved in the next few years and the Chinese firms continued investing in the Latin America. It has been observed by the researcher that the imports of China from Latin America have been increased to around seven fold, whereas, the exports to the region more than tripled (Robertson, et al. 2008). There was a fall in the inflation rates by the end of 1990 and the Latin American economies developed far better trade relation than they had developed two decades earlier and the economy had adopted exchange rate policies in order to facilitate trade (Rodriguez, et al. 2006). The improved trade relations of the Latin American economies enabled exports of China to penetrate within the economy. As a result, the exporters of China were in a better position as there was a rise in import demand from China. The country is found to be competitive in the goods market as well as it specializes in the labor intensive production. The country also acts as a competitor of the foreign direct investment due to which there are massive inflows within the economy (Rodriguez, et al. 2006). This in turn raises concern that FDI is being diverted from Latin America to China. The rapid growth in China has led to the terms of trade between the primary commodities which are to be used for further production and the labor intensive manufactured goods. The increase in demand for agricultural products has resulted in the rise in prices of the primary commodities within the Chinese economy (Bhattarai, Madhusudan and Michael Hammig 2001). Due to the labor intensive production technique, there was a fall in price primary commodities. The rapid growth rate of China has led to a sharp increase in trade with Latin America and the Caribbean. China’s impact on the exports of Peru has been large enough although, the products imported by China from these countries are different. The researcher has suggested that the rapid growth rate in China has led to a two-fold effect on Peru through the demand and supply shocks within the economy. Being a small open economy, Peru would face the external shocks from the major trading partners one of which is China. Studies have indicated that around 17% of the total exports of Peru went to China in 2012 out of which around 81% were metals (Jenkins, Rhys 2010). Nonetheless, the minerals imported by China from Peru including the gold and copper cover a relatively small share of the total mineral imports. Peru is exposed to monetary shocks as well. The country’s short-term interest rate dominated in the US dollars is said to be highly correlated with US federal funds (Inglehart, Ronald 2003). The main transmission channel of China’s spillover effect to the Peruvian economy would be its impact on the world’s metal prices and hence the trade and economic activity of Peru. However, the slowdown of investment in China has a negative impact on the world’s metal prices, the economic growth as well as the other macroeconomic indicators. The tightening of the US monetary policy has a significant negative impact and a spillover effect on Peru’s short term interest rate dominated by US dollar. Dependency Perspectives The dependency theory was first introduced in Latin America as a result of the bankruptcy that took place in the United Nation Economic Commission for Latin America (ECLA). Thus many regions of Latin America tried the developmental strategy of ECLA related to industrialization and protectionism along with import substitution within the economy. However, some of the researcher expected a high growth in Latin America (Athukorala, Prema‐Chandra and Sarath Rajapatirana 2003). In 1960, many of the problems evolved within the economy related to the unemployment, currency devaluation, declining terms of trade and inflation. It is indicated by the researcher that the dependency school was also the result of the crisis that resulted due to orthodox Marxism in Latin America. R. Prebish considers a scheme in terms of the dependency perspectives and states that Latin America had to produce food and the raw materials for the industrial centers (Besedes, Tibor and Thomas J. Prusa 2011). According to Prebish, this scheme was for the development of Latin America in order to make the country trade with other developed economies. Dependence on the export of the food items as well as the raw materials in the economy would lead to deterioration in the terms of trade which in turn affects the accumulation of capital within the economy. According to the economist, the practice of the one sided international division of labor has to be stopped and there should be a phase of industrialization in Latin America (Li, He 2007). Division of labor within the economy enhances the efficiency of the economy to produce more but it creates controversy related to gainers and the losers by following the process of division of labor (Calvo, Esteban and John B. Williamson 2008). As it enhances production in the economy, it helps both the trading partners to carry out its import and exports smoothly. The industrialization process has to be accelerated by the substitution of large part of the imports by the domestic production mechanism. There should not be any tariff imposed on the domestic industries in order to make them compete with the international rivals. The raw material production has played a key role in the Latin American countries (Calvo, Esteban and John B. Williamson 2008). However, the purchasing power of the people within the Latin American countries has been limited to some extent. The dependency on the imports has shifted from the consumption goods sector to the capital goods sector within the economy. There were other negative impacts such as the acute balance of payment problems that rose within the economy. The economy was moving to a path of depression phase. The dependency theorists stated three common features of a dependency. Firstly, the dependency deals with the international system as comprised of the two sets of the states which are described as the metropolitan/satellite, dominant/dependent and the centre/periphery (Calvo, Esteban and John B. Williamson 2008). Secondly, the external forces are of importance to the economic activities within the dependent states. Thirdly, dependency deals with the relation between the states that are either dominant or dependent and whether the relation is dynamic or not (Calvo, Esteban and John B. Williamson 2008). Dependency theory is based on the structuralism as well as materialism and has been criticized for emphasizing too much on economic factors. However, there are short-term trade costs within Latin America. Many of the Latin American countries are experiencing a rise in their exports to Chinese economy. Thus, the Latin American countries are said to experience a growth rate in their exports. Dependency is not an economic process but is also considered as a socio-political process (Calvo, Esteban and John B. Williamson 2008). Further, it not only deals with the external relationship but also internal relationship within the countries and the development is likely to occur simultaneously. The dependency theories are considered as the counter argument related to both modernization and the theory of development and also considers the neo-classical economics in order to ensure the long-term sustained growth (Paus, Eva 2009). The growth in China has affected the production processes globally. However, the dependency theory is used to address the unequal post-colonial conditions in the developing world. China and Peru’s trade relations had an irregular impact on the industrial development that is expected to take place for both the countries (Paus, Eva 2009). On one side there was a transformation of the Peru’s external economic relations, while on the other hand, there was a worse scenario of the internal economic structure and the export of the raw materials. China is considered to be Peru’s second largest trading partner,whereas, Peru plays a minor role in economic relations of China. The market share of China was around 17% which is equivalent to 5.1 USD that reflects China to be the second major exporter of Peru (Paus, Eva 2009). National and International Development The trade impact of China on the emerging markets of Latin America has indicated that there is small competition within the economies in the US market (Cheng, Joseph YS 2006). The researcher has stated that both Latin America as well as China has complementary economies and there was little or no competition within them. The rise in demand for raw materials and resources in China proved to be beneficial to Latin America since it in turn led to the rise in exports and further increase in the prices of commodities in the world market. Due to the low labor costs in China, the country had a comparative advantage in producing labor-intensive goods. Therefore, Latin America can import more of these cheap labor intensive goods including electronic, clothing, toys and footwear. Manufactured goods have covered around 85% of the imports of China on an average (Walton, Michael, 2004). The technological and industrial dependency acts as the barrier to the development that is to take place in Latin America. Industrial development in Latin America focuses on exports that generate the foreign currency which is necessary to further buy the imported goods (Cheng, Joseph YS 2006). Industrial development within Latin America is further characterized by the balance of payments. Dependent development that takes place in Latin America gives rise to wealth as well as poverty, employment for some and unemployment for other and further it accumulates as well as creates scarcity in the availability of capital. According to a researcher, the state of underdevelopment was not to remain permanent for the dependent countries within the economy (Cheng, Joseph YS 2006). The trade among China and other Latin American countries has led to the national as well as the international development of the countries. The import and the export of raw materials within the economies facilitate the trade. The export of goods from China has contributed to the total growth rate of exports within the economies. The impact of the rapid growth was severe in case of Chile, Argentina and Peru where the impact of exports was marginal in other countries. The international development deals with the economic growth of the Latin American countries. It also includes the growth that takes place in Peru. Economic growth within an economy leads to the reduction in poverty and it aims at improving the quality of life among the developing countries. According to a researcher, the development within an economy can also result in the virtuous circle of prosperity. The economic growth even creates job opportunities and there arises stronger demand for labor within the economy (Cheng, Joseph YS 2006). Thus, the countries within Latin America are gradually following the path of development and the rapid growth in China is said to have a positive impact on emerging economies like Peru and Latin America. Foreign Investment for Development The researcher has studied that almost half of the overseas investment of China goes to Latin America which includes investment in Caribbean tax havens such as British Virgin Islands. The FDI outflow of China to Latin America is considered to be resource seeking kind, primarily in the field of minerals and oil. However, the Latin American FDI in China is even less significant within the economy. It is expected to have come from Brazil but there are only some of the Brazilian economies that have invested in China. According to the Central Bank of Brazil, Chinese investment within the economy in 2001-04 totaled to around US $58 million. Between the periods of 1999-2005, the Chinese investment in Mexico accounted for around 1.2% of FDI from the Asian countries (Li, He 2007). Bilateral trade among the economies can be complimentary as well as substitutes. However, FDI and exports are mostly considered as substitutes. The relationship can be considered as complimentary as well if FDI is export-oriented or if there are strong trade relations within the economies. The growth in China has enhanced the trade relations among the Chinese economy as well as the Latin American countries. There has been trade relations of China with Peru as well that led to further development of the country and it also boosts the exports and the import sectors within the economy. Market Reform Strategies The international trade in China has contributed to the significant economic growth. The stable political system, skilled labor and vast natural resources within the Chinese economy has led to the growth of international trade within China (Li, He 2007). Some of the industries within China had comparative advantages and adopted a high level of specialization and they produced goods which were exported at cheaper rates to other countries. Most of the Chinese exports go to Latin America and thus the countries of Latin America imports goods at cheap rates and thus trade takes place smoothly among China and Latin America (Li, He 2007). The firms in Latin America were found to use import substitution within the economy in order to promote development. The United States and Peru-free trade agreement was introduced in the year 2009 (Li, He 2007). The agreement involves elimination of tariffs and removal of barriers to the U.S services and provides a secure as well as predictable legal framework for the investors to invest within the economy. The agreement also provides opportunities for increase in the level of exports from US to Peru (Li, He 2007). It eliminates the Peruvian process that involves hiring of Peruvian professionals and measures by the US firms dealing with the purchase of local goods rather than hiring US professionals who are expert enough. Focus on International Political Economy China undertook a series of changes in the management of its state owned international enterprise which is aimed at raising the productivity of the industries. The country mainly concentrated on the enterprise restructuring by following a new enterprise governance structure within the economy that focused on the autonomy of enterprise and its incentives. Instead of adopting the process of price liberalization, China concentrated on marginal economic liberalization (Li, He 2007). The kind of liberalization involves reducing the barriers to entry to the industries that enjoy monopoly power within the economy. The Peruvian economy is said to have lacked a system of both monetary as well as fiscal policies that are capable of operating without causing any serious disturbance to the economy. The researcher has pointed out that the monetary authorities lacked the basic instruments which were used in past to use the adverse supply shocks that affected the Peruvian economy (Li, He 2007). However, the neo-liberal experiment of 1990s analyzed the role of the growth strategy in the macroeconomic scenario and the long term performance of the Peruvian economy. There was an evidence of Peru’s shift towards more market oriented strategies in order to bring in development within the economy. After the end of the neo-liberal program that was held in Peru, in mid-1980 there were two strategies adopted as the Southern Cone strategy and there was an extension of the IMF stabilization policies since 1978 (Li, He 2007). Conclusion The study shows that there was a huge impact of the rapid growth rate in China over the countries of Latin America as well as Peru. China had a comparative advantage in producing labor intensive products that it manufactures at cheap rates and it exports these goods to other countries. Most of its products go to Latin America and thus the trade relation within China and the Latin American economies improves. The trade within the economies brings in development in the emerging economies like China and Latin America. The study also considers the dependency theory which comprises of a core country that is developed as well as a peripheral country which is considered to be developing. Thus the research indicates that the dependency of the emerging economies on the developed economies brings in industrialization within the underdeveloped economies. Thus it can be concluded that there is a positive impact of the growth rate of China on Peru and the Latin American economies. Further, the research states that the FDI outflow of China over Latin America and Peru proves to be beneficial to the development of the emerging economies. The rapid growth rate in China has been influenced due to the highly skilled workforce and the availability of the natural resources within the economy. The Peruvian Free-trade agreement with the US has eliminated the trade barriers of the economy and it allows import and export of goods smoothly. However, the political environment of China also plays a key role in enhancing the trade relations with other developing as well as developed economies. Reference list Athukorala, Prema‐Chandra, and Sarath Rajapatirana. 2003. “Capital inflows and the real exchange rate: a comparative study of Asia and Latin America,” The World Economy 26, no. 4: 613-637. Besedes, Tibor, and Thomas J. Prusa. 2011. “The role of extensive and intensive margins and export growth,” Journal of Development Economics 96, no. 2: 371-379. Bhattarai, Madhusudan, and Michael Hammig. 2001. “Institutions and the environmental Kuznets curve for deforestation: a crosscountry analysis for Latin America, Africa and Asia,” World development 29, no. 6: 995-1010. Calvo, Esteban, and John B. 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