Trading places

Can the EU, led by Spain, compete with China for Latin American trade?

For decades, the natural first step for Spanish companies looking to expand internationally was Latin America, due to the language, cultural links, and established trade routes. Today, Spain is the second-largest investor in the region, with EUR 150 billion and growing. According to a report from the IE Business School in Madrid, 77% of Spanish companies with investments in Latin America increased business volumes in the region in 2022.

Mexico, Colombia, Peru, and Chile are the main recipients of Spanish capital in the region. Political instability in all of these countries has not deterred Spanish investors who also see significant potential for new business in Panama, Costa Rica, and Dominican Republic. Notably, Spanish companies tend to offer a solid long-term investment plan which allows local Latin American counterparts to build strong synergies with these plans. In addition, Spanish capital enables Latin American companies to have a window on business opportunities in the European Union.

Despite these benefits, Spanish capital has been facing tough competition from China, which is now South America’s largest trading partner. Through its Belt Road Initiative, the Asian giant has become a major source of foreign direct investment in the region, mainly in large energy and infrastructure projects.

Carlos Malamud, a researcher at Real Instituto Elcano and Professor at UNED, explained that the presence of China in Latin America was often overstated, “Although China’s commercial presence in Latin America cannot be denied, direct investments in the region have never reached the levels of the EU or US. Furthermore, the availability of Chinese money to finance many projects in Latin America has consistently declined in recent years, even before the pandemic.”

“Although China’s commercial presence in Latin America cannot be denied, direct investments in the region have never reached the levels of the EU or US.”

Carlos Malamud, researcher, Real Instituto Elcano and Professor at UNED

Gustavo Bittencourt, Professor and Researcher in International Economics and Development at the University of the Republic Uruguay agreed, “China’s relevance in Latin America has been overestimated because it suits a political agenda with the US. It is true that from 2010 to 2015 some important projects in Brazil and Mexico were developed with the Chinese but China’s interests in Latin American are mainly extracting raw materials, which will not in principle benefit the region’s sustained economic growth. In that sense, it is much more attractive for Latin America to push its cooperation with the EU.”

“China’s relevance in Latin America has been overestimated because it suits a political agenda with the US.”

Gustavo Bittencourt, Professor and Researcher in International Economics and Development, University of the Republic Uruguay.

By using a different approach than Spain and most European countries, China has adopted a broader geopolitical stance in its trade relations with Latin America. Thus, it has provided loans, medical equipment during the Covid-19 pandemic, and cheap Chinese goods to intertwine local regional economies with Beijing.

China’s trade strategy in Latin America is evolving in two streams, according to Bittencourt, “China’s strategy is to reach bilateral agreements with Latin America countries, either with free trade agreements (Chile, Costa Rica, Peru) or under the scheme of “Integral Strategic association”: Brazil (2012), Mexico (2013), Peru (2013), Argentina (2014), Venezuela (2014), Chile (2016), and Ecuador (2019).”

In response, Germán Ríos at Observatorio Latinoamérica, Instituto de Empresa, Corporación Andina de Fomento believes Spain’s upcoming Presidency of the European Council could mark a turning point, “Spain is already pushing the agenda [of the EC] to work with many organisations in Latin America. The region is strategically important to the EU for several reasons. Firstly, it is an alternative producer of the grains lost due to the Ukraine war; secondly, it is a source of many of the inputs required for the energy transition; thirdly, it is home to 40% of the world’s biodiversity; and finally it provides an opportunity to diversify global supply chains for industries such as semiconductors.”

Malamud countered that this could be a challenging process, “Although there are enormous opportunities to push certain deals among EU and Latin America, the lack of regional integration in Latin America makes the process difficult. Just look at the pandemic, every country in Latin America had a different response.”

“Another aspect that should not be neglected is that Latin America is the fourth largest foreign investor in Spain.”

Germán Ríos, Observatorio Latinoamérica, Instituto de Empresa, Corporación Andina de Fomento

Importantly, Ríos highlighted that the opportunity for investment and growth between the EU and Latin America isn’t one way: “Another aspect that should not be neglected is that Latin America is the fourth largest foreign investor in Spain. This creates a very interesting ecosystem of companies from both sides of the Atlantic to work together, combining capabilities and opening the door for further collaboration.”

While Chinese investment in Latin America may be declining, its commercial trade with the region continues; can the EU, led by Spain, provide effective competition?

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