Business Patterns of International Trade - Research Paper Example

Business Patterns of International Trade Introduction Latin American is both culturally as well as geographically distant from China. These two regions also differ in terms of their government structures and natural resources. Moreover, the Latin American nations have a similar history to China in terms of the influence of colonial experience. In the past as well as at present, China and Latin American nations have engaged in trade practices that have benefited both regions. The two sides have increasingly expanded their exchanges to include comprehensive multidimensional experiences that are characterised by mutual reciprocity. China, which experienced rapid development over the last fifty years which catapulted it into the position of the second most powerful economy, continues to cultivate a strong relationship with Latin American countries in the 21st century. Globalisation avails numerous challenges as well as opportunities for countries that wish to develop greater trading experiences even if they are located in different parts of the world. Globalisation has also brought about the phenomenon of economic interdependence which encourages nations from all over the world to seek for trading ties with each other. While seeking to further develop their cooperative relationship, both Latin American countries and China are faced with different challenges and have to find strategic ways of overcoming these issues in order to mutually benefit from their trading relationships. How has trade developed over the past decade or more? Even though the Latin American region is culturally as well as geographically disparate from China, their governments have been successful in establishing trading relationships with each other since the days of yore. The first recorded exchange between Latin America and China is said to have taken place in the mid-16th century. This exchange resulted in the creation of a trade route, identified as ‘the Sea Silk Road’, which ran across the Pacific Ocean. This route would pass through the Philippines (Rosales and Kuwayama 2012). This route was used by the Chinese merchants to ferry commodities like textiles, embroidery, and flatware to Latin America, which was then identified as being part of the New World. The Chinese would then be rewarded with goods such as maize, silvers, and tobacco by nations like Peru and Mexico. These were loaded in carracks which were then given to the Chinese. In 1840, at the end of the Opium War, there were numerous Chinese labourers who were relocated to Latin America for work purposes. These labourers would contribute significantly to the region’s cultural as well as economic developments. As the Latin American nations struggled for independence, these Chinese workers also played a role in facilitating this transition. China had remote trading relations with Latin America between 1850 and the early 1900s. The Cold War between the then world’s two superpowers would further negatively affect this relationship. However, the emergence of globalisation, which materialised after the end of the Cold War, once more created factors that made possible the formation of strong trade partnerships. In the 1990s, Latin American nations and China would establish regular political exchanges that would be strengthened and promoted by their respective governments through regular visits conducted by their presidents to each others’ nations. This resulted in both Latin American countries and China both increasing their imports and exports mixed scenarios of trade deficits as well as surplus being experienced among them (Zhang 2007). What are the key features of this trade (the size, product type, changes over time and so on)? The relationship between the Latin American nations and China would benefit both regions in terms of economic benefits. As a rapidly developing economy, China has to deal with its domestic market’s increasing demand for energy, food, minerals, and metals which will benefit its economic and social development through sustainable methods. Essentially, China’s domestic demand benefits nations in Latin America which are export-oriented, which is something that then furthers their social as well as financial development. China is able to invest extensively in several nations in this region because it was one of the nations that was not unduly affected by the 2008-2009 global financial crisis. Since the 1980s, China’s growth has regularly registered at at 8%. In addition, with a population of approximately 1.3 billion citizens in China, there are great opportunities and a potentially huge market for any entrepreneurs from Latin American nations to benefit from. According to Farnsworth (2012) China is at present the main export market for Latin American nations such as Cuba, Brazil, Argentina, Chile, Costa Rica, and Peru. In the 21st century, China’s trade relationships with Latin American nations have resulted in an interdependence that has successfully accelerated their involvement with each other. For instance, China has contracts with Argentina, Brazil, and Chile to invest in and further develop their natural resources such as oil, ore, and copper. China also has considerable trading relations with Peru, which is an oil-exporting nation. China also regularly uses the Panama Canal. There are other ways in which China has developed its trade relationship with Latin American nations. For instance, Brazil and China have entered into a contract to commit to the use of atomic energy while also cooperating in space programs such as those involved in the exploration of the earth’s resources by means of satellite techniques. According to Rosales and Kuwayama (2012) China has also cooperated with Latin American nations such as Argentina and Chile in the scientific exploration of areas such as the Antarctic. Another trade feature that marks the relationship between Latin American nations and China is investment in domestic industries. According to Moreira (2007) Latin America remains as one of the most popular investment options for Chinese corporations and entrepreneurs. However, both China and Latin American nations have encountered some amount of friction in the course of their trade relations with each other. According to Loewen (2009) Latin American nations and China both create low technology-valued commodities such as clothes, textiles, and electronic gadgets which they then export to each other. Moreover, China creates a bigger challenge for its Latin American partners due to its more advanced industrial structure. This can generate unequal trading relationships that benefit China more than its partners. International trade theories that can be applied to China’s trade patterns with Latin America Essentially, international trade deals with different elements. Some different types of international trade theories include the absolute advantage, mercantilism, factor proportions, comparative advantage, new trade, international product life cycle, and national competitive advantage theories. Mercantilism has to do with the accumulation of monetary wealth through discouraging imports while continuing with regular exports, something that is established by means of trade surpluses. The absolute advantage theory, on the other hand, addresses a country’s capacity to produce or manufacture more effectively than other countries by utilising fewer resources. This occurs even as mutual trading is not restricted by tariffs but facilitated by market demand. In the theory of comparative advantage, the state in question is unable to create the needed products more effectively in the international scene but can do so within its own boundaries. In this theory, a nation may have the advantage in creating two dissimilar exports but, if it attempts to replicate this in another nation, will incur more labour and monetary costs. The factor proportions theory contends that nations import products in places where the resources that are required to create them are not adequate and export products only where the assets are abundant. The most common theory used in the trade relationship between China and Latin American nations is neo-mercantilism (Liu 2002). Neo-mercantilism basically describes the strategy whereby exports are encouraged but imports are discouraged. This theory is also marked by the control of capital movement and the central government’s consolidation of all currency decisions. The main aim of neo-mercantilist strategies is to further develop a government’s foreign reserves while making room for the creation of more effective economic policies. This does not facilitate the creation of an open economy and can even adversely affect a nation’s standard of living. However, it benefits the government in that it experiences greater autonomy and can actually wield more control. China sports neo-mercantilist trade policies in its dealings with its Latin America partners (Lall and Weiss 2005). In 2006 alone, China had a trade surplus of $210 billion, while it held $1trillion in foreign exchange reserves (Farnsworth 2012). This was the result of the fact that China’s exports were far more extensive than its imports. Some critics have even claimed that China has unfairly benefited by using an import substitution policy to restrict the number of imports allowed into the city (Gallagher and Porzecanski 2008). Other scholars have claimed that China’s currency is low-priced and, thus, maintains the export prices at low numbers. According to Jenkins, Moreira and Peters (2008), the currencies in most South American economies have been affected by rising costs. This is being experienced while China’s economy keeps developing. This naturally means that in all trade relations, China will remain as the formidable partner that has the capacity to pressurise the local manufacturing operations. This particular scene has been witnessed in nations such as Argentina and Brazil (Evan 2009). Changes in exports and imports between China and Latin America There has been a lot of imbalance in the trading competition between China and its trading partners in Latin America. China’s emergence as a principle player in the international scene has undeniably brought considerable benefits for its trading partners in Latin America through the enhancement of their exports’ collective value. However, China’s emergence as a major commercial power also generates a lot of competition in Latin American markets. In many Latin American nations, local manufacturing industries have been adversely affected by Chinese imports. According to Evan (2009) China charged into the Latin American market soon after sgaining membership of the World Trade Organiation (WTO). To launch its trade relationship with nations in Latin America in 2000, China first cut its trade tariffs by almost 20% (Gallagher and Porzecanski 2008). It would add another 10% cut in 2009. This made it possible for China to use Latin America nations as a practical destination for all its processed products. Latin America would also function as a significant supply source for primary products. This resulted in a somewhat unequal trade between the Latin America region and China. According to Farnsworth (2012), in 2009 alone, China exported $78 billion of goods to various nations in Latin America, while those same nations only shipped $40 billion worth of products to China (Rosales and Kuwayama 2012). In 2010, Mexico exported $2.74 billion worth of goods to China while receiving $32.63 billion worth of products from it. Colombia, on the other hand, exported $1.57 billion worth of products to China, while receiving $3.19 billion worth of products from it (Farnsworth 2012). Many Latin American nations are now seeking to protect sensitive industries such as those of footwear, textiles, machinery, and metal products (Farnsworth 2012). In Colombia, the local industries which have suffered due to the invasion of Chinese exports include those which deal with rubber, metals, plastics, and textiles (Rosales and Kuwayama 2012). In Brazil, it is the footwear, clothing, office machinery, industrial equipment, and non-metallic minerals that have been adversely affected by Chinese imports. In Mexico, Chinese imports of textiles, auto parts, metals, and industrial equipment have negatively affected the local industries. Patterns and Changes in the trade relationship between China and Latin America While China seeks to emphasise the complementary nature of their trade relationships with their Latin American neighbours, there are many Latin American governments that are concerned about becoming dependent on the second largest world economy. China’s economic relations with Latin America nations have expanded by more than 180% in the last decade (De Santibañes 2009). This trade has been particularly influenced by the strong demand in China for resources such as iron, copper, oil, and ore which are South American staples. Conversely, Latin American nations have benefited from Chinese products such as motorcycles and modems. The major beneficiaries of China’s financially-based interest have mainly been commodity-rich nations in Latin America like Chile, Brazil, Argentina and Peru (Hsiang 2009). China also has trade agreements with Costa Rica. In nations such as Cuba and Ecuador, the left-leaning political authorities have been further encouraged in their ties to China by the fact that the governments share socialist values. Other nations such as Costa Rica actually export electronic products such as computer micro-chips to the Chinese market (Gallagher and Porzecanski 2008). Moreover, the trade relationship between China and Latin America has significantly changed. In nations such as Honduras, China has made investments in natural features such as the hydropower plant which is being built by the Sinohydro. The Nicaraguan government is also involved in a contract with Chinese companies which will result in the creation of a $300m satellite which will be able to provide Internet, telecom, and digital TV services to a number of Central American nations in 2016. Through its international corporations such as the Suzhou Guoxin Group, Huawei, and the China National Petroleum Corporation, China has also invested in providing telecoms services, solar energy, and oil for communities in nations like Guatemala, El Salvador, and Costa Rica (De Santibañes 2009). Conclusion Globalisation has resulted in increased demand in both Latin American nations as well as China. It is likely that the trade relationship between the two regions will continue to develop even as both of them develop stronger political ties and share in projects involving economic, technological, and scientific factors. Moreover, if the trade partnership is to continue, here has to be more balance in the relationship so that Latin American nations benefit as much from it as China does at present. References De Santibañes, F. (2009) ‘An end to US hegemony? the strategic implications of Chinas growing presence in Latin America’, Comparative Strategy, vol. 28, no. 1. Evan, E.R. (2009) China in Latin America: the whats and wherefores, Lynne Rienner Publishers, Boulder. Farnsworth, E. (2012) ‘Memo to Washington: China’s growing presence in Latin America’, Americas Quarterly, vol. 6, no. 1. Gallagher, K.P. & Porzecanski, R. (2008) ‘China matters: China’s economic impact in Latin America’, Latin American Research Review, vol. 43, no. 1, pp. 186-200. Hsiang, A.C. (2009) ‘China rising in Latin America: more opportunities than challenges’, Journal of Emerging Knowledge on Emerging Markets, vol. 1, Article 4. Jenkins, R., Moreira, M.M. & Peters, E.D. (2008) ‘The impact of China on Latin America and the Caribbean’, World Development, vol. 36, no. 2, pp. 235-253. Lall, S. & Weiss, J. (2005) ‘China’s competitive threat to Latin America; an analysis for 1990–2002’, Oxford Development Studies, vol. 33, no. 2, pp. 163–194. Liu, R. (2002) ‘How to further Sino-Latin American relations’, Journal of Latin American Studies, vol. 24, no. 5, pp. 7-10. Loewen, H. (2009) ‘WTO compatibility and rules of origin—assessing bilateral trade agreements between Latin America and East Asia’, Journal of Current Southeast Asian Affairs, vol. 28, no.1, pp. 69- 81. Moreira, M.M. (2007) ‘Fear of China: is there a future for manufacturing in Latin America?’ World Development, vol. 35, no. 3, pp. 355-376. Rosales, O., & Kuwayama, M. (2012) China and Latin American and the Caribbean: building a strategic economic and trade relationships, ECLAC, Santiago de Chile. Zhang, A. (2007) ‘China-Latin American relations in economic globalisation perspective’, Party and Carders Review, no. 5, p. 48. Read More