The Geopolitical Factors of the Belt and Road Initiative in Latin America: The cases of Brazil and Mexico

Professors Miguel Montoya, Daniel Lemus, and Evodio Kaltenecker, all from the Instituto Tecnológico de Monterrey, wrote an article (link here) which analyzes how geopolitical factors impact the Belt and Road Initiative (BRI) in Latin America, in the context of the growing influence of China in the region. Specifically, these authors explain how Brazil and Mexico, the two largest economies in Latin America, have different predispositions to limit or allow their relationships with China. The research advocates that there is an external factor – The United States of America – that molded the relationships between Brazil and Mexico with China. With the use of international databases and four comparative case study method, the researchers illustrate how geopolitical factor, the influence of the United States, has influenced the possibilities of investment in China in both countries.

What is BRI?

The Belt and Road Initiative (BRI) has been defined as the most ambitious geopolitical-economic infrastructure investment strategy in history and is considered one of the most important geopolitical initiatives of our time. Furthermore, the Chinese overseas investments in infrastructural projects and foreign trade under the proposals of the BRI could be understood as much as the search of the Chinese government to find an opportunity to employ the enormous overcapacity in industries such as steel and heavy equipment. While the BRI initiative provides coherence to public and private investment to build an infrastructure network that facilitates trade with China, it also aims to generate a consistent discourse that introduces China as a partner that desires to establish a win-win relation. However, in this region, the geopolitical aspects are deeply influenced by the interests of the United States.

Introduction: China, Brazil, Mexico…. and the USA

The presence of the United States has been considered a critical issue that has limited the options of the foreign policy of Latin American Countries because this region conventionally has been considered to be under the sphere of influence of the US. In this way, Latin American foreign policy was largely shaped to avoid confrontation of the US interests in the region. However, since the beginning of the 21st century, China searched to establish a strategic relationship with Latin Countries through persistently extending its economic and political involvement in the region. Nevertheless, Montoya, Lemus, and Kaltenecker suggest that the US geopolitical factors remain a serious element that limits the expansion of China in Latin America when the US perceives that its interests in the region can be threatened. To prove their argument, the authors analyze four cases of Mexico and Brazil to understand how geopolitical factors limit the expansion of China in Latin America.

Brazil and Mexico: Geopolitical agents

Brazil and Mexico are both the most populous countries and the two largest economies in the region. At the same time, there has been a historical rivalry between these nations to lead the region. While Mexico is the US’s main trading partner and defends free trade, Brazil is a relatively closed economy and opposed the United States in some issues in the last years, such as the two countries´ divergent policies toward Cuba, Venezuela, Colombia and Honduras, the regional political institutions such as the Union of South American Nations (UNASUL), the South American Defense Council, and the Community of Latin American and Caribbean Nations – CELAC. As a consequence, while Brazil became part of the BRICS block and strengthened its ties with China in multiple ways Mexico considers China more as a strategic competitor and aligns its interests towards the US vision of the world.

Based on the available data, the authors compare the economic relationship between Brazil, Mexico, and China adopting the comparative method to contrast the main economic trends of the interrelations between the two nations and China. In this way, Montoya, Lemus, and Kaltenecker introduce a panoramic view of economic and political relations among China, Brazil, and Mexico and contrast four specific cases that clarify how the geopolitical factor is present in the relationship between the three countries.

The four cases analyzed are China Molybdenum – Anglo American, State Grid – CPFL, High-speed train between Mexico City and Queretaro and, Dragon Mart. The sectors selected were mining, energy, transportation, and commerce/trade. China has vast experience in this kind of project around the world and offers internationally competitiveness terms. The selected cases received enormous media attention and the decision of allowing the Chinese investment was beyond that of a decision based only on economic rationality. Also, the debate about the presence of Chinese investment with its risks and opportunities became a public issue.

If Brazil and Mexico are the countries with the strongest economies in Latin America and with the largest domestic market, then it is expected that both countries will be strategic partners of China in the region. Brazil has been recently an important partner of China; however, it is not the case in Mexico. In December 2003, Mexico and China established a “strategic partnership” that places relations, from the Chinese perspective, at a very high level. In August 2004, the Permanent Binational Commission was created, which meets every two years since 2004, intending to strengthen ties between the two nations. Finally, in 2013 the President of China, Xi Jinping visited Mexico; as a result, the relationship between China and Mexico upgraded to “Comprehensive strategic partnership”, which encompasses different economic, political and social aspects, and these two countries will likely strengthen their cooperation and coordination.

However, despite the agreements signed between Mexico and China, the link between both countries is still weak. Indeed, the lack of substance of the bilateral political relationship since the mid-1980s, as well as the insufficient, unbalanced and unsatisfactory development of the economic relationship was replaced – in order to maintain a positive image – with qualifications increasingly grandiloquent and distanced from reality. Today there is a debate about a “comprehensive strategic relationship” between the two countries, but the reality of trade relations, investment and economic and technological cooperation and, political and diplomatic relations, neither justify nor substantiate that characterization.

This situation has prevailed even when there has been a change of political regime in each country. In Brazil, although the end of the era of the Partido dos Tabalhadores lead by the leftists Lula da Silva and Dilma Rousseff and the start of the era of the right-winger President Jair Bolsonaro foreshadowed a change in relations with China, in practice the economic ties between the two countries remained very solid. On the other hand, Mexico elected, for the first time in contemporary history, a president, López Obrador, from the left side of the political spectrum. However, the Mexican economic dependence of the United States has driven the search for the ratification of the new USMCA trade agreement. Thus, a closer approach to China is only an intention from Mexico´s side. At the first impression, the collaboration between China and Mexico could be increased now more than ever under the Chinese BRI strategy. However, the authors suggest that the reasons for the somewhat cold relationship between Mexico and China are not only economic but also geopolitical.

A comparative approach to the expansion of China in Brazil and Mexico: four emblematic cases

A fundamental characteristic of BRI is to support large infrastructure projects. Basically, infrastructure projects have been a very important part of China’s economic success story, which the Chinese government is currently seeking to replicate to other regions of the world. Although there is a huge variety among the participating actors, investment funds, loans, and concessions, in general, the model has been to facilitate the presence of Chinese companies with local partners that, financed by the Chinese government, carry out the expected works. The range of infrastructure financed by China is very wide and includes communication and transportation, as well as obtaining primary resources that the Chinese economy requires. This model has been repeated usually in Latin America.

Both in the Brazilian and Mexican cases, China has become a relevant source of inbound FDI to Latin America´s largest economies. Figure 1 shows a remarkable difference in the scale of Chinese FDI in both countries. The FDI inflows remained very low until 2009, peaked in Brazil in 2010 and 2016, while Mexico presented a modest FDI inflow after 2014.

Figure 1 Mexico and Brazil: Foreign Direct Investment Flows of Chinese Origin, 2000-2018

Source: authors´ elaboration based on Dussel Peters (2019)

The two cases of Chinese FDI into the Brazilian economy presented in the original article offer pieces of evidence of Chinese appetite for Brazilian companies in the infrastructure sectors, such as mining and energy, respectively. The increase of the Chinese influence in Brazil´s infrastructure suggests the beginning of the weakening of the United States´ leadership position in this South American country

China Molybdenum Co (CMOC) is primarily engaged in the mining, processing, and marketing of mineral products. The organization is one of the world’s largest molybdenum and tungsten producers. On September 30^th, 2016, CMOC announced the acquisition of Anglo American´s Brazilian Niobium and Phosphates businesses for US$1.5 billion. There are several strategic and business reasons for the purchase, First, the niobium business is an important strategic addition to CMOC’s existing molybdenum and tungsten business, as it is a critical value-added input for specialized alloys and a key ingredient of for the production of specialist high-strength steels used in found in gas pipelines and jet engines. The strategic importance of the deal occurs because the acquisition gave the company a foothold in one of the most important international mining jurisdictions – Brazil – and it confirms the company´s resources-seeking strategy (Kaltenecker, 2018) of finding sources of rare earth, specialty minerals.

On the other hand, we analyze China’s State Grid acquisition of Brazil’s CPFL Energy. In 2106, China’s State Grid International Development Ltd (State Grid), the world’s largest utility which provides electricity to 88% of China’s territory and is ranked 2nd in the Fortune Global 500 in 2016, bought a controlling stake in the CPFL, Brazil´s largest power distributor, for US$1.8 bn. In 2017 and 2018, State Grid launched tender offers to buy the remaining shares the firm did not own in CPFL and also fully acquired CPFL´s renewable energy business unit.

The internationalization strategy of State Grid in Brazil evidences the firm´s focus on regulated power generation, power transmission, and distribution assets. The Chinese company actively invested in the Brazilian power market and with the CPFL deal, the Asian organization expanded in Brazil beyond the power transmission assets it already managed.

In line with projects of Chinese product exhibition centers in different countries of the world (such as in the United Arab Emirates and Bahrain), in 2011 the investment to build a Dragon Mart Cancun, in the Mexican Caribbean, was announced. The goal of the project was the construction of a shopping complex to show, promote and sell Chinese goods in Mexico and Latin-America. From the beginning, the project had attracted criticism from civic and non-governmental organizations, who said it would seriously affect the environment of the area. Between 2013 and 2014 the Dragon Mart Cancun project was fined because of the lack of environmental permits. In 2015, the Federal Attorney’s Office for Environmental Protection of Mexico announced that it was permanently closing the project.

However, there were other reasons behind the story about the cancellation of Dragon Mart was a result of the threats to the environment. First, the differences between the local and federal governments that considered that the project would benefit local authorities politically. Second, the opposition of Mexican entrepreneurs in fear of the arrival of cheaper Chinese products to Mexico. Third, a feeling of rejection of the possible arrival of Chinese citizens in a massive way. Fourth, the suspicion of corruption to obtain the contracts that would allow the construction of the project. As explained by Jin (2017), the project did not consider [environmental and social benefits] fully enough, and, to a greater extent, neglected public relations work on these aspects.” However, both in the collective imagination that presents China as a threat as well as in the pressure of the federal government to enforce environmental laws that were not respected in similar cases, the possibility of the US influence in the project cannot be disregarded.

One of China’s most important investment projects in Mexico that have been raised is the construction of a high-speed train between Mexico City and the city of Querétaro. It was a project with a route a little more than 200 kilometers of railway lines and that could transport up to almost 30 thousand people a day in its maximum capacity. The total investment was over 3 billion dollars. The corridor between these two cities is one of the most densely populated in the country, with economic growth above the national average and a major road congestion problem that the train project would partially solve. The investment for the high-speed train was a Joint Venture between China Railway Construction Corporation (CRCC), a Chinese state-owned company, and Constructora y Edificadora GIA, Prodemex, GHP Infraestructura Mexicana and TEYA of HIGA Group (Dussel Peters, 2018). The project was publicized in 2014, the consortium between Chinese and Mexican companies won the bidding process, with the criticism that it had been the only bidder.

There was no consensus about why the high-speed railway project failed. One argument put the responsibility on the Mexican side because of its unpredictability, while most of the blame was placed on Chinese enterprise. Some observers criticized the low price competition strategy since the winning project was cheaper than a similar project in China. Others praised the Chinese firm’s local partnership strategy but thought the company should have paid attention to opposition parties in the Mexican Congress as well as civil society. Table 1 presents a summary of the four cases discussed in the original article.

Table 1: Summary of the four cases of Chinese FDI in Brazil and Mexico

Discussions and conclusions

Brazil and Mexico are the two most important countries in Latin America due to their population and economy sizes. Besides, both countries maintain close commercial ties with China. However, these countries have a very different behavior regarding how could benefit from the Chinese expansion in Latin America. In other words, each country has different approaches to investment and infrastructure projects. This situation occurs despite the renewed impulse of the Chinese government to have a greater presence in the region.

The four cases show how economic rationality is not the most important factor to evaluate the expansion of China in Latin America, even if the project is promising both to Chinese companies and to the countries that receive the investments. In the Brazilian cases, the two projects that we analyzed were in the infrastructure sectors, mining, and energy. In the first, the goal was to support a resource-seeking strategy to allow the Chinese company to access a rare-earth mineral. We can infer that the principal benefited will be Chinese companies. This example can be related to the case of Dragon Mart in Mexico. While is true that the construction of shopping complex would be used for showing, promoting, and selling of China goods in Mexico could generate jobs to the people of the region, the environmental risks were high and the complex would demand more quality and productivity of many small and medium businesses that eventually would compete with Chinese commodities. Therefore, it is logical to think that people opposed this project beyond an economic point of view.  Unexpectedly, a similar opposition did not appear in the case of Brazil.

In the second Brazilian case, the goals of the investment were the strengthening of State Grid´s presence in Brazil and the vertical integration of power generation, transmission, and distribution. Obviously, this investment represents a key factor in the Brazilian economic development. We can observe the same situation in the case of the High-speed train in Mexico. Mexico needs a confinable, modern and effective net of transportation to communicate one of the most populous cities in the world with other near cities to create a solid productive cluster. These cases –infrastructure for energy and transportation- represent an opportunity for a win-win relationship between China and Brazil or Mexico. But, inexplicably from an economic perspective, the opportunities for the Chinese investment in Mexico were rejected.

A key piece to understanding Brazil, Mexico and China relations under BRI is the geopolitical interest of the United States. Specifically, although the US government has not put Latin America’s in its foreign policy priority list, the case of Mexico is different. Due to a complex historical relationship, a strong economic interrelation, an extensive border of more than three thousand kilometers that includes issues such as migration and drug trafficking, Mexico continues to be under the US influence zone. At the end of the day, geopolitics is the determining factor of the chances of success of BRI because geopolitics implies the practice of the states controlling and competing for territories (Flint, 2012).

REFERENCES

Dussel, E. (2018) Chinese Infrastructure Projects in Mexico: General Context and Two Case Studies. In, E. Dussel, A. Armony and S. Cui (Ed.), Building Development for a New Era. China´s Infrastructure Projects in Latin America and the Caribbean (pp. 58-76). México, D.F: Red Académica de América Latina y el Caribe sobre China.

Dussel Peters, E. (2019). China’s Foreign Direct Investment in Latin America and The Caribbean: Conditions and Challenges. Ciudad de México: Universidad Nacional Autónoma de México.

Kaltencker, E. (2018). The Chinese rise in Latin America: The cases of Mexico and Brazil. Retrieved from https://evodiokaltenecker.com/the-chinese-rise-in-latin-america-the-cases-of-mexico-and-brazil/

Montoya, M., Lemus, D., & Kaltenecker, E. (2020). The Geopolitical Factor of Belt and Road Initiative in Latin America. Latin American Journal of Trade Policy, 2(5), 6 – 21. doi:10.5354/0719-9368.2020.56349