Argentina Looks At Joining China’s Belt & Road Initiative: But Balancing US Debt With China Trade Is A Tricky Act For Buenos Aires

Posted by

Argentina could become the biggest economy in Latin America to join the Belt and Road Initiative (BRI), an action that would allow its heavily indebted government to deepen trade and investment ties with China even further. Argentina is one of the main economies, after Brazil, in the Mercosur trade bloc, which includes directly or via associate nations, most of South America.  Thus far, Chile, Uruguay and Venezuela together with Bolivia, Ecuador, Guyana and Suriname have signed up to the initiative, although China has been financing projects to non-BRI member states in Latin America. Argentina for example is the recipient of Chinese funding for number of major Argentinian infrastructure projects, including two nuclear plants and a US$2.5 billion upgrade of its main cargo rail network.

Yet making such a move is politically complicated. To solve its external debt problems, Argentina needs to strike a balance in its relations with both China and the United States, its largest creditor. The country has already sealed a deal with the majority of its foreign private creditors, which have agreed in principle to restructure bonds worth more than US$65 billion. But with an economy in recession and default, a thirst for investment and foreign exchange, and the need to overcome the economic consequences of the Covid-19 pandemic, Chinese capital would greatly help struggling Argentina. Then again, the United States has thrown a potential spanner in the works by placing sanctions on the China Communications Construction Company (CCCC), the largest Belt & Road foreign infrastructure contractor.

An issue in Argentina however is an uncertain political policy towards China. Bilateral relations with China intensified during the government of Cristina Fernández de Kirchner (2007-2015), but when Mauricio Macri rose to power (2015-2019) he questioned several flagship Chinese projects. Alberto Fernández, who took office in December 2019,  intends to revitalize the relationship and reactivate the controversial Chinese-backed dams in Santa Cruz province among other projects. However, his government needs to finalize its external debt problem with private bondholders, mostly US-based, and renegotiate its US$44 billion debt with the International Monetary Fund (IMF), in which Washington has a hugely influential role.

By joining the BRI, Argentina could unlock Chinese finance for vital investment in infrastructure and transport, fossil and renewable energy, mining, manufacturing, agriculture, innovation and information technology. This would enable the country to bridge infrastructure gaps and better integrate with countries such as Chile, which enjoys strong commercial corridors that connect it to foreign markets in Asia, thereby lowering logistics costs and enhancing competitiveness.  This includes the Chile-China underwater optic network is potentially a game changer, as this will help drive interconnectivity, trade, investment, as well as scientific and cultural exchanges between South America and Asia, the first time this will have happened. The cable begins in the Chilean city of Valparaiso, passes New Zealand, Australia and French Polynesia and connects with Shanghai.

Diego Mazzoccone, the executive director of the Latin American Center for Chinese Political and Economic Studies, which has strong links with the Argentinian government, has been quoted as saying that the debt renegotiation “slows BRI membership down a little”, since “the government needs a good political relationship with the US. For China it’s also important that Argentina is not in default, that it can successfully finish negotiating the foreign debt. No investor wants to invest in a country in default.”

The Foreign Ministry in Buenos Aires acknowledges the global political aspect of joining BRI. A spokesperson told Diálogo Chino that there is the “intention to study the subject and move forward [with the initiative] there is interest and predisposition,” whilst pointing out that all Argentina’s trade agreements rely on a successful conclusion of the debt renegotiation.

Foreign Minister Felipe Solá, recently told foreign correspondents: “We don’t believe that we should feel compelled to take sides [between the US and China],” adding that he did not know if the “fight between two giants” would continue after the US presidential elections in November.

Should Argentina decide to join the BRI – a situation unlikely to be resolved until the Argentine Government knows which way the US political trends are blowing – then they will be at the forefront of a Latin American region that has seen  24% of all Latin American products now going to Asia, up from 18% in 2017. China has also stated that it expects to invest about US$250 billion in Latin America over the next decade.

China and Asia overall are sound markets for Argentinian and other Latin American manufacturers as long as they do their homework and know the costs involved and what to expect. Latin America has a combined middle class population of about 50 million. China has a middle class of about 700 million, India around 350 million and the ASEAN bloc about 150 million. That means for every single Latin American middle class consumer, there are about 24 in emerging Asia. Which makes it a great market to be looking at.

The Mercosur bloc as a whole could also benefit, perhaps via a Mercosur-China Free Trade Agreement, a situation we explored in the article Linking China’s Belt & Road Initiative With South America’s Mercosur Having Argentina as a BRI member in Latin America would be a great coup for China and provide a boost to Argentina and the region when the bilateral trade flows are just beginning to show potential. If the country can balance its US debt against Chinese trade and investment  then it could become a poster case for balancing the two.

 

Related Reading

 

About Us

Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at silkroad@dezshira.com or visit www.dezshira.com

 

Leave a Reply

Your email address will not be published. Required fields are marked *