As I alluded to in previous entries (last August and October) on Latin American economies in the current context of global deceleration or recession, whatever happens to China’s growth will matter much for the region (and the world). Provided that the Chinese growth only slowdowns, its influence on prices and demand for commodities may provide a (partial) bulwark against the global turmoil for some Latin American commodity-dependent economies. At the same time, depending on China’s reaction to the global trade adjustment in course, Latin economies that compete directly with China’s manufactures might face a double whammy, coming from both the shrinkage of the US import bill and China’s competition. The impact of current global events will not spread homogenously throughout Latin America and the country-specific “China effects” will be among the differentiating factors.
China as a bulwark
It is not hard to illustrate China’s influence on the evolution of commodities in the last few years. In the case of oil and metals, e.g., the following Table 1 – obtained from JPMorgan (January 30, 2008) – shows China’s increasingly high profile as a purchaser. Despite China’s successful efforts to substitute imports (steel, e.g.), the ratio of domestic demand to supply in most cases still implies that the Chinese growth performance will keep on spilling over consequences on the overall commodity evolution.
Since last July, the heightened signals of deterioration in the global growth scenario have not led to any general downslide of commodity prices (Chart 1, from JPMorgan). Of course, notice must be taken of the price fall in industrial metals, after the exuberant bullish behavior of the last few years, as well as that recent agricultural price hikes have also reflected reversible weather factors. Furthermore, unwinding of financial positions in commodity markets as new financial shocks unfold, as the one that took place in the latest “Black Monday” (January 21 – see Chart 2), may also lean prices toward lower averages. However, it seems clear to us that the maintenance of high growth in China might constitute a bulwark capable of mitigating the effects of the global slowdown on the demand for commodities.
One must keep in sight that the “China effect” and others through commodities on Latin America will depend on the combination of commodity-specific paths and country-specific overall commodity dependence (as one can see in Table 2). The composition and diversification of exports (and imports) of commodities, as well as their weights in domestic GDPs matter much and they vary among countries in the region (Eichengreen and Park). For instance, Eichengreen and Park go so far as to appoint Brazil as a country that might be negatively impacted by new surges in commodity prices: “contrary to popular perception, Brazil with its large and varied manufacturing sector is not a net commodity exporter.” (p.14). Even though China’s growth maintenance tends to act as beneficial price-holder in most cases of commodity exporters in the region, the direction and extent of that effect will depend on the commodities to be affected.
China as a Raging Bull
So much for China as a commodity supporter. How about China as a competitor in a context hardened by smaller market sizes and tougher competition in the US? It will be challenging to confront such a manufacturing bull in a shrinking room.
The OECD’s 2008 Latin American Economic Outlook dedicated a chapter on trade opportunities and challenges represented by China and India for Latin America. It argues that “compared to most Asian and Eastern European countries, most of Latin America has little to fear from increased trade with China and India” (p.146).
Indeed, when it calculates average Coefficients of Specialization (CS) and Coefficients of Conformity for a sample of countries for the period of 2000-2005 (Chart 3), most Latin American economies seem to be the least exposed to China. (*) The degree of competition is approached by looking at the trade structure of each country with China’s. The assumption is that similar export structures (which yield high measures in CS and CC) potentially exhibit high dispute.
Nonetheless, Mexico, and to a lesser extent also Costa Rica, Brazil and El Salvador, compete with China, whereas Paraguay, Venezuela, Bolivia, and Chile are the least affected, given their exports predominantly comprised with commodities. It is striking anyway the heterogeneity of country exposures to China as a competitor.
Both dimensions of “China effects” on Latin America, as a commodity absorber and as a fierce manufacturing competitor, will have to be observed on a country-by-country basis. Any generalization is liable to generate misleading conclusions.
(*) The Coefficients of Specialisation (CS) and Conformity (CC) are calculated as follows: