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Competing with China in Latin America: Is Germany losing its high-tech advantage?

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  • Hertie School of Governance - also - Freie Universitat-Berlin (FU/BEST)

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German Chancellor Angela Merkel and other EU leaders have become increasingly concerned that China’s continued rise in Latin America could squeeze out European business. China has not only increased the quantity of its exports to Latin America, but also used its economic resources to expand into the high-tech market, long considered German industry's strong suit.
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Wilfredo R. Rodriguez H., CC BY
EU & German Latin
America Strategy
EU strategy in the region has
long focused on establishing
free trade agreements (FTAs),
and in 2011 and 2012 the EU
signed FTAs with Colombia,
Peru, and six Central American
states. At least another dozen
deals of varying types were
already in place, though
negotiations with the region’s
biggest economy Brazil have
dragged on since
1999. Consistent with this
strategy, when Chancellor Merkel attended the most recent meeting of EU and regional leaders, the EU-
CELAC summit, this year in Chile, she expounded on the evils of protectionism.
As far as meeting the China challenge, Germany focuses on those areas where it has historically had a
comparative advantage. For example, German programs seek to boost the scientific and technical levels of
regional states to create demand for Germany’s higher-tech and higher-quality manufacturing. However,
Germany is already playing catch up in the region for reasons having nothing to do with China’s challenge
there. Export business with the region by Germany’s small- and medium-sized manufacturers, a mainstay of
its economy, lags behind its potential, and a push is on to improve matters. This is largely because in the
1990s German small-to-medium-sized firms were more interested in expanding to new markets in Eastern
Europe and former East Germany. German financiers and large manufacturers also took little advantage of
sweeping privatizations by Latin American states during the 90s, whereas Spain did and is now by far the
largest EU participant in Latin American and Caribbean (LAC) economies.
Are German Efforts any Match for Chinese Competition?
German and EU domestic growth has long been stuck in the doldrums. Yet, according to a recent German
government strategy paper, while overall German foreign trade grew by only 4.7 percent between 2005 and
2009, foreign trade with Latin America rose by 16.3 percent in the same period. So it is no wonder Merkel
worries that China’s more rapidly growing trade with and investment in the region could squeeze German
and EU businesses out.
Competing with China in Latin America
Is Germany losing its high-tech advantage?
19/08/2013 | by Thomas W. O'Donnell
Category: Trade, Resources and Energy, Technology and Research, Latin America, Germany, China
German Chancellor Angela Merkel and other EU leaders have become increasingly concerned
that China’s continued rise in Latin America could squeeze out European business. China has
not only increased the quantity of its exports to Latin America, but also used its economic
resources to expand into the high-tech market, long considered German industry's strong suit.
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Figure 1: Total Chinese external investments by region of over million each from
2005-2012, separated into energy and non-energy. Source: “China Investment
Global Tracker Map” and a link to download the database are found at:
http://www.heritage.org/research/projects/china-global-investment-tracker-
interactive-map. Accessed June 2013.
But do EU and German strategies meet the China challenge in the LAC region?
The Old and New “China Challenge”
Looking at data on China’s trade and investment relationship with Latin America over the past decade, one
sees first the familiar pattern of China’s commodity seeking. (It bears mentioning here that data on Chinese
investments, loans, and trade in Latin America are both scarce and obscure.) Whatever challenge China
presented to German interests in this phase, and whatever opportunities Germany may have missed, the
consequences may be minor compared to the impact of China’s most recent phase. In this new phase
China’s trade activity in Latin America has progressed into qualitatively new areas, where it had long
seemed Germany would face little competition.
Old: China’s Quest for Basic Commodities
Beijing began sending its companies abroad in the mid-1990s primarily to acquire commodities, particularly
energy resources. These have been essential to sustain both China’s rapid internal growth and its export-
focused domestic manufacturing sector a sector characterized by low labor costs and low-to-mid-range
technology. China was then consuming such large percentages of the global output of raw materials as to
inflate global prices significantly. In Latin America it found a huge potential for not only energy resources,
but also raw minerals and agricultural products as well.
Figure 1 shows the distribution of China’s total overseas investments from 2005 to 2012 by world region,
each separated into energy and non-energy categories. Reliable Chinese data on its overseas investments
are not available; a database maintained by Derek Scissors of the Heritage Foundation in Washington,
however, was used here. China has not neglected any corner of the globe, and its investments from 2005
to 2012 in both Latin America’s energy ($43 billion) and non-energy sectors ($47 billion) are second only to
those in North America.
A more detailed analysis of
Scissors’s data shows that up
to about 2008 China
succeeded mainly in acquiring
mining stakes in Latin America.
For various reasons its entry
into the region’s energy sector
was not as rapid; factors
included a lack of technical
capacity and of overseas
business experience within
China’s national energy firms
(CNPC, Sinopec, and others)
as well as the fact that Latin
America is a region where
energy policy is deeply
involved in issues of national
sovereignty and identity.
However, the fact that all
projections showed China’s demand for oil continuously rising into the future caused Beijing to take a long-
term approach. Its patience and perseverance have paid off, bringing its energy investments into first place
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Figure 2: Chinese oil and gas investments in Latin America and the Caribbean
(hydroelectric, electric grid, etc. not included) by country and year.
in the region.
Figure 2 breaks down these
Chinese energy investments
by country and year in order of
decreasing total investment.
The order of the top five is
certainly not what Beijing had
expected even as recently as
2008. Beijing fully expected to
have in Venezuelaour largest
overseas investments
anywhere,” as a high-ranking
Chinese diplomat told me at
the time. As things turned out,
even though Venezuela under
Hugo Chavez was sitting on the
world’s largest reserves of oil,
the technical and managerial capacity of its state oil company, PDVSA, became a casualty of his revolution.
Accordingly, China has had to moderate its short-to-medium-term energy production expectations there.
On the other hand, in Brazil the discovery of large offshore oil deposits, so-calledpre-salt” deposits, plus
the superior technical and managerial capacity of its national oil company, Petrobras, has brought Chinese
firms ample opportunity to invest in the Brazilian oil sector, as evident in Figure 2 a reality largely
unexpected in 2005 or even 2008.
China also made large energy investments in Argentina in 2010 with the aim of becoming a major player in
that country’s newly discovered shale gas reserves in the Vaca Muerte region. This potential has only come
to light with the development of fracking technology in the US that, again, was not in the cards in 2005 or
2008.
However, more in keeping with Beijing’s early expectations, its firms’ energy investments in Ecuador rapidly
made China the biggest oil producer there. The openness of President Correa’s administration to Chinese
energy firms has been greatly fostered by Beijing’s willingness to invest in and construct large hydroelectric
projects in Ecuador.
German Absence From the Latin American Oil & Gas Sector
It is striking how little participation German firms have in the LAC energy sector, considering the size of the
German economy. Unlike many of its EU15 and other European neighbors, Germany has no national
energy champion or major oil-and-gas (O&G) exploration-and-production (E&P) firm to do business in the
region. One can contrast this absence with the participation of Great Britain (BP), The Netherlands (Shell),
Italy (ENI), Spain (Repsol), France (Total), Norway (Statoil), and, of course, Russia (with its various newer
firms). There may be historical explanations for this German absence in energy exploration and production,
but Germany also has no major energy technical service company in the LAC region. And although
Germany is an electro-mechanical manufacturing powerhouse, Tokyo, for example, stands out in Latin
America in contrast to Berlin in its use of Japanese development bank loans and in its diplomatic activity in
the region to support deals for Japanese O&G equipment manufacturers (e.g., Mitsubishi).
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Figure 3: Chinese non-energy investments in Latin America and the Caribbean by
country and year. Note: To aid comparison, the scale is identical to Figure 2.
All in all, in light of the relative lack of technical and manufacturing sophistication of Chinese firms in the
energy sector as compared to their European and US competitors, it is remarkable how Beijing has so
rapidly acquired large stakes in the LAC energy sector. The ability and willingness of the Chinese state to
lubricate the process with generous infrastructure projects and loans to local states has been a key factor.
Infrastructure and Loans Facilitate China’s Access
Beijing has focused on two levers to facilitate access to LAC resources. The first is that Beijing extends
financing and often does the construction for large infrastructure projects, and, secondly, it extends large
loans generally at reasonable rates to states or national energy companies.
Figure 3 illustrates the extent
of such non-energy
investments. For example, the
2009 investment of $7.5 billion
in Venezuela was used to build
a railway in the remote Faja del
Rio Orinoco region, where its
untapped heavy-oil reserves
are found. Beijing’s strategy
here is obvious. Infrastructure
projects like this railway and
the Ecuadorian hydro
mentioned earlier are not
meant to turn a profit. Rather,
they are intended to allow
Chinese national energy
companies to obtain contracts to produce oil. This is no big secret; Chinese officials have frankly explained
this to me on more than one occasion. The non-energy investments shown in Figure 3 are of largely this
type, but also include investments in minerals and agricultural lands.
The other major lever used to facilitate energy access is loans from Chinese banks and the state. Here
again, it is difficult to obtain systematic information from Chinese sources; however, data from a study by
The Inter-American Dialogue in Washington, DC published in 2012 provides valuable insight.
Figure 4 shows the totals of
Chinese loans to each of 12
Latin American and Caribbean
states between 2005 and
2011. The lopsided total to
Venezuela nearly equal to all
other loans combined is
mainly a loan-for-oil deal
signed in 2010, where the
national oil company pays with
oil deliveries ramping up over
several years.
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Figure 4: Chinese loans to Latin America by country; totals from 2005-2011.
Although Chinese firms have
invested in oil production
projects in Brazil, Brazil has at times rebuffed such investments, preferring to develop its fields as far as
possible on its own, especially as Chinese firms lack Brazil’s expertise in deep offshore projects. So,
although Chinese firms would prefer more opportunities to participate directly in producing oil in Brazil,
Beijing has on occasion settled for making a large loan to be repaid in oil.
In the case of Argentina, China is now the major recipient of soy grown there, which has come to replace
beef as Argentina's main agricultural export.
These oil loans fulfill a dual purpose for China. Beijing’s loans ingratiate Chinese companies into the
recipient state by providing important sources of financing for the local oil companies and/or state. In
addition, developing new oil fields generally requires at least seven years lead time (and often longer in
Latin America), so while Chinese national oil companies are working to develop new fields, receiving oil right
now as payment for loans provides a jump start for these future flows.
Note, however, that three of the top four recipients of Chinese loans – Ecuador, Venezuela, and Argentina
are states that have either been cut off from traditional sources of international finance because of past
defaults, or, as with Venezuela, suffer from very poor credit ratings and can otherwise only issue expensive
junk bonds” to raise cash abroad. Beijing has come to play a very special role for these states.
Nevertheless, Chinese banks significantly reduce their risks of default by taking repayment in commodities.
These aspects of Chinese involvement in Latin America are not necessarily antithetical to German and EU
interests. However, the problem with the scenario is that China’s role in the region is evolving. Data indicate
that China’s export activity is already vigorously occupying niches where Germany formerly had a strong
advantage.
New: China’s High-Tech Export Surge
It is clear that, even if the pie has been steadily growing in Latin America and with it EU and German exports
that have been constantly increasing in absolute terms, viewed from a more competitive point of view (i.e.,
in terms of each player’s percentage increase) the vast bulk of this increase has gone to China. Figures 5a
and 5b show this quite starkly. Using data from the UN’s Economic Commission on Latin America and the
Caribbean (ECLAC), Figure 5a shows the total exports to 33 Latin American and Caribbean states the
LatAm33." It compares the US, China, the EU15-without-Germany, and Germany itself, taking snapshots
every third year from 2003.
This shows that just 10 years
ago China’s trade challenge
did not look so daunting. In
2003 exports both by Germany
alone and by the EU15 without
Germany exceeded the total of
all Chinese exports to the
LatAm33. But by 2006 China’s
total had exceeded Germany’s,
although it was not more than
that of the EU15 without
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Figure 5a: Total exports by selected exporters during selected years to Latin America
and Caribbean 33 that comprise the Comunidad de Estados Latinoamericanos y
Caribeños (CELAC). Data from the UNs Economic Commission for Latin America
and the Caribbean (ECLAC), 2013.
Figure 5b: Percentage change in exports of selected countries or regions to Latin
American and Caribbean 33 from 2003 to 2012. Data: ECLAC, 2013.
Germany, and it was still not
greater in 2009. However, by
2012 China’s total exports
($134 billion) exceeded the
combined total of all the EU15.
Clearly, throughout this period,
each of these players
increased its total exports to
Latin America largely due to
Chinese demand for
commodities and the
Panglossian assessment is
that all exporters to the region
have gotten consistently larger
pieces of a growing pie.
However, this says little from
the competitive angle. Figure
5b looks at the percentage
change from 2003 to 2012
calculated from the total trade
amounts shown in Figure 5A.
Clearly not Germany, nor the
remainder of the EU15, nor the
USA – all of which grew about
200 percent each saw their
trade grow in percentage terms
anywhere near China’s (over
1000 percent).
To see the full competitive
implications we have to look at
this trade growth according to
technical categories. Following Adam Smith, one might argue that all is well so long as each exporter
continues to export those goods in which its nation has a comparative advantage.” For China this has
always meant focusing on the export of cheap, low-tech goods, and for Germany the export of high-quality
and higher-tech goods. If this is in fact the current situation, one might argue that Germany’s and the EU’s
trade-promoting diplomatic strategies described above are not inappropriate.
However, a breakdown of exports to Latin America according to technology content shows that the
aforementioned scenario so engrained only a few years ago has begun to collapse. Figure 6 breaks
down from total trade three germane categories of manufactured exports: low-tech, medium-tech, and high-
tech.
Not only have China’s low- and
medium-tech exports grown
phenomenally (about 1000
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Figure 6: Export growth in low-, medium-, and high-tech categories 2003-2012. Data:
ECLAC, 2013.
Figure 7: Exports by Tech Category every three years since 2003 for selected states
to the 33 independent Latin American and Caribbean states. Data: ECLAC, 2013.
percent and 800 percent
respectively), but its high-tech
exports have also grown (by
1200 percent). This far
exceeds the rate of German
and the other states’ growth in
these categories, all below 200
percent.
But, of course, China started
from near zero exports in this
category a decade ago. One
needs to investigate the
absolute amounts of trade in
each category for these
players. Figure 7 does this.
Without overemphasizing this,
in absolute terms, China’s
exports to Latin America in the
low-, medium-, and even the
high-tech categories were
below those of Germany and
the EU in 2003, but in 2012
they exceeded the combined
totals of the EU15 in the
medium-tech and even in the
high-tech categories. The only
place the EU15 surpasses
China is, rather oddly, in the
low-tech manufactured goods
category.
Conclusion: implications for German Trade Policy
The new aspect of theChina challenge” to Germany in the LAC region is that China is now exporting more
medium-tech and high-tech goods of all sorts to the region. Of course, Chinese quality in higher-tech
equipment is still generally nowhere near that of similar German goods. There are often significant
complaints by states and oil companies who import Chinese goods, and there is also widespread
recognition that for certain critical equipment one has to go to European or American producers and not to
cheaper Chinese producers (I myself have heard many such statements from O&G producers and
importers who have been forced by the national oil company in Venezuela to accept Chinese equipment).
However, the central point here is that the nature of the Chinese challenge to German and EU export
business in Latin America is evolving. Chinese competition is a moving target, and it has begun to
undermine Germany’s (and the EUs) traditional comparative advantage in LAC trade.
THOMAS W. O'DONNELL is an expert in the political economy and geopolitics of the global energy sector,
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Thomas W.
O'Donnell
AUTHOR
specifically petroleum. He is a part-time faculty member in Graduate International Affairs at the New School
University in New York City.
The EU’s legal framework for economic and trade agreement with Latin American states and groups of states
includes: EU Association Agreements, EU Free Trade Agreements, EU Cooperation Agreements, and Economic
Partnership Agreements. “The typological classification of the agreements derives from the legal basis, although
their actual title and content may transcend this frame of reference.” See: “Germany, Latin America and the
Caribbean: A Strategy Paper by the German Government.” Ausrtiges Amt, 2010, p.55, www.auswaertiges-
amt.de.
http://www.auswaertiges-amt.de/cae/servlet/contentblob/479872/publicatio... “Germany, Latin America and the
Caribbean: A Strategy Paper by the German Government – 2010.”
A detailed breakdown is beyond our present discussion.
The LatAm33 include all Western Hemisphere states with the exception of the USA and Canada and possessions
or dependencies of European states, i.e., Great Britain, The Netherlands, and France. These same 33 states
comprise the CELAC, a group founded in 2001 in Caracas, and whose annual summit with German Chancellor
Merkel and other EU leaders have repeatedly led to further trade relations, the most recent of which was January
2013 in Santiago de Chile (see the German Federal Chancellor’s
website:http://www.bundeskanzlerin.de/Content/EN/Reiseberichte/2013/2013-01-25-c...).
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ResearchGate has not been able to resolve any citations for this publication.
He is a part-time faculty member in Graduate International Affairs at the New School University
  • O Donnell
  • Author Petroleum
O'Donnell AUTHOR specifically petroleum. He is a part-time faculty member in Graduate International Affairs at the New School University in New York City.
He is a part-time faculty member in Graduate International Affairs at the New School University
  • W Thomas
  • O'donnell
Thomas W. O'Donnell AUTHOR specifically petroleum. He is a part-time faculty member in Graduate International Affairs at the New School University in New York City.
The typological classification of the agreements derives from the legal basis, although their actual title and content may transcend this frame of reference
The EU's legal framework for economic and trade agreement with Latin American states and groups of states includes: EU Association Agreements, EU Free Trade Agreements, EU Cooperation Agreements, and Economic Partnership Agreements. "The typological classification of the agreements derives from the legal basis, although their actual title and content may transcend this frame of reference." See: "Germany, Latin America and the Caribbean: A Strategy Paper by the German Government." Auswärtiges Amt, 2010, p.55, www.auswaertigesamt.de.