Latin America Looks to Strengthen U.S. Trade Relations and Step Back From China

The United States has long referred to Latin America as its "backyard", and held a strong economic influence on its southern neighbors.

But someone else is moving in.

China's trade with Latin American countries has surged over the past few years, weakening the region's economic relationship with the United States. Now some of those nations - especially Brazil - want to strengthen U.S. ties to reduce their dependence on the world's second-largest economy.

[mm-toolbar]"In the past, we feared the predominance of the U.S.; now it's the opposite," former Brazilian President Fernando Henrique Cardoso said in an interview last month. "It's better for us for the Americans not to retreat too much to keep the balance."

U.S. President Barack Obama will head to South America on March 18 to discuss strengthening U.S. trade relations with the region. Stops on his five-day visit include Brazil, Chile and El Salvador. President Obama wants to plan a new future with Brazilian President Dilma Rousseff and Chilean President Sebastian Pinera before losing key economic opportunities to other countries.

"We can no longer assume we are the only game in town," Eric Farnsworth, vice president of the Council of the Americas, told Bloomberg News. Competitors are "knocking on the door. We cannot ignore the Western Hemisphere, nor can we take it for granted, because other people are moving in very quickly and very effectively."

China overtook the United States as Brazil's biggest trading partner in 2009. The United States imported $27 billion from Brazil in 2008, compared to China's $16 billion, according to the Inter-American Development Bank. However, raw material demand for Asia's biggest emerging economy drove imports to $20 billion in 2009 while U.S. imports fell to $16 billion.

China's foreign direct investment (FDI) in Brazil surged in 2010. Brazil's FDI inflows from China totaled about $17 billion last year, up from less than $300 million in 2009, according to Brazilian think tank Sobeet.

China became Chile's leading export market in 2007. The Asian powerhouse increased imports from mining, oil and agricultural industries over the past few years to supply its domestic manufacturing.

Argentina also has benefited from China's new Latin American presence. Last year, it agreed to a $10 billion package with the China Development Bank to renovate its aging railway system.

"The U.S. has such a long way to go to catch up with China that anything it can do will be useful," Ronald Scheman, former director general of the Inter-American Agency for Cooperation and Development, told Bloomberg. "But the ballgame has changed. The U.S. has to find a new role and restructure its partnership with Latin America."

The region's energy and infrastructure development presents a key selling opportunity for U.S. goods. Central and South America's gross domestic product grew 6% in 2010 and is expected to grow 4% in 2011. And Brazil is prepared to spend $200 billion for the upcoming 2014 soccer World Cup tournament and 2016 summer Olympics.

President Obama hopes his visit will improve rocky U.S. trade relations with Brazil. Arguments over U.S. farm subsidies, an import tariff on Brazilian ethanol and Brazilian duties on consumer goods have created tension for years.

President Obama also wants to silence some Latin American critics that claim the United States is too distracted and financially troubled to offer much to the region.

"The Chinese are a kick in the pants for the United States to articulate a little bit more of a serious relationship with the region," Kevin Gallagher, an international relations professor at Boston University and co-author of a book on China's presence in Latin America, told Reuters.

Currency War Hits Home

The increase in Chinese imports to Brazil is due to Brazil's strengthening currency and China's yuan, which many consider undervalued.

Currency tensions between the countries heightened in September when Brazilian Finance Minister Guido Mantega said a global currency war was undermining Brazil's competitiveness.

Mantega has said he supports a revaluation of the yuan, which the United States has been advocating for years. The currency's value makes for cheap Chinese imports, which are flooding into Brazil and hurting local manufacturers.

Even many of the costumes at Brazil's annual Carnival celebration this year were made from fabric imported from China.

"When the real got strong, or, rather, the dollar weakened, the carnival industry reacted like any other," costume shop owner Claudia Sakuraba told The Financial Times. "Of course we imported more."

Sakuraba started her business in 2005 when the Brazilian real was 2.5 to the U.S. dollar. She imported about 30% of the fabrics. But now the real is trading around 1.67 per dollar and her imports jumped to 60%.

The real appreciated about 50% from 2006 to 2010, and domestic manufacturing can't compete with Chinese goods.

"When you're at 20 to 30-year highs in your currency, that usually spells problems for your manufacturing base," Gray Newman, an economist at Morgan Stanley (NYSE: MS), told The FT.

Brazilian manufacturers lost an estimated 70,000 jobs and $10 billion in income last year, according to Sao Paulo Industrial Federation (Fiesp). Some companies have moved production to China or India for a lower cost base.

Brazil increased import tariffs on toys and took anti-dumping actions on Chinese products.

Finance Minister Mantega has called for international currency system reform to help countries' balance trade and capital flows. He defended Brazil's imposition of capital controls earlier this year.

"We would prefer to have capital freedom and a freely floating exchange rate system," Mantega told The FT. "We are only using these limits because others are using their exchange rates as a weapon for trade."

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