THE JOURNAL OF ENERGY AND DEVELOPMENT

Ernesto Ferro,

The Dragons Approach: The Future of Chinese Investments in the South American Region,
Volume 36, Number 1

Copyright 2012

THE DRAGONS APPROACH: THE FUTURE OF CHINESE INVESTMENT IN THE SOUTH AMERICAN REGION
Ernesto Ferro*

Introduction n this article we will be examining two aspects of the economic relationship between China and South American countries. First, we will present a study of how the growth of Chinas economy and its global expansion is affecting the commodity and energy trade flows and investments in South America. Second, we explore how the arrival of China as a major consumer in the global commodity sector affects the ability of South American nations to compete in world markets both in terms of their exports and the ability to attract foreign direct investment (FDI). For each of these factors, we utilize studies that have been conducted on the issue that offer critical assessments on the subjects. Moreover, we present a series of analyses that confirm and deepen the conclusions offered in some of these works. We find that there is an emerging consensus in reference to China and the South American countries in terms of trade and investment flows; China has accounted for a significant portion of the investment and export drive that the

*Ernesto Ferro, earned an M.B.A. at the University of Colorado at Boulder, and holds a graduate degree in international business and an undergraduate degree in mechanical engineering from the Universidad Metropolitana in Caracas, Venezuela. At the beginning of his professional career, he worked as a team leader for the metropolitan Caracas subway system (Metro de Caracas) and then moved to project leader for mechanical equipment installation and logistics of Servicios Integrales Integ de Venezuela.The author worked as a project engineer assigned to high impact projects for Inelectra de Venezuela, an international engineering, procurement, and construction firm. His areas of research and professional specializations include energy, sustainability, and international business investments. The Journal of Energy and Development, Vol. 36, Nos. 1 and 2 Copyright 2012 by the International Research Center for Energy and Economic Development (ICEED). All rights reserved.

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region has experienced since 2000. However, at the same timeeven with South American exports to China reaching higher levels than importswith respect to global competitiveness these nations are significantly threatened by Chinas exports in local and international markets.

Chinas Economic Growth Engine In 2010 Chinas growth domestic product (GDP) was $9.87 trillion and grew at a rate of 10.3 percent. The GDP was comprised of industry, services, and agriculture, which contributed 46.8 percent, 43.6 percent, and 9.6 percent, respectively. Chinas net exports for that year were $0.20 trillion ($1.50 trillion in exports minus $1.30 trillion in imports), making it the largest net exporter in the world, and its major trading partners included the United States, Japan, South Korea, and Germany (figures 1 and 2). Chinas leading exports are machinery and raw materials (e.g., textiles, iron, and steel), but to keep apace with its growth it has to import machinery, fuels (oil), metal ores, plastics, and organic chemicals (figure 3). From 2000 to 2010, China has more than doubled its consumption of oil and in the latter year was the worlds second largest consumer of oil at more than 9.05 million barrels a day. Thus, securing adequate energy resources has been a strategic imperative for the Chinese government to maintain its level of economic growth. Chinas ability to provide for its own energy demand is limited by the fact that proven oil reserves are small relative to consumption levels. The proven crude oil reserves of China have increased by a mere 12 percent in the last 20 years (1990 2010). Some experts estimate, that at its current consumption, the reserves are likely to last less than a couple of decades. Chinas expectation of growing future dependence on oil imports has led it to acquire interests in exploration and production ventures and invest in energy projects in places such as Kazakhstan, Russia, Venezuela, Sudan, West Africa, Iran, Saudi Arabia, and Canada. As of 2010, China imported about 58 percent of its oil from the Middle East and by 2015 that share is anticipated to increase to 70 percent. The strategic interest in the region has not been long standing, but China-Middle East relations are becoming increasingly important as the share of oil imported from this area witnesses such a surge. In the past, Chinas energy consumption mix included a very small share of natural gasless than 3 percent. Natural gas was used exclusively for agricultural purposes, such as feedstock and fertilizer plants. The construction of the ChinaCentral Asia natural gas pipeline (also known as the Turkmenistan-China line) was vital for its Central Asian neighbors. Starting in Turkmenistan, transiting through Uzbekistan and Kazakhstan, and terminating in China, the pipeline helped achieve a level of shared interest, commonality, and alignment for the regional oil

CHINESE INVESTMENTS IN SOUTH AMERICA Figure 1

CHINAS MAIN TRADE PARTNERS, 2010 (volume in billions of U.S. dollars on left axis)

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Source: The US-China Business Council (USCBC), available at https://www.uschina.org/ statistics/tradetable.html.

and gas importers and consumers. The installation of the pipeline aided in expanding Chinas annual gas consumption growth rate by 16 percent for the 2000 to 2010 period, an increase from the growth rate of just 4.6 percent witnessed during the previous decade (19902000). According to the Chinese official forecast, by 2010 natural gas consumption and production reached 109 billion cubic meters and 96.8 billion cubic meters, respectively.1 To fuel its growth engine, China has been working to secure energy reserves around the world; but this has not been an easy endeavor. In 2011 PetroChina and the Canadian-based energy company Encana abandoned plans for a joint venture to develop a large shale gas deposit in Western Canada. This was by far the largest retreat by a Chinese company from a proposed natural resource deal overseas. The investment was valued at $5.4 billionmaking it the largest Chinese investment in Canadas energy sector. Beyond the investment, PetroChina had wanted to gain greater expertise in shale gas extraction technologya type of natural gas that is difficult to develop and in which China lacks experience.

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CHINAS TOP EXPORT DESTINATIONS, 2010 (volume in billions of U.S. dollars on left axis)

Source: The US-China Business Council (USBS), available at https://www.uschina.org/ statistics/tradetable.html.

China-South America Relations Since the end of the 20th and beginning of the 21st century, the world has witnessed an increasing trend of greater ties between China and South America. Particularly in the last decade (20002010), Chinese and South American relations have burgeoned in a variety of areas. In some economic sectors, South American nations and China have converged in their manufacturing and production of similar export products. The similarities of these baskets of products have affected some of the countries in Latin America as they must now compete with Chinese outputs that are relatively inexpensive and have a cost advantage. Some nations with large light-manufacturing industries, such as Brazil and Argentina, have seen a decline in the demand of their domestically made products due to Chinese imports. For example, in the past Brazilian swimwear solely was produced locally; now that market segment is dominated by low-cost imports from China. On the other hand, there are countries that have been able to maintain their comparative advantages and even generate an increase in their sales and revenues due to their natural-resource-based sectors, such as Bolivia, Chile, Uruguay, and Venezuela. We see the trend of increased Chinese foreign direct investment in Latin American countries highlighted in table 1, which outlines both the confirmed and announced investments over the past two decades (19902011). Not surprisingly, Chinas FDI

Figure 3
CHINAS TOP IMPORTS BY CATEGORY, 2010 (volume in billions of U.S. dollars on left axis)

CHINESE INVESTMENTS IN SOUTH AMERICA

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Source: The US-China Business Council (USBS), available at https://www.uschina.org/statistics/tradetable.html.

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CHINESE FOREIGN DIRECT INVESTMENT IN SELECTED ECONOMIES OF CENTRAL AND LATIN AMERICA, 1990 TO 2011 (in millions of U.S. dollars) Confirmed Investments 1990-2009 Argentina Brazil Colombia Costa Rica Ecuador Guyana Mexico Peru Venezuela (Bolivarian Republic of) Total 143 255 1,677 13 1,619 1,000 127 2,262 240 7,336 2010 5,500 9,563 3 5 41 ... 5 84 ... 15,251 Announced Investments 2011 onwards 3,530 9,870 ... 700 ... ... ... 8,640 ... 22,740

Country

Source: United Nations, Economic Commission for Latin America and the Caribbean (ECLAC), Foreign Direct Investment in Latin America and the Caribbean 2010 (New York: ECLAC, May 2010), available at http://www.eclac.org/cgi-bin/getProd.asp?xml=/publicaciones/xml/0/43290/ P43290.xml&xsl=/ddpe/tpl-i/p9f.xsl&base=/tpl-i/top-bottom.xslt.

has concentrated in Latin Americas major economies, such as Brazil and Argentina, but it still is a salient factor for the smaller nations. However, according to the United Nations, much less investment has flowed toward Mexico, Central America, and the Caribbean:
The country (China) is also sometimes an important source of investment for smaller economies, as has recently been seen in Ecuador and Guyana. With the exception of Costa Rica, 2 Chinese investment has almost no relevance in Mexico and Central America.

China and South America: The MERCOSUR Nations MERCOSUR, which stands for the Mercado Comun del Sur, is the Common Market of the South and the largest trading bloc in South America. MERCOSURs primary interest has been in eliminating obstacles to regional trade such as high tariffs, income inequalities, and conflicting technical requirements for bringing products to market. The Southern Common Market is an economic and political agreement among Argentina, Brazil, Paraguay, and Uruguay. Venezuelas entry as a full member is still pending ratification by Brazil and Paraguay (as of the end of 2011). The collective GDP of this trading group is U.S. $2.4 trillion, making it the worlds fourth largest trading bloc.

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Argentina: Other players in the region have been working with China to attract investment. In this case, Argentina has secured an agreement with China to invest $10 billion in its railways. Argentina would receive the funds in 19-year loans with an interest rate of hundreds of a percentage point. This kind of lowrate financing does not exist anywhere in the world, particularly for Argentina, which has been virtually shut out of the international credit market. China is using creative strategies to secure natural resources and imports needed to continue to grow in the future. Along with these investments, China is pursuing opportunities in the energy sector. In 2011, the China Petroleum & Chemical Corporation (Sinopec) bought the Argentina-based assets of Occidental Petroleum Corporation for $2.5 billion; while a year earlier in 2010 the Chinese National Offshore Oil Corporation (CNOOC), in partnership with Argentinas Bridas Corporation, agreed to buy a 60-percent stake in Pan American Energy from BP for $7.1 billion. Argentina cannot truly be considered a significant oil-exporting country since most of its productionabout three-quarters of its total productionis intended for domestic consumption. But that has not hindered Chinese companies from expanding their presence in the marketplace. In the past, companies like Esso have taken measures to leave the Argentinian market, selling its refinery and assets to Bridas and CNOOC. Moreover, Argentinas governmental policies in recent years (early 2010s) have resulted in discouraging private-sector energy investment and production that, when coupled with energy price controls aimed at shielding the countrys consumers from rising prices, has created some unintended consequences. Most notably, that Argentina is forced to rely more heavily on energy imports while it witnesses reduced domestic oil and gas output and increasing end-user demand. Overall, this has a negative effect on existing refiners and producers as they adopt a strategy to hold on to their investments to wait for better conditions, lower risks, and energy security. The obscure rules and heavy regulation that the government implements, the incentives put in place, and the regulated prices have scared away some of Argentinas long-time partners and given new opportunities to Chinese companies that are looking to broaden their Latin American energy portfolios. Argentinas mineral reserves are also an attractive investment opportunity for China. Chinese hunger for raw materials has led it to invest in the Argentinian mining sector with MCC Minera Sierra Grande SA, a unit of the state-run China Metallurgical Group, which bought the Sierra Grande iron mine in the Rio Negro Province in 2006. This mine had been closed since 1991, but at the beginning of 2011 it made its first shipment of iron-ore concentrate to China. Agricultural products represent Argentinas largest export category (figure 4). They are particularly important in trade with Asian consumers, e.g., China and India. Argentina is the worlds largest exporter of soya oil and the third largest of soya

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THE JOURNAL OF ENERGY AND DEVELOPMENT Figure 4

ARGENTINAS EXPORTS BY CATEGORY, 2000 to 2010 (in millions of U.S. dollars)

Source: Compiled by the author with data from Instituto Nacional de Estadstica y Censos (INDEC), Argentina, available at http://www.indec.gov.ar/.

beans, as well as one of the worlds top cereals producer.3 China buys 90 percent of Argentine soya exports and other agricultural goods worth $4 billion a year and is by far the largest market for the countrys agricultural products. China imported more than 40 percent of Argentinas soya oil, which amounted to 4.6 million tons in 2009more than twice the amount sold to India, the second largest customer. Agricultural products account for 85 percent of Argentinas bilateral trade. In 2010, Beijing banned soya imports from Argentina on the grounds that the oil did not meet quality standards. Many analysts believe that the real motivation for this action was the Argentine antidumping measures against a range of Chinese textiles and other manufacturing goods. More than 2 million tons of soya oil worth some $1.7 billion was expected to be exported during the soya oil dispute. Overall, Chinas bilateral trade flow has continued to increase over the past decade (20002010). While the majority of Argentinas trade is still dominated by MERCOSUR countries, followed by historically strong economic ties with Europe, Chinas bilateral trade with Argentina now rivals that of the United States (figure 5). Despite the domestic energy challenges, it may be Argentinas agricultural and mining products that help to solidify greater Argentine-Chinese trade.
Brazil: In 2009, China became Brazils largest foreign direct investor. The trading relationship has been reinforced by ongoing investments. After the

CHINESE INVESTMENTS IN SOUTH AMERICA Figure 5

ARGENTINAS BILATERAL TRADE FLOWS, 2005 to 2009 (in millions of U.S. dollars)

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Source: Compiled by the author with data from the Instituto Nacional de Estadstica y Censos (INDEC), Argentina, available at http://www.indec.gov.ar, and from the U.S. Census Bureau, Trade in Goods with Argentina, available at http://www.census.gov/foreign-trade/balance/ c3570.html.

discovery of vast offshore oil fields, which catapulted Brazil into the top ranks of the worlds oil producers, China has shown an increasing interest in investing in Latin Americas largest economy. The FDI inflows from China were less than $300 million in 2009 but in 2010 increased to $17 billion. The trade between these countries has exponentially risen from $3 billion in the last decade to more than $56 billion in 2010.4 Brazils significant energy reserves account for some of its attractiveness to Chinese investors. The country had an estimated 12.9 billion barrels of oil reserves in 2011, putting it just behind Venezuela as the largest oil reserve holder in South America.5 A sizable amount of the Chinese investments recorded in Brazil ($7.1 billion) went to the purchase of a 40-percent stake in Repsol Brazil by Chinas Sinopec while the other 60 percent will remain in the hands of Repsol. The capital collected by the latest $70-billion share issuance by the semi-public Brazilian energy corporation Petrobras will cover the costs of current oil projects, including offshore oil fields. Sinopec has been interested in Brazilian assets; this acquisition is the beginning of a series of agreements that started with a deal to buy 200,000

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barrels of oil per day (b/d)representing a tenth of Petrobras regular production. Petrobras investment plans will require $224 billion through 2014 to meet the companys aggressive development and production plans; China offers an attractive potential financing source. In 2011 Brazil was in talks with the China Development Bank Corporation for a new loan after having secured a $10-billion loan in 2009.6 China is focused on the additional production of Brazilian liquid fuels that, when added to its oil production, makes Brazil the largest producer of liquids in South America. In 2010 Brazil produced 2.7 million b/d of liquids (75 percent was crude oil and 25 percent was other liquids).7 Moreover, Brazil is the worlds second largest producer of ethanol (behind the United States) and the worlds number one ethanol exporter; most ethanol, however, is directed toward the domestic market. With Brazil finding more offshore energy reserves and having a greater capacity to export energy resources, it is very clearly a strategic move for Chinese energy companies to invest in Brazil. For all of 2009, Chinese investment in Brazil totaled $83 million, according to Brazils Central Bank. Brazil sold $20 billion worth of goods to China in 2010, with soy and iron ore accounting for 66 percent of the total according to Brazils Trade Ministry.8 However, some Brazilian manufacturers caution about the de-industrialization of the country. Figure 6 provides an overview of Brazils exports to China for 2009 and 2010, showing that very few manufactured or semi-manufactured goods were exported relative to basic materials; figure 7, in contrast, shows the predominance of manufactured Chinese imported goods into the Brazilian market during the same time frame. Brazilian manufacturers say that the government is not activating protection measures to stop what they insist is the dumping of artificially cheap Chinese products in Latin America. The worst affected are certainly textiles and shoe producers, said David Fleischer, a political scientist at the University of Brasilia.9 During the 2011 visit of Brazilian President Dilma Rousseff to China, she vowed to seek the promotion of Brazilian products other than basic commodities. President Rousseff secured contracts worth $1.4 billion for Embraer, the Brazilian aircraft producer, with Chinese airlines.10 According to the Brazilian government, 84 percent of its exports to China are commodities, while 98 percent of the Chinese sales to Brazil are manufactured goods. China buys Brazilian iron ore, copper, soybeans, and oil, among other raw goods. Brazilian imports from China include shoes, textiles, and furniture. China has become Brazils number one trading partner, displacing the United States. Figure 8 details the rising salience of China for Brazilboth in terms of imports and exports over the past decade (20012010). By the end of 2010, the bilateral flow trade between Brazil and the United States was $59.38 billion, while Chinas trade with Brazil tripled in value over the past five years (20052010). This trade had a surplus for Brazil of $5.19 billion after a negative balance in 2007 and 2008.11 Most indicators suggest a continued and strengthening economic bond between Brazil and China.

CHINESE INVESTMENTS IN SOUTH AMERICA Figure 6

BRAZILS EXPORTS TO CHINA BY CATEGORY, 2009 and 2010 (in millions of U.S. dollars)

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Source: Central Bank of Brazil (Banco Central do Brasil), Annual Report, Volume 46 (Braslia, Brazil: Banco Central do Brasil, 2010), available at http://www.bcb.gov.br/pec/boletim/ingles/ banual2010/rel2010i.pdf.

Paraguay: Paraguay is the only South American nation that has no official diplomatic relations with China. In 1957 the government of Paraguay signed an agreement of diplomatic relations with Taiwan (officially named the Republic of China), recognizing the island as the legitimate Republic of China in exchange for financial support and loans. Over the preceding decades, trading and other ties between Taiwan and Paraguay deepened. Paraguay is one of only 23 countries in the world to recognize Taiwan (the Republic of China) instead of the Peoples Republic of China as the sole and legitimate government of China. The longstanding animosity between Taiwan and China is well known, ensuring that any country that supported Taiwan would not be looked upon favorably. But in the 21st century international trade environment, alienating China as a trading partner could prove a monumental mistake. Thus, in 2008 and in a matter of days following his resounding election victory, the President of Paraguay Fernando Lugo announced his intentions to establish diplomatic relations with China.12 Following the 2008 announcement to reestablish diplomatic ties, Paraguay has discussed the opening of a trade office in China with which it had suspended diplomatic relations since 1957. Irrespective of the official diplomatic relationship status, trade between China and Paraguay still exists. According to the Banco

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BRAZILS IMPORTS FROM CHINA BY CATEGORY, 2009 and 2010 (in millions of U.S. dollars)

Source: Central Bank of Brazil (Banco Central do Brasil), Annual Report, Volume 46 (Braslia, Brazil: Banco Central do Brasil, 2010), available at http://www.bcb.gov.br/pec/boletim/ingles/ banual2010/rel2010i.pdf.

Central del Paraguay (Paraguays Central Bank), the country exported more than $500 million worth of goods to China, primarily consisting of soy beanswhich is equivalent to 6.1 percent of Paraguays total foreign sales in 2009.13 Moreover, in that same year Paraguay received more than $1,952.4 million in Chinese imports.14 Imports from China represented more than 37 percent of the countrys total, while products imported from MERCOSUR reached 40 percent. This shows the impact of the imports coming from China relative to the traditional commercial allies within MERCOSUR. While some countries have benefited from foreign direct investment with China, Paraguay has not. Overall, the country has relatively small levels of FDIalthough growing rapidly over the past decade from $84 million in 2001 to $289 million in 2009.15 Obviously, if China did engage in FDI with Paraguay in the future, it would most likely have a very large impact on the economy. In Paraguay local entrepreneurs and, in particular, soybean farmers are pushing for their government to improve trade relations with China, arguing that this will enhance their sales opportunities into Asia. As of January 2010, China was the leading single importer into Paraguay with $235 million worth of goods, followed by Brazils imported products worth $145 million, and Argentinas worth $98 million.

Figure 8
BRAZILS BILATERAL TRADE FLOWS, 2001 to 2010 (in millions of U.S. dollars)

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Source: Secretariat for Social Communication, International Area Fact Sheet 12, Presidency of the Federative Republic of Brazil (Braslia, Brazil: Secretariat for Social Communication, 2011).

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Between the years 2005 and 2006, the bilateral flow trade with China reached a strong second place after the MERCOSUR, leaving the United States behind (figure 9). Paraguay has become the sixth largest soy producer in the world with an output of almost 7.5 million tons and the fourth largest exporter of oilseeds, mainly because of Chinese demand for this product. With the increased importance of China economically, there is mounting pressure for improved diplomatic, political, and trade ties between China and Paraguaywhich does not auger well for the Paraguayan-Taiwanese relationship. Furthermore, with China replacing the United States as the largest trading partner outside of the MERCOSUR, Paraguayan businesses and agricultural interests are steadily focusing on Asian market demands, customers, and trends, which could have a significant impact on Paraguayan crop selection and product output in the future.
Uruguay: China has increased its trading presence with Uruguay remarkably since the beginning of 2000. It now surpasses the trade with the United States and

Figure 9
PARAGUAYS BILATERAL TRADE FLOWS, 2005 to 2009 (in millions of U.S. dollars)

Source: Banco Central del Paraguay, Comercio Exterior, excluido el MERCOSUR, available at http://www.bcp.gov.py/index.php?option=com_content&view=article&id=723&Itemid=446, and U.S. Census Bureau, Trade in Goods with Paraguay, available at http://www.census.gov/foreign-trade/ balance/c3530.html.

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only trails the European Union and MERCOSUR in terms of bilateral trade (figure 10). Bilateral trade with Uruguay has been experiencing tremendous growth since 2000, with trade booming with Brazil, China, and the European Union. The United States is Uruguays only major trading partner to witness a stalling out of bilateral trade during this period (20012009). As Uruguays third largest trading partner, China is interested in agricultural products and fisheries; however, it also is keen on promoting other business growth opportunities outside of the more traditional investment arenas, including manufacturing plants, automotive production, and telecommunications. Uruguay provides a hospitable investment climate for China to make these types of FDI investments due to its level of political stability and its role as a MERCOSUR hub with the ability to sell products into the much larger, neighboring economies of Latin America. During 2010 Uruguay sold to Chinaincluding the products from free trade zonesmore than $1,126 million. The principal products exported by Uruguay were wool and hair, yarn, and fabric, representing 43 percent of the total. The Figure 10
URUGUAYS BILATERAL TRADE FLOWS, 2001 to 2008 (in millions of U.S. dollars)

Source: Instituto Nacional de Estadstica (INE), Republica Oriental de Uruguay, available at http://www.ine.gub.uy/economia/externo2008.asp, and U.S. Census Bureau, Trade in Goods with Uruguay, available at http://www.census.gov/foreign-trade/balance/c3550.html.

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second most important trade category was oilseeds, which represented 20 percent and was composed almost entirely of soybeans. The third-ranking category was fish and crustaceans, with exports accounting for 8 percent of the total in the period from January through July of 2009.16 ANCAP, Uruguays oil and gas refining corporation, signed an agreement with Chinas BBCA for the construction of a citric acid plant. The venture plans to invest $100 million with production commencing in 2011. Once operational, the plant is expected to employ 400 people directly and produce 60,000 tons of citric acid from corn and sorghum destined for U.S. markets and the European Union, for which the company seeks to establish agreements with farmers and agricultural cooperatives to ensure the supply for many of these grains. Additionally, BBCA and ANCAP plan to install a bioethanol plant for domestic consumption and export using sorghum and corn. BBCA aims to collaborate in the installation of the production plant, technology transfer, and financing of the agricultural portion.17 Uruguays stellar economic performance of the past decade (2000-2010) has ensured Chinese FDI. While the overall population of Uruguay is relatively small with less than 4 million people, its proximity to other markets makes it very attractive. The Chinese company, Geely International, signed a $40-million deal in 2011 with Nordex, a Uruguayan car producer, to begin automobile manufacturing. The country was chosen because of its location near the mega-markets of Argentina and Brazil and because of its skilled labor force. The Chinese company believes this is a convenient hub for the MERCOSUR market.18 The government of Uruguay sees China as a significant and strategic trading partner. The economic relations between the countries have experienced a sustained expansion since the mid-2000s. Chinese corporations have invested heavily in the telecommunications and automobile sectors of Uruguay. On the other hand, Uruguay is interested in boosting its exports of higher value-added products and quality goods, expanding its traditional role as a primary commodity exporter. Joint ventures with Chinese firms offer expanded opportunities for this relatively small nation to increase its economic presence with exports to the major economies of the region (Brazil and Argentina), the European Union, and possibly into new Asian markets. China and South America: The Andean Community of Nations (CAN) The Andean Community of Nations (Comunidad Andina de Naciones or CAN) is a subregional customs union with four current full member countries: Bolivia, Colombia, Ecuador, and Peru. It was originally formed by these four nations and Chile (although Chile later withdrew from the organization) based on the bodies and institutions of the Andean Integration System. Its history dates back to 1969 with the signing of the Cartagena Agreement, also known as the Andean Pact. The

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Bolivarian Republic of Venezuela entered the Andean Community in 1973 but left in 2006 due to its opposition over the signing of unilateral free trade agreements between CAN-member countries (Colombia and Peru) with the United States. CAN and MERCOSUR comprise the two largest trading blocs in South America. A new agreement between the two blocs has allowed for associate member status for MERCOSUR states within CAN. There has been much discussion about the possible merging of these organizations or a free trade agreement between the blocs but this remains uncertain at the present time (2012).
Bolivia: Bolivia is one of the poorest and least developed countries in Latin America. The period from 2003 through 2005 was characterized by political instability, ethnic tensions, and violent protests against planswhich were subsequently abandonedto export Bolivias newly discovered natural gas reserves to large North American markets. After 2005, the government imposed higher royalties on hydrocarbons and required foreign firms to operate under risk-sharing contracts. These contracts would surrender all production to the state energy company in exchange for a predetermined service fee. During 2008, higher prices for mining and hydrocarbon exports produced a fiscal surplus, but in 2009 the global recession slowed growth. In 2010 the increase of the worlds commodity prices resulted in the largest trade surplus in the history of Bolivia. Nevertheless, the regulations imposed by the government have posed challenges for the Bolivian economy, since the lack of foreign investment in the mining and hydrocarbon sector has hindered development. Although foreign direct investment in Bolivia has come from many different countries, its economy is closely tied to neighboring states like Brazil, Peru, and Argentina. Despite the turmoil experienced from 2003 to 2005, Bolivia has been able to increase its FDI from $91 million in 2000 to $790 million in 2008.19 Its primary partner, Brazil, has a pivotal impact on the Bolivian economy as can be seen in figure 11. In the case of Bolivia, the trade with the United States and China has remained at the same levels throughout the last decade (20002010). Some experts suggest that this is due to the difficulties that the government has experienced in establishing foreign investment and joint ventures in the gas and mining sectors. In 2007, Bolivia secured a deal with Jindal Steel and Power, an Indian steel company, to exploit an iron deposit (El Mutun). The dealthe largest foreign investment in Bolivias historywas worth $2.1 billion. El Mutun contains the worlds largest deposits of iron ore, which is sold mainly to China, West Asia, Europe, and other South American countries.20 The Bolivian government continues to establish a closer relationship with China. Evo Morales, president of Bolivia, signed a contract with Chinas satellite and launch services export company. The Tupak Katari Satellite is to be constructed and launch by Beijing-based China Great Wall Industry. This

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THE JOURNAL OF ENERGY AND DEVELOPMENT Figure 11

BOLIVIAS BILATERAL TRADE FLOWS, 2001 to 2010 (in millions of U.S. dollars)

Source: Instituto Nacional de Estadstica (INE), Estado Plurinacional de Bolivia and the U.S. Census Bureau, Trade in Goods with Bolivia, available at http://www.census.gov/foreign-trade/ balance/c3350.html.

telecommunication satellite is the sixth export order for the Chinese firm. In this case, the China Development Bank would provide a commercial loan to the Bolivarian government in order to underwrite the projects cost. The loan is estimated at around $300 million, about 85 percent of the total cost, including satellite construction, launch, insurance, ground facilities, and training of Bolivian personnel. Moreover, China has extended Bolivia loans worth $60 million to purchase natural gas drilling rigs and to expand its natural gas distribution network and another $58 million for the purchase of six Chinese light military aircrafts to fight drug traffickers. In 2010, Bolivia was the worlds six-largest tin producer according to the tin industry monitoring group ITRI. A Chinese engineering group in 2011 was awarded a $50 million contract to expand the production at one of the largest tin mines in the world. Tin is a mayor export earner for Bolivia and the government is willing to extend the useful life of the state-owned mine operator with this deal. Increasingly, we expect to see greater Chinese investment in Bolivias energy and mining sectors given the countrys abundant reserves of these key commodities. While other sources of foreign direct investment may be weary of the Bolivian investment climate and politics, the Chinese seem undeterred in their expansion into this market.

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Colombia: Colombia has seen a dramatic increase in oil production in recent years (20072011), following a period of steady decline. This reversal has put Colombia back on the map as a major player in the Latin American energy scene. Although still behind the production levels of the regional powers (Venezuela and Brazil), Colombian black gold production grew strongly in 2011 that, together with the discovery of new reserves and a policy facilitating foreign investment, has begun to position the Andean country on the worlds broader energy radar and more than ever places oil as a driver for its economy.21 Colombias oil output in 2010 was 786,000 b/d (placing it behind Venezuela with 2.146 million b/d and Brazil with 2.055 million b/d), while its domestic consumption was under 300,000 b/d allowing it to export the majority of its production.22 The United States is the largest source for Colombian oil exports, followed by China and Japan. Chinas growing oil demand coupled, with Colombias expanding production, is an obvious international trade fit. Ecopetrol, the Colombian state oil company, has been partially privatized as part of the strategy to enhance the upstream oil sector. It has been increasingly looking toward China as an export market. In 2008, some 10 percent of Ecopetrols heavy oil exports went to China, according to Javier Gutierrez, president of Ecopetrol.23 He also stated that Ecopetrol is working with companies such as Chinas Sinopec in an effort to strengthen cooperation with the Asian country. The trade between China and Colombia reached more than $7.4 billion, surpassing the current trade between the European Union and Colombia (figure 12). The United States still remains the major trading partner with Colombia, fueled in large part by its exports of petroleum and coal. In addition to petroleum, which accounts for a little under half of the nations total exports, Colombia is the fourth largest coal exporter in the world. Its coal reserves are estimated at a little less than 7,500 million short tons of recoverable coal and are concentrated in the Guajira peninsula and Andean foothills, making it the largest reserve holder in South America. Moreover, Colombia has the worlds largest open pit mine for coal (Cerrejon Zona Norte). While China has its own sizable coal reserves, these additional reserves hold huge potential as Colombia uses very little of its coal domestically. From 2000 to 2010, Colombias coal output almost doubled to more than 82.78 million short tons with domestic consumption of less than 5 million short tons. After coal prices rose and the Chinese market became increasingly more attractive than the European market, the owners of the Cerrejon Zona Norte mine (BHP Billiton, Anglo-American, and Glencore) started shipping coal 10,000 miles to China from their Cerrejon mine in the north of Colombia through the Panama Canal.24 Traditionally, coal has been exported to Europe (receiving 48 percent of Colombias exports coal), the United States (17 percent), Latin American and the Caribbean (14 percent), and China (7 percent).25 This fact, among many others, has encouraged Colombias president, Juan Manuel Santos, to begin talks with Beijing to build a multi-million-dollar

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THE JOURNAL OF ENERGY AND DEVELOPMENT Figure 12

COLOMBIAS BILATERAL TRADE FLOWS, 2001 to 2010 (in millions of U.S. dollars)

Source: Boletn de Comercio Exterior, Direccion de Impuestos y Aduanas Nacionales, Bogota, Colombia, available at http://www.dian.gov.co.

railway connecting Colombias Caribbean and Pacific coasts. In 2011, Chinese officials confirmed that their country had agreed to invest in the $7.6 billion project, which would stretch about 140 miles (220 kilometers) from Colombias northern Caribbean region, near Cartagena, to an as-yet-undesignated site on its western Pacific coast, mainly to ferry Colombias abundant coal to Asia.26 Petroleum and coal make up the majority of Colombias exports, representing 49 percent and 14 percent, respectively, in 2011. But Colombia would like to broaden its base further. As such, the government has embarked on a number of additional trade agreements with countries outside of Latin America. In October 2011, the U.S. Congress officially agreed to the United States-Colombia Free Trade Agreement (formally referred to as the United States-Colombia Trade Promotion Agreement), which had been in the works for a number of years and was a significant advancement for Colombia as the United States is its major trading partner. Colombia is continuing to expand its investment agreements with Canada, the European Union, and China. Given the improved security and political environment in Colombia, in conjunction with the growth in its petroleum sector, the country is poised to expand its international trade while diversifying its

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export end markets. Strengthened ties with China would only serve to enhance the countrys economy and diversify its export markets.
Ecuador: In December 2008, Ecuador defaulted on more than $3 billion in foreign debt. The president of the country, Rafael Correa, considered this debt immoral and illegitimate and asserted that the loans were contracted illegally by previous administrations. Obviously, international financial markets were not very enthusiastic about providing new loans to the nation. While the traditional sources of funding dried up, China saw an opportunity where others saw a crisis and myriad difficulties. China also recognized that Ecuador was a major South American oil producer and was located on the Pacific coastfacilitating oil exports to the Asian market. The Chinese government offered a first credit that included $1.68 billion for 85 percent of a hydropower plant (Coca-Codo Sinclair) that supplies three-quarters of Ecuadors energy needs.27 This loan opened up new opportunities for the Asian giant in the Ecuadorian oil industry and solidified its relations with Ecuador. In 2011, Ecuadors credits from China and Chinese corporations exceeded $7.3 billion, including loans, advance payments for oil sales, and energy project financing.28 According to the Banco Central de Ecuador, the debt as a percentage of the GDP was 15.20 percent as of December 2010; this represents an alarming amount but, at the same time, the countrys overall debt is still only at $15.26 billion, considered relatively low by some experts.29 All of these loans are connected to the sale of thousands of barrels of oil per day to China. There are no official numbers about the negotiations, but analysts estimate that the latest loan is connected with the sale of 39,000 b/d of crude and fuel oil over the next two years to PetroChina. Economic policies under President Correas Administrationincluding an announcement in late 2009 of its intention to terminate 13 bilateral investment treaties, including one with the United Stateshave generated economic uncertainty and discouraged private investment. As can be seen in figures 13 and 14, bilateral trade and FDI with the United States have plummeted since the countrys default and global economic crisis. The Ecuadorian economy contracted 0.4 percent in 2009 due to the global financial crisis and the sharp decline in world oil prices and remittance flows. Growth picked up to a 3.7 percent rate in 2010, according to Ecuadorian government estimates. Foreign direct investment is very sensitive to changes and political instability. As shown in figure 14, when President Rafael Correa took office (January 2007), the expectations of the countrys better performance incentivized foreign investments in Ecuador. Nevertheless, as the default of the debt occurred in December 2008, many companies started to divest. The roller coaster FDI ride that has occurred in Ecuador makes it even more reliant upon Chinese investment, financing, and lending. What has helped Ecuadors bilateral trade flows and economy is that the country is the fourth largest oil exporter in South America, with net oil exports of around 285,000 b/d in

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THE JOURNAL OF ENERGY AND DEVELOPMENT Figure 13

ECUADORS BILATERAL TRADE FLOWS, 2001 to 2009 (in millions of U.S. dollars)

Source: Banco Central de Ecuador, Boletn Anuario (Quito, Ecuador: Banco Central de Ecuador, 2011), available at http://www.bce.fin.ec.

2010; oil revenues account for 50 percent of the nations export earnings.30 With Ecuadors oil production increasing, it has a ready and willing trading partner in China that can help the nation weather the fallout from its financial defaults of 2008. We expect to see increasing economic ties between the two countries in the future given Ecuadors ability to export oil easily to the Asia-Pacific market and as China becomes a much larger trading partner.
Peru: Chinas interest in Peru resides with the countrys vast mineral resources. Peru is the worlds top producer of silver, the second largest producer of copper (after Chile), and has numerous other valuable minerals and metals, including gold and zinc. About 60 percent of Perus exports are mineral related, and in 2010 they were worth an estimated $20 billion. The growth in commodity prices during the first decade of the 21st century led the country to experience very high levels of economic growth. Peru is a net oil importer and natural gas exporter. The rapid economic growth in recent years has led to an increase in the energy demand, especially in the industrial sector. Thus, Peru does not have

CHINESE INVESTMENTS IN SOUTH AMERICA Figure 14

ECUADORS FOREIGN DIRECT INVESTMENT, 2000 to 2010 (in millions of U.S. dollars)

121

Source: United Nations, Economic Commission for Latin America and the Caribbean (ECLAC), Statistics and Economic Projections Division (New York: ECLAC, 2009).

a role to play in meeting Chinas energy demand but, rather, in meeting its needs for minerals and metals. In Peru, 99.98 percent of Chinese investment is concentrated in the mining sector. The top 20 mining projects of paramount importance to the Peruvian government include the biggest Chinese-owned mines, including the Toromocho copper mine in the central Andean region of Junn and the Ro Blanco copper project in the northern province of Piura.31 Exports to China represent 19 percent of all traditional sales of the country of which $5 billion worth of products was directly related to the mining industry, mainly copper, lead, zinc, and steel. On the other hand, FDI from China until 2010 has been relatively low compared with that of the United States and other traditional partners with Chinese FDI amounting to $147 million compared with U.S. FDI of $3.17 billion. The Chinese Vice Minister Jiang Yaoping remarked at the Forum on Trade and Investment Promotion PeruChina 2010 that Peru has become the main destination of Chinese investment in Latin America, while China has become the second largest trading partner of this country.32 He also highlighted the expanding volume of Chinese investment in Peru, especially into large-scale companies that are very competitive and that the Chinese have made substantial investment in operations in various areas throughout the Peruvian economy. As evident in figure 15, one can see the steady rise of all bilateral trade flows into Peru for the period from 2002 through 2009; however, the Chinese trade was not as

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THE JOURNAL OF ENERGY AND DEVELOPMENT Figure 15

PERUS BILATERAL TRADE FLOWS, 2002 to 2009 (in millions of U.S. dollars)

Source: Superintendencia Nacional de Administracion Tributaria (SUNAT), Anuario Estadis tico 2009, Lima, Peru, available at http://www.aduanet.gob.pe/aduanas/informae/anuaindi.htm, and the U.S. Census Bureau, Trade in Goods with Peru, available at http://www.census.gov/ foreign-trade/balance/c3330.html.

adversely impacted by the financial crisis of 2008 and went on to surpass Perus trade with the European Union in 2009. China is now second to the United States as Perus largest trading partner, with bilateral trade of more than $7 billion. According to the state export and tourism promotion council (PromPeru), the countrys exports accounted for about $4 billion and could increase in 2010 by 17 percent reaching $4.7 billion. With Chinas demand for metals and minerals expected to continue to grow, one sees increased opportunities for Chinese-Peruvian trade and investments, possibly surpassing the U.S.-Peruvian trade levels. Investment in Other South American Nations: Chile, French Guiana, Guyana, Suriname, and Venezuela
Chile: In 2005, Chile and China signed a free trade agreement that has helped catapult China into Chiles number one trading partner. The trade between these

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two states exceeds more than $11 billion and in 2010 Chilean exports to China grew by more than 20 percent. The worlds most populous country is the largest single export market for Chile, receiving one-fourth of Chilean foreign sales. Mining is a pillar of the Chilean economy and the government is working to encourage greater foreign investment in this sector by cultivating a favorable regulatory and investment environment. The country is the worlds largest copper producer, providing over one-third of global output. In 2010, Chinas imports of raw copper materials continued to grow steadily; imports of copper concentrate increased by 5.5 percent to 4.36 million tons and copper scrap imports jumped 9.2 percent to 4.36 million tons.33 Chiles foreign trade with the world reached $121 billion in 2010equivalent to a growth of 32 percentexplained by the increase experienced in both its imports (36 percent) and its exports (28 percent). As shown in figure 16, the bilateral trade between Chile and China has expanded dramatically since the signing of the China-Chile Free Trade Agreement in 2005. The trade with China has overtaken that of the United States and European Union and, during the period of 20092010, has witnessed an exponential burst. However, foreign direct investment from China through 2010 appears to be extremely low, according the Central Bank of Chile. The United States and the European Union have steadily invested in Chiles mining sector; China has not. From the information gathered from government and newspaper sites, one concludes that, in the near future, China will be investing heavily in Chile; as yet, there is no official documentation that supports this. The President of Chile, Sebastian Pinera, revealed that Chilean authorities are developing a series of plans to enhance the potential of foreign investment over the 2010 to 2020 time frame. These plans aim to increase investment in key parts of the economy: $50 billion in the mining sector, $40 billion in energy, and $30 billion in infrastructure, among other measures.34 China was the main source of Chilean imports from the Asian continent, worth a total of $8.3 billion in 2010. These imports are largely responsible for a sharp drop in the Chilean price of clothing, footwear, and consumer goods and electronics. China exported to Chile 72 percent of the computers, 57 percent of the cellular phones, 86 percent of all kitchen appliances, 84 percent of T-shirts, 88 percent of sweaters, and 73 percent of shoes, among many others products. The lower-priced imports benefited the lower-middle class by enabling access to these items to a portion of the population that had previously not been able to afford them. The China-Chile Free Trade Agreement definitely has proven to be a fruitful endeavor to date. China has gained access to key mining commodities and Chile has gained access to lower-priced goods that have benefited the middle and lowermiddle economic strata. However, one of the main needs of the Chilean economy is to diversify its export portfolio in relation to its trade with China. Experts point

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THE JOURNAL OF ENERGY AND DEVELOPMENT Figure 16

CHILES BILATERAL TRADE FLOWS, 2001 to 2010 (in millions of U.S. dollars)

Source: Servicio Nacional de Aduanas, Importaciones Mensuales del Ano, Santiago, Chile, 2010, available at http://www.aduana.cl/prontus_aduana/site/artic/20080328/pags/20080328113605.html, and the U.S. Census Bureau, Trade in Goods with Chile, available at http://www.census.gov/foreign-trade/ balance/c3370.html.

out the need to diversify Chilean foreign sales and promote the export of products with higher value-added content goods, since most of Chiles exports to China are mineral and other raw materials, thereby making the country less susceptible to the boom-and-bust cycles of commodity prices.
The OutliersFrench Guiana, Guyana, and Suriname: These three countries on the Atlantic coast of South America have had limited trade with China to date. Their economies are highly influenced by their historical trading partners and, despite having some mining resources, they have had a challenging time attracting the same level of foreign investors as other countries in South America. With gold and bauxite resources, these states have been impacted adversely by the historic commodity price volatility, most recently hit by the fall in prices in 2008. These countries are outliers from the stand point that they have virtually no exports to China and very limited imports from the Asian country. While China has been

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fueling investment and trade throughout South America, these three countries have not benefited. French Guiana is unique in that, as an overseas region of France, it is a member of the European Union. The countrys economy is tied very closely to the larger French economy through subsidies and imports. The French space center accounts for 25 percent of French Guianas GDP and provides numerous jobs for local and international scientists. In addition to the operation of the French space center at Kourou, the most important economic activities are fishing and forestry. To date, the European Space Agency (ESA) has invested more than V1.6 billion in improving and developing the ground facilities at Europes Spaceport. ESA owns the special infrastructure built for the Ariane launchers; this includes launcher and satellite preparation buildings, launch operation facilities, and a plant for making solid propellant.35 The large reserves of tropical hardwoods, not fully exploited, support an expanding sawmill industry that provides sawn logs for export. Cultivation of crops is limited to the coastal area, where the population is largely concentrated; rice and manioc are the major crops. French Guianas main exports are shrimp, timber, gold, rum, rosewood essence, and clothing; most of these are sent to France (62 percent in 2003), Switzerland, and the United States. French Guiana is heavily dependent on imports of food and energy. The country majors imports are food, machinery and transport equipment, fuels, and chemicals. Imported products come mainly from France (63 percent in 2003), the United States, Trinidad and Tobago, and Italy.36 French Guiana lacks the commodities in which China is interested in investing and, given the strong role of French investment, there would be limited ability to enter this market. The country of Guyana is in a different situation than French Guiana. Having gained independence from Great Britain in 1966, Guyana has surprisingly little trading ties with the United Kingdom or Europe in general. Guyana is one of the poorest nations in the Western Hemisphere, with the economy heavily dependent of six exports: sugar, gold, bauxite, shrimp, timber, and rice. While it imports a small amount of goods from China (less than 5 percent), it exports virtually nothing to that Asian giant. Guyanas recent economic growth is based in these agricultural and extractive industries that represent nearly 60 percent of the countrys GDP. The current fluctuations of commodity prices have shown how susceptible the economy is to international prices and also to weather conditions. In 2005, Guyana joined the Caricom Single Market and Economy (CSME), which has helped the country broadened its export market, primarily in the raw material sector. In the same year, the nation faced difficult weather conditions that flooded sugar and rice plantation as well as mining fields. These events had a major impact on the foreign direct investment for these exporting sectors. Despite the countrys gold and bauxite mining, Chinese companies have not been investing herea position taken up by Canadian and U.S. firms.

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Suriname, like French Guiana and Guyana, is also something of a bystander in the China-South America investment boom. While the country does import a small amount from China (10 percent), it exports virtually nothing to Asia. Surinames economy is one of the smallest in South America with an estimated GDP for 2001 of $4.7 billion and a work force of less than 165,000 people. The economy is dominated by the mining sector, accounting for 85 percent of exports and 25 percent of government revenues. The mining industry exports mainly alumina, gold, and oil. The countrys economy is highly vulnerable to mineral price volatility. In 2008, the economic growth reached about 7 percent, largely because of a sizable foreign direct investment in the mining and oil sectors. Netherlands, Belgium, and the European Development Fund gave aid to Surinames bauxite and gold mining projects to increase their productivity. In 2009, Surinames economy suffered a slowdown due to the fall of global prices of commodities and the country earned less for its principal exports; however, recent investments have helped to keep the much-indebted economy going.
Venezuela: With some of the largest oil and natural gas reserves in the world and ranking among the top ten global crude oil producers, it is not surprising that the Chinese would be interested in Venezuela. In 2011, Venezuela had 211 billion barrels of proven oil reservesthe largest in the worldowing to the upward revision from around 100 billion barrels due to the inclusion of the countrys extraheavy oil in the Orinoco belt.37 The countrys main petroleum deposits are found around and beneath Lago de Maracaibo (Maracaibo Lake), the Golfo de Venezuela (Gulf of Venezuela), and in the Orinoco River basin (eastern Venezuela), where the largest reserve is located. Besides the largest conventional oil reserves and the second-largest natural gas reserves in the Western Hemisphere, Venezuela has nonconventional oil deposits such as extra heavy crude oil, bitumen, and tar sandsapproximately equal to the worlds reserves of conventional oil. In 2010, Beijing and Caracas emphasized their growing ties with $20 billion in Chinese financing, largely for Venezuelas energy sector. The series of signed accords includes plans for a joint venture for exploration in the oil-rich Orinoco belt and securing Venezuelan oil for energy-hungry China. This is a larger scope, a super heavy fund. China needs energy security and were here to provide them with all the oil they need, said Venezuelan President Hugo Chavez in televised remarks. The President continued, noting that China is going to give financing to Venezuela, to the Venezuelan people, to the Bolivarian Revolution. . . over the long-term and in large volume. The funds could ease some of the hardships experienced by the Andean countrys battered economy and infrastructure.38 At the heart of the new deal is a $16.3 billion joint venture between Petroleos de Venezuela (PDVSA) and China National Petroleum Corporation (CNPC) to develop the Junin-4 block of the Orinoco oil belt. The venture gives PDVSA 60 percent of the shares compared to 40 percent for CNPC in a pact that remains valid

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for 25 years. A PDVSA statement forecast that the Junin-4 blocks production would reach 50,000 b/d by 2012 and hit 400,000 b/d by 2015. More recently, the U.S. Geological Survey estimated a mean volume of 513 billion barrels of technically recoverable heavy oil in the Orinoco Oil Belt Assessment Unit of the east Venezuela basin province. Experts suggest that the Orinoco Oil Belt Assessment Unit contains a range of 380 billion to 652 billion barrels, making this one of the worlds largest recoverable accumulations and considerably boosting the countrys reserves.39 Official statistics from the Venezuelan government put bilateral trade at $4.097 billion in 2009, up from less than half a billion in 2003. PDVSA tripled exports of oil to China between 2005 and 2008, while China launched Venezuelas first satellite and delivered four of eighteen Chinese military planes and air-to-ground missiles. Some question the accuracy of the China-Venezuela trading volume; the New York Times reported some discrepancies regarding the oil trade figures: Venezuela claims it is exporting 460,000 barrels a day of oil to China, while Chinese government data show the country importing around 132,000 barrels a day.40 This issue of apparent PDVSA output and export reporting discrepancy has been raised periodically. Economic prospects remain mostly dependent on oil prices and the export of petroleum. The oil sector accounts for roughly 12 percent of GDP, 94 percent of export earnings, and more than half of the central governments ordinary revenues. Venezuela remains an important supplier of crude and refined petroleum products to the United States, despite political tensions between the two nations. In May 2009, the National Assembly passed an oil services sector law reserving all primary hydrocarbons activity to the state. This legislation laid the foundation for the expropriation of nearly 80 oil services companies, including three U.S. firms. Later that year in June, the National Assembly enacted legislation to require private-sector petrochemicals producers to enter joint ventures with Petroqumica de Venezuela (Pequiven, the state chemicals company). This will affect many foreign companies operating in Venezuela. Regardless of the political tensions between Washington and Caracas, the United States remains Venezuelas most important trading partner. As seen in figure 17, the United States and the European Union are still Venezuelas major trading partnerswith China a very distant third. According to the U.S. Census Bureau, in 2010 the bilateral trade topped $43.3 billion. Venezuelan exports to the United States were worth $32.7 billion, accounting for at least 42 percent of total Venezuelan exports, and the United States exported $10.6 billion, which represented 24 percent of all Venezuelan imports. Venezuela shipped an average of around 1 million barrels of crude oil and petroleum products to the United States in 2010.41 While trade and investments with China will most likely continue in the future, one should avoid underemphasizing the important long-time trading ties between Venezuela and the United States and Europe.

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THE JOURNAL OF ENERGY AND DEVELOPMENT Figure 17

VENEZUELAS BILATERAL TRADE FLOWS, 2001 to 2010 (in millions of U.S. dollars)

Source: Instituto Nacional de Estadstica (INE), Republica Bolivariana de Venezuela, available at http://www.ine.gob.ve, and U.S. Census Bureau, Trade in Goods with Venezuela, available at http://www.census.gov/foreign-trade/balance/c3070.html.

Conclusion China is now the worlds second largest economy and largest exporter of goods. The Asian country has been, without question, a massive player in world trade, particularly expanding its presence over the 20002010 period. More recently, Chinese companies have begun to invest aggressively overseas. When global FDI was plunging because of the financial crisis of 2008, Chinese direct investment surged. China became something of a counter-market investor and entered into places where others were retreatingpossibly getting better contract terms and making inroads much more quickly than under ordinary market circumstances. Chinas investment overseas exceeded $50 billion for the first time; in 2009 it was the worlds fifth largest investor nation. Chinese foreign direct investments have been influenced by a number of domestic and external approaches. The government of China has a policy of encouraging its companies to expand abroad; this is one of the most crucial factors.

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The robust growth of the Chinese economy, high savings levels, strong export performance, and advantages in science, technology, and innovation have created capacities in many firms that have been leveraged through foreign investment. In some cases, Chinese companies have bought firms overseas to secure key assets, such as technology and brands in advanced economies, or to access natural resources in developing countries. As this study suggests, Chinese investments in South America have been historically low; however, over the past decade (20002010) there has been an enormous surge in trade and growth in political relations with some of the countries, thus creating an attractive investment environment for FDI. More recently, Chinese direct investments in South America have gained significant momentum in the aftermath of the 2008 financial crisis. South American nations received more than $15 billion from Chinese transnational corporations in 2010, most of which was directed toward natural resource extraction. The United States and the European Union historically have been the principal investors in the region, but China has positioned itself as a solid third partyin some cases even supplanting the traditional investors. The new wave of investments comes from a strong trading relationship built during the first decade of the 21st century. It is striking to see how China is overtaking South Americas top trading partnersthe United States and the European Unionin countries such as Chile, Uruguay, and Paraguay. South American countries are importing manufactured goods from China in almost any shape and form; for its part, China is buying raw materials and becoming a robust competitor in the regions export markets. Raw material prices have forced China to venture overseas and secure these critical assets and South America has become one of the main destinations for Chinese investments. The government of China has pressured firms to secure sufficient supplies of energy and raw materials. Brazil, Argentina, and Peru are the main recipient nations of Chinas FDI; they also are the ones with the closest trading relationships with the Asian country. For some smaller South American economies like Ecuador, Chinese FDI has a great overall impact. Chinese in the region are focused in three main sectors: hydrocarbons, mining, and agriculture. The greatest investment is in the hydrocarbons sector and takes place in two stages. The first phase involves individual exploration and production concessions tied with agreements between the states, for example, contracts with the Bolivarian Republic of Venezuela, Ecuador, and Peru. The second stage is through partnerships with international private companies, mainly in Argentina and Brazil. Peru has been the primary recipient of Chinese investment in the mining sector, principally for copper extraction, followed by Brazil for iron-ore mining. In the agricultural sector, the investments are much smaller in terms of volume, but have a significant impact domestically. These investments are very important for the Chinese government since they have

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a strategic objective of securing supplies of raw materials. Countries, like Argentina, are very concerned about the implications of allowing land to be controlled by foreign investors with the possible impact of food security and the livelihoods of the rural populace. Chinese FDI in the region will undoubtedly continue to be dominated by companies specializing in natural resources, given the plans and expansions announced recently. The prices of raw materials will determine the investments in this industry, and other factors may encourage diversifications toward other sectors. As the Chinese economy grows and its largest companies develop, the investment and motivation of investing abroad will increase. Additionally, steadily rising domestic production costs, the need for geographical diversification, and the policies of the government of China will all drive foreign investment forward in South America. However, increased trade with China has not been without drawbacks. While Chinese FDI has undoubtedly helped many economies in South America, it also has hurt some domestic producers that could not compete with the lower-cost Chinese imports on goods, such as textiles, either in their home market or globally. Furthermore, many of the South America countries would like to produce and export higher value-added products rather than rely so heavily upon commodities, which face significant price volatility. Chinas low-cost exports crowd out some South American manufacturers in international markets. Thus, while the addition of China as an investor, export market, and a source of affordable imports has benefited the region overall within the past decade, there are broader ramificationseconomic, political, and strategicthat may take longer to determine.

NOTES British Petroleum Global, BP Statistical Review of World Energy (London: BP Global, June 2010), available at http://www.bp.com/bodycopyarticle.do?categoryId=1ampcontentId=7052055. United Nations, Economic Commission for Latin America and the Caribbean (ECLAC), Foreign Direct Investment in Latin America and the Caribbean 2010 (New York: ECLAC, May 2010), available at http://www.eclac.org/cgi-bin/getProd.asp?xml=/publicaciones/xml/0/43290/ P43290.xml&xsl=/ddpe/tpl-i/p9f.xsl&base=/tpl-i/top-bottom.xslt, accessed July 2011. Jude Webber, China Looks to Argentina to Grow Food, Financial Times, June 29, 2011, available at http://www.ft.com/intl/cms/s/0/7f6fa1f6-a28f-11e0-9760-00144feabdc0.html#axzz1TFXeesDk. Paolo Prada, Brazilian President to Visit China on Trade Mission, Wall Street Journal, April 11, 2011, available at http://online.wsj.com/article/SB10001424052748704366104576254904179874640.html. U.S. Energy Information Administration (EIA), Brazil Country Analysis Briefing (Washington, D.C.: EIA, January 2011), available at http://www.eia.gov/countries/cab.cfm?fips=BR.
5 4 3 2 1

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6 Andre Soliani and Michael Forsythe Petrobras in Talks for New Loan From China Development Bank, Bloomberg News, April 14, 2011, available at http://www.bloomberg.com/news/ 2011-04-14/petrobras-in-talks-for-new-loan-from-china-development-bank.html. 7 8

U.S. Energy Information Administration, Brazil Country Analysis Briefing. Business Week, CNOOC Interest in Brazil Driven by China Oil Demand, September 15, 2010.

9 Vincent Bevins, Brazils Commodities-Heavy Trade with China Gives Some Pause, Los Angeles Times, July 16, 2011, available at http://www.latimes.com/news/nationworld/world/la-fgbrazil-china-20110716,0, 4814114.story.

China Signs $1.4bn Brazil Plane Deal to Kick Off Summit, BBC News, April 12, 2011, available at http://www.bbc.co.uk/news/business-13045546. Kieran Murray, Brazil-China Ties Surge with Trade and Investment, Reuters, April 13, 2010, available at http://www.reuters.com/article/2010/04/13/china-brazil-idUSN1321425620100413.
12 Eduardo Arce, Paraguay Planea Establecer Relaciones Diplomaticas con China, BBC News, February 19, 2010, available at http://www.bbc.co.uk/mundo/america_latina/2010/02/100218_0133_ china_paraguay_jg.shtml?print=1. 11

10

Figura Paraguay como unico pas sudamericano sin relacion con China, Despierta Paraguay, June 20, 1011, available at http://vivapy.wordpress.com/2011/06/20/figura-paraguay-comounico-pais-sudamericano-sin-relacion-con-china. Banco Central del Paraguay, Analisis Comparado de los Registros de Importaciones para los Principales Socios Comerciales Excluidos los Paises del MERCOSUR (Asuncion, Paraguay: Banco Central de Paraguay, October 2010), available at http://www.bcp.gov.py/gee/ac/2005-2009/ Comparativo_Registros_no_Mercosur2005-2009.pdf.
15 16 14

13

Ibid.

Instituto Uruguay XXI, Uruguay XXI Promocion de Inversiones y Exportaciones (Montevideo: Uruguay: Instituto Uruguay XXI, August 2009), available at http://www.uruguayxxi. gub.uy/innovaportal/file/384/1/intercambio_comercial_uruguay_china.pdf.
17 China encuentra oportunidades de negocios en Uruguay, El Pais, June 6, 2011 available at http://genteynegocios.elpais.com.uy/inversiones-chinas-planta-de-acido-citrico-para-2011-y-otrade-bioetanol-en-carpeta.

Jude Webber, Uruguay Closer to Investment Grade, Financial Times, June 1, 2011, available at http://blogs.ft.com/beyond-brics/2011/06/01/uruguay-closer-to-investment-grade/#axzz1S1cgLTgd. United Nations, Economic Commission for Latin America and the Caribbean (ECLAC), Statistics and Economic Projections Division (New York: ECLAC, 2009).
20 Hal Weitzman, Bolivia Lands $2bn Iron Deals with Jindal Steel, Financial Times, July 19, 2007, available at http://www.ft.com/intl/cms/s/0/99873914-360f-11dc-ad42-0000779fd2ac. html#axzz1TFXeesDk. 19

18

U.S. Energy Information Administration (EIA), Colombia Country Analysis Briefing (Washington, D.C.: EIA, June 2011), available at http://www.eia.gov/countries/cab.cfm?fips=CO.

21

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22

THE JOURNAL OF ENERGY AND DEVELOPMENT

Ibid.

23 Adriaan Alsema, Ecopetrol to Strengthen Cooperation with China, Colombia Reports, March 30, 2009, available at http://colombiareports.com/colombia-news/economy/3421-ecopetrolto-strengthen-cooperation-with-china-.html. 24

U.S. Energy Information Administration, Colombia Country Analysis Briefing. Ibid.

25

Tim Padgett, Chinas Proposed Colombia Railway: Challenging the Panama Canal, Time, February 17, 2011, available at http://www.time.com/time/world/article/0,8599,2049645,00.html. Nathan Gill and Laura Price, Ecuador Gets $571 Million China Loan for Hydroelectric Plant, Bloomberg News, July 1, 2011, available at http://www.bloomberg.com/news/2011-07-01/ ecuador-gets-571-million-china-loan-for-hydroelectric-plant.html. Ecuador Negotiates China Bank Loan, Signs Oil Deal, Taipei Times, July 3, 2011, available at http://www.taipeitimes.com/News/biz/archives/2011/07/03/2003507255. Banco Central de Ecuador, Banco Central de Ecuador Monthly Report (Quito, Ecuador: Banco Central de Ecuador, July 2011), available at http://www.bce.fin.ec/. U.S. Energy Information Administration (EIA), Ecuador Country Analysis Briefing (Washington, D.C.: EIA, September 2011), available at http://205.254.135.7/countries/cab.cfm?fips=EC.
31 Milagros Salazar, Social Responsibility Missing in Growing Trade Ties, Inter Press Service News Agency (IPS), February 3, 2010, available at http://ipsnews.net/news.asp?idnews=50206. 30 29 28 27

26

Peru es el principal destino de la inversion china en la region, Gestion Diario de Economia y Negocios del Peru, April 21, 2010, available at http://gestion.pe/noticia/465257/peru-principaldestino-inversion-china-region. Servicio Nacional de Aduanas, Informe Mensual de Comercio Exterior (Santiago, Chile: Servicio Nacional de Aduanas, July 2011), available at http://www.aduana.cl/prontus_aduana/site/ artic/20070228/pags/20070228170134.html. China y Chile acuerdan extender sus relaciones comerciales, La Revista Minera, November 17, 2010, available at http://revistaminera.wordpress.com/2010/11/17/china-y-chile-acuerdanextender-sus-relaciones-comerciales/. European Space Agency (ESA), Europes Spaceport (Kourou, French Guiana: ESA, July 2011).
36 Regions and Territories: French Guiana, BBC News, December 20, 2011, available at http:// news.bbc.co.uk/2/hi/americas/country_profiles/3516572.stm. 35 34 33

32

U.S. Energy Information Administration (EIA), Venezuela Country Analysis Briefing (Washington, D.C.: EIA, March 2011). Simon Romero, Chavez Says China to Lend Venezuela $20 Billion, New York Times, April 18, 2010, available at http://www.nytimes.com/2010/04/19/world/americas/19venez.html.
38

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133

39 U.S. Geological Survey (USGS), An Estimate of Recoverable Heavy Oil Resources of the Orinoco Oil Belt, Venezuela (Washington, D.C.: USGS, October 2009), available at http://pubs. usgs.gov/fs/2009/3028/pdf/FS09-3028.pdf. 40 41

S. Romero, op. cit. U.S. Energy Information Administration, Venezuela Country Analysis Briefing.