COVID-19 Will Accelerate China’s Advance in a More Distrustful World: Prospects for Latin America
Prior to the COVID-19 pandemic, the rise of China, and its corresponding transformation of global commercial, political, and institutional structures was well underway. As part of PRC’s work toward being a “great modern socialist country” by the 100th anniversary of the takeover of mainland China by Communist forces in October 1949, Chinese State Owned Enterprises (SOEs) and other firms were growing powerful in resources, technical capabilities and global market share. Through this growing weight in commerce and finance, a global web of infrastructure centered on the 2013 Belt and Road Initiative (BRI), and China’s growing weight in international bodies from the United Nations to the International Monetary Fund, the PRC was restructuring the world order to resemble that of earlier Chinese dynasties: with trade supporting flows of wealth from the periphery to a powerful imperial Chinese government at the center.
The COVID-19 crisis does not change the PRC’s fundamental objectives, but rather, accelerates its economic, political and strategic advance, at the same time that it increases discomfort and resentment toward China throughout the world, creates challenges for the expanding global operations of its China’s commercial entities, and gives the PRC expanded tools to address, or at least suppress, such challenges. The crisis will give the PRC unprecedented opportunities to expand its presence in global supply chains, and strategic sectors, as well as to increase its influence with governments and international institutions. Such opportunities arise because the PRC is emerging from the crisis at the same time that the US, Europe and other developed nations are likely to remain mired in crisis.
The PRC’s authoritarian controls over its population allowed it to maintain a relatively effective quarantine to extinguish the virus, then restart its economic production in a relatively orderly fashion. Although PRC GDP shrunk 6.8% in the first quarter, it is likely to show growth for 2020 as a whole.
In Europe and the U.S. by contrast, economic and political pressures are prompting partial economic reopening that may fuel a cycle of new local COVID-19 outbreaks and the reposition of partial quarantines. Jeremy Powell, head of the U.S. Federal Reserve Bank, anticipates that the U.S. economic recovery may not begin until the end of 2021. IMF head Kristalina Georgeva has made similar predictions for the global economy.
The combination of the duration of the economic crisis in the West, and limits to government ability to keep at risk companies afloat for such an extended period, means that some temporary business closures will become bankruptcies, creating opportunities for PRC-based companies. While the crisis may motivate businessmen and governments to attempt to reduce risks by diversifying sources of supply, or relying more on “near-shoring” and within-country production, in the short term, Chinese companies may actually expand their position by filling emerging gaps in supply chains.
With the persistent weakness of Western and developing nation economies, multinational companies may seek to divest themselves of unprofitable overseas business to shore up their financial position, concentrating more on operations closer to home, or the relatively healthy Chinese market. As occurred during the 2008 financial crisis, but on an even greater scale, such selloffs will create opportunities for Chinese companies to expand their global footprint in strategic sectors via acquiring the distressed companies.
In Latin America and other parts of the less developed world, the crisis will generate enormous financial and political pressures that could expand dependence on China. In Argentina, the May 22 default by the Alberto Fernandez government on its debt obligations is likely to freeze Argentina out of traditional financial markets, leaving China as the high-interest rate lender of last resort, as occurred with Ecuador in 2008. Ecuador itself is similarly at risk of default. In Mexico, with depressed oil prices, AMLO could be tempted to permit Chinese financing for PEMEX, and has already contracted a Chinese company as part of the consortium to build Tren Maya, one of his signature projects to pull Mexico out of the COVID-19 induced recession. Latin American and Caribbean countries currently recognizing Taiwan, may be tempted to switch relations to the PRC in exchange for the lure of economic benefits.
While the PRC has concentrated much current effort on winning goodwill through donations of medical equipment, tests and protective gear, the goodwill purchased by such Chinese aid has also been undermined by serious gaffes, including defective tests and ventilators, or China’s attempt to charge the Italian government for devices that Italy ha previously donated to it in an earlier stage of the crisis. Such difficulties play into distrust toward China prior to the crisis, even as it hoped to profit from China. Evidence of the PRC cover-up of information about the virus as a key factor in the gravity of the pandemic further reinforces that mistrust, even if the world is not receptive to the U.S. making the argument.
On the other hand, China’s pledge of $2 billion to the World Health Organization after the U.S. suspended its own assistance may win China significant goodwill and give it an opportunity for global leadership. China’s greatest sources of strategic influence in the context of significant global political change and economic need are the demonstrated recovery of its economy, and perceptions by some that the authoritarian nature of the Chinese system were useful in helping it to defend the country against Coronavirus and reactivate its economy thereafter. While the reality of both matters is complicated, the discussion is likely to be part of the post-COVID debate about whether democratic, free market systems, or state-led authoritarian ones are more effective in protecting citizen wellbeing against pandemics and other risks of globalization, albeit at the expense of individual protections and liberties.
As China expands its commercial presence in Latin America and globally, it is likely to meet significant resistance and challenges. Like after the 2008 economic crisis, where Chinese companies expanded their presence, as PRC-based enterprises take control of newly acquired overseas assets, they will have to reconcile the management style and desires of China-based headquarters organizations with the exigencies of local law, and other dynamics in the countries where they operate. Workers and communities will push back, particularly in domains such as labor laws, relations with local communities, and environmental laws. The Chinese workers and affiliated businessmen who follow PRC-based companies into a country will also generate tension, particularly among displaced workers and small businesses The violence against Chinese store owners in the Bogota suburb of San Vitorino in 2017 hints at what may be occur.
The new Chinese companies will also face security challenges, just as did the new Chinese entrants following the 2008 crisis did. The challenge for the new Chinese companies will be worse this time around, though, due to the expanded levels of criminality in the region. It will create opportunities for security companies operating in the region, but also prompt the PRC government to expand its work with Latin America law enforcement and military organizations and will create new incentives for Chinese security companies to seek opportunities in the region.
Finally, China’s expanding on the ground in Latin America as a result of COVID-19, even if principally economic, will likely mobilize increasing concern and pushback from the United States.
The challenges from China’s expanded presence will be offset by increased PRC leverage for managing or suppressing them. With a fall in demand from the U.S. and the European Union, and their companies selling off assets rather than investing in the region, and with U.S. and European politicians distracted by elections and domestic concerns, government in developing countries will be more reluctant to jeopardize commerce with, and loans and investment from the PRC through speaking out against Chinese policies or companies, as Chinese officials threatened a boycott against products from Australia after its government called for an investigation into the origins of the Coronavirus.
Increasing Chinese commercial leverage over governments will be complimented by the increasing presence of Chinese firms and equipment in Latin America’s technology sectors, including 5G networks and surveillance architectures, giving the PRC unprecedented opportunities to obtain information on Latin American business and political elites, if it requires companies like Huawei to provide such data under China’s 2017 National Security law.
With the expanding Chinese commercial presence and decreased opportunities for business, investment and loans from the U.S. and E.U., businesses in the developing world will also find it increasingly risky to speak critically about the PRC, lest their business be cut off, as happened with the Houston Rockets basketball team following a tweet by its manager in support of Hong Kong protesters.
With respect to PRC “people-to-people” diplomacy, more important than the 46 Confucius institutes and 5 Confucius classrooms operating in the region, is the pressure to self-censure, by journalists, academics, and think tank leaders who have received Hanban paid trips to China, on the fear of seeming ungrateful and losing that coveted access.
In its engagement with the developing world, to paraphrase Niccolò Machiavelli, China is likely to be more “feared than loved” if it cannot be both. yet as Chinese presence, influence, and resentment toward the PRC simultaneously grow in the post-PRC world, how the PRC manages the new dynamic will shape its success, and level of difficulty in achieving its goals, even as that presence transforms the geopolitical landscape.
R. Evan Ellis is Latin America Research Professor for the Strategic Studies Institute at the U.S. Army War College and former Member of the U.S. State Department Policy Planning Staff. The views presented here do not necessarily represent the U.S. Army War College or the U.S. Government.
“Covid-19 acelerará avance de China en un mundo más desconfiado: Proyecciones para América Latina,” RedCaem, June 1, 2020, http://chinayamericalatina.com/covid-19-acelerara-avance-de-china-en-un-mundo-mas-desconfiado-perspectivas-para-america-latina/.
