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August 19, 2008
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Special Report: Doing Business in China and Latin America
Does U.S. face a challenge in China?

August 12, 2008 By: Wayne Tompkins
Doing business in China and Latin America
 
hen Mario Sacasa hears about the surge in trade between China and Latin America, he has only to glance at a world map to see the potential rewards for South Florida.

Click play to listen to Mario Sacasa

“We are basically a distribution platform, if you will, with a good infrastructure, good logistics, good financial network, telecommunications and so forth to serve as a distribution center, just like the Europeans have been doing now for years,” said Sacasa, senior vice president for international programs at the Beacon Council, which focuses on Miami-Dade County’s economic development.

China needs raw materials — oil, copper, soy, iron ore — to fuel its economic growth. It’s finding them in Latin America, building relationships, making investments and weaving itself into the fabric of the region’s economy and politics.

In the process, however, it’s challenging the long-dominant United States in ways that could upset Latin America’s geopolitical and economic balance.

That could pose challenges as well as benefits for South Florida’s economy, and exporters, economists and trade officials recall the oft-told myth that in Mandarin Chinese, the word for crisis is also the word for opportunity.

Only, in this case, that just might hold true.

Just as important as South Florida’s geography, Sacasa adds, “It is the United States. That brings a lot of stability that the companies find useful and also from a business standpoint more efficient. Executives want to live here.”

But while South Florida could find ways to benefit from China’s ambitions, there are plenty of reasons to be wary.

“The United States government does have a concern about the growing trade between China and Latin America, because they believe they are taking away opportunities that U.S. multinational corporations or the government might otherwise have in the region,” said attorney Michael Diaz, managing partner of Diaz Reus in Miami who has worked extensively with companies in both Latin America and China on international trade issues. “It’s not just the Chinese; you have the Middle East investing heavily in Latin America. In 2007, for the first time in Latin America’s history, you had over $100 billion in foreign direct investment.”

China’s $102.6 billion in trade with Latin America in 2007 is more than double the $50 billion in business it did with the region two years earlier, but, for now, it remains well below the $560 billion Latin America-U.S. relationship.

Unfettered trade rules

While China does not pose a military threat to the region, it also isn’t bound by the same trade rules and regulations as the United States.

“For example, the Foreign Corrupt Practices Act; all the things that keep our hands tied when doing business abroad,” said Mark Weiner, an attorney who recently joined Katz Barron in Miami to start an immigration and international practice group. “Right off the bat, culturally, the Chinese have more in common with Latin America than they do with us. In terms of their political structure, their civil law, or common law they are much more familiar with and can get things done faster dealing with a Latin American country.”

Weiner said China has been signing free-trade agreements with Latin American countries — they’re about to finalize one with Peru — while over the past eight years the U.S. has largely neglected the region.

“They’re financing bilateral investment treaties with South America, which is dangerous because Latin America is moving to the left,” he said.

For example, China’s dearth of natural oil reserves has compelled it to court Hugo Chavez, president of OPEC member Venezuela.

“It wants its oil, it needs its oil. They have very little of it,” said Neal Asbury, a Fort Lauderdale businessman who chairs the South Florida District Export Council. “They’ll be going to people like Chavez and offering him just about anything he wants. There is risk there politically.”

Whatever the strategic and economic implications, the courtship of China and Latin America was inevitable, said Manuel Lasaga, an economist who heads StratInfo in Coral Gables.

“South America has an abundance of raw materials and natural resources that China needs and China also sees Latin America as a good market for its own products. So there’s a very natural base for growing trade between the two continents,” Lasaga said.

Now that it has two suitors to play against one another, Latin America will come out a winner on many levels, but also needs to be mindful of downsides.

China’s economic footprints are felt in the booming exports countries like Argentina and Brazil have enjoyed in products ranging from soybeans to copper. That promises to be a boon to South America, where countries such as Brazil are seeing a growing middle class, but also a cause of growing pains. Soaring revenues for soy and sunflower oil in Argentina sparked a bitter, months-long fight between the government and farmers over who would keep the spoils. Chile’s booming copper profits sparked labor unrest as miners demanded a larger share of the profits.

Hopes that China would invest in Latin America’s long-neglected highways and railroads, a means to move exports more cheaply and efficiently, have yet to materialize.

Manny Mencia, senior vice president for international business development for Enterprise Florida, is among those who believe that even a perpetually growing Chinese presence will help South Florida.

“That part of the world has helped Latin America continue its expansion even in the face of a U.S. recession,” Mencia said. “That changes a historical pattern, which is every time the U.S. economy sneezed; Latin America went into the tank.”

A Chinese market still consuming tremendous amounts of commodities even in the face of declining U.S. demand has kept Latin America afloat, and by extension South Florida’s economy, Mencia said.

“Last year was unprecedented: We were close to $45 billion in origin exports from the state. We’re doing 21 percent better this year and a significant amount of that is with nations of Latin America. Our exports to Brazil are up over 35 percent this year.”

Mencia said that international business has been crucial to cushioning Florida’s economy against the state’s real estate driven economic downturn.

Threat exaggerated

Others argue that the Chinese threat is overblown — that its glory years of miraculous economic growth are past and that the world’s most populous nation faces internal challenges of its own. Crucially, economic pressures are raising the cost of doing business in China, undermining its competitive position.

China’s stock market has lost over 50 percent of its value in less than eight months, housing prices are plunging, electricity rationing is afflicting several provinces, upward wage pressure and public unrest is growing, environmental problems abound and a 2006 Ernst & Young report estimated that the Chinese financial system is carrying close to $1 trillion in bad debt, said William Gamble, who heads the consulting firm Emerging Market Strategies and is the author of two books on China.

“They have enormous inflation, but they can’t raise the renminbi (China’s currency, whose unit is called the yuan) because that throttles their export market,” he said.

Click play to listen to Neal Asbury

Fort Lauderdale exporter Asbury, whose Greenfield World Trade does business in both regions, said the Chinese currency remains from 20 percent to 25 percent undervalued, still giving that country an advantage.

“China is under tremendous pressure from its world trading partners to get the renminbi valued at where it should be, or better yet let it float and find its own level like other major trading currencies,” said Asbury, whose company exports heavy commercial products, mostly targeted toward the commercial food service market.

“What’s going to happen over the next 12 months is the renminbi is going to appreciate another 10 to 15 percent. Export tax rebates, which are against [World Trade Organization] rules, are being withdrawn. They were 13 percent, they’re now 8 and some have gone away completely.”

Asbury said that a Chinese company could run at a loss and still make money through its tax rebates, something that he says will soon be a thing of the past.

“They’re going to have to be more financially responsible,” he said.

The implications: “Thousands of companies in South China are going to be going out of business because of the renminbi appreciation and because of the tax rebates being withdrawn. Labor rates and operational costs are going up.” Asbury said. “Companies are saying, ‘Maybe we can be in Vietnam, maybe we should be in India. It’s just too expensive now to do business in China.’”

Enterprise Florida’s Mencia agrees that the China threat is overblown, but for a different reason.

“If you look at what China sells in Latin America, most of it does not really compete with our products,” he said. “There are some telecom-related products, but what they sell tends to be more labor-intensive, low-cost producer driven while what we sell tends to be more value-added, high technology: computers, information technology, aviation and aerospace, transportation equipment and health technologies.”

Even if China eventually catches up in these areas, Mencia said, South Florida still maintains its advantage as a financial and distribution platform.

He does have concerns for Latin America, however.

“Particularly smaller nations like in Central America or the Caribbean Basin have been losing U.S. market share to China for some of the commodities that they have traditionally supplied our country with,” he said. “For example, apparel and accessories. It is much better for Florida for Latin American countries to sell products to the United States than for China to sell the same product to the United States and cut out the Latin American suppliers.

Advantage of NAFTA

Asbury said a lot of Latin American countries see China as a competitor, “and that’s a good thing.”

Mexico and Central American countries are watching with alarm as Chinese companies begin underselling them on world markets in areas such as textile manufacturing and consumer products.

He said free trade agreements are crucial to the U.S.’s competitive advantage.

“A lot of people are beating up on NAFTA,” Asbury said of the controversial free trade agreement between the U.S., Canada and Mexico that has been in place since 1994.

“It has meant incredible business for American exporters; it has put millions of Americans to work. It’s given Americans a huge advantage in Mexico.”

Meanwhile, he said, duties of Chinese products going into Mexico have been between 23 percent and 30 percent.

“That just shows what the trade relationship with the U.S. means and their suspicion of China, keeping the tariffs and duties high,” he said. “In Central America, the same thing exists. They just signed a free trade agreement with the United States; they have bet their economic futures on the trade relations with the United States, it’s hugely important to them.”

Textiles made in Central America are competing head-to-head with textiles made in China.

“The difference is textiles manufactured in Central America have a much better chance of having American content than Chinese,” Asbury said. The raw materials used to manufacture textiles often are exported from the United States to manufacturers in Central America, and then sent back as a finished product.

“China has almost no American materials in textiles being exported to the U.S.,” he said

“That business [textile manufacturing] isn’t coming back to the United States, but it would be great to bring it back closer to our border.”

Lasaga, the Coral Gables economist, said Latin American countries “won’t put all their eggs in one basket.

“China can not sustain its growth rate,” he said. “That will trigger more trade between Latin America and the U.S. — particularly for the sourcing of production out of Latin America for U.S. companies and consumers — because the revaluation of the [renminbi] is going to increase the cost of doing business in China.”

Even those concerned about the geopolitical threat of China are optimistic that South Florida can find several ways to benefit from Latin America’s popularity as a global trading partner.

Miami attorney Weiner’s vision has the city emerging as “The Hong Kong of the West,” a nexus of trade between not only Asia and Latin America, but also Europe.

It’s a goal he says that is lofty, but not impossible.

His advice: “Try to keep Florida as the place to do your business in South America” while diversifying an export economy still highly dependent on Latin America.

“Unless Miami stops taking its focus on just doing business with Latin America, and thinking, ‘Wait a minute, there is this superpower called China that we should be courting …’ Miami’s not focusing on the Eastern bloc, the Czech Republic, Poland, Romania, Bulgaria, which are friendly with the Americans, but totally neglected.”

Click play to listen to Michael Diaz

Diaz said business and political leaders need to recognize the changing trends in global trade.

“You have two regions of the world where there’s a great amount of liquidity, both the Middle East and China, and that will increase the demand for services from our financial industry, from our professional services here in South Florida, as we are not only a gateway to Latin America but we’re a gateway to the rest of the world.”

South Florida should also welcome the infusion of liquidity that comes with Latin America growing trade.

“I believe,” Diaz said, “that we are going to be the direct beneficiary of that as the closest city that can service the needs of folks both in goods and services.”

Mencia says he believes the trends that have already made Miami a center for Latin American trade will only accelerate.

“You’ll see more Chinese companies coming to Florida as their operations in Latin America mature,” Mencia said. The key advantage is logistics.

“It is a lot easier communicating, traveling from South Florida to many parts of the Americas than it is inter-regionally, even if the distances are shorter,” he said. “If you’re going from South America to the Caribbean Basin and even places in Central America, often it is easier to transfer through Miami.”

South Florida also is the central data processing and telecom hub for the nations of the hemisphere, Mencia said.

South Florida’s diverse Hispanic population means that companies can find neutral ground amid international rivalries.

“We have a multilingual, multicultural workforce and if you’re doing a lot of business in Colombia and you’re looking for someone to manage that market, you don’t have to hire a generic Latino to run that operation, but you can hire a Colombian who understands the culture of the specific markets where you are doing business.”

Lasaga said the widening of the Panama Canal also needs to be closely watched, to see how it will impact trading patterns that could help or hurt South Florida.

The canal’s widening would allow additional large ships to onload and offload their cargo in Miami, Lasaga said.

“To the extent that Miami has the infrastructure in terms of warehousing facilities for transshipment of goods, then it would help us,” he said. “That, of course, hinges on additional investments here in Miami as far as improving the capacity of the port,” and the dredging of the port so larger ships can be accommodated.

“It’s in our blood. It’s in our DNA,” Asbury said of South Florida’s world trading role. “We are a very sophisticated trading city and bringing Latin America closer to the U.S. economically is great for South Florida. As China becomes more expensive and more business finds its way back to Latin America, that relationship with South Florida will become even more important.”

Wayne Tompkins can be reached at (305) 347-6645.

Reader's comments
Franck Dossa @ www.CondHotel.com said:I strongly believe in South Florida as a trade center. I think that this is the right time to maket it to the Euopean company, showing them that they can use South Florida as the gateway for their products and services towards the USA and Canada, as well as the Caribbean and Latin America. Then there is another avenue which is totally neglected: South Florida is geographically close to Africa, where you have tons of natural ressources, from precious woods to oil and diamonds. This something that needs to be developped. Franck Dossa @ http://www.CondHotel.com Aug. 15 at 2:37 a.m.

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