Why the Chinese are getting aggressive in South America

The recent wave of Chinese investments in South America, especially in Brazil, marks the start of a new phase of economic and eventually military activity in that continent that cannot, indeed, must not, be ignored. Brazil, where China has already invested the equivalent of $53 billion in infrastructure projects, should be a particular concern.

In some respects, the Chinese interest in South America was the latest search for cheaper labor costs. Starting in the 1970’s, industry first moved to the Far East and South East Asia for this reason. That initially proved to be a win-win strategy as Asia developed new emerging economies and middle classes while the West benefited from cheaper products and less pollution.

{mosads}As was virtually inevitable, the economic growth created by these investments meant that the four billion people in this region consumed more and that made what once had been plentiful raw materials increasingly scarce. That increased prices and started a new colonial race. This time, however, it was not Europe and the United States taking the lead as they did in the 16^th and 19^th centuries. This time it’s China and many other Asian nations at the forefront and making the investments needed to promote their own growth.

South America was not the first target. They started by looking for the water, food, energy and metals where they were still available in great quantities and were easiest and least expensive to obtain: south of the Equator but closest to home in sub-Saharan Africa and Oceania (Fiji, Australia, Guam, Tonga, Micronesia, etc.) plus Indonesia.

The first nation to start with this playbook was Japan in the 1980’s, followed by the Chinese in the 1990’s and the Indians in the 2000’s. Korea and Taiwan are now joining the race.

Investors typically prefer markets that are closer geographically and culturally, so Oceania plus Indonesia was the first priority, followed by Africa, particularly the Indian Ocean shore. 

Phase 1 of this colonization constitutes exportation and importation because sunk costs and, therefore, risks are low.

Phase 2 starts as the volume of transactions increase, the variable costs become prohibitive and a change in strategy is needed. This is usually accomplished through investments in local companies either by buying them outright or creating joint ventures.

Phase 3 occurs when investors start looking to reduce their risks by projecting military power, usually by creating an air-naval force or establishing military bases. Later efforts include establishing protectorates and colonies.

China, Japan and India are already in Phase 3 in Oceania plus Indonesia. China is developing a large air-naval force capable of projecting power in the South China Sea, the Japanese navy is becoming increasingly more capable and India is developing a true blue water navy. Competition in the region is no longer only commercial and there are many risks associated with the potential clashes in military power.

The situation in Africa is moving from Phase 2 to 3. There are large investments to develop the interior leading to the strategic ports of Mombasa (Kenya) and Dar-Es-Salam (Tanzania). From Sudan to Mozambique towards the Atlantic Ocean, China and India are transforming sub-Saharan Africa into the farmland they need to supply their food, metal and energy necessities, and these countries are becoming more dependant on this source of resources.

That is leading to a race for new naval bases in Pakistan, Ceylon and the Seychelles. China is leading the way looking for such bases.

South America is now changing from Phase 1 to 2. Japan, which was the first big customer of the region, developed several mining and infrastructure projects.

But China has now become the best customer for many nations in the region, particularly in Brazil. As China has become an increasingly important client and the volume of its investments has grown, the Brazilian infrastructure has become incapable of further growth in trade volume. That makes Phase 2 the natural next step largely because local governments may not have the money to do it themselves. The Chinese seem to be particularly interested in developing railroads

The military aspect of this investment should not be underestimated. China wants access to ports in the Atlantic or the Pacific so that, in case of a war, they may choose which route is safer and more defensible. Loads exiting through the Atlantic ports may be blocked in the Cape of Good Hope, Magellan’s Straits or Panama Canal. While those loaded in Pacific ports are harder to block and goods may reach China unhindered.

The perception of the investments in Brazil is very positive right now because the Chinese are viewed as good partners and not as imperialists. If history is any indication, this perception is a bit naïve and will change with time.

Time will tell whether this colonial race will lead to more Phase 3s, that is, military competition, in each of the three regions. In the two previous colonial races the participants established strong military presences to insure their supply lines would not be disrupted and to gain monopolistic access to certain resources. This is a likely line of development in the future.

Alves is strategy professor at Fundação Dom Cabral, the leading business school in Brazil.