China to Change the Trade Landscape in South America

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During President Obama’s State of the Union speech, he mostly pressed on about advancing beyond our global peers by working hard to “innovate more than anything; he was notably much shorter and less specific on the manufacturing and fair trade fronts. He did mention, however, that as he would continue to work on US-Asia trade relations (China being the elephant, with other Southeast Asian nations taking a backseat on that train as well), he would simultaneously push for trade pacts with Latin American, notably Panama and Colombia.

Fascinatingly and not surprisingly this is exactly where China is getting another foothold for its own interests. Capitalizing on Colombia longing to build a replacement for the Canal for some time now, and on the fact that the US-Colombia free-trade agreement signed in 2006 has yet to be ratified, China has begun serious talks with Colombian officials to build an alternative “rail canal, so to speak, that would link the country’s Atlantic coast to the Pacific by train, according to the Financial Times.

Needless to say, if the countries complete the rail link, it would be a big deal for Colombia and for global trade in general. For context, a total of nearly 205 million long tons of commodities, including 17.3 million long tons of ore, metals, and iron/steel products, were shipped through the Panama Canal in (fiscal year) 2010, according to Panama Canal Authority data. With the US as its largest trading partner, Colombia feels road blocked by the stalled FTA between the two countries, and is that much more welcome to Chinese investment in its infrastructure and getting to move China’s goods through Colombia in exchange.

According to the article, the “dry canal would stretch for 220 kilometers, “from the Pacific to a new city near Cartagena where imported Chinese goods would be assembled for re-export throughout the Americas. Colombia-sourced raw materials would make the return journey to China¦Chinese and Colombian officials say talks are most advanced over a 791km railway and expansion of the Pacific port of Buenaventura. The $7.6bn project, funded by the Chinese Development Bank and operated by China Railway Group, would move up to 40m tonnes of cargo a year from Colombia’s economic heartland to the Pacific. Priority would be given to coal destined for China. As the world’s fifth-largest coal producer, Colombia would have more efficient entry into China’s market (and those of other emerging Asian economies) as a coal exporter, since most of its coal exports leave out the Atlantic side. China is already Colombia’s second-largest trade partner the FT points out that trade between the two nations stood at $5 billion in 2010, up from only $10 million in 1980.

China’s banks certainly have the money to spend, as evidenced by the country’s investment domestically and internationally in the rail sector. David Michael, writing in Bloomberg BusinessWeek, recently deemed this the Year of the Metal Rabbit, equating the country’s bullet trains with this year’s zodiac symbol. “Over the next four years, Japanese bank Nomura projects the Chinese government will spend $113 billion per year on railway infrastructure and rolling stock, he writes. “The new high-speed line connecting Shanghai to Hangzhou, opened in late October 2010, cost $4 billion and took just two years to build”an astonishingly rapid rate, given the glacial pace at which grand infrastructure projects proceed in most nations.

If this is any indication of how speedily China’s banks and builders will get infrastructure up and running in Colombia, then the South American nation will be sitting pretty having China invest in its economy while getting another bargaining chip in FTA ratification with the US (something the folks at the Brookings Institution, among others, think is a good idea) while the US deals with another major Chinese initiative in its backyard.

*Check out Stuart’s take on the international implications of this “Dry Panama Canal” tomorrow!

–Taras Berezowsky

MetalMiner and its sister site, Spend Matters, along with Nucor, will host a live simulcast, International Trade Breaking Point, on March 1, 2011. If your company sources products from overseas, you will not want to miss this half-day event.

Click here to register for the live simulcast today!

Comments (3)

  1. fer caicedo says:

    For years we -the Colombians- had been asking USA to take care of the best ally they have in South America, not only politically but economically and because of its strategic location on top of the sub-continent, being the only country in South America with coasts on both the Atlantic and Pacific Oceans; Once we lost Panama with the helpof the American Flag ; but now after more than a Century is USA who is losing the pace in front of the soon to be next power, China; Colombia would be the first but no the last in making the Chineses their major partner in the South and Central part of the continent, USA left the back yard door open and the Chineses are bringing all they need for the BBQ.

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