(13 September 2006) China and India have rapidly risen to rank among the world's leading economies. Since 2001, the combined growth of these two countries has accounted for more than 30% of the increase in world GDP. In 2005, China became the world's fourth-largest economy, after the United States, Japan and Germany. India, the second most-populous country on the planet, now ranks as the eighth-largest economy in the world.
With their high growth rates, both countries are helping to maintain the fragile international economic balance by generating a strong and growing demand for commodities. This presents the countries of Latin America and the Caribbean with a huge, and largely unexploited, potential market for the exports of both goods and services, according to ECLAC's report Latin America and the Caribbean in the World Economy, 2005-2006.
The new report emphasizes the importance for Latin America - still a minor trading partner of the Asian giants -- of expanding trade with this dynamic region, and particularly with China and India.
The Chinese economy grew by nearly 10% in 2005, a rate that increased to 10.9% in the first half of 2006 as a consequence of domestic investment and exports. For its part, India displayed a growth rate of 8.4% for the fiscal year ending 31 March 2006. Combined merchandise exports for both countries in 2005 represented 8.2% of the world total. By 2005, China had become the world's third-largest merchandise importer and exporter. Its exports jumped by 28% to US$ 760 billion (nearly 1.5 times the external sales of Latin America and the Caribbean). In the case of India, merchandise exports totaled US$ 90 billion (ranked 30th internationally) and its imports US$132 billion (ranked 17).
China is one of the largest recipients of FDI in the world, with US$ 72.4 billion in FDI inflows for 2005. The acceleration witnessed in 2006 by the already buoyant Chinese economy illustrates the risk involved in unrestrained growth. Its economic expansion is being fuelled by the country's enormous trade surplus, leading to well-grounded calls for a steeper appreciation of the yuan.
The short-term outlook for India is promising, given its solid economic growth and moderate rates of inflation. Challenges for the medium term include the management of its high levels of public indebtedness, its growing current account deficit and the need to embark on reforms.
Between 1990 and 2005, trade flows between countries of the region and China and India expanded considerably, especially over the past five years. Trade with China is particularly significant, with regional exports exceeding US$19 billion in 2005 -- close to 3.5% of the region's total exports.
Exports to India stood at just US$3 billion (0.5% of the regional total). The main exporting countries to China are, in order of magnitude, Brazil, Chile, Argentina, Peru and Mexico. The same countries are present for India, except Peru.
Chinese imports from the region are concentrated in primary commodities, providing, for example, more than 60% of soybean imports (chiefly from Brazil and Argentina) 80% of fishmeal (from Peru and Chile), close to 69% of edible poultry offal (from Argentina and Brazil) and 45% of wines and grapes (from Chile).
Trade relations between South America and China tend to be complementary, taking the form of inter-industry trade in which the region exports primary commodities and imports manufactured goods. Trade with Mexico and Central America is more asymmetrical. China buys less than 1% of Mexico's total exports but is its second-largest supplier of imports. As a result, Mexico and Central America have been building a growing trade deficit with China, and China has supplanted Mexico as the United States' top trading partner.
For India, Latin America and the Caribbean is still a small, but growing market. As in the case of China, trade patterns between India and the subregion differ from the structure of trade flows between India and Central America and Mexico. India has already concluded trade agreements with Mercosur and Chile.
According to ECLAC, South America should consolidate this trend by further strengthening its trade links based on greater productive complementarity with both China and India, creating the necessary trade and technology partnerships.
For Mexico and Central America to attain more strategic relations with China and India, the ECLAC report suggests that increased intra-industry trade. This could open new access routes to Asian markets and foster incorporation of new technologies, rather than compete face-to-face in third markets like the United States.
For ECLAC, Latin America should take advantage of the opportunities offered by both China and India to enter existing production and distribution chains. One way of achieving this is through trade agreements with both countries. In this respect, the agreement already signed by Chile and China and the agreement negotiated between India and Mercosur are promising, but require more depth and wider scope.
See chart. China and India: Trade with Latin America and the Caribbean
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