Colombia’s announcement that China plans to build a railroad to serve as a canal alternative received widespread media coverage last month. However, the proposal is simply the most high profile of a growing pattern of outside infrastructure investment by new powers in Latin America.
In the 19th century, following Latin America’s independence, there was a stage of significant investment in the region by outside powers. This ranged from the UK investment in Argentine railroad system to the French building of a railroad and eventual US building of a canal in Panama.
Much of the infrastructure investment by outside powers in the 21st century, led by China, is being made for the same reasons it was in the 19th. Latin America remains a key raw materials exporter and getting those good to markets, now largely in Asia, requires new transportation, energy and communications infrastructure.
A few recent examples suggest China is leading the way. In July last year, China signed a $10 billion agreement with Argentina to refurbish the Belgrano Cargas freight rail line and an additional $2 billion agreement to upgrade the Ferrocarril Belgrano Norte y Sur. Two other initial agreements worth $1.5 billion each are related to a potential subway line in Cordoba and train line connecting the Buenos Aires Ezeiza airport.
In 2009, China signed an agreement to take a 40% stake in a Venezuelan rail project worth $7.5 billion. This project to connect rural portions of Venezuela, oil producing regions and the capital is seen as part of China’s interest in maintaining a steady energy supply from a Venezuela indebted to China for the next few decades due to recent agreements by President Chavez. Meanwhile, a consortium of three companies from China, (as well as companies from Japan and South Korea) are bidding on a high speed rail project in Brazil to connect Rio, Sao Paulo and Campinas.
Beyond rail, Chinese companies are building three hydroelectric dams in Ecuador. In total, China is financing over half of the energy infrastructure projects in Ecuador right now. However, the projects have not come without controversy. One project, the Coca-Codo Sinclair Hydroelectric Project, which is 85% financed by China at a 6.9% interest rate, will divert water from Ecuador’s highest waterfall, angering environmentalists and concerning those watching Ecuador’s long term budget outlook.
Though it is not exactly an outside power, Brazil’s growing investment in its neighbors also falls along this pattern. Through its development bank (BNDES) and the company of Odebrecht, Brazil is pushing infrastructure projects across the continent. Brazil is in the process of completing its own transcontinental highway through the Amazon and Peru to the Pacific Ocean. In Venezuela, Brazil has at least fifteen ongoing significant infrastructure projects, including roads, bridges, light rail, dams and water treatment plants. Brazil has also built two of Nicaragua’s dams, providing a key power source for the country, though also indirectly involving them in the dispute over the Rio San Juan between Nicaragua and Costa Rica.
Perhaps most ambitiously, Brazil is planning to build up to five hydroelectric dams in Peru. This construction is meant to directly assist Brazil as it attempts to manage its growing energy needs. Much of the energy produced by the dams over the first decades will be exported to Brazil as part of the repayment process. Like the dams China is building, some of Brazil’s projects have drawn criticism for their environmental impact and financial conditions on the receiving countries.
The Brazilian investment surge puts it in competition with China in South America. At times it’s a friendly competition while other times it can be quite fierce. For now, Brazil still allows and encourages significant Chinese investment in their own country, though the tone may change after President Rousseff’s April visit to Beijing. China’s investment in Ecuador’s hydroelectric scene comes after Ecuador had a very public dispute with Brazil over other construction. Meanwhile, apart from the transportation and energy infrastructure issues listed above, Brazil is playing a bit of offense by planning an increase in the rare earth mineral market, with a consortium of Japanese and Korean companies taking part ownership. That move directly impacts China’s conflict with its neighbors over rare earth exports and could lead to a response by China into mineral markets in other Latin American countries
Separate from competition with Brazil, China may face some of its own risks for not understanding the region. US-based analysts often look at the downside risk for the US losing influence or economic trade with the region, but rarely is it considered that China could lose out on one or more of their deals if the political or economic situation in a country turns against them. In Venezuela, Ecuador and Argentina, China is betting a certain amount of political and economic stability that will continue good relations into the next government. None of those three countries are known for their macroeconomic stability and China may find itself surprised to lose out in the next shakeup.