China's economy is cooling, weakening demand for the raw materials that go into building its skyscrapers and laying its roads. How will Latin America fare?
Chinas voracious appetite for commodities has revived the growth engine in Latin America for years, turning Brazilian iron ore and Chilean copper into cold cash.
But now that Chinas economy is cooling, weakening demand for the raw materials that go into building its skyscrapers and laying its roads, how will Latin America fare?
Many analysts forecast China's GDP will dip below 8 percent this year, coming off two decades of growth in the 10 percent range. While that figure still blasts past growth projections for the United States and Europe, analysts warn the downshift could be especially detrimental to Latin America, which has become hooked on revenue from iron ore, copper, soy and zinc, but hasn't had much success moving up the value-added chain.
The Economic Commission for Latin America and the Caribbean (Eclac) recently revised its forecast for regional growth to 3.8 percent in 2013, down from 4.3 percent in 2011, but higher than the 3.1 percent in 2012. The revision was based on a gloomy global economy, in part due to Chinas slowdown.
"The region has been benefitting from the rapid growth in China and I have no doubt that the current slowdown is going to be impacting quite a bit," said Mauricio Mesquita Moreira, chief trade economist at the Inter-American Development Bank (IDB).
Pointing to Brazil, he said the effects are already being felt. Brazilian exports to China--its No. 1 trading partner--grew a whopping 40 percent last year. But that rate slipped to about 4 percent for the first semester of 2012, he said. The deceleration comes as Brazil emerges from a cycle of government stimulus and credit expansion, making it all the more difficult to tackle. It also puts a damper on Brazil's efforts to raise investment rates.
"This is a clear sign there has already been a strong impact and the question is, 'How big will the slowdown be in China?"' Moreira said.
FOUR COUNTRIES, THREE COMMODITIES
Experts say a failure to diversify trade compounds the problem. Just three commodities--iron ore, soy and copper--account for about 70 percent of Latin America's exports to China.
Iron ore, a steel-making ingredient, has been especially hard-hit; prices had slumped by more than 23 percent on the year when the Chinese government announced in September it would pump an estimated 1 trillion...