The guest commentary below was written by Daniel Lacalle.
Part of the economic debate in Latin America, particularly in Argentina after the elections, focuses on what type of financial and trade relationship is most convenient for the region, and several discussions talk about the merit of strengthening relations with China instead of the United States
The first thing we should understand is that it is a false dilemma. Latin America is not in an economic situation where it can afford to “choose” trading and financial partners. Therefore, the answer is simple: Latin American countries must strengthen their commercial relations with all countries, including China and the United States, and the way to do it is by improving transparency and reliability.
Why do some politicians repeat that their country has to choose between one and the other? There is a misconception among some commentators who think that entering into aggressive agreements with China is much more beneficial, cheaper and, in addition, will allow countries like Argentina or Mexico to diversify their position. The most populist politicians talk of China as if the country gave money for nothing.
It is a ludicrous and misguided view of relations with China as if the business partners and Chinese rulers were not going to demand the same conditions as US ones. The evidence from countries like Venezuela, Ecuador and many African nations is clear: China does not give free money. Money for nothing does not exist. The Chinese are neither fools nor amnesiac.
The experience of decades shows us that many populist rulers have believed that they would enter into large trade agreements with China and receive low-cost financing with no burdens attached. The example of Ecuador at the time of Correa shows us that this idea of enormous financing with no cost is completely false.
China is not only as rigorous and demanding as any other partner, but – in many cases – has shown that it imposes conditions, especially collaterals on natural resources, that are stricter than those of others.
Usually, the idea that China is going to offer favorable, flexible and even almost free conditions usually comes from a mistaken perception that the Asian country will finance the expansion of socialist or leftist models without conditions as if it were a donation. Nothing could be more wrong.
China is an economy that is extremely dependent on the US dollar and has an elevated debt, but above all, it is an economy with a growing demand for commodities and, as such, usually lends money in exchange for wide access to natural resources.
The Chinese economy is not a source of cheap donations and loans. Their companies and rulers have a very clear idea of the risk they take when they lend money to socialist regimes and countries with economic challenges. China always analyzes carefully the real economic return they need in their business transactions. There is no free money.
We cannot think that China will give Argentina or Mexico free money or investments or that it will demand less credit security than the United States. Quite the opposite. China, as a business partner, is much more demanding and rigorous than some politicians would like.
Sometimes, in the discussion about whether to favor China or the United States, there is a hidden line of thought, which could be summed up as “who can we default on without generating a financial crisis? Who will finance the unfinanceable at a low cost? The answer is simple. Nobody.
The opportunity for Latin America. Open the economy, become an exporting power and attract foreign investment. To achieve this, countries must put legal and investment security as the absolute pillar of their commercial and financial policies. Becoming a reliable country with unquestionable credit responsibility is a capital factor for economic recovery.
No country is going to give dollars for cents or finance insane economic policies for free as everyone starts from a significant risk of devaluation and default when they analyze financing options.
What governments must do is eliminate those two risks so that China, the US and all the countries of the world perceive the enormous potential of the region.
This is a Hedgeye Guest Contributor note by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial Markets, The Energy World Is Flat and the most recent Escape from the Central Bank Trap.