- Amidst rising US-China tensions, the China-Chile relationship continues to thrive, with trade and investment flows reaching new heights.
- During the COVID-19 pandemic, Chile depended heavily on China for supplies of masks, respirators and PPE, and successfully bet on Chinese vaccines long before they became available.
- Despite pressure from the US to deal strictly with ‘traditional partners’, Chile and Latin America are better off diversifying their international links instead of limiting them.
In June 2021, Chile opened a Consulate General in Chengdu, capital of Sichuan province. This will be the first consulate from any Latin American country in that ancient city with a millenarian history, China’s gateway to Central Asia, and launching pad of the Belt and Road Initiative (BRI). This comes one year after the Chinese government ordered the closure of the U.S. Consulate in Chengdu, in response to orders by the U.S. State Department to close the Chinese Consulate in Houston. In turn, in the first half of 2021, China was the single biggest source of foreign investment in Chile, with US 5.64 billion dollars in thirty projects. In this period, China was also the number one market for Chilean exports to the former Middle Kingdom, which reached a record US 19 billion dollars, a 35 per cent increase on 2020.
Chile, the first country in South America to establish diplomatic relations with the PRC in December of 1970, 14 months before President Nixon’s historic visit to China, thus continues to play the trailblazing role it has played in Sino-Latin American links. Chile was also the first Latin American country to support China’s bid to join the WTO; the first to recognise China as a market economy; and, in 2005, the first individual country anywhere to sign an FTA with China. Yet, this relationship has undergone some rocky moments. The low-key celebration of the half-century of diplomatic relations (with no Chinese ambassador in situ in Santiago, and no high-level official visits), is emblematic of this. At the same time, the key role that China played in supplying Chile with vaccines to fight the COVID-19 epidemic, which led Chile in March 2021 to be among the top five countries in the world with the highest number of vaccinated people, underscores the degree to which these long-established links continue to flourish.
Chile-China relations have come long way. Ever since the signing of the FTA between both countries in 2005, bilateral trade has increased five-fold, from US 8 billion to US 40 billion dollars, with Chile running a rare surplus in its trade with the Asian giant. To put these figures in perspective, Chile, a country with a population of 19 million, located 20,000 km away from China, exports more to China than Pakistan, a neighbour of China, with a population of 200 million. And although copper provides the bulk of Chile’s exports, Chile’s export basket has diversified its offerings. In 2016, Chile became the number one exporter of fruit to China by value (one out of every four fruits imported by China hails from Chile); and China became Chile’s leading export market for its wine (Chile is the fourth largest exporter of wine worldwide), displacing the United States and the United Kingdom. In 2020, one third of Chile’s exports went to China, nearly three times the value of Chile’s exports to the United States.
For long, however, Chinese investment in Chile lagged. Whereas Chinese companies poured tens of billions of dollars into Brazil, Peru, Ecuador and Argentina, Chile had little to show. Thus, one of the priorities of the second government of President Michelle Bachelet (2014-2018) was to increase Chinese investment.
In 2016, the purchase of Pacific Hydro (with 1 billion in assets in Chile) by the Chinese State Power Investment Corporation (SPIC), marked a turnaround, as did investment in farms and vineyards. Yet, the real breakthrough came in 2018, with the purchase by China’s Tianqi Lithium of one fourth of SQM, Chile’s main lithium producer, for US 4 billion dollars, leading to the biggest intake for a single transaction in the history of Chile’s Internal Revenue Service, a cool one billion dollars. Other Chinese companies followed, and in 2019, China was not only Chile’s number trading partner, but also its number one source of foreign investment, with US 4.8 billion dollars. In 2020, State Grid (China’s and the world’s biggest power company), announced the purchase of CGE, a leading power distribution company in Chile, for US 3 billion dollars, a deal that became effective in 2021.
Beware of what you wish for
A key point in assessing Chile-China links is the interface between politics and economics. Every single Chilean president since 1990 has visited China at least once. According to one study, Brazil and Chile are the countries that have received the largest number of high-level (presidents, prime ministers and foreign ministers) visits from Chinese authorities. And there is a reason for it. Chile is far from being the region’s largest economy. But Chile is seen, rightly or wrongly, as Latin America’s trailblazer, the country where things happen before they do elsewhere, the equivalent of what California is to the United States. This makes it into a key reference point in China’s broader Latin American strategy. From 2015-2019, Chinese Foreign Minister Wang Yi visited Chile four times.
For most of these fifty years, Chilean policy towards China has also elicited a remarkable consensus from governments of both Left and Right, providing continuity and stability. There has also been agreement that, to succeed, this policy needs to be based on close collaboration between the public and the private sector—with government doing the spadework to open the tricky Chinese market, and business delivering products tailored to the needs of the Chinese consumer.
Unfortunately, Chile’s decades-long delicate balancing act, in which it has managed to have good relations with both Washington and with Beijing, has not been immune to US-China tensions. An ambitious digital infrastructure project to connect Valparaiso and Shanghai by submarine fibre optic cable was ditched after a visit by Secretary of State Mike Pompeo to Chile in April 2019, in which he read the riot act to President Sebastián Piñera. Another ambitious and badly needed infrastructure project, a joint venture between a Chilean private company, Sigdo Koppers, and China Railway Group (CREC) to build a railway line from Santiago to Valparaiso, was given short shrift by the Chilean government.
Public opposition to Chinese investment in Chile was orchestrated from various quarters. Members of Parliament of both the Left and Right warned ominously (in words echoing Jair Bolsonaro’s in Brazil in 2018), that China was “buying Chile”. The establishment of a committee to authorise foreign investment projects, one that would evaluate them according to their geostrategic and security implications for Chile (along the lines of the Committee on Foreign Investment in the United States, CFIUS) was mooted – an absurdity in a country that is not in strategic competition with China, and that needs more, not less, FDI. Lawyers opined that all Chinese SOEs should be treated as part of a single conglomerate by Chile’s anti-monopoly law. In 2020, a bill submitted to Congress by the chair of Chile’s Chamber of Deputies Economic Affairs Committee would have required a law approved by two thirds of Parliament to give the go-ahead to any foreign investment project by foreign SOEs, thus de facto banning most Chinese investment.
All of this went down like a lead balloon in Beijing. Ambassador Xu Bu, a senior Chinese diplomat who had made quite a mark in Santiago, was recalled in October of 2020, after less than three years in post. This meant that on 15 December 2020, the 50th anniversary of the establishment of Chile-China diplomatic relations during the government of President Salvador Allende, there was no Chinese Ambassador in Santiago. The position was left vacant until February 2021. Chile’s cherry exports to China, projected to reach as much as a record US 1.8 billion in the 2020-2021 season, ended up adding up to only half as much, as a result of opaque and unsupported accusations in Chinese social media that these cherries carried the COVID-19 virus, causing prices to plummet.
Vaccine diplomacy in action: It takes two to tango
To its credit, and after some fumbling, the Piñera government kept its eyes on the ball. Much as in the early months of the pandemic in 2020 it depended heavily on China for supplies of masks, respirators and PPE, Chile bet on Chinese vaccines long before they became available. Chile thus secured early delivery of two million doses of Sinovac-CoronaVac vaccines at a reduced price in January 2021, while much of the rest of Latin America (and the world) was still scrambling for them, and received tens of millions of doses later on. Although Chile also bought other vaccines, from Western companies like Pfizer and Johnson & Johnson, these were small batches. By July 2021 Chile had vaccinated 13.5 million people, out of a total of 19 million, 71 per cent of the population with at least one dose, and 11.5 million with two doses. Of these, 82 per cent have been vaccinated with CoronaVac. In July of 2021, Mexico had vaccinated 27 per cent of its population, and Brazil 29 per cent.
The onslaught of a second wave of virus infections across Chile with the onset of the 2021 winter months led some to question the effectiveness of the CoronaVac vaccine, rated at only 67 per cent effective, as opposed to Pfizer’s and Moderna, rated at over 90 per cent. Yet, in a study published in the New England Journal of Medicine, Jara et al demonstrated the effectiveness of the CoronaVac in protecting against severe disease and death in Chile. New daily cases dropped from 8867 on 5 June to 1874 on 17 July, as did the positivity rate. The bottom line is that, while most other countries in Latin America continue to grapple with the devastating effect of the pandemic, Chile is on the forefront in terms of vaccinating its population and bringing the virus under control.
The way forward
As it happens, the debate on China’s vaccine diplomacy in Latin America was preceded by one on the role of so-called external powers in Latin America and the resurrection of the Monroe Doctrine by Secretary of State Rex Tillerson in 2018. The key proposition was that there was something inherently “unnatural” in the presence of non-Western powers, like China, Russia, Iran and even India, in Latin America, and that the region should go back to dealing strictly with its traditional partners, meaning the United States and Western Europe, as it was in the 19th and 20th centuries. Yet, if anything, the COVID-19 pandemic showed that exactly the opposite is true. In its worst crisis in 120 years, that is, the COVID-19 pandemic, it was precisely those “external powers” – mainly China, but also Russia, and, in the beginning, India – that came through with vaccines at a time when the United States and Western Europe were not. The message could not be clearer: Latin America is better off diversifying its international links, instead of limiting them.
Chile, in turn, precisely because it has such diversified foreign trade and investment links, is particularly well-positioned to navigate the challenge posed by US-China tensions and its reverberations in the region. A key reason Chile managed to secure tens of millions of Sinovac vaccines in such timely fashion is because of its long-standing ties with China. The ups-and-downs in the Chile-China relationship in the past few years show that there is little to be gained from opportunistic behaviour and giving in for no reason to pressures from one or the other of the competing major powers. By focusing strictly on its own national interest, and following what I have referred to elsewhere as a policy of Active Non-Alignment, Chile will be best positioned to make the most of an international environment it is so dependent upon.
This article gives the views of the author, and not the position of the China Foresight Forum, LSE IDEAS, nor The London School of Economics and Political Science.