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China-Latam economic ties tightening

By Shasta Darlington, CNN
November 19, 2012 -- Updated 0559 GMT (1359 HKT)
Cars made by Chinese company JAC Motors are pictured on display in Rio de Janeiro, Brazil.
Cars made by Chinese company JAC Motors are pictured on display in Rio de Janeiro, Brazil.
STORY HIGHLIGHTS
  • China has increasing economic influence in Latin America
  • China has replaced United States as Brazil, Chile's top trading partner
  • China's appetite for raw materials fueling high growth in commodity-producing countries

Sao Paulo (CNN) -- The rise of China in Latin America, long considered the United States' "backyard," took many by surprise.

Now, its economic influence in the region is only expected to grow.

For the past decade China has fueled high growth in major commodity producing countries like Brazil, Chile, Argentina and Peru with its appetite for raw materials such as iron ore, soybeans and copper.

In fact, China replaced the United States as the top trading partner in Brazil and Chile and is on the way to doing so in many others countries in Latin America.

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That relationship made China popular with many countries weary of trying to get their goods onto American and European shelves.

But when global demand for Chinese goods dried up in 2008 and 2009, the relationship with Latin America evolved.

"China figured out that Latin America could be a very good alternative market for its surplus," said Roberto Dumas Damas, a professor at Sao Paulo's INSPER business school.

The flood of cheap exports from China sparked a backlash from many of the hardest-hit industries, but overall, the trade relationship still tips in Latin America's favor.

Brazil's trade surplus with China, for example, was $11.5 billion in 2011.

Read more: Will Chinese consumers rule the world?

China followed up not only with cheap exports of its goods, but hefty investments in Latin America to make it easier to reach the region's growing middle class consumers.

"There were two waves of foreign direct investment," Dumas said. "First to guarantee access to raw materials, like land for soybeans and iron ore plants."

"In the second wave," he added. "Companies want to explore the region's consumer markets."

He pointed to plans by Chinese carmakers Chery and JAC carmakers to build automobiles in South America.

According to China's Ministry of Commerce, Chinese foreign investment in Latin America jumped to $10.5 billion in 2010 from $7.3 billion in 2009.

Latin America's growing reliance on the Chinese economy has made it less likely to criticize politics there. Indeed, many leaders are keen on maintaining the status quo.

A slowdown in China's economy, however, is taking its toll on Latin America.

Analysts say a slump in exports of raw materials like iron ore, for example, will be partially offset by growing demand for soft commodities like soybeans.

But they insist Latin America now needs to focus on investing in its own industries and diversify its economy so that the region won't rely so heavily on China in the future.

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