Geopolitical factors affecting China’s Belt and Road Initiative in Latin America: Brazil and Mexico
By Emerging Markets Institute Research Fellow Evodio Kaltenecker, Miguel Montoya, and Daniel Lemus Delgado
China’s Belt and Road Initiative (BRI) is one of the most ambitious infrastructure investments in history. It is also considered one of the most critical geopolitical initiatives of our time — geopolitics implying states’ practices in controlling and competing for territories. In some regions, the BRI can be understood as the Chinese government’s search to find an opportunity to employ the enormous overcapacity in industries like steel and heavy equipment. However, in some nations, the geopolitical aspects of the initiative are deeply influenced by the interests of the United States. In this article, we use four paradigmatic cases in Mexico and Brazil to understand how geopolitical factors limit the expansion of China in Latin America.
Using geopolitical codes, we compare the economic relationship between Brazil, Mexico, and China, contrasting key trends in the relationships between these nations and China. We distinguish four specific cases that show how a geopolitical factor is present in the relationship between the three countries. In this way, we are able to understand how geopolitical factors influence China’s interactions with Latin America.
The power of geopolitics and the limits of the BRI
We suggest that China’s expansion in Latin America is determined not only by economic but also by geopolitical factors. China’s expanding relationship with Latin American countries reflects the Latin American boom in commodities, as well as China’s search for natural resources in the region—particularly oil, iron, copper, and soybeans. But Mexico’s case supports the perception forged by the geopolitical codes of the United States—that the United States should contain China’s advancement in the region.
A comparative approach to the expansion of China in Brazil and Mexico
A fundamental characteristic of the BRI is to support large infrastructure projects, which have been a crucial part of China’s economic success story — something the Chinese government is seeking to replicate in other parts of the world. This model has facilitated the work of Chinese companies and those financed by the Chinese government. As a result, the infrastructure funded by China is extensive, including communication, transportation, and the sourcing of primary resources important to the Chinese economy.
In Brazil and Mexico—two of Latin America’s largest economies—China has become an important source of inbound foreign direct investment (FDI). Analysis of FDI inflows is subject to methodological difficulties since operations often occur through tax havens; however, reports on greenfield and M&A investment provide a valuable picture of Chinese FDI in Brazil and Mexico. Historically, Chinese FDI in Brazil has been several times higher than Chinese FDI in Mexico.
Presenting four cases of Chinese FDI in Latin America
Case 1: China Molybdenum (CMOC) is primarily engaged in the mining, processing, and marketing of mineral products and is one of the world’s most significant molybdenum and tungsten producers. On September 30, 2016, CMOC announced the acquisition of Anglo American’s Brazilian niobium and phosphates businesses for US $1.5 billion. Molybdenum and tungsten are critical, value-added inputs for specialized alloys and essential ingredients for the production of special, high-strength steels used in gas pipelines and jet engines. The acquisition was strategically important because it gave the company a foothold in Brazil, one of the most important international mining jurisdictions. Moreover, the deal confirms the company’s resources-seeking strategy (Kaltenecker, 2020) of finding sources of rare earth and specialty minerals, providing a successful example of a brownfield investment.
Case 2: We look at China State Grid’s acquisition of Brazil’s CPFL Energy. The internationalization strategy of State Grid in Brazil provides evidence of the firm’s focus on regulated power generation, power transmission, and distribution assets—more evidence of China’s appetite for FDI in the infrastructure sector in Brazil.
Case 3: In 2011, China announced Dragon Mart Cancun. The project’s goal was to construct a shopping complex to show, promote, and sell Chinese goods in Mexico—a vision in line with Chinese product exhibition centers in countries like the UAE and Bahrain. But from the beginning, the project attracted criticism from civic and non-governmental organizations that said it would seriously affect the region’s environment and ecosystem.
Case 4: One of China’s most important investment projects in Mexico was the construction of a high-speed train between Mexico City and Querétaro, announced in 2014. The train was meant to solve a significant road congestion problem between the two cities. China’s strategy, in this case, was quite different from the one followed in Brazil because it was a greenfield project with Mexican investors. However, the Mexican government canceled the project in response to controversy surrounding the legitimacy of the deal.
The two cases of Chinese FDI in Brazil we have presented share a common trait: Both are successful investments in the infrastructure sector through brownfield acquisitions. However, in the case of Mexico this strategy failed, as evidenced through the latter two cases.
Discussion and conclusion
The four cases analyzed show how economic rationality is not the most critical factor in evaluating China’s expansion in Latin America. The results of big infrastructure investment projects in Brazil and Mexico have varied significantly. Consequently, our central question is: Why do these countries exhibit different behaviors in the face of China’s advance in Latin America?
Multiple factors can explain the BRI’s chances of success or failure in Latin America. First, regional differences within Latin America are vast. If the Chinese government wants to succeed in Latin America, it must consider these. Second, the complementarity of the economies of many Latin American countries—including Brazil—led to the boom in the export of raw materials to the Chinese market. As the top suppliers of manufactured goods to the North American market, China and Mexico have typically been in direct competition over the past decade. Also, many low-cost Chinese products destroyed or decimated traditional local industries such as shoe-making, textiles, and toys manufacturing.
However, a key piece to understanding Brazil, Mexico, and China’s interactions under the BRI is the geopolitical interest of the United States. Although the US government has not put Latin America in its foreign policy priority list, it follows a different strategy with Mexico. Due to a historically complex relationship, a solid economic interrelationship, and an extensive shared border, Mexico remains under the US influence zone. Therefore, geopolitics is a determining factor of the BRI’s success in the country. Mexico stopped two high-stakes projects under pressure from the United States. In Brazil, on the contrary, geopolitical conditions facilitated the concretization of these projects. Thus, we conclude that Brazil and Mexico show that geopolitics is fundamental in evaluating the effects of the BRI in Latin America.
About the authors
Evodio Kaltenecker is an assistant professor at the Monterrey Institute of Technology and a research fellow with the Emerging Markets Institute at the Samuel Curtis Johnson Graduate School of Management. His research focuses on strategy, Latin America, emerging market multinationals, and international business. He is also a member of the international faculty at EGADE Business School and faculty-in-residence at the Austral Education Group. In 2020, Kaltenecker received two distinguished professor awards for teaching in undergraduate and executive education classes, one from Tec Monterrey and one from EGADE.
Miguel Montoya is a full professor and researcher at the Monterrey Institute of Technology and teaches at the undergraduate, graduate, and executive education levels. He is also the director of research and post-graduate studies at the School of Architecture, Art, and Design at the Monterrey Institute of Technology. He has received recognition from students and alumni for the quality of his teaching. Montoya holds a PhD in applied economics from the Autonomous University of Barcelona. Since 2009, he has been a member of the National System of Researchers of the National Council of Science and Technology.
Daniel Lemus Delgado
Daniel Lemus Delgado is a research professor at the School of Social Science and Government at the Monterrey Institute of Technology. He teaches the Theory of International Relations, Foreign Policy Analysis, and the Asia Pacific Scenario. He has been a visiting scholar at Fudan University in Shanghai, China, and research focuses on regional innovation systems, international development cooperation, and foreign policy in East Asia, particularly China. He holds an MSc in liberal arts and science from Tec Monterrey and a PhD in international relations from the University of Colima.