Creeping Influence in America's Backyard

As the US concentrates on events in the Middle East, a disturbing trend seems to be gathering strength among South American countries.

Meetings between Argentina and the International Monetary Fund in Washington today will give an important signal as to whether the biggest Latin American countries are really taking as stroppy an anti-US and anti-capitalist direction as their rhetoric suggests. The “pink tide” sweeping the continent has been much remarked on — too much. The inauguration this month of Uruguay’s first socialist chief executive gave another opportunity for the observation. The Bush Administration has been right to ignore much of the rhetoric, although the gibes clearly sting.

But several new twists merit its closer attention now. First, the giants of the continent — Venezuela, Brazil and Argentina — are making more effort to work together. Secondly, Venezuela is actively exploring new markets for its oil to reduce its dependence on the US. And thirdly, Argentina is poised to pull off an extraordinary coup in forcing its international creditors to accept startlingly poor terms for the debt on which it has defaulted.

If that deal holds, it will put an end to Argentina’s four-year debt crisis, and set the country back on the path to normality. But it will also set a new benchmark for the licence allowed to defaulting governments. It may suggest to others that they can get away with worse behaviour towards the capital markets, and institutions such as the IMF than they had thought.

Argentina's threat to simply walk away from its debts brought it creditors to the negotiating table and won great concessions from the creditors, but the strategy's long term consequence will be to convince the capital markets that lending to Argentina, and South America in general, is a risky idea. That means in the future less credit will be extended and at a significantly higher cost.

Venezuela's Hugo Chavez fancies himself the new Che Gueverra. But as previously noted (see posts below), he's simply the latest "progressive populist" to recycle the same socialist economic and political policies that have failed Latin and South America so badly in the past. Nevertheless, Chavez knows how to play anti-American sentiment into a rallying cry.

[Argentina, Brazil and Venezuela] also discussed integrating their energy industries, something that will cause alarm in the US. Hugo Chávez, Venezuela’s President, a radical nationalist and the most acidly anti-American in his language, wants to reduce dependence on oil sales to the US, and has just finished a trip to India to that end. Venezuela’s own growing confidence has been helped by record oil prices.

These shifts are enough to provoke alarm in Washington. Of course, as calmer voices point out, the anti-market, anti-US rhetoric from the three giants has not been much borne out in practice. They have, on the whole, appeared respectful of the need for fiscal restraint and for foreign capital.

But the growth of the left-leaning group is a reminder that this rhetoric is a powerful route to the top in these countries, where economic mismanagement has left many bitterly resentful. Their new sense of solidarity with each other may demand more US attention.

The US needs to pay close attention to the spread of Chavez-style anti-American sentiment around the southern continent, which could open that region of other - more worriesome - influences. Like, say, China. Recently, the Chinese have been delicately sounding out South American governments in hopes of securing access to oil and new markets.

China's sights are focused mostly on Venezuela, which ships more than 60 percent of its crude oil to the United States. With the largest oil reserves outside the Middle East, and a president who says that his country needs to diversify its energy business beyond the United States, Venezuela has emerged as an obvious contender for Beijing's attention.

The Venezuelan leader, Hugo Chavez, accompanied by a delegation of 125 officials and businessmen, and Vice President Zeng Qinghong of China signed 19 cooperation agreements in Caracas late in January. They included long-range plans for Chinese stakes in oil and gas fields, most of them now considered marginal but which could become valuable with big investments.

Given the rising tension with China, and the very real theat of a Sino-American military conflict over Taiwan, Chinese efforts to wield influence in South America should be treated seriously.

"The Chinese are entering without political expectations or demands," said Roger Tissot, an analyst who evaluates political and economic risks in leading oil-producing countries for the PFC Energy Group in Washington. "They just say, 'I'm coming here to invest,' and they can invest billions of dollars. And obviously, as a country with billions to invest, they are taken very seriously."

Investment, of course, provides a platform upon which to build political influence, especially in terms of backing certain political candidates and policies. Chinese money could ultimately be used to sway national policy in South America, bringing important countries into the Chinese sphere of influence. That influence could prove expensive to the US in the event of a US-China conflict.

"For years and years, the hemisphere has been a low priority for the US, and the Chinese are taking advantage of it," the aide said, speaking on condition of anonymity. "They're taking advantage of the fact that we don't care as much as we should about Latin America."

To be sure, China, the world's second-largest consumer of oil, has emerged as a leading competitor to the US in its search for oil, gas and minerals throughout the world -- notably Central Asia, the Middle East and Africa.

China has accounted for 40 percent of global growth in oil demand in the last four years, according to the US' Energy Department, and its consumption in 20 years is projected to rise to 12.8 million barrels a day from 5.56 million barrels now. Most of that oil will need to be imported. The US now uses 20.4 million barrels a day, nearly 12 million of it imported.

Aggressively seeking out potential deals, China tries to out-muscle the big international oil companies, always beholden to shareholders. Chinese companies, which have substantial government help, can dispense government aid to secure deals, take advantage of lower costs in China and draw on hefty credit lines from the government and Chinese financial institutions.

"These companies tend to make uneconomic bids, use Chinese state bilateral loans and financing, and spend wildly," Frank Verrastro, director and a senior fellow at the Center for Strategic and International Studies in Washington, told the Senate Energy Committee early in February.

"Chinese investors pursue market and strategic objectives, rather than commercial ones," he said.

Few Chinese "companies" are actually independent of the communist government; even the People's Liberation Army, China's ever-growing military, is known to directly operate a number of large Chinese "corporations." China can thus use trade as a direct means to establish and wield influence. The US needs address this expansion of Chinese influence with an eye toward mitigating it before the consequences begin to harm US interests. Chinese lines of credit and trade deals are allowing anti-US Chavez to pump up Venezuela's economy with big spending projects. This makes him increasingly dependent on China to keep Venezuela's economic engine functioning, and thus ever more eager to do Beijing's bidding.

"We have been producing and exporting oil for more than 100 years," [Hugo] Chavez told Chinese businessmen in December. "But these have been 100 years of domination by the United States. Now we are free, and place this oil at the disposal of the great Chinese fatherland."

China, though, is not just interested in Venezuela. Much of Latin America has become crucial to China's need for raw materials and markets, with trade at US$32.85 billion in the first 10 months of last year, about 50 percent more than in 2003. Mining, analysts say, is among China's priorities, whether it is oil in Venezuela, tin in Chile or gas in Bolivia.

Chinese involvement in Latin America is "growing by leaps and bounds," said Eduardo Gamarra, director of the Latin America and Caribbean Center at Florida International University, adding, "It's driven by the need for privileged access to raw material and privileged access to hydrocarbons."

During the Cold War, the US slowly encircled the USSR with a web of military and commercial alliances that allowed the free world to contain the communist sphere of influence. Trade agreements often led, over time, to military agreements. The Chinese seem to have studied American Cold War strategy and appear to be implementing something similar against the US. American diplomatic and military attention, currently focused on the possibly sisyphean task of bringing democracy to the Middle East, needs to be brought to bear on the spread of Chinese influence, particularly in its own backyard. China with its great manufacturing base represents a far greater threat to the US than any terrorist organization springing from Middle Eastern muck - where they manufacture exactly nothing. Through generous trade agreements, the US has permitted the rapid growth of the Chinese economy at the sacrifice of much of its own manufacturing base, whist allowing Chinese money to bankroll Washington's irresponsible spending. It is finally time for the US to re-examine its trade policies and diplomatic disposition toward China.