“Beijing is now the main trading partner for most nations in the region and has the fastest-growing stock of investments.”
On August 17, 2021, we published an article titled “The US Is Losing Power and Influence Even In Its Own Back Yard.” It was the first in a series of articles that have traced how China has gradually surpassed the US as South America’s main trading partner and has even begun chipping away at US economic dominance over parts of Central America, the Caribbean and, more recently, Mexico. From that initial article:
Unlike the US, China generally does not try to dictate how its trading partners should behave and what sorts of rules, norms, principles and ideology they should adhere to. What China does — or at least has by and large done over the past few decades until now — is to trade with and invest in countries that have goods — particularly commodities — it covets…
In Latin America and the Caribbean it has worked a treat. China’s rise in the region coincided almost perfectly with the Global War on Terror. As Washington shifted its attention and resources away from its immediate neighbourhood to the Middle East, where it frittered away trillions of dollars spreading mayhem and death and breeding new terrorists, China began snapping up Latin American resources. Governments across the region, from Brazil to Venezuela, to Ecuador and Argentina, took a leftward turn and began working together across various fora. The commodity supercycle was born.
China’s trade with the region grew 26-fold between 2000 and 2020, from $12 billion to $315 billion, and is expected to more than double by 2035, to more than $700 billion.
[Recent data suggest it is well on track to achieving that. In 2023, the total trade volume between China and Latin America reached a record $480 billion, according to China’s National Customs Administration]
In the last 20 years China has moved from an almost negligible position as a source of imports and destination of exports within the region to become its second trade partner, at the expense not just of the US but also Europe and certain Latin American countries such as Brazil whose share of inter-regional trade has fallen. According to the World Economic Forum, “China will approach—and could even surpass—the US as LAC’s top trading partner. In 2000, Chinese participation accounted for less than 2% of LAC’s total trade. In 2035, it could reach 25%.”
A Thousand-Word Photo?
The potential ramifications of China’s rise to dominance of South America, a region whose fortunes and resources have been largely controlled by Europeans and their North American descendants for the best part of the past 500 years, appear to be finally dawning on the West. The German broadcaster DW reported last week that “Alarm bells are ringing in the United States,” citing an article by Swiss newspaper Neue Zürcher Zeitung:
“As a supplier of raw materials, South America has great economic importance for China’s development. This is where 45 percent of the agricultural products traded on the world market come from. Meat and soybean exports are particularly important for the nutrition of the Chinese population. South America also supplies two fundamental minerals for the energy transition: lithium and copper. Two-thirds of the known lithium reserves and forty percent of the copper reserves are located in the region. Chile and Peru are the two largest copper producers in the world. (…)
Spain’s El País warned that the Asian giant is expanding its political and economic influence in the region, eroding the role of the West and putting Washington and Brussels on alert. The Financial Times appears to have reached the same conclusion. In a “Global Insight” op-ed on Wednesday, the pink paper’s Latin American editor, Michael Stott, averred that Joe Biden has lost to Xi Jinping in the “battle for Latin-America”:
“Beijing is now the main trading partner for most nations in the region and has the fastest-growing stock of investments.”
The article notes that Biden’s farewell trip to Brazil and Peru “epitomises Washington’s waning influence” in the region, citing photos from last week’s Apec summit in Peru and this week’s G20 meeting in Brazil as visual proof of that waning influence. In both photos Xi Jinping stands front and centre in the first row while Biden “lingers near the end of the back row in one picture and is absent from the other.” There are, however, official explanations for this that have nothing to do with the US and China’s relative strategic influence:
In the first picture at last week’s Apec summit in Peru, leaders stood in alphabetical order, which favoured China over a rival superpower starting with U. In the second, shot at this week’s G20 meeting in Rio de Janeiro, US diplomats said the group photo was taken early, before Biden had arrived.
As we can see in this photo of the 2016 Apec summit, also in Peru, Obama was also close to the end of the back row.
Nonetheless, as the op-ed notes, “the summit photographs serve as metaphors for the eclipse of the US by China in Latin America, a region that Washington used to call its backyard,” and which Biden has called its “front yard”, as if that were somehow better.
China Making Moves
A better illustration of the two rival superpowers’ sharply contrasting approaches in Latin America was on display last week at the opening of Peru’s Chancay megaport, at which Xi Jinping made a guest appearance. What was China’s paramount leader doing attending the inauguration of a Peruvian port? First, he was already in Peru to attend the Apec Summit; and second, Chancay is as much, if not more, Chinese than it is Peruvian since it is majority financed and owned by Chinese state-owned company Cosco Shipping.
This has raised questions about Peru’s sovereignty. From DW:
In 2021, the national port authority granted Cosco exclusivity to operate Chancay. When this clause was made public, there was a nationwide outcry in Peru.
In March of this year, the government asked the judiciary to annul this provision. (…) But in June, President Dina Boluarte backtracked under pressure from China and abandoned the request to annul the clause. At the same time, the Peruvian Congress adjusted the port law, so that exclusive rights are now allowed for Cosco.
With an estimated total cost of $3.6 billion, the half-finished port in Chancay represents one of the most important infrastructure projects China has spearheaded in the region. The first phase of construction has already cost $1.3 billion and the next five phases will see further investments of another $2.3 billion through 2032.
Chancay is the first port on South America’s Pacific coast that will be able to receive ultra-large vessels – which can transport more than 18,000 containers — and it is hotly tipped to become the main maritime node in Latin America, especially if China’s ambition to forge a new maritime-land corridor between China and Latin America bears fruit.
“China wishes, together with Peru, to use the port of Chancay as a starting point to create a new land and sea corridor between China and Latin America, connecting the Inca Trail with the 21st century Maritime Silk Road, and opening a path to shared prosperity for Peru and for the countries of Latin America and the Caribbean,” Xi said on Thursday during a bilateral meeting with Peruvian President Dina Boluarte, according to Chinese media.
The idea of building a land corridor connecting South America’s Pacific and Atlantic seaboards is hardly a new one. In fact, it has been on the drawing board since the late 19th century. In 2007, the then-heads of state of Brazil, Bolivia and Chile, Lula da Silva, Evo Morales and Michelle Bachelet, agreed to undertake efforts to build a land route connecting the Atlantic port of Santos (Brazil) with the Pacific ports of Arica and Iquique (Chile) or Port of Ilo (Peru) and expedite custom procedures along that route.
But progress has been sporadic. In 2013, Xi Jinping proposed the construction of a 3,755-kilometer-long Central Bioceanic Railway Corridor connecting Peru, Bolivia and Brazil, with the goal of improving the efficiency of international freight transport, optimizing export logistics and promoting regional integration. The project received fresh impetus in 2023 thanks to an agreement between the presidents of Bolivia and Brazil, Luis Arce and Luiz Inácio Lula da Silva, to reactivate this ambitious infrastructure initiative.
Where’s the US Marshall Plan for Latin America?
While Xi Jinping celebrated the opening of the Chancay sea port, the Biden Administration promised to deliver nine Black Hawk helicopters for a $65mn anti-drug programme. Peru, together with Ecuador and Argentina, recently signed an agreement with the US to intensify cooperation in the War on Drugs — a war whose real purpose it to maintain US geostrategic dominance in key, normally resource-rich regions of the world.
But that wasn’t all: Biden also announced the donation of second-hand diesel trains from California for the Lima metro system.
“It was such a striking contrast,” Michael Shifter, adjunct professor at Georgetown University, told the FT. “You have this huge Chinese mega-port project that evoked Peru’s history going back to the Incas and seeking greatness. And then what Biden delivered was some more helicopters for coca eradication. That seems completely outdated and stale.”
During his visit to Brazil, Xi discussed multibillion-dollar Chinese investments while signing a joint declaration with Luiz Inácio da Silva to raise the status of their countries’ bilateral relationship to a “Community of a shared future Brazil-China for a more just and sustainable world”. Likewise in Peru, Xi signed a declaration with President Dina Boluarte to upgrade their countries’ bilateral free trade agreement and express readiness to cooperate on large-scale infrastructure projects in accordance with their respective national laws.
The contrast with the US could not be starker. During his brief stay in Brazil, Biden announced a $50mn donation to a conservation fund. And that was about it. And this has been more or less the story of the past two decades of US interaction with Latin America. Even as Washington has grown more and more agitated about Beijing’s rising influence in its “back yard”, it has not come close to matching China’s economic footprint in the region.
A few months ago, General Laura Richardson, the now-retired commander of US Southern Command, called for a new Marshall Plan for Latin America in order to counter Chinese and Russian influence in the region. But beyond military helicopters and diesel trains, there is little to show for it. As Shifter told the FT, the Americas Partnership for Economic Prosperity, an initiative touted by Biden as an answer to Beijing, was “all dressed up very nicely. But when it comes down to committing real resources, there’s nothing there.”
In a recent interview, Ben Rhodes, Obama’s former deputy national security advisor for strategic communications, warned that Washington is rapidly running out of time to change its ways: “while the US is watching the Trump show, the rest of the world has moved on; they’re aligning around China or they’re neutral like Lula.”
This video is a must-watch. I rarely agree with @brhodes but he's 100% correct here.
He says he'll "always be haunted" by a comment that Xi Jinping made to Obama in 2016 when referring to Trump: "If an immature leader throws the world into chaos, the world will know who to… pic.twitter.com/DyKNQw1aPq
— Arnaud Bertrand (@RnaudBertrand) November 22, 2024
Even Argentina’s anti-communist, fanatically US and Israel-aligned President Javier Milei had a brief meeting with Xi on the side lines of the G20 summit, the outcome of which was a joint pledge from both leaders “to continue working on strengthening their [countries’] commercial ties and on the development of joint projects.”
“China expressed its interest in increasing trade with the Argentine Republic, while Argentina expressed its vocation to diversify and increase its supply of exports to the Chinese market,” said Milei’s spokesman Manuel Adorni after the meeting with the Chinese government, adding: “Both nations agreed to continue working on strengthening their trade ties and developing joint projects that benefit both economies.”
This is arguably one of the most impressive testaments to China’s rising influence in South America — the fact that a national leader who a year ago was calling the Chinese government “murderous” and was pledging to “never to do business with communists” just met up with Xi and pledged to expand trade with China. Milei, never one to worry about betraying his word to voters, was so pleased with the meeting that he posted a photo of him and Xi on his twitter account.
El Presidente Javier Milei se reunió con el Presidente de la República Popular China, Xi Jinping, en Río de Janeiro. pic.twitter.com/49uaV2nsia
— Oficina del Presidente (@OPRArgentina) November 19, 2024
Milei is hoping that his close ties with Donald J Trump and his near-total alignment with US foreign policy will also yield economic dividends for Argentina, particularly with regard to Argentina’s foreign debt to the International Monetary Fund (IMF), where the United States has veto power as the majority member of the organization. Milei is also keen to sign a trade agreement with the US, but he is likely to be disappointed.
In his first presidency, Trump visited Latin America only once and that was to attend the 2018 G20 summit in Buenos Aires. By contrast, this was Xi’s third visit to Peru and the third time he had met with its President Dina Boluarte in a year.
If anything, a new Trump administration, with Marco Rubio installed as secretary of state, is likely to play the role of spoiler in the region — even more so than most other US governments. As Matias Spektor of the Getúlio Vargas Foundation in São Paulo told the FT, there is little prospect of Trump boosting US trade and investment in Latin America. And if Washington cannot compete with Beijing on economic terms, it will instead try to make life more difficult for Chinese investors by pressuring Latin American countries to curb China’s presence while more generally stirring the pot in the region.
The Trump transition team is already talking about taking punitive action against Chancay. Mauricio Claver-Carone, an adviser to Donald Trump’s transition team, has proposed applying a 60% tariff to products from China and other Latin American countries that pass through the port. Claver-Carone cites two motives for taking such action: to address concerns that the port could become an entry point for low-cost goods from China, and to discourage Latin American countries from allowing the Chinese regime to build strategic infrastructure in their territories.
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Why is there a battle for Latin America? If we want to conquer those nations then let’s declare war. If we want to trade, then what else should we be doing? Hearts and minds? Why? People only do what’s in their own best interests. I watch out for mine and surely you do for yours.
So China builds a port in Peru? So what? We can use it. Our ships can dock there and load and unload just as surely as Chinese ships arrive at Pier 90 or Berth 46 in Los Angeles. Whose money built the port is immaterial. Influence the Peruvian government? Our laws make it illegal for Lockheed to pay under the table for them to buy our weapons. China? She does what is in her interests, so does Peru. We could have built a port to serve Lima. We can build a competing one beginning today. Assuredly nothing stops us.
That Milei and Xi meet and the outcome is Argentina wants to sell more plums to Asia and diversify from the USA as principal market and China wishes to sell more cars and widgets is nobody’s concern. We can have ‘all’ the plums if we wish, all we have to do is pay a higher price because the sellers will assuredly do what’s in their best interest and accept the higher price.
Either we’re a nation of buyers and sellers, or we’re not, but enough with the whinging and pearl clutching. Nobody owes us allegiance because of mere geographic proximity.
The answer is that the US wants to dominate Latin America by inky ruling over client governments like Pinochet in Chile, which the US installed in 1973 after a violent coup, but doesn’t have the domestic support for a full scale war nor wants to take the reputational hit for an aggressive war around the world.
From there, Western corporations are going to facilitate the exploitation of the nation, keep the profits for rich Americans along with a few local oligarchs, and give very little back to the people who live in Latin America.
China is far more mutually beneficial, note that they always emphasize the importance of a win-win relationship. Ut may not be perfect, but it is a lot better than the US offers. Certainly, the Chinese are not engaging in the kind of war the US has done, nor regime change via its intelligence agencies.
Accordingly, there is a war. China is a rising industrial power, while the US is a declining power that is financialized and with a very limited industrial base, but the US elite would like to remain on top, so that they can get richer at the expense of the rest of the world.
I don’t think that the US is capable of building infrastructure projects on the scale of the Chinese. Certainly not at the cost and speed of the Chinese. There have been a number of high profile failures, such as the High Speed Rail in California. The neoliberal types have seen to that. There’s been a loss of state competence to make sure that the rich get richer and the whole Western economy is heavily build around that rent seeking.
If a higher short-term return can be found selling and buying in Latin America than there is in financial speculation, then some sector of US capital will be there to take it, and they will sponsor thinktanks to justify a supportive policy.
So far, profits without production has been more lucrative, even if it has degraded US geopolitical power; short-term unenlightened self-interest seems to be the norm in the US ruling class.
I agree, BUT the question everyone is dodging is why isn’t America capable of building a mega port in Peru? Why isn’t America capable of building a mega port in America? Why is America going to rely on South Korea to build USN ships? This was UNTHINKABLE when I was in the USN. What is wrong with America?
America is very much a nation of buyers and sellers, but so is every (as Trump would say) $hithole in Africa.
That was the question I wanted to ask as well, but maybe ‘Altandmain’ has answered it in their last paragraph? And Rev Kev too.
True, nobody owes us allegiance because of proximity; however, the goal is to prevent alternatives (US companies are more profitable when there is a monopoly, plus they can provide crapola products). While the US was messing around in the sands of the middle east, China has developed a commanding lead at an economic alternative, and at better terms.
In the past, the US could best enforce its monopoly with its military in our hemisphere – the Europeans had the upper hand in Africa and South Asia. WW2 allowed the US to replace the Europeans in the rest of the world.
Let’s just build our own megaport in Lima! Maybe we can even build it across the street from the Chinese-built port to really cheez them off! /s
This is beyond “assume a can opener” levels of delusion.
Available land + natural harbor to build a megaport isn’t just lying around. Not to mention splitting the demand. Not to mention that the US probably lacks the capacity to undertake such a project.
And 1/3 of Peru’s population and most of its GDP and internal transport nodes are in Lima, so they can’t just build it somewhere else.
This is the kind of non-thinking that can only come out of a country that’s not only stopped making much of anything, but has stopped thinking in terms of actual reality.
There was one shot to build this thing and China is taking that shot.
Sanctioning the port just because it may instrumental in securing the success of Chinese firms on the continent strikes me as an expression of frustration and resentment at being surpassed by a competitor.
I am reminded of the old saying “If you can’t beat them, join them”. Why is it that a country like the USA seems absolutely incapable of following that principle?
“Joining them” would imply an equal footing and such a concession to the forces of Savagery is simply not kosher (ha) for our ruling dotards.
Thanks, Nick, for another excellent regional summary.
The USA still controls security in the region (not the same thing as making it secure for all). To some degree…
And the USA is the final destination for alot of the trade between China and South America. Even if there aren’t a lot of factories in America that need raw materials. Many “US owned” factories are in other countries. Industry was moved (aka de-industrialization).
The USA finances (for better and for worse) global consumers that China needs for all those exports.
While this is certainly true, in my opinion even more significant (and bolsters your point further) is the US influence in credit markets. The fight over debt forgiveness between china and the west shows the enormous influence the US retains with which to derail chinese development. Just look at the whole Congo infrastructure for resources deal, and how the IMF intervened to reduce the infrastructure portion of the deal by over 60%.
It’s hard to see the US being able to adapt without throwing away their present foreign policy and thinking out a new one. You want trade and infrastructure for your country? You go to the Chinese and they will do it for you. You want trade and no development? That is the game that the US is playing. They don’t want those South American nations to develop and have used the World Bank and the IMF to undercut their development for decades now. Keep them weak and down so that they can be exploited better. But the Chinese are instead doing big engineering right now. The same sort that the US used to be renowned for.
So what does the US usually offer? US bases, military training, US weapons that have to be serviced by US contractors and training for local officers who as often as not use it to topple their own governments. And surely people in South America remember General Laura Richardson talking about all the resources in that continent while trying not to drool. Even when the US tries to do development they try to do it on the cheap. China builds a billion dollar port which will help ensure the prosperity of Peru. The US sells, not gives, sells 40 year-old locomotives and carriages that were probably on their way to the wreckers. The US could compete with China in South America but I cannot see them changing their foreign policy to do so. The system is too deeply embedded right now.
If I recall rightly the only port the USA has built recently was the one – meant to deliver aid- that got blown away in Gaza!
Russia is winning the military aid argument in Africa (and I expect now in South America) versus uber-expensive US military hardware that is proving inadequate on the battlefield in Ukraine against the US shinola (which anyway is unavailable for years with the US demanding returns of Patriot missiles, tanks, etc.)
I also want to congratulate drugs for winning the war on drugs.
It was the original war that never ends, designed to drive funding to the police state. Total victory to date.
“… and to discourage Latin American countries from allowing the Chinese regime to build strategic infrastructure in their territories…”
Strategic infrasctructure that makes people in other countries look around their region of birth and say, “there’s a better future here”…that’s the USA’s worst nightmare. The Americam Dream propaganda getting its final flush.
Great article Nick. The Ben Rhodes interview is a stunning rebuke to decades of American exceptional foreign policy. It’s also the first time I’ve seen a US official show some awareness that the times they are a changing.
It’s also more proof that you can’t run an empire with neoliberalism as your operating system
i am surprised bill clinton was not standing next to Xi, after all, this is the inevitable outcome of bill clintons free trade polices. obama is to stupid to understand his role in this, but bill i am sure, understands what his role was, and was absent.
the towering intellectual midgets that got control of the u.s.a. in 1993, have turned a once super power, into a has been hedge fund/bank with nukes.
the towering intellectual midgets, cannot even come up with a marshall plan for their own country.
anything the towering intellectual midgets try, they must order it first from china. then they blame working people, and double down on them.
with the people trump has chosen to try to resurrect something out of the ashes of what was done to america from 1993-2001, he will surely fail. but in reality, that ship sailed in 1993, and its to late now.
I’ve been following this guy for a few months now and he makes the choices pretty stark. South America and the rest of the world simply can’t afford to cut China out because it delivers high quality machinery and infrastructure that they desperately need, at a quarter of the cost of American and European brands. There’s a lot of competition and they’re competing on value to the customer, not marketing and locking in the customer in on exclusive maintenance contracts and upgrades.
https://youtu.be/z7m5Z6FuPbk?si=RqHqkqrK-gatIP4g
They can also offer financing terms that are far more favorable and without the political risks of Western coercion and sanctions.
The US could offer a Marshall plan because it had more than half of the world’s total industrial production after WWII. Nowadays it can’t even build a flyable plane or a HSR line through the flat agricultural land. The only things that they still want from us are dollars and Miami condos, and both may be under water soon.
And most of the US machinery is made in China, but inflated once it enters the US. And in the case where it is assembled in the US, its from components made in China.
I am looking at a vaccuum oven, and can get from china for around 800 bucks delivered. US equivalents (made in China) are $2000. Another item I currently source are inclinometer. They are 120 bucks from CHina, the same ones in the US are sold for 800 bucks, the US equivalent is 4000. Quality for these items is very high, and customer support better than I get in the US. I coudl go on and on and on. The US has a clearly losing pitch.
“They can also offer financing terms that are far more favorable and without the political risks of Western coercion and sanctions.”
Not exactly. The Chinese got long-term, full control of the Chancay port despite some Peruvian objectors. You know, the sovereignty thing! They threatened to withdraw from the partially completed project, otherwise.
Big guys play rough, east and west.
Why wouldn’t Argentina and Brazil find China a more appealing interlocutor? After all, the US, Brazil and Argentina are the top three soya producers, with the US and Brazil routinely swapping places to the head of the charts, and there have been considerable incentives for US farmers to shift into soya production over the last generation (what with the 40B and 45Z credits for biofuels, and the Renewal Fuels Standard from 2006). Again, China and southern hemisphere producers are complementary rather than competitive. Argentina harvests its soyabeans in April-June, whilst China does so in October.
Moreover, Milei must know what Elliott Management (Singer) did to Peru in 1996 or Argentina in 2002. The US not only exerts suasion over its Latin American backyard by means of tariffs, quotas and coups, but also by means of lawfare in courts which are sympathetic to US creditors. Chinese investment is not without strings attached, but the suasion exerted is relatively less stringent (especially for the comprador class), and there is simply more on offer: Argentina has by far the largest liability to the US-dominated IMF, but China increasingly functions as an alternative IMF, allowing the Argentine government to play the one off against the other in order to gain better bargains from both (arguably an urgent necessity given the present critical state of Argentine reserves): https://www.phenomenalworld.org/analysis/new-world-order/
In 1914 British influence was prevalent across Latin America, especially in the southern cone (and Woodrow Wilson even saw Weetman Pearson’s Mexican Eagle oil firm as a major factor in fomenting instability in Mexico). By the 1930s it was in severe run-off, as the Roca-Runciman treaty (1933) and Willingdon mission (1940) demonstrated. Much the same could happen to US influence, though the decline is unlikely to be nearly as absolute. Given the tendency of US policymakers to deny reality and to bear deep-seated grudges, the progressive intrusion of Chinese influence in Latin America might prove to be yet another flashpoint, although I suspect the Chinese leadership will probably act as prudently as Salisbury did over the Guiana/Venezuela boundary dispute following Olney’s invocation of the Monroe Doctrine in 1895.
According to Michael Hudson on yesterday’s Dialogue Works, there is a new international law that If a majority of global south or third-world bond holders agree on the renegotiation of debt then the minority partners (Paul Singer, vulture funds) have to go along with it. They have no ability to hold up what the majority (75 or 80%) agree with.
The discussion was between Hudson and Richard Wolff about a hypothetical country threatening debt repudiation/go bankrupt on their debt. That would require lawfare ,but not if the country recruits enough ally countries to renegotiate the debt. Say give them 10 cents on the dollar for the debt. That’s where China might come in.
Many thanks! There is this, but its application would be to those debt contracts executed under New York law: https://www.whitecase.com/insight-alert/new-yorks-proposed-sovereign-debt-stability-act-overview. It is not clear whether the applicable bill has been passed. Of course, it would affect a large section of the debt market which has contracts under New York State law and/or jurisdiction. Presumably, however, many creditors would be willing to agree to further credit if other jurisdictions within the US are used instead. Query also whether the bill is more performative than effective in terms of creating a level playing field between creditor and debtor.
Nick, can you please link the source of the interview? It’s interesting but how can I fact check it?
Yves and team, please let this comment go through moderation.
Here you go, Paul. The clip is from the latest episode of his Pod Save the World podcast (around the 44 minute mark).
https://www.youtube.com/watch?v=YRMZGNSqNRA
Thank you!
To add to this discussion is to point out the fact that China is getting its dollars for these projects likely from Saudi Arabia.
And Saudi Arabia is selling US Treasuries to lend dollars to China. Why? Because Saudi Arabia wants to diversify its dollars portfolio so that they won’t end up cut off like Russia.
Saudi Arabia buying fewer US Treasuries means that the cost to America to print dollars will increase. And this is coming at a time when America is borrowing more than ever.
Michael Hudson and Richard Wolff covered this yesterday on Dialogue Works. I cued the video to the pertinent part and following is my rough summary of what they said.
https://www.youtube.com/live/jQkNAQQoTxw?si=dA76EYYZJWgUhosR&t=2464 41:04
Wolff: Petrodollar System is that the world would pay in dollars and Saudi Arabia would get a huge portion of that. Saudi Arabia made a commitment to then lend those dollars back to United States to purchase U.S. treasuries.
The United States ,as a major oil purchaser, sends its dollars out to buy oil and the Saudis send it back into American bank accounts. This enables the US to send out its dollars, other countries use the dollars to buy things they need, and it acts as a subsidy for the American standard of living.
Saudi Arabia is now selling some of its dollars to China to diversify its trade deals (BRICs consequence). The Chinese are able to borrow at very low rates due to the fact that they are a wealthy nation.
The Chinese, then, are likely to turn around with these dollars to pay down/forgive the debt of the belt and road countries. The Chinese will get something important in return like access to ports, minerals…They’re building their apparatus which is happening more than is reported.
This also means that Saudi Arabia, one of America’s greatest creditors, is going to be lesser in that role because China is taking some of the dollars that would normally be lent back to America. This is coming at a time in which America is borrowing more than ever. It’s going to cost the Treasury more to borrow because money that is going to China used to come here.
Hudson: *wants to get into the technicalities* Hudson sat in the White House when the Petrodollar arrangements were being set up. Saudi Arabia never got petrodollar money-that came from American oil companies paying directly into American bank accounts. Saudi Arabia was told that they could charge what they wanted for the oil, but that it has to be in dollars and paid back to the US (treasuries, securities, stocks and bonds (no controlling share of American companies)).
China goes to Saudi Arabia to borrow dollars at 1.2%. In order to raise the cash, Saudi Arabia draws down and sells US treasuries. Why? Saudi Arabia experienced a lot of pressure from the US when it joined BRICS and saw what the US did to Russia’s holdings According to the petrodollar agreement of 1974, removing the dollar would be considered an act of war-Secretary of the Treasury told Hudson.
Saudi Arabia wants to keep dollars because the dollar is still strong due to the fact that all of America’s satellites use the dollar. Also countries owe huge amounts of debt in dollars. Saudi Arabia wants to diversify its dollars in friendly countries.
Hudson doesn’t think that China will use the money to pay down country’s debts. Thinks that they will use it instead to build the belt and road initiative. This will allow China to maintain its current dollar holdings to ward off George Soros-type currency raiders that want to drive down the Yen.
Saudi Arabia shifts the risk of holding US dollars to China and China is confident that the US won’t try to do them what the US did to Russia.
It’s important because it shows the desire for de-dollarization.
I don’t mean to sound as if I am in shoot the messenger mode, since I assume you wanted to be helpful.
But this is absolutely ridiculous. And I get frustrated when people with reputations who should know better pass off patently bogus claims.
China has over $1 trillion in USD in foreign exchange balances, for fucking sake. China does not need to get dollars from anyone. It is awash in dollars. Arguably the last thing it needs is more dollars, particular if one is of the school that the dollar is going to be toast.
Second, this is not “Saudi Arabia” as in the government. This was a bond issue marketed in Saudi Arabia and there were many buyers, almost certainly including wealthy individuals and companies.
Third, Wolff is completely wrong about the history. He needs to read State Department archives. The US, and by the way also UK and European concern was that the Saudis were rapidly accumulating such a large dollar horde that they could amass so much in REAL resources as to dominate Western governments and societies. The idea that the Saudis then would or could diversify meaningfully away from the dollar back then was absurd. The economies of the rest of the world (and even more so their financial markets) were too small to allow for very much of that.
Forth, this is not going to undermine demand for Treasuries. This is one deal of $2 billion. Foreign holdings of Treasuries reached an all time high in August, exceeding July’s then all time high: https://www.reuters.com/markets/us/foreign-holdings-us-treasuries-soar-all-time-peak-august-data-shows-2024-10-17/. The INCREASE in foreign Treasury holdings in August alone was over $8 trillion (with a T), 4,000x the value of this bond deal!
Fifth, the so-called petrodollar deal was only 5 years in duration and not renewed. The big reasons the Saudis continued to hold dollars was again that the US had far deeper financial markets than any other country by far. A second reason was all the oil futures market were in dollars, and any hedges or options would be structures and price with reference to the prices on these markets. Many oil buyers want hedges. Not selling in dollars = no hedges = much worse price.
Confirming that, see a commentary on the thinking then:
https://factcheck.afp.com/doc.afp.com.36769QG
And the Treasury was not a player in theses talks. It was Kissinger to the Saudi oil minister, Al Faisal, and also to Europeans he was getting on the same page. There is absolutely na da in the record substantiating Hudson’s claim re the status of the dollar or that it was in any way a US concern. In fact, it was the reverse, the power that the Saudis wielding with such a dollar hoard, that they could buy up so much stuff in the US.
I did a study with the world’s biggest FX trading desk in 1984, and even then, 10 years later, the dollar was still far and away the dominant currency, again due to comparatively small securities markets elsewhere (ex Japan in theory, but virtually all Japanese investments were held domestically).
Sixth, it is ridiculous to depict this Saudi bond sales as dedollarization. If China had sold renminbi bonds, you could argue that, but not dollars. And China still had to pay more, albeit a very small amount more, than the US Treasury to get this financing done. This is reinforcing, not weakening, dollar hegemony.
The best reasons I can come up with for this deal (which BTW is not the first deal Chinese banks have done in dollars) is:
1. This is just another regular small foreign currency bond sale. See Bloomberg: https://finance.yahoo.com/news/china-begins-market-first-dollar-013137791.html. So not special save how much oversubscribed. The one novel wrinkle is targeting Saudi buyers.
Per that, aside from “relationship deepening,” it may also be a political move to let Saudis express their unhappiness with the US policy towards Israel by selling Treasuries and buying a similar-risk dollar instrument.
2. Demonstrating that US ratings agencies are biased against China. Its bonds were priced at an AAA level when the agencies put them at A1
3. Part of a government policy that banks have to sort out their messes. These banks are big lenders outside China to emerging economy borrowers. Those loans have been shifting to RMB over time but a lot are in dollars and some are being made in dollars even now. Some of those loans are probably under water. Brad Setser has opined that the banks do fancy footwork to finesse the losses. That may include having to get any related $ from somewhere other than the central bank FX reserves. Mind you, even if some of this is mess related, it’s chump change in terms of the Chinese economy.
But again, these bonds reinforce the dollar system. Payments of interest and principal will have to do through US licensed financial institutions.
What is most stunning about the US losing Latin America is that so many Latin American elites *are* Americans with dual nationality.
They would infinitely prefer to do business with the US, and if the US isn’t doing business with them it’s because the US doesn’t want to or is so sclerotic it doesn’t know what it wants.
Nick Corbishley, thank you so much for this excellent essay.
Keep in mind as well that the port in Chancay is a clean port. Also, the port connects directly to the Pan-American Highway running up and down South America and connects the Atlantic coast of Brazil to Peru and the Pacific. Also, Colombia is connected to Peru and the Pacific.
The stark truth is that in fact it is the US that needs a Marshall Plan, which needs to be applied not only to infrastructure and economic base, but the knowledge, cognitive, moral, ethical fundamentals…
Really, the battle for hearts and minds started to turn when the Chinese government started building soccer stadiums in Latin America.
Literally concrete material benefits.
Climate change (the man made concept) only exists in the minds of the western ‘money power’. It becomes real when this energy transition junk like windmills, electric cars, giant batteries etc are sold to western govts and paid for by us whether we want it or not. He’s right, the world is moving on while ‘the west’ ie America and its satellites print more and money just to survive.
As for the Trump show, it’s good to keep us all on our feet and entertained, meanwhile America needs to get its act together now and the satellites need to break free urgently.
That photograph of Milei and Xi was priceless. Milei looked like a boy who’d just been made a prefect because his mother was sleeping with the headmaster. Xi looked as if he felt obliged to keep maintaining the handshake for the duration of the shutter-click even though the stench was disgusting.