Who really benefits from China’s trade with Latin America?Beijing’s deals with Latin America have reached $100bn, but some doubt the trade boom will have a positive impact on the region’s 189 million poor

The news that China is in talks to build a rail link through Colombia to challenge the Panama canal says much about the scale of Beijing’s economic ambitions in Latin America.

According to reports, the 220km rail link built by the Chinese could connect Cartagena on the Caribbean sea with the Pacific coast, making it easier for China to export goods through the Americas and import raw materials such as coal and iron ore from Latin American nations.

In recent years Latin America has been seen as increasingly important for Chinese investors. The rail link in Colombia could be of great strategic importance, acting as a “port to the rest of Latin America” for the expansion of Chinese interests in the region. The continent is already proving fertile ground for the raw materials China needs to sustain its economic growth. The country imports soy from Argentina, copper from Chile, iron ore from Brazil and zinc from Peru. In 2010 Chinese deals with Latin America topped $100bn.

This growing influx of Chinese wealth has been credited with helping Latin American nations weather the recent financial crisis and expand access to global markets. Beijing has earmarked billions of dollars for much-needed infrastructure, transport, energy and defence projects across the continent in line with its remodelled and rebranded foreign trade strategy, which it has been selling to the developing world as an alternative model for ending poverty.

In the past decade, Latin America has taken great strides in lifting millions out of poverty. Yet in a continent with the most unequal income distribution in the world, and where, according to UN figures, 189 million people still live on less than $2 a day (about 34% of the population), who is really benefiting from the Chinese economic boom?

Instead of working towards better wealth distribution, a 2004 report by the Latin America/Caribbean and Asia/Pacific Economics and Business Association warned that Chinese expansion could actually have a detrimental impact on the vulnerability and exclusion of the poor from economic activity. It argued that China’s expansion into the region has been fuelled by the need for agricultural and extractive resources – energy oil reserves, iron ore, copper and soy – mostly non-labour intensive products that are unlikely to have a big positive impact on the poor. In fact, the report concludes that the most vulnerable could have been negatively affected as a result of the Chinese-led expansion.

The soy industry is a case in point. While China has helped South America’s soybean industries expand their access to global markets, few benefits have gone to rural communities. Despite rising production, employment and wages have decreased with the proliferation of high-volume monoculture farming. For example, while Brazilian soy production quadrupled between 1995 and 2009, employment in the sector actually shrank. Soy production has also been linked to the deforestation of 528,000 sq km of the Brazilian Amazon rainforest.

A research project backed by the Institute of Development Studies and the British Academy is looking into the links between Chinese business in Latin America and the knock-on impact on poor communities. Researchers in Peru have found that Chinese companies running state or private enterprises have little meaningful or positive engagement with local communities or labour organisations.

Neil Renwick, a university professor of global security at Coventry University, is one of the researchers leading the project. He says that Beijing’s approach in Latin America is indicative of its domestic approach to development. “In many ways, the Chinese approach [in Latin America] reflects the high price the [Chinese] people have paid for development, for example, with regard to poverty, inequality, corruption or the environment,” he says.

China’s determination to take advantage of the spending power of Latin America’s emerging middle classes through flooding local markets with cheap Chinese goods could also affect the growth of domestic manufacturing, often vital to growing local employment and income opportunities and to reducing poverty.

Last year Argentina fell foul of China when it announced it planned to impose a tax on cheap Chinese shoes to protect local producers. China suspended an order for more than 2 million tonnes of soya oil from Argentina citing safety concerns. Argentina’s economy is now heavily reliant on its annual $1.5bn soy exports to China. It is not a relationship it can afford to lose.

Ultimately, Renwick believes the current model of expansion is unlikely to prove a positive model for poverty reduction for Latin America’s 189 million poor. However, he does believe this can change. He says that Latin American governments, and not the Chinese, must be the ones who take steps to ensure the business boom translates into meaningful improvement in the lives of the most vulnerable.

He says this must be done by negotiating better engagement with local workers and communities, and by ensuring the boom in wealth from Chinese business is translated into poverty reduction initiatives. Everyone must benefit from Latin America’s best new customer. Because one thing is for certain: the Chinese are here to stay.