Could Latin America Be the Winner of the New Cold War?

If so, Latin American countries must manage to use the rivalry between two world superpowers to their advantage.

Rivalry between the superpowers of the world is good news for Latin America for once. The region often called “America’s backyard” has struggled throughout history to carve out for itself an independent place in global politics and economy. However, competition with China has now driven the United States to initiate measures that may work in Latin America’s favor.

One of these is nearshoring, a policy that will try to get American-owned businesses to move from China to Latin America. However, though the policy may bring Latin America momentary profit, the increasingly more clear-cut subordination of economy and geopolitical goals of institutions will have a negative impact in the long run.

China as Investor

Since Latin America has been extremely dependent on the U.S., a change in the power relations between the U.S. and China will also be felt strongest there. From the turn of the century to today, China has gone from an insignificant collaborative partner to South America’s most important customer and supplier. The country is a frequently preferred investor and lender.

For a long time, the United States saw this as a positive, that China provided money for sorely needed infrastructure in Latin America. The last few years, however, the U.S. has seen China as a direct rival, especially after Latin America was invited into China’s Belt and Road initiative in 2016.

One of the reasons is that the U.S. views Latin America as a pawn in a global superpower game, called a new Cold War by some.

Latin America also sits on key resources for “the Green Shift.” I wrote about this in the book “Latin America Today: New Interests and Old Ties to USA, China, Russia, the Middle East and Europe.”

This means Latin America will be the object of more attention from the U.S., China and Europe in coming years.

Welcome Resources

In the short term, the United States’ shift in course will bring welcome resources to Latin America. Even if the pandemic is on its way out, Latin America is still the region in the world being hit the hardest. The region has 30% of all COVID-19 related deaths in the world, with only 7.6% of the global population. It is also experiencing its deepest economic crisis ever.

During the last economic crisis, the financial crisis in 2008, the result for Latin America was that China filled the empty space left after businesses from the United States and Europe withdrew. The U.S. wants to avoid the same happening again and has established a new development bank, the U.S. International Development Finance Corporation, and a large new investment program for infrastructure, America Crece, while taking control of the Inter-American Investment Bank.

But what might bring about the most significant consequences of all are the plans for nearshoring. The policy began under Donald Trump with the “Back to the Americas” initiative. But Congress is now debating the Latin American Nearshoring Act, which will secure support for American businesses that choose to move to Latin America.

So far, Whirlpool, Samsung, LG and Boeing have moved production to Mexico; several others are also considering it. Supporters are hoping for $72 billion in new investments in Latin America.

Help for COVID-19

In contrast to almost all other issues, the plans for nearshoring are supported by both the Democratic and Republican camps. But even if there is consensus across party lines that American businesses should move from China to Latin America, Joe Biden and Congress do not have the same power over big American companies that Xi Jinping and the Chinese Communist Party has over Chinese companies.

They have temporarily received help for the COVID-19-created crisis in supply chains and transport worker shortage. This has made localizing neighboring markets more attractive again.

The pandemic has also brought about awareness of how much of American medicine is produced in China, and how vulnerable the supply is.

Sanctions against Enemies

To give an academic backing for the policy, the dust is now being brushed off of mercantilist economic theories which have long been neglected for globalization mantra and market liberalism. At the same time, some go as far as to make this about pure geopolitics.

Instead of nearshoring, the terms “ally-shoring” or “friend-shoring” are being frequently debated. This is meant to indicate that businesses should not be moved just anywhere, but rather limited to countries that conduct USA-friendly politics.

Sanctions are used more frequently against those who fall outside this friend group. This includes, foremost, authoritarian ideological challengers such as Venezuela, Cuba and Nicaragua — but also, in time, other countries with significant democratic challenges, like El Salvador and Guatemala.

Lately, we have also seen examples of the United States demanding that Latin American countries shut out China and collaborate with the U.S. It has so far been successful in Ecuador, which blocked Huawei from its 5G licensing round in order to get access to a billion-dollar loan from the U.S. This will not be the last attempt.

Sorely Needed Investments

If the United States succeeds with its nearshoring strategy, Latin America may be one of the winners, attracting increased investment. It is sorely needed if Latin America is going to be able to stop the rise in unemployment, poverty and migration that we see today.

Another intention is to strengthen regional integration in Latin America. It has been an aspiration since it won independence from Spain in the 1800s. However, as I also stated in my book, Latin America is more fragmented today than ever.

Even so, the United States’ interest can quickly become a two-edged sword.

First, the U.S. approach contributes to what it is accusing China of doing — undermining a regional and global “order” based on principles of pluralism and economic openness.

Second, it may lead to even more division in Latin America, since the countries rich in raw materials in particular will likely not give up their connections to China right away.

Third, the new superpower interest can lead to increased strain on natural resources and new conflicts.

If Latin America is to be among the winners of the New Cold War, it will need to use the rivalry to its advantage and not end up in a new dependency relationship with new and old superpowers.