Latin America: Amid fast technological change and high geopolitical tensions, how long can Latin America maintain a neutral stance?

A period of high geopolitical volatility is once again on the horizon

Throughout history, the world has witnessed periods of varying levels of stability as the global superpowers – often referred to as global hegemons¹ – have risen and fallen. Today, the world is once again experiencing a highly volatile phase due to changes in the global distribution of power. Since the late 1980s, the United States has been the sole global superpower following the implosion of the Soviet Union in a period that was marked as a relatively calm phase. However, in recent years, the USA has found itself in conflict with China, which has been a rising global superpower over the past two decades. In this context, it is highly likely that rivalries would erupt, and that the emerging superpower would challenge the existing rules of the game and the status quo. Hence it is of no surprise that international organisations like the WTO and the UN, established under the influence of the USA, are currently hamstrung while China reshapes sovereign debt restructuring practices. This rivalry also has repercussions for the rest of the world, with both superpowers using a mix of incentives and coercive tactics to pursue their interests globally, and geopolitical considerations are now overshadowing efficiency gains in the global economy. Countries are being persuaded to ally with either party, increasing the risk of a fragmented world economy into geopolitical blocs. This fragmentation extends beyond the economic realm (for example, through sanctions), and also affects diplomacy, technology and military affairs. Furthermore, as the unipolar dominance of the USA comes to an end, some regional superpowers and non-state actors are perceiving opportunities to aggressively follow their own agendas, which is increasing geopolitical volatility even more, as evidenced by conflicts worldwide from Ukraine to the Middle East.

Latin America pursuing a neutral stance in the geopolitical rivalry between the USA and China 

Luckily, Latin America has remained relatively immune to geopolitical volatility thanks to being geographically further away from regional hotspots. Moreover, the region has been spared from recent military conflicts despite the lingering, centuries-old border disputes in various countries, such as Peru and Bolivia with Chile, Guatemala with Belize and Guyana with Venezuela and Suriname. Most Latin American countries, which historically have strong ties with the USA, have managed to take an independent and neutral approach in geopolitical rivalries also known as “active non-alignment”. However, it’s worth noting that China’s influence in the region has been vastly on the rise in recent decades, particularly in countries like Venezuela and Nicaragua that have tense relations with the USA.

While the USA continues to hold significant influence over the majority of countries in terms of economics, military and soft power, China’s influence has been on the rise due to several events. First, since the country’s entry into the World Trade Organization in December 2001, its economic importance in Latin America has boomed. Trade with China rose almost 30 fold, from USD 14 billion in 2000 to USD 495 billion in 2022. These numbers are likely to be even higher today, especially as Chinese overcapacity (for instance in electric vehicles) and re-exports have found their way into the USA although this trade is still massively eclipsed by the value of trade between Latin America and the USA that totalled USD 1.5 trillion in 2022, mainly thanks to strong trade ties with Mexico. Furthermore, potential new import tariffs set by Latin American countries on Chinese goods, such as the recently imposed steel tariffs in Mexico, Chile and Brazil, could also limit trade growth in the future, depending on their effectiveness. Second, as the world’s largest sovereign creditor, China also plays an increasingly crucial role as the main sovereign creditor in many Latin American nations: so far 21 countries have signed up to China’s Belt and Road Initiative, while countries including Venezuela, Ecuador and Suriname have an important bilateral sovereign debt towards the Asian nation. It is also a key investor, especially in strategic sectors such as critical minerals, technology and renewable energy, although the USA is still the region’s largest investor (USD 1.1 trillion versus USD 6.4 billion for China in 2022, although accurate figures are hard to come by given the opacity of Chinese lending). The USA also still plays the largest military role in Latin America (e.g. the war on drugs and the war on terror) but since 2010 its focus has shifted to the Middle East and Asia, while China has been developing security ties in the region – from stronger military relations with Cuba and Venezuela to investments in the space sector with several satellite ground stations across the entire region, and engagement treaties with law enforcement agencies. Finally, China’s soft power has also risen in the region, especially during the Covid-19 pandemic when it supplied medical equipment and hundreds of millions of vaccine doses before the West.

An increase in friendshoring, but hurdles remain

The US-China rivalry, in combination with its neutral stance, has provided opportunities for Latin America, primarily through investment that will boost economic growth in the long term. Given its proximity to the USA and its large and relatively cheaper labour force, the USA has been eyeing up Latin America – especially Mexico and Brazil – for potential friendshoring, namely encouraging US companies to shift manufacturing and investment to countries that are geopolitical allies. Partnerships are also being formed between the USA and countries such as Costa Rica and Panama to develop a regional semiconductor supply chain, in order to bypass China’s pivotal position in the global supply chain of electronics.

An additional attractive feature of the region is that it holds the key to the global green transition. Latin America has a rich supply of strategic minerals such as lithium and copper, which make it a crucial partner for China with its dominant position in global critical mineral processing. This also makes the region attractive for Western countries that seek to weaken China’s dominant position, especially as Asian countries such as China have already begun to impose export restrictions on strategic minerals. That being said, friendshoring is a long-term trend and it could take years before countries can reap its benefits. Moreover, hurdles such as poor infrastructure, unpredictable policies such as the Mexican nationalisation of lithium, low levels of effectiveness, low productivity (Latin America’s productivity is the second-lowest in the world after the Middle East) and a low degree of technical advancements compared to Asian countries will most likely hinder a large investment boom. Investors may also worry that non-aligned economies could be forced to choose one bloc over another in the future, and as such, investments remain on the fence. Another concern is that there could be increased scrutiny for indirect imports.

Unilateral restraints on trade, often in the name of national security, have recently become more frequent. To date, these kinds of bans and tariffs have been imposed on China, the USA or clearly aligned countries, but there is also a risk that re-exports through neutral third countries or products from Chinese or US companies based in neutral countries will be sanctioned too. For instance, in 2018, former President Donald Trump levied heavy taxes on Chinese imports that have been largely maintained since. As a result, a significant number of Chinese companies have subsequently established operations in Mexico, where one of the main advantages is Mexico’s free-trade agreement with the United States and Canada (USMCA). The USA is now raising concerns over these Chinese firms based in Mexico, because they can export goods to the USA on a much lower tariff or even tariff free, depending on which components are used, and circumvent the Chinese-specific targeted tariffs. These concerns have grown further, especially since Mexico became the United States’ biggest trading partner last year, overtaking China. This factor is also therefore likely to be an important topic during the 2026 negotiations for the review of the USMCA agreement, which expires in 2036.

A technological dilemma awaits

Technological change is likely to be the next game changer in geopolitical rivalries. Over the years, we’ve seen a swift progression in technological advancements, with the USA holding a technological lead for many years. However, China has rapidly risen as a formidable technological contender. Recognising the potential benefits of technology, both superpowers have employed economic pressure and sanctions to leverage their technological edge, for instance in the field of advanced semiconductors. Furthermore, nations and corporations are increasingly faced with the dilemma of having to choose which technologies they prefer or cannot do without. Consequently, the USA has been exerting pressure on Latin American countries through sanctions to deter them from adopting China’s Huawei telecommunication equipment (5G phone networks), citing potential vulnerability to cyber threats and espionage threats from China. However, Latin American countries are still opting for Huawei, as US or European alternatives are often more expensive. The question is what will happen in the future as the technological evolution continues, with developments in areas such as artificial intelligence (AI), smart cities, digital currencies and a potential separate cross-border payment system. Moreover, unilateral sanctions could be broadened in the future to encompass companies and countries that use technological equipment from the rival superpower amid security concerns. In this context, the question for Latin America is how long it can hold onto this neutral position as the blocs decouple further, which could eventually evolve into differentiated technological standards or sanctions based on technological security and espionage concerns.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com

¹ Countries influencing and predominating other countries thanks to their economic, military and soft predominance over other countries.