Growing U.S.-China tensions could push more companies to move factories to Latin America | Opinion

The escalating U.S.-China tensions following House Speaker Nancy Pelosi’s trip to Taiwan will probably drive more multinational companies to move their manufacturing plants from China to Latin America to protect themselves from potential export snags.

Unfortunately, few Latin American countries are likely to take full advantage of this opportunity. Many of the region’s leaders are old-guard populists who are doing little to lure foreign investments. In many cases, they are scaring them away with nationalistic rhetoric and excessive regulations.

Several China experts to whom I talked in recent days agree that, despite the bad business climate in most of Latin America, there will be increased pressure for multinational companies to diversify their supply chains away from China.

“Pelosi’s visit to Taiwan has exposed the fragility of China-based supply chains,” Jorge Guajardo, a Washington-based former Mexican ambassador to China, told me, referring to China’s furious reaction to the trip. He believes that some factories will move from China to Latin America.

“The most obvious risk to U.S. supply chains would be a war, which would make it impossible to access Chinese ports,” Guajardo told me. “But there are other dangers, like if the U.S. imposes trade sanctions on China, or if China decides to use its value chains to punish the United States in the same way that [Russian President Vladimir] Putin is using Russia’s gas exports to punish Europe.”

In addition, supply problems during the COVID-19 pandemic lockdowns in China have alarmed many multinational companies. And China’s wages have risen in recent years, in part because of the country’s increasingly aging population. Those factors are not likely to change anytime soon.

By comparison, Latin America can offer multinational firms a greater proximity to the United States — the world’s biggest market — and similar time zones. Also, Mexico and several other countries in the region have free trade or preferential trade deals with the United States.

But, unfortunately, key Latin American countries, like Mexico, are still betting on their commodity exports at the expense of developing 21st century industries like technology exports or sophisticated manufacturing plants.

And few countries in the region are promoting themselves as alternatives to China-based factories. Among the few that have been doing it are Colombia’s outgoing government of President Iván Duque and a newly created “Alliance for Development in Democracy” made up by the Dominican Republic, Costa Rica and Panama.

Most other countries are led by political dinosaurs who peddle 19th century pre-globalization ideas. Not surprisingly, only 54% of Latin Americans believe that foreign investments are good for their countries, according to an Inter-American Development Bank study.

“It’s a little bit optimistic to assume that factories leaving China will automatically land in Latin America and the Caribbean,” says Pepe Zhang, a China expert with the Washington-based Atlantic Council’s Adrienne Arsht Latin America Center. “There is a global competition for these factories. We need to make our economies more attractive to foreign investors.”

Right now, many multinationals leaving China are moving their factories to Vietnam or other Southeast Asian countries, or automating them with robots in the United States.

Another possible side effect of the escalation of U.S.-China tensions following Pelosi’s trip to Taiwan could be China’s decision to increase its support for Venezuela, Cuba and Nicaragua. It would be a way for China to tell the United States, “If you step into my neighborhood, I’ll step into yours.”

But Evan Ellis, a professor of Latin American studies at the U.S. Army War College, told me that such a reaction by China is not very likely. “It’s possible, but China has traditionally not used the kind of tit-for-tat style diplomacy that Russia has used in Cuba, Venezuela and Nicaragua,” Ellis said.

My overall impression is that, despite many Latin American leaders’ failure to attract foreign investments, there will be a small increase in the number of China-based factories migrating to the region. That will apply especially for Mexico and other countries that are close to the U.S. market, for proximity reasons.

Multinational firms tend to think long term when making investment decisions, far beyond the terms of current populist leaders like Mexico’s Andrés Manuel López Obrador. It’s a pity that what could be a huge windfall for the region will — at least until political winds change — be reduced to a small, slow-motion rise.

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