IE Focus | By María del Pilar Galeote, Professor at IE Law School
China’s growing presence in Latin America is a reality, but is only half the story. Now it´s time for Latin America to do the same in China.It is a proven fact that China´s presence in Latin America is on the increase. Analyses have been made of the advantages and opportunities brought about by the situation, but disadvantages and threats it may hold for Latin American economies in the long run have also been revealed: Latin America has the opportunity to become a large-scale supplier of raw materials and, in particular, an area that demands processed products from China. That is why the route between China and Latin America needs to become a two-way affair. Like many Western countries, Latin America needs to increase its presence there.
There are many strategic reasons for encouraging entrepreneurs to invest in China. First of all, there is a significant competitive advantage in terms of costs. Low labour costs, as shown by the hourly pay of a worker in the manufacturing industry, even if current studies show that labour costs will increase in China over the coming years. If that were the only attraction of the Chinese market, decisions about investing in the country would not always be taken because the same competitive advantage also exists in other countries. However, there are other strategic reasons that justify the decision, such as the Chinese market’s huge potential at the present time. It is a market with a growing middle class that is increasing the level of demand in a large number of sectors.Nevertheless, there is a marked difference in market levels that depends on whether the area is rural or urban, which is very important when deciding where to invest. Finally, tax incentives. We also need to be more specific about these incentives since they were even greater in 2007 than they are now. After 1 January 2008, the new Corporate Tax Act applied the principle of non-discrimination, as provided for by the WTO, which means that national and foreign businesses pay the same tax rate of 25%. However, there are still incentives in place that depend on the location of the investment (more underdeveloped areas or areas far removed from coastal development) and on the sector (clean energies, research and development, etc.).
If foreign investors decide to set up operations and start trading on the Chinese market, the first doubt that comes to mind is whether to do so alone or with a partner and, if the latter applies, which partner is the most suitable. After Deng Xiaoping came to power at the end of the Maoist era, foreign investment was only possible in China through a local partner and as long as the product that was being manufactured were for export. China´s entry in the WTO in 2001 led to the deregulation of every sector except for a few that the state considered could be damaging for Chinese strategic interests if they were to be opened up, in which foreign capital is not allowed. Generally speaking, foreign investors seeking to enter the Chinese market can choose from three vehicles: equity joint ventures, cooperative joint ventures and wholly foreign entities. There are, however, further ways of doing business in China without the need for physical presence or direct investment there – supply agreements, distribution agreements, the subcontracting of products with local businesses (OEM manufacturing and processing trade) and BOT – which can serve to complement the abovementioned vehicles.
We have everything we need to turn the China > Latin America route into a two-way affair – Latin America > China is also possible.