Entrepreneurs without money (XIV). When China joins the piña colada party and we aren´t ready.

eleonoraescalantestrategy 30 Aug 2018 Leave a Comment

Have a beautiful day!

piña colada 4.jpg Today we would like to share some thoughts about an interesting current fact which is already happening in terms of El Salvador international trade future. Why? Simply because El Salvador country is like an entrepreneur nation without money, wondering about which could be our economic recipe for success. Let´s start. The Salvadoran government announced a few days ago, the opening of diplomatic relations with China and a rupture with Taiwan. This path has been already taken by our nearest neighbors, Panamá and Costa Rica some years ago. As usual, each Central American country has decided to establish the lonely path of one-to-one diplomatic and economic relations with the Dragon China, instead of joining efforts all together as a block of countries called Central America in order to build a strong proposal for negotiating terms. Anyway…

Some thoughts have come to my mind in relation to this. Again my perspective is from the point of view of a corporate strategist, and I wouldn´t analyze it from the political or the diplomatic perspective (remember those are not my pertinent domain fields).

El Salvador is the tiniest country in Central America, our total size in terms of land (20,720 sq km) is as big as the state of New Jersey in the USA, or the equivalent size of Israel or Slovenia. Our local population is around 6 Million citizens living in the territory, and almost 2.7 Million living in the USA. China size (9,596,960 sq km) is as big as the United States, Australia, Brazil or Canada. The city of Shangai only has around 24 Million people which are 4 times the territorial population of El Salvador, and the total Chinese population is 1,415,045,928 people!

China is leading the world in terms of trade. Everyone knows that China has become the world factory. China has a specific mission with Latin America. To my understanding, China wishes to deepen ties with Latin America, because of several reasons. Mainly to diversify their trade and to reduce reliance on commodity exports. Chile and Costa Rica have already free trade agreements with China. Meanwhile, other countries as Ecuador, Brazil or Perú, have been working economic bi-lateral trade agreements with China in their own terms. For example, “Nearly 98 percent of products traded between China and Chile had zero tariffs attached when the new China-Chile free trade agreement started this year”. Remember, in late 2016, “several LAC and Asian countries were on the verge of entering the Trans-Pacific Partnership (TPP). A year later, the U.S. abandoned the TPP and relinquished its traditional role as a driver of global economic integration in bilateral and multilateral negotiations”.

Nearly 75% of the Latin American exports to China are oil, copper, iron ore, soybean, and other natural resources. At the moment China exports to Latin America a high proportion of low and medium high-tech consumer goods to Latin America, bringing higher value-added manufactures to the region. China wishes a secure supply of natural resource products and the right infrastructure to facilitate the transportation of them to Asia. Chinese Foreign Direct Investments in Latin America are oriented to their own interests or wishes. That is why Chinese economic priorities of FDI are the following: Energy, natural resources, infrastructure-construction, agriculture, manufacturing, logistics, transportation facilities and scientifical technology innovation. Latin America lacks development in the majority of those economic clusters. Anyone could think that is a good reason to accept help from China. china latin america relations.gif

But from the perspective of a Salvadoran, I feel as if we already started to drink piña colada without being ready for the party with China. Of course, El Salvador has started diplomatic relations only, but if we speak of economic relations such as building a Free Trade Agreement (FTA), I am really scared about it. Why? Because our country is not ready for the party yet. It is a matter of size fit.

water in punch Any FTA or economic trade agreement has to be reviewed in detail for the best interest of our country. It doesn´t matter if the FTA is with China, Brazil, Canada, India, Australia or the USA. Basic instruments of free trade policy such as tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, antidumping policies and administrative policies have to be carefully scrutinized. In addition, given the divergence of size and industries between El Salvador and China, it is undoubtedly serious to consider some degree of Salvadoran Government intervention in our future economic trade agreement with China. When a country is not ready, some degree of government intervention is required. Even the USA is scared of China. Some degree of protectionism of issues such as protecting local jobs, protecting the local infant or nascent industries and/or artisan industries deemed important for us, protecting national security industries such as defense-related, preventing unfair foreign competition, protecting consumers from dangerous products, protecting the human rights of the Salvadorans moving to China, and the local human rights of our people working for the future Chinese corporations investing in El Salvador. In summary, all the areas which any government will be concerned in relation to the benefit of the Salvadoran Population. What is our value proposition for China? What is the Chinese Value Proposition for El Salvador? Are they a match? Do they fit into our future? Are we ready to negotiate for the benefit of El Salvador citizens? Do we have a strategic right business model with China in our economic planning? Are we creating integral value or not?