William C. Gruben

English

Research Papers in Economics

n recent years, much of the talk in
Central America’s business commu-
nities has revolved around competi-
tion with China in the garment trade. In
the early 1990s, Chinese apparel exports
to the United States were more than
twice those of the countries that would
become part of the Central American
Free Trade Agreement (DR-CAFTA)—
Costa Rica, the Dominican Republic, Gua-
temala, Honduras, Nicaragua and El Sal-
vador. By 1994, these countries had begun
to capture U.S. apparel market share from
China and, by 1998, had overtaken China. 
The DR-CAFTA countries’ competi-
tive advantages included trade openings
with the U.S. that China did not share.
The U.S. has encouraged the apparel in-
dustry in Central America and the Car-
ibbean islands through trade arrange-
ments in the Caribbean Basin Initiative
(1985) and related acts and agreements
in 2000 and 2002. However, China’s 2001
entry into the World Trade Organization
increased its competitive opportunities in
textiles and apparel. The following year,
China’s U.S. apparel sales pushed past
DR-CAFTA’s. 
The competition remains intense.
China’s apparel production costs are only
75 percent of Nicaragua’s and 62 percent
of Guatemala’s. But the average time re-
quired for transporting textiles and ap-
parel to the U.S. from DR-CAFTA coun-
tries is less than one-third China’s. Overall,
the average turnaround between receipt
of an order and delivery to the U.S. is
about four weeks for DR-CAFTA nations
and 10 weeks for China.
1
Although the DR-CAFTA countries
are going head to head with China in
economic competition, there is reason to
think that China may seek ways to buy
their diplomatic cooperation. China has
been devoting considerable effort to eco-
nomic diplomacy in Latin America. In
2004, President Hu Jintao visited Argen-
tina, Brazil, Chile and Cuba. China’s vice
president, Zeng Qinghong, visited Mex-
ico, Venezuela and Peru. Chinese invest-
ment projects in those countries were 
announced in conjunction with the visits.
These investments seem designed largely
to create stable supply sources to China
and to allow Chinese firms to profit on
the supply end. Many of the announced
investment plans involve raw materials
production, metal smelting and trans-
portation infrastructure. Another Chinese
initiative appears to be textile investments
in Mexico—another significant, though
waning, apparel exporter to the U.S. 
China’s investments in Latin America
have been small by U.S. standards. But
in Brazil alone, some 50 Chinese firms
have already directly invested. In 2004,
46 percent of total Chinese foreign direct
investment went to Latin American and
Caribbean countries. The new projects
are said to be dominated by the Chinese
equivalents of Japanese keiretsu—large
business conglomerates with strong gov-
ernment ties.
China’s Latin American diplomatic for-
ays and investments may well have polit-
ical implications for its future involvement
in Central America. It is no secret that
China wants Latin American nations to
break their diplomatic ties with Taiwan.
Twelve of the 25 nations that still recog-
nize Taiwan are in Latin America and the
Caribbean. Six of the 12 are in DR-
CAFTA. 
In some countries, China has already
announced investment and aid plans sub-
stantially larger than Taiwan’s. Last year,
Taiwanese newspapers complained that
the new prime minister of the Caribbean
island country of Dominica asked Tai-
wan for $58 million in aid and then ac-
cepted a package from China for double
that amount. In response, Dominica
dropped its diplomatic recognition of Tai-
wan.  The Taiwanese argue that China’s
financial program for Dominica is part of
an ongoing attempt to discredit Taiwan’s
unusually independence-focused presi-
dent, Chen Shui-bian. Since Chen took
office in 2000, not only Dominica but also
Macedonia, Nauru, Liberia and Grenada
have all dropped diplomatic recognition
of Taiwan. 
Taiwan’s ties to the DR-CAFTA coun-
tries include announcements of investment
plans in Guatemala and other DR-CAFTA
countries. Not to be outdone by Chinese
diplomacy, Taiwan’s Chen made a 12-day
tour of Central American and Caribbean
countries in September. Taiwanese Vice
President Annette Lu also made a diplo-
matic tour of Central America.
But President Chen’s term of office
ends in 2008, leaving plenty of time for
more Chinese diplomatic efforts at reduc-
ing world support for Taiwan during his
administration. It would not be surprising
to see China attempt to make the DR-
CAFTA countries adopt its political per-
spective. There are already reports that
China plans textile investments in Cen-
tral America. 
The DR-CAFTA accord includes duty-
free benefits on fibers, fabrics, yarns and
apparel made in member countries, giv-
ing DR-CAFTA countries an advantage
over China in selling to the U.S. The tar-
iff savings might offset some of China’s
lower production costs. Coupled with
these factors, political incentives might
be more reason for Chinese textile oper-
ations in Central America. 
It is conceivable that the Chinese might
realize a price advantage from the region’s
“spaghetti bowl” of free trade agreements,
perhaps by producing textiles in Mexico
for manufacture into apparel in Central
America. This, however, ignores the Tai-
wan issue. Investments, whether in tex-
tiles or other industries, could turn up as
carrots for DR-CAFTA countries that con-
sider playing the mainland China side of
the street. 
—William C. Gruben
Gruben is director of the Center for Latin
American Economics and a vice president of
the Federal Reserve Bank of Dallas.
Note
1 The Emergence of China: Opportunities and Challenges for Latin Amer-
ica and the Caribbean, edited by Robert Devlin, Antoni Estevadeordal
and Andres Rodriguez, Inter-American Development Bank, 2005. 
FEDERAL RESERVE BANK OF DALLAS   SOUTHWEST ECONOMY   NOVEMBER/DECEMBER 2005 18
Beyond the Border
I
Yuan Diplomacy: China, Taiwan Vie in Latin American Trade Arena

Yuan diplomacy: China, Taiwan vie in Latin American trade

http://dallasfed.org/assets/documents/research/swe/2005/swe0506e.pdf

Yuan diplomacy: China, Taiwan vie in Latin American trade

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