Building China-latin America Digital Silk Road: Challenges and Roadmap

As the Belt and Road Initiative is officially extended to Latin America, China and Latin American countries will work together to build the Digital Silk Road. The two sides need to formulate or refine relevant rules in the interest of both parties, and gradually integrate their cooperation into the framework of global digital economic governance.

The digital economy1 is becoming one of the driving forces for global economic development, drawing wide attention of nations across the world. At the Belt and Road Forum for International Cooperation held in May 2017, Chinese President Xi Jinping initiated the Digital Silk Road and called on countries to “pursue innovation-driven development and intensify cooperation in frontier areas such as digital economy, artificial intelligence, nanotechnology and quantum computing, and advance the development of big data, cloud computing and smart cities so as to turn them into a digital silk road of the 21st century.”2 With the Special Declaration of the Second Ministerial Meeting of the CHINACELAC Forum on the Belt and Road Initiative, the initiative is officially extended to Latin American and Caribbean countries (hereinafter referred to as Latin America). Under this framework, China and Latin America will work together to build the Digital Silk Road by deepening cooperation in the digital economy. Currently, the construction of China-latin America

Digital Silk Road is merely in its foundational stage. Therefore, a timely discussion of a roadmap and the challenges will be of extraordinary practical significance for a stable and lasting development of China-latin America “Digital Silk Road.”

Current Situation and Challenges of Digital Economic Development in Latin America

According to Monitoring the Digital Agenda for Latin America and the Caribbean ELAC2018, a report issued by the Economic Commission for Latin America and the Caribbean (ECLAC), Latin American countries have made significant progress in the application of digital technology, but they also face various challenges and obstacles, as reflected in the following three aspects.

First, although Latin American countries have increased their support for technological innovation companies, the amount and performance of these companies cannot be regarded as satisfactory. Most companies use information and communications technology (ICT) only for their computers and the internet, while very few have the expertise to apply sophisticated ICTS, such as technologies to add corporate values and raise productivity.3 E-commerce activities in Latin America also grow relatively slowly. The United Nations Conference on Trade and Development’s (UNCTAD) B2C e-commerce index shows that Latin America scores only 47 points, lower than the world average of 54 points. Two factors, namely a low personal payment account ownership rate and an insufficient capacity for postal delivery services, are major constraints for the expansion of e-commerce in Latin America.4

Second, ICT infrastructure and human capital are the main factors hindering the development of Latin American e-government. According

to the 2016 UN E-government Survey,5 while Latin American countries are generally ranked in “medium” and “high” level categories of the E-government Development Index (EGDI), none is ranked in the “very high” level category (greater than 0.75). From 2014 to 2016, the EGDI of the Latin American region rose on average from 0.49 to 0.51. During this period, online services in Latin America made slow progress, and insufficiency of ICT infrastructure and human capital has constituted the biggest obstacles, restricting a more rapid development of Latin American e-government.6

Third, despite some progress in digital governance, Latin America still faces challenges and inadequacies. For example, ICTS have been utilized in emergency disaster relief cooperation at regional and sub-regional levels in Latin America, but there still seem to be significant difficulties to provide comprehensive information for decision-makers and real-time information for vulnerable population groups. Latin American countries have made headway with ICT application in education, but they still lag behind in application innovation, educational resource sharing and digital cultural exchange.7

In addition, Latin American countries have to make continuous and lasting efforts to narrow the digital divide between them and developed countries, among themselves, and within the society of each country. First, Latin American countries spent US$133 billion on ICT in 2014, 63% of which on hardware, but only 16% on software and 21% on services, in stark contrast to developed countries such as the United States, which focuses the bulk of its expenses on software since it already possesses an advanced hardware infrastructure.8 Second, in terms of broadband services, there

is still an enormous gap between Latin America and the world’s leading countries. Even in the top two Latin American countries with the highest quality of broadband infrastructure, only 15% of their broadband has a bandwidth of more than 15 megabits per second (Mbps), while in the least equipped countries only 0.2% of their broadband has a bandwidth of more than 15 Mbps. In stark contrast, the 10 leading countries in the world offer more than 50% of their users access to bandwidth of above 15Mbps.9 Furthermore, only half of the families in Latin American countries are able to use a broadband connection to the internet at home, depending on their economic conditions and geographical locations.10

In sum, to enhance the use of digital applications and close the digital divide, Latin American countries should increase investment in ICT infrastructure and human resources training, accelerate the development and improvement of their digital economy strategies, and step up international cooperation to fill the gaps in terms of funding, technology and experience. China is currently exploring cooperation potential in the digital economy with countries along the Belt and Road routes, in order to work with them for a “Digital Silk Road.” The “Digital Silk Road,” as the outcome of a rapid development of ICT and the increasing importance of the digital economy, indicates a new path for promoting Belt and Road construction. With comparative advantages in related technologies and capital, China can offer enormous valuable support to cooperation with Latin America in developing the digital economy.

China-latin America Digital Silk Road: A Win-win and Allwin Choice

China and Latin American countries all regard economic restructuring, transformation and upgrading as a fundamental path toward sustainable

economic development, and the improvement of the digital economy is an essential driving force to reach that goal. Enhancing cooperation in the digital economy to build the Digital Silk Road will not only help China and Latin America achieve their goals of sustainable economic development, but it will also facilitate further integration and diversification of their economic and trade relations. Its value is specifically reflected in the following two aspects.

Diversifying economic cooperation and integrating industrial chains

First, the development of the digital economy has opened up new areas and provided a new platform for China-latin America economic and trade cooperation. Since 2012, the combined effect of the fall of commodity prices and the structural adjustment of China’s market demand negatively impacted China-latin America trade, the volume of which witnessed shrinking for two consecutive years after reaching an alltime high of US$263.6 billion in 2014. There was an increasing urgency to optimize and diversify the structure of China-latin America trade. In January 2015, China and Latin American countries, in their jointly formulated and released cooperation plan for 2015-2019, pledged to “intensify cooperation, boost trade in services and e-commerce without prejudice to traditional trade.”11 At present, China-latin America trade is still characterized by inter-industry trade, with China selling industrial manufactured goods to Latin America and buying their primary products. Although most Latin American countries have a trade deficit with China, export of agricultural and livestock products to China has become a steady source of trade surplus for countries in the region. In 2016, the bilateral trade volume in this field was close to US$23 billion.12 As China’s urbanization process accelerates and the middle-class population continues

to grow, its demand for high-quality agricultural and livestock products is further increasing, offering multiple new opportunities for businesses operating in this field. The development of China-latin America crossborder e-commerce will undoubtedly provide additional convenience for more Latin American specialty goods and high value-added products to enter the Chinese market.

Second, a firm commitment to the digital economy strategy in Latin American countries grants Chinese ICT companies access to Latin American markets, and allows the integration of their industrial chains. For developing countries, foreign direct investment is not only an essential financing channel, but also an instrument to improve national competitiveness and productivity through technology transfer, integration of transnational industrial chains, and grasp of new business models and management systems. Under the influence of uncertain macroeconomic and policy prospects, foreign direct investment into Latin America has declined for five consecutive years, with a year-on-year decrease of 14% in 2016.13 Contrary to that trend, China’s direct investment to Latin

America has been rising steadily and has helped lessen the pressure of their declining foreign direct investment. In their effort to diversify investment portfolios, Chinese companies have reduced their input in mining and energy sectors, and have become increasingly interested in telecommunication, real estate, food and renewable energy.14 Latin America has become China’s second largest investment destination. The increased Chinese investment in Latin America, including in the ICT sector, will have a positive impact on digital industrialization and industrial digitalization in Latin America.

Third, China-latin America financial cooperation will provide financial support for the construction of ICT infrastructure in Latin America. Inadequate ICT infrastructure has been one major factor that hinders digital economic development and closing of digital divide in Latin America. Construction of infrastructure, including communication facilities, is one key area of China’s investment in the region. From 2002 to 2012, the average investment in infrastructure by a country in the region accounted for only 2.7% of its GDP, of which only about 0.5% went into ICT infrastructure.15 As more funds are needed to meet the demand of ICT infrastructure construction, Latin American countries must look for additional sources of capital to meet the growing demand. Financial cooperation is one of the three engines to move forward China-latin America relations, and China has sufficient foreign exchange reserves to support financial connectivity with Latin America.

Upgrading status of developing countries in global digital economic governance

In spite of the rapid development of global digital economy in recent years, relevant international rules have not yet been brought up-to-date. Since the digital economy has broken the existing traditional economic and

social development pattern, there is an urgent need to establish national and international regulations for healthy and orderly industrial growth, and especially advance international cooperation in formulating digital trade rules, ensuring data security and developing information networks in the digital economy era.

In the field of the digital economy, advanced economies are naturally in leading positions in terms of ICT, capital and human resources, and they are the most influential contributors in the formulation of international rules, eager to maintain their leadership in this field. To give an example, the rules of digital trade, which the United States has been in charge of formulating in recent years, are characterized by the following three aspects. First of all, the US defines digital trade to reflect its own best interests by including most of those business formats in which the US plays a leading role. Second, in the economic and trade negotiations it leads, the US advocates a separate clause to regulate digital trade under the e-commerce chapter. Third, the US customizes some rules to defend its commercial interests and its primary position in the digital trade.

To safeguard their interests effectively, developing countries must participate in formulating rules in the digital economy at the earliest possible stage. As the largest developing country and the second largest digital economy in the world, China must also actively participate in the formulation of international rules for the digital economy, and at the same time vigorously represent the opinions of developing countries. China-latin America digital economic cooperation will not only help earn and share a digital dividend, but also help explore their common interests in digital trade and cyberspace governance.

Feasibility to Align China and Latin American Digital Development Strategies

China-latin America cooperation in the digital economy benefits from

China’s immense progress in the digital economy and its adherance to the principle of development for all. The cooperation is also rooted in the close and comprehensive multi-level relations between China and Latin America since the 18th National Congress of the Communist Party of China. This cooperation model corresponds to the general trend of global economic development as well as to the needs of both sides.

First, China has made remarkable achievements in the digital economy and follows the principle of inclusiveness, which is helpful for the advancement of cooperation between China and Latin America. According to Digital China Construction and Development Report (2017) released by the Cyberspace Administration of China, the output of China’s digital economy reached 27.2 trillion yuan in 2017, a year-onyear increase of 20.3%, accounting for 32.9% of its GDP. It has become a potent catalyst for economic transformation and upgrading. The growth rate of China’s information consumption is about twice as high as that of the total domestic consumption growth, and the number of customers using mobile payment in transactions ranks first in the world. The overall strength and global competitiveness of China’s internet-based enterprises have risen considerably, so that seven out of the world’s top 20 internet companies are now Chinese.16 In addition to its own extraordinary success in the digital economy, China is actively moving forward on the issue of global digital economic governance by creating a platform for cooperation, thus enabling more countries to enjoy the dividends of the digital economy. The G20 Digital Economy Development and Cooperation Initiative was launched at the G20 summit held in Hangzhou in September 2016. Soon thereafter, the International Strategy of Cooperation on Cyberspace was jointly issued by the Chinese Ministry of Foreign Affairs and the Cyberspace Administration of China in March 2017, putting forward the principles and strategic objectives of international cooperation on cyberspace, and devising an action plan based on an analysis of opportunities and challenges of

international cyberspace cooperation.17

Second, recent cooperation in digital economy sectors between China and Latin America does not represent starting all over, but rather a further upgrade of China-latin America relations as well as the natural outcome of their continuous consolidation of Belt and Road construction. Chinalatin America ICT cooperation already began in the late 1980s. China and Brazil reached an agreement on joint development of the earth resources satellite in July 1988, and their cooperation has proven to be a model for South-south cooperation in the high-tech field. Since then, China and other Latin American countries such as Argentina and Venezuela have also worked together in satellite communications and achieved solid results.18 Since the beginning of the 21st century, with the rapid development of China’s ICT industry, its cooperation with Latin America in this field has gradually deepened and become an indispensable tool to upgrade their economic and trade ties. According to Report on Development of China’s Outward Investment and Economic Cooperation (2017), China’s investment in information/ software and information technology services in Latin America, as of the end of 2016, was US$38.02 billion, accounting for 18.4% of its direct investment stock in the region.19 The influence and market share of China’s communications technology giants such as Huawei and ZTE in Latin American communications equipment manufacturing and services markets are also steadily increasing.

As the Belt and Road Initiative expands its influence and realizes continuous socio-economic benefits, the enthusiasm of Latin American

countries to participate in Belt and Road construction has been growing. Argentine President Mauricio Macri, Chilean President Michelle Bachelet and some 20 other leaders of Latin American countries and regional organizations took part in the Belt and Road Forum for International Cooperation in Beijing in May 2017. In January 2018, the second ministerial meeting of the Forum of China and the Community of Latin American and Caribbean States (CHINA-CELAC Forum) was held in Santiago, Chile. It adopted and published the Special Declaration on the Belt and Road Initiative, which reaffirmed Latin America’s status as the natural extension of the 21st Century Maritime Silk Road and an integral part of the Belt and Road international cooperation framework. As a crucial element for the development of the 21st Century Maritime Silk Road, the Digital Silk Road will enhance China-latin America relations, facilitate their cooperation in economy and trade, science and technology, education and culture, and it will ensure that the benefits of the digital economy are shared among the partners.

Restraints of China-latin America Digital Economic Cooperation

As China-latin America digital economic cooperation is still at an early stage, it is confronted with various obstacles and challenges in the process of extending the Belt and Road Initiative to Latin America and facilitating transformation and upgrading of China-latin America relations. The insufficient development of digital applications in Latin America, as described earlier in the article, also affects the cooperation. Challenges for cooperation can be summarized in the following three aspects.

First, policy and regulatory differences may affect cooperation. On the one hand, similar to the current circumstances of global digital economy, China and most Latin American countries have begun to develop and implement digital economic development strategies, aimed mostly at upgrading domestic digital infrastructure and digital capacity, but there is a shortfall in transnational or inter-regional connectivity. On the other

hand, because the digital economy is growing at a much faster rate than the formulation of relevant regulations and policies can keep up with, national states are still negotiating on global digital economic governance and stand divided on how to regulate cross-border e-commerce and data flow, privacy, and intellectual property protection, among others. This creates barriers for cross-border digital trade and investment.

Second, relatively less developed ICT infrastructure in Latin America stifles cooperation. A smart digital network of infrastructure represents true connectivity and is the prerequisite to build the Digital Silk Road.20 Digital infrastructure in Latin American countries is still relatively underdeveloped, and there are disparities between the various nations, between urban and rural areas, and rich and poor families.21 While this situation provides opportunities for cooperation in the region, it is not generally conducive for either the transformation of Latin American countries or the comprehensive China-latin America digital economic cooperation. Moreover, the apparent lagging behind of construction of information communication network between China and Latin America is also not advantageous for deepening cooperation in the digital economy. Submarine optical fiber cables, the most important information carrier for global telecommunication, has become the most important media for China to connect with the world. Nowadays, submarine cables are linking China with the coastal areas of Asia, North America, Europe and Africa, but connection with South America still has to be realized through a transfer.22 With an increasing density of exchanges between China and Latin America, and with growing business activities of Chinese internet companies in Latin American market, China-latin America internet traffic will also expand continuously, which raises the issue of digital connectivity to a level of

greater urgency.

Third, the rise of political and economic uncertainties in Latin America may impede cooperation. In the political arena, the power struggle between left-wing and right-wing parties in Latin America has become more intense in recent years, witnessing declining influence of traditional political parties and intensified social contradictions. Regional integration processes, such as the efforts led by the CELAC, have experienced a setback by certain political factors. The digital economic cooperation between Latin America and China is inevitably affected by these regional and national political changes.23 From an economic point of view, growth bottomed out in 2017 and there were signs of an upswing, but whereas economic performance in 2018 began with a high growth rate, it went down again afterwards. To overcome the weak economic recovery since the global financial crisis in 2008, Latin American countries are faced with many pressing issues. According to a recent ECLAC report, the Latin American economy is expected to grow at 1.7% in 2019, 0.1% lower than estimated in October 2018, a combined result of increased uncertainties in the global economy, weakened economic dynamics both in developed and emerging economies, heightened volatility in international financial markets, a decline in commodity prices in regional countries, and greater financing costs.24 Therefore, all uncertainties, regional and global, economic and political, will undoubtedly add to the complexity of China-latin America digital economic cooperation.

Roadmap for Promoting China-latin America Digital Silk Road

Building the Digital Silk Road in the course of intensifying China-latin America digital economic cooperation provides ample opportunities to achieve multi-level and diversified win-win cooperation. However, both

sides must face up to the difficulties and obstacles, and work together towards common solutions. Under the Belt and Road principle of achieving shared growth through wide consultation and joint contribution, and based on the existing bilateral and multilateral cooperation mechanisms, China and Latin America may integrate various projects and synergize national strategies to accomplish successful digital economic cooperation. They must learn from the cooperation experience, formulate or refine rules in the interest of both parties through consultation and negotiation, and gradually integrate their cooperation into the framework of global digital economic governance.

First, designing a top-level architecture to coordinate Chinese and Latin American digital strategies and related regulations. In China’s second policy paper on Latin America and the Caribbean, the CELAC and China Joint Plan of Action for Cooperation on Priority Areas (20192021), and other guideline documents, information technology and the digital economy have become cornerstones of China-latin America cooperation. China has been improving the top-level design of Digital China and of relevant international cooperation by introducing the Outline of National Informatization Development Strategy, the 13th Fiveyear Plan on National Informatization and the International Cyberspace Cooperation Strategy. The 6th Ministerial Conference on the Information Society in Latin America and the Caribbean held in March 2018 adopted the 6th Latin American and Caribbean Digital Agenda. The agenda defines seven areas of Latin American digital agenda for 2018-2020 (including digital infrastructure, digital transformation and digital economy, regional digital markets, digital government, cultural integration and digital skills, emerging sustainable technologies, and information society governance) and 30 targets for action.25 Synergizing Chinese and Latin American digital strategies is a vital step toward enhanced digital economic cooperation for

the Digital Silk Road. The Chinese experience and the Chinese model, as the result of the development of China’s digital economy, can serve as excellent reference for Latin American countries that are willing to adjust their economic structures, reshape development models, and work for a coordinated development of society. China and Latin America can further define and refine their common interests in their digital agendas, explore the opportunities and challenges of cooperation in information technology and the digital economy, and develop a digital cooperation agenda that is in the interest of both parties.

Second, strengthening cooperation in ICT infrastructure. In addition to cooperation in the field of satellite communications, China and Latin America can further accelerate work on a feasibility study for a trans-pacific submarine optical fiber cable. The Chilean government has initiated research on the route and the viability of the trans-pacific submarine cable project, and is seeking cooperation partners and sources of financing. One of its options is to build a cable line from Shanghai to Chile, which is 22,800 kilometers long with an investment of about US$500 million.26 In 2017, Huawei submitted a feasibility study and a preliminary cost estimate of the project to the Chilean government. If the China-chile trans-pacific submarine cable project can be implemented, it will greatly enhance information connectivity between Chile, South America at large, and East Asian countries. In addition, China and Latin America can advance technical and financing cooperation in ICT infrastructure. Chinese companies such as Huawei and ZTE, which are eminently competent in the field of ICT infrastructure construction, have not only become major product and service providers of Latin American communication technology and terminal markets, but have also started working together with European telecom operators to outline a new generation of network construction and technical standards. In the

future, China may continue to encourage Chinese information technology companies to provide more technical support for overseas local digital development. In addition, China may also provide flexible and diversified financing support for Latin American ICT infrastructure through international multilateral financial institutions, special loans, cooperation funds, and policy or commercial banks.

Third, utilizing the platform economy and advancing cooperation in digital capacity building to foster connectivity of trade and people. On the one hand, the two sides can actively use cross-border e-commerce platforms to upgrade their economic cooperation. As Jack Ma, founder and Executive Chairman of China’s e-commerce giant Alibaba Group, said, “For a very long time globalization had only benefited a small number of developed countries and large companies. However, the internet and e-commerce have benefited developing countries, small- and mediumsized enterprises (SMES) and young people.”27 China and Latin American countries may use the Taobao and other e-commerce platforms to provide more convenient and diversified channels to connect their markets. On the other hand, while strengthening official digital capacity building cooperation, they must encourage capable companies to increase investment in this field. Huawei has accumulated extensive successful experience by training more than 2,000 ICT talents each year at its R&D and training center in Campinas, São Paulo, Brazil. The company has also collaborated with Brazilian universities and research institutions in establishing joint laboratories, network technology colleges and projects, which contribute greatly to local tax revenues, employment, personnel training and technological upgrading.28

Chinese government officials, overseas dignitaries and tech heavyweights discuss challenges and solutions for a digital future at the International Cooperation along the Digital Silk Road Forum held on November 8, 2018 during the 5th World Internet Conference in Wuzhen, East China’s Zhejiang Province. (China Daily)