Emitting carbon, embodying water: how China’s FDI and trade impacts Argentina

Soybeans and soybean oil are Argentina’s two main exports to China. Cultivating soy products incurs a large ‘water footprint’ (image: Andrea Cummings/ Flickr).

Emitting carbon, embodying water: how China’s FDI and trade impacts Argentina

Over the past decade, China’s economic presence in Argentina has become especially significant. China is now Argentina’s third largest export destination and the second largest source of its imports. But as the volume of trade grows, so do greenhouse gas (GHG) emissions. In fact, China is the only major export destination for Argentine exports for which GHG intensity – the amount of CO2 equivalents emitted per US$ of exports – is growing.

Not only this, our research has found that the amount of water used in the production of Argentina’s exports to China (mainly soybeans and soybean oil) is topped only by that of exports to Spain.

And Argentina is fast-becoming a strategic location for Chinese firms investing in the oil and gas sector, with the state-owned Sinopec eyeing the huge shale reserves at Vaca Muerta in Neuquén province, which are recoverable only by water-intensive ‘fracking’ techniques.

Our recent study, FDI and trade: is China relevant for the future of our environment? The case of Argentina recently published by Boston’s Global Economic Governance Institute (GEGI), is an attempt to explore relatively new subjects on which scarce hard data exist, and which try to analyze some social and environmental impacts that result from the trade and investment relationship between China and Argentina.

Argentina’s trade with China is based on a clear pattern: Argentina exports natural resource-based products while China exports manufactured goods to Argentina. This is the ‘standard pattern’ of China’s bilateral trade relations with all Latin American countries. In the case of Argentina, it has raised a number of concerns from various quarters.

Domestic firms complain that their home and global market share is threatened by China, sometimes going so far as to accuse China as deploying unfair trade practices. And those employed by such industries fear losing their jobs to Chinese workers.  Environmental and social movements, cognizant of the weak enforcement of China’s domestic environmental legislation and the poor standards historically applied by China’s overseas investors, warn about the further abuses.

In the political arena, sovereignty issues have arisen surrounding the presence of many state-owned Chinese firms investing in Argentina as bilateral trade and FDI with China are strongly concentrated in Latin American natural resources. Fears about the sustainable use of those resources and the environmental impacts of their exploitation have also been articulated.

But many such worries are not unique to Chinese trade and investment. For example, we must acknowledge that oil extraction, where much Chinese investment is channeled, is environmentally degrading anywhere, not just in Argentina.

Moreover, due to the fact that Chinese investment in Argentina’s oil sector is in the form of mergers and acquisitions (M&A’s) it is difficult to assign responsibility for environmental damage and liability because environmental damage could be a function of previous owners. But in spite of this, we find that Chinese firms get blamed for increasing amounts of environmental damage, though they may not even be responsible for it.

Though they may sometimes be incorrectly blamed for damaging Latin American environments, Chinese firms do tend to be more environmentally responsible when in a merger with a western firm than with a Latin American one. This is partly due to the intense scrutiny that big western firms face from national governments in host countries and from international NGOs. China National Offshore Oil Corporation (CNOOC), for example, partners with British Petroleum (BP), which after suffering huge reputational damage as a consequence of the Deepwater Horizon disaster is under pressure to implement robust environmental policies.

There also appears to be an institutional mismatch between the federal and provincial governments with respect to the incentives and capacities on the environmental regulation of foreign firms. And the evidence suggests that while provincial (and national) governments in Argentina have often been more interested in maximizing royalties or tax collection, growing pressure from local communities and other stakeholders has created awareness about environmental impacts. This owes in part to the fact that in Argentina, social and environmental policymaking happens at the provincial level, where access to decision-makers is easier.

Better evaluation of the issues addressed by our research requires more transparency from both sides. Neither governments nor private firms are prone to disseminating relevant information on these matters, and no legal framework pushing for more transparency in the relations between both parties exists in Argentina, making it difficult to critically assess the current situation and its prospects.

On balance, our study reveals that Chinese economic activity is not categorically more environmentally degrading within a given sector than that of other domestic or foreign counterparts.  That said, Chinese demand continues to grow in the soy and energy sectors and Argentine authorities will need to strengthen efforts to maximize the benefits and mitigate the environmental risk stemming from economic activity in these sectors.  New policies should try to do the following:

  • Foster ‘learning’ exchanges between firms with stronger environmental capabilities and their Chinese counterparts to speed up the environmental learning curve.
  • Better align national and provincial efforts at designing and implementing environmental policy in the extractive sector.
  • Encourage all foreign firms, including Chinese, to engage with the Extractive Industries Transparency Initiative (EITI) and other mechanisms for transparency and accountability.
  • Generally upgrade social and environmental policy, particularly in the extractive sector.

Such practices are especially urgent given the imminent exploitation of the huge gas and oil reserves at Vaca Muerta.

If forecasts predicting that Vaca Muerta has the largest shale oil and gas reserves outside the United States are correct, Argentina should be able to leverage favorable negotiation conditions not only in terms of royalties, technology transfer and other economic variables, but also in terms of the preservation of the environment and the protection of local communities and producers.

But the project has had an inauspicious start, since the terms of the first Vaca Muerta exploration contract between Argentine state oil firm YPF and Chevron of the United States, have not been made public.

As China consolidates its role as a major economic and political superpower, there is a need for strategic consideration of the role of Argentina in this new international context, and how to handle the opportunities and risks presented by China’s growing role in trade and investment. Long-term vision is needed, since the temptation to pursue short-term profit in spite of long-term risks is very strong in countries with fragile institutional settings.

More research on these issues could help to inform the public debate and help politicians and decision makers adopt more informed and better policy choices to take advantage of the trade and investment opportunities under an inclusive and sustainable development framework.

 

This article is based on the discussion paper FDI and trade: is China relevant for the future of our environment? The case of Argentina, published by the Global Economic Governance Initiative, Boston University, and co-authored with Julian Donaubauer.

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