Prior to the release last week of some striking new research on the social and environmental impacts resulting from China’s economic engagement with Latin America, many of the effects of increased activity in areas such as mineral extraction and agriculture remained unquantified.
But China in Latin America: Lessons for South-South Cooperation and Sustainable Development, a paper co-authored by a working group of academics in the US, Peru and Argentina revealed, among other findings, that the trade relationship incurs a net loss of water for Latin America, increases carbon emissions and is shrinking the Latin American manufacturing sector's share of exports.
As well as questioning the long term sustainability of the current model, the paper noted Chinese companies’ inexperience in overseas trade and investment, and the cultural and communication problems they encounter.
But it also highlighted the opportunities for the regions to pursue low-carbon development pathways – by investing in solar energy, for example.
The paper provides an important contribution to the debate about the nature of Chinese engagement with Latin America and its impacts on the environment. Here, Chinese and Latin American experts explain why.
Paulina Garzon, Director of the China-Latin America Sustainable Investment Initiative
Among the important findings of this report is that Chinese companies have the capacity to adapt their social and environmental behavior and how they do this depends on the host countries’ institutional capacity and regulation. Unfortunately, there is a crisis of environmental governance in many countries that host Chinese capital. It’s already evident that environmental institutions and regulations in Ecuador, Venezuela and Peru are losing their relevance in the current investment scenario. If the researchers’ findings are correct, there will be insufficient incentives for good social and environmental conduct in those countries.
In a globalised world, it is not only the responsibility of governments to protect the planet and local communities. Financiers and multinational companies cannot be excused from their obligations. Chinese banks and companies have social and environmental standards for their foreign operations, some of them more advanced than those of the World Bank. But that doesn’t mean that the standards are always met, however, because for the most part Chinese banks have not created the required tools to implement them. Chinese banks should freely offer information about the socio-environmental risks of their operations, and should improve transparency and accountability mechanisms for the societies in which they operate.
Historically, Latin American societies have long depended on incomes generated by the exploitation and trade of nonrenewable resources. What is new is the massive scale of Chinese investments and the increase in the trading of these resources with China. Last year, China lent more money to Latin America than all of the multilateral banks combined. Most of these loans will be repaid in oil. Regarding trade, Latin American exports of oil, minerals and food to China are increasing and exports of manufactured goods are declining.
Latin Americans would like China to import more manufactured products and to establish a genuine technology transfer. Those are two key drivers that would allow Latin America to escape a ‘primarized’ economic model. But we still haven’t seen any substantial advance in these areas.
China and Latin America talk about a “new kind” of relationship and a lot of countries have framework agreements to establish ‘integral strategic relationships’ with China. Latin American governments seem to be satisfied with the terms of those agreements.
It seems difficult to talk about China as a new imperial power as long as it’s raining Chinese money in Latin America. Maybe this subject will come up when some countries face difficulties in servicing their debt to China. Given the economies of Venezuela and Argentina, that time might not be too far away.
Bai Yunwen, Researcher, Climate and Finance Department, Green Innovation Hub
This report provides detailed data analysis that is extremely beneficial to the discussion. It gave me a more direct understanding of how the trade structure between China and Latin America impacts upon the environment and society.
The paper provides objective accounts of the conduct of a number Chinese enterprises investing in Latin America and the problems that exist. It recognises that some companies have good conduct, while that of others is poor, and it differs from some research papers that tend to generalise while discussing Chinese enterprises with lagging practice.
Our own research has also highlighted vast inconsistency in the overseas conduct of Chinese-funded enterprises. This is largely determined by the domestic business and management capabilities of the enterprise and their experience in taking on corporate social responsibility, while the robustness of legal system in the investment country and the state of local economic development also have a large impact on a project.
The report states that in 2013 over half of Chile’s photovoltaic products were imported from China, spurring on the local use of renewable energy sources. This shows that renewable energy will be a future trend in China’s trade and investment. Using their industry advantage, China can play a big role in global climate finance.
According to the report, Chinese enterprises are doing less well in terms of information disclosure and communication with local communities, which is true. Chinese enterprises are accustomed to working solely with local governments, and lack dialogue with local community organisations. But with the new different political environments China is now investing in, this needs to change, particularly in the case of Latin America with its well-developed and influential civil society that actively works to protect the interests of community residents.
For Chinese enterprises “going out” is part of the process of “bringing in” foreign investment. Within this complex global environment, academic institutions communicate with local residents and NGOs, leading to increased information disclosure and transparency on business operations and the establishment of accountability mechanisms. These capabilities and experiences could improve the quality of how domestic projects are managed and could aid China’s green sustainable development.
On this basis, I hope that this research can be extended to provide more data for comparison. The report mentions that the cumulative water consumption and greenhouse gas emissions is higher for the products that Latin America exports to China than those it exports to other countries, largely due to the character of these exported goods – mainly agricultural and mining products. However China is by no means the only major importer of Latin America’s primary products, and I would be interested to know the environmental impacts and carbon emissions for similar products being exported to other countries. Creating a horizontal comparison of the environmental footprints of companies from other representative countries exporting similar products would give a clearer understanding as to how China could improve local production, operation and purchase methods, and drive sustainable development locally.
This information could also be used to make more specific definitions and distinctions between trade and investment projects. Chinese investment in overseas primary products does not necessarily result in those products being shipped back to China. A number of Chinese mining companies have made large investments in Latin America in the past decade, but two years of domestic economic downturn has slowed growth in crude steel production, and led to some manufacturers producing and selling products directly overseas, rather than shipping it back to China. While this reduces process time and costs, it may lead to increased emissions and pollution by extending the industrial chain, which should not be overlooked.
César Gamboa, executive director Derecho, Ambiente y Recursos Naturales (DAR)
If there is a culture of secrecy that surrounds trade and investment in Latin America, it is not restricted to Chinese companies and investors. But their entry into the region allows national lending institutions to reflect on their own practice. For example, there’s a direct relationship between the proposal to make BNDES’s (the Brazilian Development Bank) more transparent and the introduction of the Brazilian Central Bank’s rules of compliance on environmental and social standards. BNDES’s technical reports on the social and environmental feasibility of investment projects are not made public, so there’s no way of knowing if standards are being met. For a comparison of the social and environmental safeguard policies of BNDES, China EXIM Bank and others, see here.
As regards the effects on the local labour market, in 2010, Ecuadorian employment regulations in the hydrocarbons sector were amended amid an increased presence of Chinese companies in the sector. Among the changes introduced was a rule that 95% of the employment contracts go Ecuadorians and workers must receive 3% of the profits. In Colombia there’s something similar. In October 2012, a Labour Ministry decree ruled that for the next two years unskilled labour in hydrocarbon exploration and production projects should be local. In the event that there is insufficient local labour, recruitment may be extended nationally. In Peru, the Labour Ministry has determined that national and foreign labourers should have equal terms with no distinction between sectors But the approach favouring local workers embraced by Colombia and Ecuador may yet triumph.
Jin Jiaman Executive Director, Global Environmental Institute
Dealing with environmental issues places a great deal of pressure on both China and Latin America. How should the host country protect its environment as it develops? And how should China, as the investor, work to reduce the effects of its investment projects such as environmental impacts, public pressure, and even potential extended economic risks? Investment enterprises face many such questions and pressures.
To reduce these pressures, three aspects need to be considered: the Chinese government must introduce appropriate policies, Chinese enterprises need to practice appropriate corporate social responsibility, and host governments need robust policies and regulations.
Although it has been more than a decade since the implementation of the “going out” policy, China still lacks overseas investment experience when compared to developed countries. Chinese enterprises face a lack of multi-level, multi-faceted help and support domestically, which isolates and weakens them when operating overseas. Most Chinese investment currently resides in projects with developed resources. Most host countries have abundant resources but under-developed economies, cheap labour but limited labour capability, which increases the environmental risks they are facing. The capabilities of these host countries will increase as their economies develop, gradually transitioning from raw material to capital for resource processing, increasing the added value of their resources, slowly switching to the production of higher value added products.
I wish to respond specifically to one point raised by the report: the non-alignment of China's overseas investment guidelines with international standards. This is an area we have been making constant efforts to improve, and one to which Chinese enterprises must pay attention. $US 250bn of Chinese investment is tied-up in Latin America, which still poses a risk to Chinese enterprises. China’s Myitsone dam project in Burma, for example, was halted due to local clashes brought about by environmental and social risks, which led to losses of several billion dollars.
For a decade we have been working towards the introduction of the first set of forestry guidelines for Chinese overseas enterprises. The Chinese government has introduced many guidelines on aspects such as forestry management, environmental conduct, palm oil, and mining, but at present these guidelines are all voluntary. We must improve this by providing guidelines with binding standards, in line with industry, region-wide or even international industry standards. Once these standards are in place, we need to promote their international authentication, namely by aligning these Chinese standards with international ones. Establishing such a system will take time, but it will provide an effective guarantee in reducing social and environmental impacts.
Shen Yiyang, Senior Energy Advisor at the Asia Development Bank and Green Finance Expert at the China International Chamber of Commerce
The report mainly provides descriptive analysis of the situation, present and past. But we should also have our eyes on the future trends of overseas investments of private enterprises, in order to plan ahead and evade risks. In the long-term, I think there are great future prospects for Chinese cooperation with Latin America, with both sides benefiting from the partnership.
From my perspective, Chinese investment in Latin America still carries a certain amount of risk. Latin America’s issues include more liabilities, an unstable financial system, relatively low labour costs, trade protection, and so on. There are still many areas in which Chinese investing enterprises must engage in risk prevention.
A lot of Chinese public and experts are concerned about the risks of overseas investment into the Asian Infrastructure Investment Bank, BRICs Development Bank, and the Silk Road Fund, but I’m not so worried. I believe that in line with their founding principles of openness and inclusion, these future international banks will have excellent risk control. I am, however, somewhat worried about the private capital driven by such an investment policy.
When dealing with developing countries who lag behind developed countries in terms of government management and implementation capabilities, we need to recognise that it is easy for the World Bank and the United Nations to invest in Latin America, not only due to their superior technology, but also because they are bringing richer management experience to that of local enterprises. Large state-owned enterprises do not currently carry out bad practice in Latin America, but looking ahead, the free trade agreements being signed between China and many other countries and the establishment of many domestic free trade zones, will lead to a large number of Chinese private enterprises and capital flooding overseas.
Local partners in Asia, Africa and Latin America lag behind Chinese enterprises in areas such as managerial experience, transparency, regulatory quality, and environmental protection, with no means to bridge the gap. I hope that future Chinese investment enterprises will improve their management transfer, or that China might input more advanced management experience locally. This will also lower China’s own risks and benefit other parties.
Providing foreign aid without any political conditions has been one of China’s long-standing policies. But in the future, as the trend of international cooperation shifts from small-scale to large-scale aid, mutual “conditions” with foreign partners must be established so as to to ensure a safe investment environment.
For a long time the European Union and the World Bank’s investments in Latin America and Africa have often been accompanied by a number of conditions, e.g. the country receiving the investment must practice corruption control, effective governance, respect the rule of law, provide immunisation for a certain proportion of the population, health care, basic education – and educate a certain proportion of girls. But it must also ensure regulatory quality, the cost of start-up enterprises, trade policies, inflation control etc.
The basis of the Asia Development Bank is that all investment programmes have prerequisites (safeguards) that need to be met regarding environmental protection and resettling displaced people. Many developing countries in Asia, Africa and Latin America do not find it easy to reach these targets.
Experiences from many of the World Bank and Asia Development Bank’s past projects show that it is exactly these “safeguards”, conditions given to the countries receiving investment regarding corruption control, inflation control etc., which have prevented disputes on a number of issues such as immigration, environmental protection and corruption, and have protected the safety of the investment as a result.
From analysing the data in the report, I think that there are huge future prospects for China and Latin American partnerships within green industries, ones which will allow more balanced and sustainable trade structure and will play a huge role in helping to enhance the image of Chinese investment within Latin American society.