Report scopes sustainability of China-Latin America relations

A study examining Chinese trade and investment in mining, agriculture and forestry in Chile, Brazil and Peru says sustainability is increasingly on the agenda.

News, 09 May 2013
Satellite image of the zinc, lead and silver mine in Cerro de Pasco, Peru.

Satellite image of the zinc, lead and silver mine in Cerro de Pasco, Peru. China’s demand for materials, such as minerals, are driving trade and investment in Latin America. (Photo: SkyTruthCC BY-NC-SA 2.0)

While much attention focuses on Chinese investment and trade in Africa, another story is unfolding in Latin America, with which China will become the second biggest trading partner next year, overtaking the European Union.

A report published today by the International Institute for Environment and Development, says sustainability is increasingly on the agenda in trade and investment relations between the two regions, and that Chinese companies are showing signs of learning from the previous mistakes they’ve made in international investments.

The discussion paper uses primary and secondary data sources and interviews with stakeholders to examine Chinese trade and investment in mining, agriculture and forestry in Chile, Brazil and Peru. It shows how complex interactions between regulations, shareholder and investor demands, consumer preferences and civil society pressure shape the sustainability of these new relationships.

"China’s demand for materials – from timber and minerals to soybeans, its desire to access new markets and its strategy of south-south cooperation and ‘soft power’ diplomacy are driving a boom in trade and investment that will have important implications for the sustainability of natural resource development in the region," says Emma Blackmore, the report’s lead author.

"To satisfy the demands of investors, consumers and other stakeholders, businesses involved in this trade increasingly apply international standards that aim to ensure sustainable, accountable operations."

In addition, there are new national standards being developed and implemented. These include the Guidelines on Environmental Protection for China's Outbound Investment and Cooperation, developed by China’s Ministry of Commerce and Ministry of Environmental Protection, as well as China's 'green credit' guidelines, which should shape the investment decisions of Chinese banks through the assessment of environmental and social risks.

"China's Green Credit guidelines are likely to play a growing role in shaping the nature of Chinese investment both within China and overseas," says Blackmore. "But it will be important to monitor the implementation of these guidelines and their impact."

Much of China's visible investment in Latin American comes from state-owned enterprises. In 2012, in Brazil, these provided 93 per cent of all Chinese investment. And while China’s Industrial Bank has signed up to the Equator Principles -- by which banks can manage environmental and social issues in project financing -- other Chinese banks that lead financing of overseas direct investment have not, and the Chinese government does not yet endorse the Principles. National standards developed in China may end up being far more important – and having more legitimacy – than ‘international’ standards like the Equator Principles.

The report shows how host country legislation and enforcement is also important in determining the performance standards of Chinese companies and in legislating the types of investments that can take place.

Peru, for instance, is more flexible than Brazil in the types of investments it allows. While Chinese investors have set up new companies and projects in Peru that are fully Chinese owned, or obtained majority shares of local companies, Chinese investors in Brazil have typically had to partner with local companies. As a result Chinese investors in Brazil have inherited the sustainability agendas of local companies, which are relatively well developed because of tougher legislation and enforcement and greater external pressures to be sustainable and accountable.

"While Chinese companies have often been accused of performing worse in terms of sustainability than their foreign and domestic counterparts, evidence for this is far from conclusive," says Blackmore.

"Chinese investors face steep learning curves with respect to local practices and the contexts in which they are operating – both cultural and regulatory. But they are showing signs of increased recognition of the importance of sustainability in informing investment decisions and in building long-term relationships and China’s reputation in the region. The key test will be putting these good intentions into practice."

Download the report Sustainability standards in China-Latin America trade and investment