China Power | Economy | East Asia

The Missing Link in China’s Economic Ambitions in Latin America

The spotty records of Chinese companies on sustainability continue to undermine Beijing’s ambitions in the region.

By Wenyuan Wu for
The Missing Link in China’s Economic Ambitions in Latin America
Credit: Kremlin Photo

Accusations of Chinese neocolonialism and debt entrapment are now being levied in America’s geopolitical backyard, with negative remarks from U.S. Secretary of State Mike Pompeo regarding Chinese economic involvement in Costa Rica prompting a furious response from Beijing. Of course, Pompeo also bashed Chinese policies in South America last year during his visits to Chile, Paraguay, and Peru. China, for its part, has vehemently denounced allegations that it is eroding the sovereignty of its Latin American partners at each juncture.

For the past 20 years, Latin America and the Caribbean (LAC) has been a coveted target for Chinese economic expansion. Commercial exchanges between China and Latin America developed on a large scale in the early 2000s, and 19 countries in the region have now joined the Belt and Road Initiative (BRI). Overall, Chinese trade with BRI partner countries reached $1.34 trillion in 2019.

In spite of this momentum, corporate missteps by Chinese firms are driving local opposition in a number of host countries. Left unaddressed, these miscalculations could compromise the viability of Chinese investments and Beijing’s vision of win-win outcomes in the United States’ strategic backyard.

China’s Corporate Diplomacy in Latin America

Although Beijing encourages private Chinese FDI in the region’s value-added sectors, Chinese state-owned enterprises (SOEs) are spearheading “China-LAC 2.0.” Extractive industries accounted for 53.1 percent of LAC China-bound exports in 2018, and SOEs dominate these industries in China. In terms of infrastructural investments, Chinese SOEs are leveraging official loans to supply the 652 million people living in Latin America with transport, energy, and sanitation systems, with aggressive deals including the $1.2-billion Chaglla hydroelectric power plant in Peru, four highways in Bolivia, and the $4 billion bid for Bogota’s subway project in Colombia. Even after decades of market-oriented restructuring, Chinese SOEs continue to align their commercial activities with Beijing’s strategic interests.

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Of course, China’s growing economic footprint in South America, which has seen a 480 percent rise in investment volumes between 2008 and 2018 and over $150 billion in official lending between 2007 and 2017, has made positive impacts in job creation, scientific innovation, and the geopolitical balance of power. A uniquely Chinese brand of science and technology diplomacy is taking shape under the banner of the “science silk road,” exemplified by the Chinese Academy of Sciences’ South America Center for Astronomy (CASSACA) in Chile and the Caucharí Solar Park complex in Argentina.

China’s corporate diplomacy has made it a desirable ally for South American leaders looking to offset Western influence and diversify international relationships. In Argentina, President Alberto Fernández is looking to deepen financial, infrastructural, and energy relations with China. Chinese RMB has been proven to be an ideal tool for Argentina, with its record of currency crises, while Chinese investments are addressing a $358 billion infrastructure shortage anticipated by 2040. The BRI’s focus on upgrading value and infrastructural investments also appeal to Peru, which is actively seeking a more diverse set of partners in logistics and tourism.

Chinese SOEs Disregard Local Communities and Concerns

Nonetheless, tensions have been brewing as a result of Chinese companies’ spotty sustainability records and unwillingness to adopt meaningful corporate social responsibility (CSR) practices beyond official pronouncements. Local resistance to China’s growing presence is especially pronounced in host countries where both government regulatory capacity and civil society are weak.

Antagonism against Chinese SOEs is particularly acute in Ecuador, South America’s second biggest petrostate. Ecuador depends on oil rents for 26 percent of its revenues and has a long tradition of resource nationalism. While oil and gas already make up over 60 percent of Ecuadorian exports to China, the Ecuadorian government has received $6.5 billion in loans from Beijing to finance its hydrocarbons sector. China’s largest oil project there, the $1.47 billion Andes Project, is entirely located in the Amazon and primarily in the Oriente Basin and the Yasuni National Park. Since August 2015, Chinese oil drilling has sparked fierce opposition from indigenous populations, led by the Confederation of Indigenous Nationalities of Ecuador (CONAIE) and Ecuarunari.

Ecuador’s indigenous communities have been marginalized by the central government since the early 2000s, with environmental disputes and infighting emboldening Chinese SOEs to act aggressively and unapologetically. For example, in 2015, the government jailed and then deported my former colleague Manuela Picq, an indigenous rights activist opposed to oil exploration in the Amazon. On the other hand, oil drilling in AndesPetro’s Blocks 14 and 17 at the de facto epicenter of oil-related conflicts in the Eastern Amazon remains very much active.

Since then, Chinese investments in Ecuador’s mining and infrastructure sectors have fueled a new wave of anti-government and anti-China protests. Chinese mining conglomerate Ecuacorriente S.A., an Ecuadorian subsidiary of China’s CRCC-Tongguan consortium, has become the target of indigenous activism, with the San Carlos-Panantza copper project in Morona Santiago attracting local resistance since August 2016 over issues of environmental licenses and prior consultation. The situation has degraded to the point of causing social unrest in the Shur Nankints community, with the government declaring a state of emergency. The local community is now internally displaced and cannot return to Nankints; in February 2019, the Shuar people took legal action against the Ecuadorian government over multiple rights violations related to the San Carlos-Panantza mine.

In April 2018, I interacted with several executives from Ecuacorriente through a consulting assignment, after the Ecuadorian government suspended the company’s operating license in the higher-profile Mirador Mine in Zamora-Chinchipe Province. After receiving our CSR proposal on streamlining the company’s sustainability initiatives and mitigating sociopolitical risks through peer learning, the Ecuacorriente executives ignored the CSR aspects and opted to focus on our established working relationship with the Ecuadorian Mining Ministry. The short-lived collaboration demonstrates Chinese SOEs’ unwillingness to prioritize sustainable CSR activities.

Far From a Local Problem

The case of Ecuacorriente is a sadly typical example of the counterproductive interactions between Chinese companies and local communities. More recently, Chinese gold mining and a Chinese dam in Ecuador have sparked protests, against a backdrop of larger concerns regarding unhealthy dependence and the potential for a Chinese debt trap.” Meanwhile, in Argentina, last year’s presidential election saw the country’s reliance on Chinese investments become a contentious topic of national debate. China’s expansive relationship with Brazil in areas such as in agriculture,  crude oil, and telecommunications has raised similar concerns.

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Unfortunately, these trends are not limited to Latin America. The environmental misdeeds of even non-Chinese firms in other emerging markets, such as Southeast Asia, can still be connected to Beijing. The willingness of Chinese banks and investors to overlook important factors of sustainability and local impact makes Chinese interests complicit in social and ecological crises worldwide. One prime example is Indonesia’s Sinar Mas, whose subsidiary Asia Pulp & Paper (APP) has a close relationship with the China Development Bank (CDB). The CDB has been a crucial financial backer for APP’s recent operations, extending a $1.8 billion loan to help develop a pulp mill in Indonesia and standing by the controversial company even after it has been caught backsliding on major ecological commitments. By turning to China for loans and financing, companies like Sinar Mas have effectively insulated themselves from withering international opprobrium from environmental groups like Greenpeace for their role in deforestation and catastrophic fires.

That symbiotic relationship has begun to have more global ramifications, while also demonstrating the divergent strength of environmental regulations and enforcement between North and South America. Just last month, Canadian officials forced the closure of a major facility owned by APP affiliate Paper Excellence in Nova Scotia, as local environmentalists and communities protested the plant’s pumping of effluent into local water systems.

A Better Way Forward

Overall, as new players in the global market and South America’s complex economic landscape, Chinese SOEs have yet to devise sustainable mechanisms of community engagement. Their refusal to go beyond paying lip service to CSR has backfired, and to move forward, they must learn from regional best practices. Fortunately, they don’t need to look far: the Aluminum Corporation of China (Chinalco) has continuously invested in improving community relations through a $50 million relocation project on the Morococha copper mine in Peru, while at Ecuador’s operational Fruta del Norte gold mine, Canadian company Lundin Gold has institutionalized an all-encompassing CSR program, which includes local governance, biodiversity conservation, and economic responsibility.

China’s expanding footprint in Latin America, with its heavy focus on primary industries and increasing attention to value-added investments, has undoubtedly generated jobs, furthered development, and created a viable alternative strategic partnership for countries across the region. On the other hand, the Chinese SOEs leading major extractive and infrastructural investments have earned harsh criticism for their lack of social responsibility. Cases such as AndesPetro and Ecuarcorriente demonstrate how far Chinese enterprises have yet to go in terms of community engagement, local governance, and environmental stewardship. If they hope to mitigate the political and societal risks they face when operating in new markets, it is essential that these state-backed firms revisit their approaches to CSR and learn from regional best practices.

Wenyuan Wu is an independent researcher with a Ph.D. in International Studies from the University of Miami. She previously served as a Distinguished Research Fellow at the University’s Center for Latin American Studies, where her dissertation focused on the corporate social responsibility of Chinese national oil companies in Latin America.