Questionable Chinese mining practices in Latin America

Originally published at the Americas Report

China has conducted an economic foreign policy under the slogan of “win-win”.

This concept is based on the notion that China’s investments abroad could help China’s growth as well as the infrastructure of the countries where Chinese investments are pursued.

As Elizabeth Economy has pointed out, in order to advance its investments, mostly in countries that provide raw materials, China includes broader trade and aid deals to promote the development of the recipient country’s infrastructure.

In Latin America, China is the third largest foreign investor, mostly in the mining and hydrocarbon industry. Considering the broader picture, a recent study by the Economic Commission for Latin America and the Caribbean (ECLAC) predicts that China will become Latin America’s most important trading partner within the next five years. ECLAC suggests the need for a more balanced trade relationship as most of the exports out of Latin America are in the form of raw materials (59%) with a high ratio of manufactured products coming from China to Latin America. When China invests it secures an equity share of production on terms comparable to other co-owners (mainly the host country). Likewise, China usually makes a loan to the producer country in return for a purchase agreement.

In Latin America, mining industry contracts were awarded to China to help exploit valuable subsoil resources.

Ecuador and Peru offer two different models of Chinese investment that are very telling not only about China but also about how these two different political regimes deal with this issue.

Ecuador, a member of the Bolivarian Alliance, is one of the largest recipients of Chinese investment, particularly in the area of mining and oil.

The government of Ecuador has signed a number of deals with China. One of the largest such projects is a huge mine called Ecuacorriente. The Chinese company signed an agreement with the Ecuadorian government where the former obtained 50% of the profits.

China has developed a large loan operation. Ecuador is the recipient of loans from China, which China considers as a good will gesture.  The interest payments on these loans are high and come with strings attached as Ecuador is obliged to use Chinese contractors to build the projects. Most importantly, these contracts are not available to the public. However, a letter signed by PetroEcuador and Petro China was recently disclosed. The letter seems to suggest that Petro-China can seize oil from Ecuador’s other international clients if the country fails to repay any part of the loan.

Chinese companies have been guilty of environmental negligence, giving rise to protests from the Confederation of Indigenous Nationalities of Ecuador (CONAEI), the largest indigenous organization and one of the groups that initially supported President Rafael Correa for president. As pointed out by Carolina Ocampo-Maya, from the Vale Columbia Center on Sustainable International Investment,   neither China nor any Chinese mining company is part of two major trans-national organizations promoting better practices in mining, which are the International Council on Mining and Metals and the Extractive Industries Transparency Initiative. Likewise, China has not signed the International Labor Organization’s 169 Convention protecting the rights of Indigenous and Tribal Peoples, the main tool used by Latin American communities to demand consultation on matters affecting their territories and way of life.”.

In fact, Chinese oil and mining companies have amongst the worst records in labor rights, environmental responsibilities and transparency. In addition, these companies only deal with high level government officials instead of with the local population.

President Correa, who in the past, fought Chevron’s environmental policies and pursued a big law suit against the company has not set up clear guidelines on issues related to transparency or environmental issues.

Chinese companies are greedy and draconian in contrast to those companies linked to members of the Organization for Economic Development (OECD), which is mostly comprised of Western countries. OECD companies not only comply with environmental and labor laws but also hold a permanent dialogue with local communities and have an open transparent policy that prevents bribery and corruption.

However, Chinese companies do not always behave in a draconian way unless the host country permits them to do so.

The case of Peru provides an instructive example as Barbara Kotschwar, Theodore Moran, and Julia Muir have shown.

A Chinese company, Shougang, won a bid to work in Peru in the exploitation of steel. According to the agreement with the Peruvian government, they were supposed to invest $150 million in the community over three years but they failed to live up to this agreement.  The company also fired Peruvian workers and brought laborers from China. Furthermore, they forced Peruvian workers into cramped living quarters in order that single family homes could be occupied by multiple families or workers.

Shougang also paid amongst the lowest wages and fired workers without giving a reason.

According to a report by the UN Refugee Agency,  the company forces its employees to renew their contracts and also changes the company’s trading name every six months in order to prevent the workers from organizing.  In addition, protests by workers were brutally repressed by the police.

On the other hand, a second Chinese mining company operating in Peru, state-owned Chinalco, has so far behaved differently. Chinalco’s open-pit copper mine, high in the Andes just outside the town of Moro Cocha is due to become operational sometime in 2013. Chinalco underwent a major project of relocation of the town’s approximately 5000 residents by building a new town six miles from Moro Cocha. This has been met by mixed reviews from the residents as for many it is an improvement in their living standards while for others the environment is very sterile and the houses, at 400 sqaure feet each, are too small. So far, Chinalco has respected labor rights, has not imported Chinese laborers, has complied with environmental laws, and has invested in the community while maintaining a network of local communications.

Kotschan, Moran and Muir explain the different types of behavior by both Chinese companies by referring to the time they started their operation. Shougang began its operations under the authoritarian government of Alberto Fujimori, whereas Chinalco began its operations after democracy was re-established. It was under the democratic government of Alejandro Toledo that civil society began to flourish; indigenous rights were enhanced and local government more fully developed. Chinalco could not avoid this important transformation.

While in Ecuador, Correa has claimed that mining is a natural resource he wishes to exploit since economic growth is important to him, he has ignored the rights of the Ecuadorian population.

For a leader of the Bolivarian revolution that has promised inclusion  and claims to  represent the most oppressed in society as against ‘the factual powers” as he likes to call them, his tolerance of China’s  19th century brutal capitalism looks surprising on the surface but it has its own logic.

Correa’s citizens’ revolution is, in fact, a system where citizens empower the president and not the other way around. Correa’s top-down approach is exactly like the Chinese top-down approach. All this comes at the expense of civil society and workers’ rights.

If we look at the Ecuadorian constitution, we can clearly see that it gives significant prerogatives to the state. The state is responsible not merely for guaranteeing or expanding liberties and rights but the Ecuadorian constitution empowers the state with overall national planning and involvement in all aspects of life in the name of the “social interest”.  The constitution also provides the executive power with prerogatives that are unacceptable in a true constitutional democracy. (See deeper analysis here)

Therefore, it is not surprising that in Correa’s Ecuador, the behavior of the Chinese companies not only reflects the ruthlessness , anti-civil society approach of these companies but also the exploitative approach of the Ecuadorian government, whose regime is built on a top-down model, despite claiming to represent the poor.

Chinese companies will always try to take advantage of the weaknesses of countries where they invest. They are ruthless and have no self-regulation. This is true of so many Chinese companies in their own country that have used this same model of massive relocation, environmental degradation and poor labor practices. The questions for countries in Latin America are whether the exploitation of raw materials is to their benefit in terms of alleviation of poverty and long term  environmental impacts as well as are they getting a fair deal.  Therefore, it is up to the different governments to set up the appropriate conditions that prevent exploitation of their workers and irreversible environmental destruction.  Aggravating the situation is that transparency, the rule of law, and good governance are generally very weak in Latin America, with some exceptions.

Even though the story is not fully told, the more positive experience of Chinalco in Peru can only be reproduced in countries that maintain a strict rule of law and proper enforcement.

Nancy Menges and Luis Fleischman are co-editors of the Americas Report. Luis Fleischman is also the author of the upcoming book  “Latin America in the Post-Chavez Era: The Security Threat to the United States”

About Luis Fleischman

Dr. Luis Fleischman is a Senior Adviser to the Menges Hemispheric Security Project at the Center for Security Policy in Washington DC. He is also a professor of Sociology at Palm Beach State College. He is the author of the book, "Latin America in the Post-Chavez Era: The Security Threat to the United States."