Chinese presence is Latin America expands rapidly while the U.S. role dwindles

By Carlos Harrison

China has big plans for Latin America—plans that seem to reflect China itself: massive and ambitious.

There are plans for a $10 billion, 3,300-mile-long transcontinental railroad snaking through the jungles of the Amazon river basin and over the highest mountain range in Latin America, linking the Atlantic shore to the Pacific. There’s talk of a $50 billion supersized canal carving a 161-mile-long swath across Nicaragua, offering passage to the megatankers of tomorrow and overwhelming even the newly expanded Panama Canal to its south.

There are more. Many more. These gargantuan projects are aimed at fueling China’s needs for resources and feeding South America’s need for energy and infrastructure. But geopolitics also play a role as China strives to make Latin America an economic partner, if not a counterpoint to the United States.

In fact, China’s investments in Latin America, from mining to massive hydroelectric dams, nuclear reactors and railroads, grew by 500 percent between 2000 and 2010, totaling nearly $100 billion, with another $250 billion in spending promised over the next decade. And while the U.S. still accounts for more than three times as much in trade and investment in the region, some analysts see disturbing signs in the steadily shifting balance.

In 2000, the Chinese portion of Latin American trade was about 2 percent. The U.S. share was 53 percent. Ten years later, the Chinese share was up to 11 percent and the U.S. portion was down to 39 percent.

“Clearly we are still the dominant player vis-à-vis them,” says Francisco Cerezo, the U.S. head of DLA Piper’s Latin America corporate group. “But it does speak to the trend. And I would be more concerned about the trend and making sure you right the ship and you focus on it properly.”

The past two decades of forays into Latin America come as part of China’s “go global” plan. Its first priority: raw resources to fuel its economic growth. China is heavily, and increasingly, dependent on imported oil. Its energy needs led it to offer some $65 billion in loans to Venezuela’s government in the last decade, according to the Washington nonprofit Inter-American Dialogue, along with direct investments in oil production and infrastructure there.

China also single-handedly accounts for nearly a fourth of the world’s copper demand, along with significant demand for tin and iron ore. “That’s why you see them coming into Latin America’s mining sector, which is huge,” says Jerry Brodsky, a partner and director of the Latin American practice group at Peckar & Abramson. “It’s perhaps the largest economic driver in Latin America’s mining.”

China gets much of its copper from Chile, while the China-based Chinalco Mining Corp. International put $3.5 billion into the Toromocho mine in Central Peru, giving it control of “the world’s second largest preproduction copper project, as measured by proved and probable copper ore reserves,” according to the company’s website.

Now China is reaching beyond resources. Its latest wave of investments involves massive infrastructure and energy projects.

The China Three Gorges Corp. has been rapidly acquiring hydroelectric dams in Brazil since 2013, paying nearly $4 billion in June to take over operation of two of the country’s largest dams, with a combined capacity to produce 5 gigawatts of electricity. That came just three months after China Three Gorges announced a proposal to build a new 8-gigawatt dam on the Tapajos River.

China’s State Grid Corp. is developing two transmission lines to deliver power from the Belo Monte dam in the Amazon basin. Last year, state-owned China National Nuclear Corp. signed a $15 billion deal to build Argentina’s fourth and fifth nuclear power plants, roughly doubling the amount of electricity generated by the country’s nuclear plants. Construction of the first of the new reactors, in cooperation with Argentina’s state-owned Nucleoeléctrica, is due to begin early next year.

These projects come on top of the nearly $42 billion that China invested in infrastructure in Latin America in just 2013 through 2015 alone. China is finishing construction of a space tracking, telemetry and command facility in Patagonia, Argentina, complete with a pair of maneuverable parabolic antennas, engineering facilities, and a $10 million electric power plant.

China Harbour Engineering teamed up with local partners to win the contract for Autopista Mar 2, a 152-mile motorway connecting four towns north of Medellin, Colombia. And, in May, it landed a $465 million road contract in Costa Rica.

“They’re providing what the specific markets need,” says Brodsky. “They follow the path of least resistance. Latin American needs infrastructure. Brazil has an insufficient production of local energy. So does Argentina. The road projects in Colombia are booming right now because for 30 or 40 years they spent all their money fighting the guerrillas, and they didn’t pay attention to their road infrastructure. So now there is an accelerated program in Colombia for road building.”

The nature of the projects also plays to China’s strengths. Despite its recent economic slowdown, China remains flush with money from its boom years. Combined with the technical expertise that it has built with domestic projects and industries, those deep pockets allow China’s state-owned companies to compete at a scale that few challengers can match.

“When you get to that level of megaprojects, there are not that many qualified bidders out there­—people that have not only the technical capacity but the financial capacity,” Brodsky says, adding that Chinese companies “have the money to self-fund a lot of their projects, and that makes them very competitive when it comes to bidding for big, large projects in Latin America.”

But results, and consequences, are mixed. Several of China’s forays into the region have stumbled amid economic and political turbulence in the region: notably a railroad in Colombia that has yet to launch five years after it was announced, oil production partnerships in Venezuela and a $3.7 billion high-speed rail project in Mexico that lost its approval because of political pressure.

“Things in Latin America have a different rhythm than they do in China. In China, when they decide they’re going to build a dam, they build a dam,” says Cerezo. “Essentially the government takes the decision, and whether you have to move whole towns—everything from the permitting to the environmental aspects of it, to the moving of people, all of that is done is essentially by decisions from the top.

“When you do a project as complex as a canal in Nicaragua or a railroad that traverses part of the Latin American territory, or a massive dam, the realities are far more complex than in China,” he says. “You are dealing with multiple governments. You’re dealing with individual rights in land use, in permitting and whatnot, that are far more involved than perhaps if you just did it in China itself.”

Chinese projects have been assailed for their labor practices, and for their environmental consequences. The final route of the Nicaragua supercanal has not yet been determined, but a report in the journal Nature contended that the most likely path “would cut an approximately 90-kilometre [55-mile] swathe across Lake Nicaragua, requiring a major transformation of the lake bed and local rivers. … The extensive dredging required would dump millions of tonnes of sludge either into other parts of the lake or on to nearby land.” The coast-to-coast path would destroy “around 400,000 hectares of rainforests and wetlands” and “threatens multiple autonomous indigenous communities.”

However, China has made efforts in other places to mitigate the negative impacts of projects. Before taking over the Toromocho mine, Chinalco spent $50 million to relocate a town of 5,000 people to new homes with proper sanitation, and built them a school and hospital.

China may be on a learning curve, but the Asian giant’s announced plans fit well with its long-term geopolitical objectives. Chinese projects are likely to increase Chinese influence and soft power in the region.

“Infrastructure projects are an economic multiplier, hands down,” says Jeremiah Schwarz, an associate at K&L Gates who advises clients on cross-border transactions. “So, by virtue of building new roads, building new bridges, building the type of transportation systems that move people, goods and commodities to a market, it is an unquestioned economic multiplier.”

They are also, he says, “generally, politically very popular.” From that point of view, nuclear reactors and hydroelectric dams may be more about currying favor and gaining geopolitical influence than they are about strict, and swift, profits.

“The Western perspective is to always look for profitability, and is this thing good and will it make money, etc. And that’s the wrong perspective to have when you’re going into a public-private partnership with China,” says Arent Fox partner Malcolm McNeil, the former co-chair of the American Bar Association’s China Committee Section on International Law. “Because on these large projects that involve either African governments or Latin American governments, it has become clear to me … that political influence, from the Chinese perspective, is the most important thing, creating a counterbalance to the U.S. So it’s really, No. 1, how do they do that, and how do they buy that influence?”

Railroads, roads and canals also may answer a more direct need for China. The Nicaragua canal would give China another, presumably cheaper, route to bring raw materials to its factories, and to move goods to market.

China also appears to be emerging as a direct competitor to Latin American companies in some markets. Chinese telecom giant Huawei reportedly controls about 40 percent of the telecom networking gear market in Brazil, and built six out of that country’s seven 4G mobile phone networks. Persistent reports surfaced over the last year that China’s third largest carrier, China Telecom, was putting together a multibillion-dollar bid for a new mobile broadband network in Mexico, already having secured financing from Chinese state-controlled banks for the project.

American companies still can—and do­—play a major role in Latin America. Pasadena, California-based Parsons Corp. is project manager for construction of the new $9 billion Mexico City International Airport, which “is probably the largest public works project in Mexican history,” says Michael Camuñez, former U.S. assistant secretary of commerce for market access and compliance. But Camuñez, now a partner at Los Angeles-based Manatt, Phelps & Phillips and president and CEO of its consulting arm, ManattJones Global Strategies LLC, says that China’s long game puts pressure on the United States to step up its own performance.

“The Chinese to their credit are smart,” he says. “They’re putting in capital. They’re focusing attention. They’re investing. They’re building relationships. It’s not a zero-sum game, but it’s definitely to, in many respects, the detriment of the United States for not being more on the ball with respect to the region.”

And domestic politics in the United States could be making matters worse, he says.

“There are opportunities. But this is just one of the reasons why the ongoing political debate in this country is so dangerous. The vilification of Mexico. The vilification of Latin America and its citizens. The desire to kind of build walls and look inward instead of embracing the region as a strategic economic partner puts the United States at tremendous risk of not only losing influence but opportunity in its own backyard.”

Those opportunities, however, can bring risks of their own. Peoria, Illinois-based Caterpillar Inc. saw its fortunes rise as Chinese companies expanded their mining operations in Latin America. But they were later forced to scramble and lay off thousands in a commodities market bust.

“For American companies the primary challenge is economic competition for Latin American markets, Latin American investment, Latin American partnerships,” says Schwarz. “The Chinese character for crisis is a combination of the character for danger and opportunity. So in every danger there is an opportunity, and in every opportunity there is a danger. The key for American companies is to look for the opportunities that are generated by increased competition and a more dynamic market.”

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Credit: The American Lawyer, www.americanlawyer.com