U.S. and Chinese investment treaties in Latin America: convergence or competition?

• Author: MacFarlane, Philip J.

1. INTRODUCTION II. A NEW ERA OF CHINESE AND LATIN AMERICAN RELATIONS A. The Pacific Alliance B. China's Policy Toward Latin America C. Chinese FDI in Latin America D. U.S. and Chinese Approaches to Foreign Investment Policy III. U.S. INVESTMENT TREATIES WITH PACIFIC ALLIANCE COUNTRIES A. U.S. Model BIT B. NAFTA C. U.S.-Chile Free Trade Agreement D. 2004 U.S. Model BIT E. U.S. FTAs with Peru and Colombia IV. CHINESE INVESTMENT TREATIES WITH PACIFIC ALLIANCE COUNTRIES A. China's 1995 Investment Agreements with Chile and Peru B. The "NAFTA-isation" of China's Investment Agreements V. A PACIFIC TRIANGLE A. Chinese and U.S. Interests in Latin America B. Possible Changes to U.S. Policy VI. CONCLUSION I. INTRODUCTION

   The economic relationship between the People's Republic of China and Latin America has strengthened significantly over the past decade. (1) Trade is the main component of this growing relationship, and the increase in trade has led to increased Chinese foreign direct investment (FDI) in the region. (2) More specifically, Chinese FDI has grown rapidly since the 2008 global financial crisis. (3) Investment in Latin America from Chinese companies has averaged approximately $10 billion per year since 2010--compared to a total of approximately $6 billion during the previous 20 years (4)--and state-owned Chinese companies have made significant investments in the natural resource sectors of Latin American economies. (5) Perhaps most importantly, Chinese FDI in Latin America is expected to grow in the coming years. (6)

   This growing economic relationship between China and Latin America has come at a time when the relations between the United States and many Latin American countries are in flux. For example, backlash against U.S. international economic policies has worsened relations between the United States and several Latin American countries and has raised challenges for U.S. policy in the region. (7) Some have questioned if the so-called "Washington Consensus" (8) of economic policy prescriptions has ended in Latin America and if this marks the rise of a Chinese model of state-centered economic development in its place. (9)

   Overall, growing investment in Latin America is one example of how China's economic growth is changing the global economy. The pace of this growth in investment, especially in recent years, warrants inquiry into how, or if, China's growing FDI in Latin America is influencing international investment law and if it is converging with U.S. and international practices or if it represents a competitive alternative. This assessment is especially important to the United States given its historical economic influence in the region. (10)

   This Comment will compare U.S. and Chinese economic policies in Latin America by focusing on U.S. and Chinese investment treaties with Mexico, Chile, Colombia, and Peru, the countries of the Pacific Alliance, an organization that aims to promote free trade and investment with a focus toward the Asia-Pacific region. (11) Part II will discuss the background of recent relations between Latin America and China. Part III will discuss U.S. bilateral investment treaties (BITs) and the investment provisions of free trade agreements (FTAs) with Mexico, Chile, Colombia, and Peru. Part IV will discuss Chinese BITs and the investment provisions of Chinese FTAs with these same countries. Part V will discuss the larger effects for the global economy from the interaction between the United States, China, and Latin America. It will also discuss possible changes to U.S. investment policy in response to China's growing investment in Latin America. Part VI will conclude the Comment.

2. A NEW ERA OF CHINESE AND LATIN AMERICAN RELATIONS

   China's increased investment in Latin America is part of its strategy of economic and diplomatic engagement with developing countries. (12) Increased investment in natural resources and infrastructure as well as increased diplomatic activity have accompanied this strategy. (13) This section will discuss this economic and political engagement. It will first introduce the Pacific Alliance and its economic significance to Latin America. It will then briefly discuss China's increased political engagement in Latin America, Chinese FDI in the region, changes in Latin American approaches to investment treaties, and the different approaches that both the United States and China take in pursuing economic partners.

   1. The Pacific Alliance

      The Pacific Alliance was formed to promote economic integration of member countries and to negotiate FTAs as a group with Asian countries, the United States, and the European Union. (14) The alliance's pursuit of trade and investment with Asian counterparts, including China, is viewed as part of the expanding relations between developing countries known as "South-South cooperation." (15) It is also a result of the desire for Latin American countries to diversify their economic relations while lessening their economic dependence on the United States. (16)

      As a group, Mexico, Chile, Colombia, and Peru represent a significant share of Latin America's economy. (17) These countries provide a way to compare U.S. and Chinese investment approaches to the region directly, as they have strong economic relations with the United States and are increasing their economic relations with China. The differences within this group also contribute to this comparison. Mexico and Colombia are significant oil exporters and are more economically connected to the United States. (18) Mexico is a member of the North American Free Trade Agreement (NAFTA, (19)) and Colombia has strong political ties to the United States. (20) The economies of Peru and Chile rely on exports of natural resources, mainly copper, and are more economically connected to China. (21)

   2. China's Policy Toward Latin America

      China has pursued stronger diplomatic and cultural ties to Latin America by expanding diplomatic missions, sending trade delegations to Latin American countries, and promoting Chinese tourism and educational opportunities in the region. (22) In (2008), China issued its "Policy Paper on Latin America and the Caribbean," which discussed the emergence of a multi-polar world with increased economic globalization. (23) The paper emphasized the importance of Latin American and Caribbean countries to the developing world and noted their importance to regional and international affairs. (24)

      China's stated policy toward the region includes its desire "to build and develop a comprehensive and cooperative partnership" (25) and its efforts to strengthen cooperation between China and Latin American countries in both politics and economics. (26) Related to international investment, China's description of cooperation in international affairs included the aim to "make the international political and economic order more fair and equitable" and to "uphold the legitimate rights and interests of developing countries." (27)

      China also stated that it will work with Latin American countries "to expand and balance two-way trade and improve the trade structure to achieve common development," and that it supports investment "to promote the economic and social development of both sides." (28) China also emphasized South-South cooperation. (29) This includes "bringing about a more just and equitable multilateral trading regime" as well as increasing influence in "decision-making for developing countries in international trade and financial affairs." (30)

   3. Chinese FDI in Latin America

      In addition to political engagement, China's 2008 policy paper marked the beginning of a new era of increased Chinese FDI in Latin America and in the developing world generally. China became one of the world's three largest sources of foreign investment in 2012, when FDI from China reached more than $87 billion for that year. (31) China's FDI has gone primarily to developing countries, as $378.14 billion of China's total FDI of $531.94 billion has been invested in developing countries, according to the Economic Commission for Latin America and the Caribbean (ECLAC). (32)

      Chinese FDI in Latin America reached $13 billion in 2010 and has since grown to average approximately $10 billion per year. (33) Estimates put total FDI from China into Latin America at $80 billion as of the end of 2013. (34) Despite this growth, Chinese investment in the region has not kept pace with its growing trade relationship, as trade with China in 2010 represented 11% of regional trade but FDI from China represented only 1% of FDI into the region. (35) This gap could indicate the potential for more Chinese FDI in Latin America, as an increase in trade is likely to bring an increase in investment in the form of facilities to manufacture or assemble goods from China. (36) Adding to this potential is the possibility, by one estimate, that China's total outbound FDI will reach $ (1) trillion during the next ten years. (37) While China's FDI in Latin America is small compared to that of the United States, (38) it has the potential to overtake U.S. investment. (39)

      China has also made loans to Latin American countries to secure access to natural resources. (40) China is estimated to have provided approximately $75 billion in loans to countries in the region since 2005, and in 2010 alone it provided $37 billion in loans. (41) These loan commitments have been greater than those from the World Bank, the Inter-American Development Bank, and the Export-Import Bank of the United States combined. (42)

      These financial commitments in Latin America are part of China's strategy of engaging developing regions, and Latin America fits into this strategy as a source of natural resources. (43) Most Chinese mining investments in Latin America are in Peru, and Colombia has received Chinese investment in its oil industry. (44) Chile and Mexico have not had significant Chinese investment, (45) but that is likely to change. China views Chile, a...