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PERU-CHINA: Social Responsibility Missing in Growing Trade Ties

Milagros Salazar

LIMA, Feb 3 2010 (IPS) - China has become Peru’s second largest trade partner, with interests basically in mining and oil. However, it is viewed with caution by this Andean nation, because the Asian giant has a reputation for flouting environmental standards and labour rights.

China accounts for 40 percent of the total investment flowing into Latin America, while this region is an important source of commodities needed for China’s breakneck rate of growth.

But analysts say this relationship should be radically modified so that the emerging global power becomes an actual partner, making a real contribution to development in Peru.

“The economic ties between Latin America, and Peru in particular, and China, pose the challenge of going beyond these countries’ current role as exporters of raw materials, and ensuring that China behaves like a loyal trade partner, investing with social and environmental responsibility,” Peruvian economist Víctor Torres told IPS.

Torres and U.S. political scientist Cynthia Sanborn are the authors of “La Economía China y las Industrias Extractivas: Desafíos para el Perú” (China’s Economy and Extractive Industries: Challenges for Peru), a book that describes how Beijing’s increasing investment in Peru is concentrated in the extractive industries.

The arrival of Chinese investors in Peru requires a national effort to define Peru’s development priorities and reorient development activities for the benefit of the majority of the population and with respect for basic human rights, the book says.

China is the world’s leading producer of aluminium, antimony, iron ingots, steel, zinc and lead. Furthermore, mined materials generate 92 percent of its energy, 80 percent of industrial raw materials, and 70 percent of the means of agricultural production in the Asian giant.

In Peru, 99.98 percent of Chinese investment is concentrated in the mining sector. The 20 or so mining projects of paramount importance to the Peruvian government include the biggest Chinese-owned mines, like the Toromocho copper mine in the central Andean region of Junín, and the Río Blanco copper project in the northern province of Piura.

Latin America has become the top destination, outside of Asia, for Chinese direct investment. The Chinese government is particularly interested in copper from Chile and Peru, iron and steel from Brazil and Peru, oil and natural gas from Argentina, Bolivia, Ecuador, Peru and Venezuela, tin from Bolivia and nickel from Cuba.

In contrast to other countries, in China all companies are linked to the state and the ruling Communist Party, so that its investments conform to a strategic economic and political vision of the medium and long-term goals of the country, which sets the agenda for its bilateral relations, say the book’s authors.

Chinese investors are mindful of their country’s interests every step of the way, and the state reciprocates, aligning itself closely with the interests of its companies.

There are two leading Chinese mining firms in Peru: Chinalco, which runs the Toromocho mine, and the Zijin Consortium, which administers Río Blanco, the new name for the controversial project formerly known as Majaz.

The Chinalco corporation belongs to the Chinese government and has a large number of divisions and partner companies. The Zijin Consortium is owned by a consortium of three Chinese holding companies, with private sector participation but regulated by different Chinese government agencies.

The two firms’ copper mining projects are of strategic importance to China, as it is the country with the highest consumption of refined copper – 21.2 percent of the world total in 2007 – followed by the United States, Germany and Japan, according to the World Metal Statistics Yearbook.

“To understand the implications of China’s growing investment in Peru and elsewhere in Latin America, it is necessary to understand the nature of power in that country,” Sanborn told IPS, before going on to describe its key features.

“The Chinese state is a shareholder in most of these companies, and finances these investments with funds from national banks. The country not only wants to ensure good returns on its investments, but also in the medium and long-term to ensure expanding international relations, and therefore it takes a very pragmatic approach to ties with the countries it invests in,” the expert said.

China “doesn’t care what kind of political system its trading partners have, or whether they are less than transparent in their financial dealings,” she added.

Given this scenario, are there any reasons for concern about this wave of Chinese investment? Sarborn’s answer is “Yes.” “China has difficulty regulating what its companies do abroad, and there are no incentives for Chinese leaders to take a stand on social and environmental responsibility,” she said.

“Many investment agreements are made between governments, which is a double-edged sword, because although it guarantees the states’ interest in the projects, it can create the impression that social and environmental problems will also be solved by the governments, and that is not necessarily the case,” she said.

For example, the Río Blanco project has been at the centre of conflict with local people opposed to the mine since 2004. Several people have been killed and many more wounded, and legal charges have been brought against dozens of rural leaders and environmental activists.

In spite of this history, Zijin entrepreneurs bought a controlling interest in the project, perhaps hoping that the Peruvian government would take measures to defuse the local conflict, but this has not occurred.

Neither has Zijin taken significant steps to improve its relationship with the local communities.

The latest violent incident took place in December in the province of Huancabamba, where two local peasant farmers were shot and killed during police investigations in their villages of an earlier attack on the mining camp, according to the La República newspaper.

The view of local residents is that the government wants to impose the mining project on them because of the close relations between Lima and Beijing, reflected by a free trade agreement signed in April 2009. The trade deal was presented as a tool to affirm China’s position as the second purchaser of Peruvian exports, after the United States.

But the agreement does not include “any stipulations about environmental and labour standards, which is worrying in the light of the behaviour of the Chinese government and its companies in those fields,” Torres said.

One symbol of irresponsible practices by Chinese companies in Peru is Shougang Hierro Peru, which has been mining iron ore in the country since 1992, and has failed to fulfil its initial investment commitment with the Peruvian state.

The Chinese firm is also accused of causing pollution and flouting health standards and labour laws as well as the right of workers to form trade unions.

Moreover, local people in the district of San Juan de Marcona, where the mine is situated, have to get the company’s permission to obtain water, sanitation or electricity.

In the view of the two analysts, it is time for China and its companies to adopt mechanisms allowing access to information, in spite of the weakness of Chinese civil society and the lack of dialogue with the communities where they operate abroad.

“This is vital if China wishes to enhance its global status,” Sanborn said.