From investments in mining and infrastructure, to agricultural commodities and green energy, Latin America and the Asia Pacific region are increasing trade and commercial ties. As those ties grow, so does the potential for disputes, particularly in the current geopolitical context created by the war in Ukraine, price spikes, supply chain and other disruptions, and the specific political landscape in Latin America with significant legal and regulatory changes in several countries such as Chile, Peru or Mexico.
In this article, we focus on the growing investment and trade relationship between Asia-Pacific and Latin America using Australia, China and Korea as an illustration, and the potential for disputes under the relevant investment protection frameworks.
Growing investment and trade
After two decades of continued investment, Latin America is now the second largest destination for Chinese investment and the third largest market for China’s foreign contracted infrastructure projects. Trade between China and Latin America has grown 26-fold between 2000 and 2020 and is set to more than double by 2035, to more than USD 700 billion, with China importing, among other things, soybeans, copper, petroleum, oil, and other raw materials from Latin American countries to drive its industrial development.
Korea has also created strong ties to Latin America. It is worth highlighting that, since 2015, Korea has entered into six new Free Trade Agreements with Latin American countries. As a result, 2019 saw Korea as Chile’s 12th import and 4th export trading partner with trading volumes of approximately USD 1.3 billion and USD 4.6 billion, respectively. Korea also became Peru’s 11th largest exporter and 5th largest importer with trade volumes reaching approximately USD 744 million and USD 2.3 billion, respectively.
Finally, the trade and investment relationship between Australia and Latin America has also grown over the last two decades. In particular, mining has been a key sector with very significant investments being made by Australian companies in Chile, and also in other Latin American countries such as Peru. Beyond mining, the trade and investment relationship has grown stronger in agriculture and energy. With Brazil and Mexico predicted to be the world’s 5th and 7th largest economies respectively by 2050, and current significant investments in countries like Chile and Peru, it is likely that the relationship will continue to develop.
In this regard, the recent Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) between, among other countries, Australia, Chile and Mexico, and the Peru-Australia Free Trade Agreement (PAFTA) are already bolstering trade according to Australia’s Department of Foreign Affairs and Trade (DFAT). Certain barriers to trade such as tariffs have been eliminated or reduced, and new markets are now accessible (e.g., before 2020 Australian beef, sugar and dairy farmers did not have access to the Peruvian market). In particular:
- Agricultural commodities
Australian exporters are taking advantage of growing demand and improved access for agricultural commodities in Latin America. For example, the CPTPP has reportedly been instrumental in Australia’s first shipment of barley to Mexico in January 2021, and such exports have led to more than USD 48 million of barley exports in 2021 alone. Under the CPTPP, Australia’s barley tariff rate dropped from 46% to 23% in 2021 and were subsequently extinguished on 1 January 2022.
- Green energy
The need to develop renewable power generation in Latin America presents Australia with the opportunity to leverage its capacity and technological expertise in renewables. For example, in line with its 2020 National Energy Plan, the Brazilian government has recently entered into arrangements with two Australian companies (Fortescue Future Industries and Enegix Energy) in relation to green hydrogen powered projects.
Investment protection framework
Ongoing efforts of collaboration by both government and industry to build key relationships between Asia Pacific and Latin American countries have played a major role in increasing long-term investment growth. In particular, the establishment of investment protections, including access to investment treaty arbitration, in investment treaties and free-trade agreements is often credited with assisting the expansion of investment and trade ties between both regions.
China, Korea, Australia and most Latin American countries (with the notable exception of Brazil) are parties to the ICSID Convention. The World Bank’s International Centre for Settlement of Investment Disputes (ICSID) is an international arbitration institution established as an investor-state dispute settlement (ISDS) mechanism.
In comparison to other regions, investment arbitrations against Latin American states represent the largest share of ICSID cases. Out of 66 cases registered by ICSID in 2021, 24 were against Latin American States, an increase from the 20 registered in 2020. For example, an arbitral tribunal constituted under the ICSID Arbitration Rules found in favour of a Chinese company which successfully claimed that Peru had breached its bilateral investment treaty obligations by seizing the bank account of the Chinese company, resulting in the substantive deprivation of its investment in Peru.
Flashpoints for disputes
While the rise of investment and trade between Asia-Pacific and Latin America creates great business opportunities, the commercial and regulatory risks and challenges inherent to certain investments will continue to provoke disputes.
Navigating those risks will require particular care, and those investing should consider in particular:
- appropriate allocation of risk in the contractual arrangements relevant to the project and parties in question;
- for infrastructure and energy projects, proactive contract administration and management during project delivery, particularly during design and construction in an effort to avoid disputes from arising. Such proactive management should also include government engagement to police regulatory changes; and
- the applicable investment protection framework, in particular the availability of investment arbitration for breaches of the investment protections afforded by the relevant treaties or free-trade agreements.
Some specific flashpoints for disputes include the following:
- Developing political and regulatory environment
Several countries such as Chile, Peru or Mexico offer a complex political and regulatory landscape.
Investment treaty arbitration will likely be in the spotlight if legislative changes are implemented in, for example, the energy and mining sectors.
- New technologies
Certain investments and projects in the mining, infrastructure and energy sectors may eventually require parties to adopt and implement new and emerging technologies. Some of the technologies will be untested.
There is an inherent risk that technologies do not perform as intended during construction or operation of the project. Where this occurs, it is common for disagreement to arise as to who is responsible, including project delay and cost, or downstream commercial impacts. This is an area highly likely to lead to disputes.
HSF’s Latin America group closely monitors these developments in the investment and trade relationship between the Asia Pacific region and Latin America, and we encourage you to subscribe to our Latin American Notes to be kept informed of the latest developments.
For further information, please contact:
Christian Leathley, Partner, Herbert Smith Freehills