In the first decade of the 21st century, China’s foreign policy toward Latin America has been focused on the acquisition of natural resources that can support its growing economy for years to come. Despite the global economic downturn, China continues to look for business and investment opportunities in Latin America, including direct purchases of minerals, metals and other commodities, obtaining the rights to mine and exploit natural resources, forming joint ventures and acquiring target companies.

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China and Latin America: The Art of the Deal
By Michael Diaz, Jr. (Diaz Reus & Targ, LLP)
In the first decade of the 21st century, China’s vehicles, as well as cell phones, smartphones, laptops and
foreign policy toward Latin America has been focused computing tablets. Latin America has readily accessible
on the acquisition of natural resources that can support lithium salt lakes, and the Chinese are striving to obtain
its growing economy for years to come. Despite the access to those natural resources.
global economic downturn, China continues to look for
business and investment opportunities in Latin America,
including direct purchases of minerals, metals and other Despite the global economic downturn,
commodities, obtaining the rights to mine and exploit
natural resources, forming joint ventures and acquiring China continues to look for business
target companies. and investment opportunities in latin
But for these types of high-stakes transactions to be
successful, Latin Americans governments, state-owned america, including direct purchases of
enterprises and private businesses must understand minerals, metals and other commodities,
that there are substantial differences with the Chinese in
terms of cultures, negotiation styles, financial objectives obtaining the rights to mine and exploit
and long-term goals. natural resources, forming joint ventures
As Beijing adopts an active role in the region, most
Latin American countries want to do business with China and acquiring target companies.
in one way or another. Recent examples include a US$3
billion deal by the Aluminum Corp. of China (Chinalco)
for the Toromocho mines in Peru. China Minmetals For China, like the U.S., political risk is a key factor
Nonferrous Metals Co. invested US$2 billion in a joint affecting investment decisions in Latin America. Political
venture with Chile's state copper giant Codelco, and or economic instability is a turn-off for Chinese investors,
Baoshan Iron and Steel's made a US$1.4 billion investment just as it would be for U.S. or European companies. For
in a joint venture with Brazilian iron-ore giant CVRD to example, Chinese companies have yet to venture into
construct a new steel plant in Brazil. Bolivia, which is awaiting a governmental decree on
Venezuela's oil reserves have also attracted Beijing's whether its lithium salt lakes are a protected national
attention and not surprisingly, U.S. concern. In the past resource. Other Latin nations have various regulations
four years, China has signed more than 20 agreements that affect these types of commodities transactions. Chile,
with Venezuela for long-term investments in exchange for instance allows international investment in its lithium
for oil. Under President Hugo Chávez, Venezuela has resources, but limits the exploitation rights. On the other
borrowed US$6 billion from China, bringing China's total hand, Argentina is more open when it comes to acquiring
investment into that country to US$12 billion. In mid-May, and exploiting its mineral resources.
China and Venezuela announced multi billion-dollar Once the Chinese have identified a potential
investments in Venezuela's iron and aluminum deposits investment – by nation, geography or type of resource
industry. Also, China-owned, State Grid has purchased – they begin the process of negotiating a deal. This is
various electric transmission projects recently in Brazil in often a long, exhausting process for Latin American
another multi billion dollar investment. governments and businesses that are not used to the
Today, Chinese state-owned and private entities are Chinese style of negotiations and may not understand
actively seeking sources of lithium salts, a key element Chinese objectives.
in the manufacture of batteries for electric-powered First and foremost, China’s motive behind both its
foreign policy moves and investment decisions is long-
Michael Diaz, Jr. (MDiaz@diazreus.com) is Managing Part- term stability, regardless of short-term profits. That is
ner with Diaz Reus & Targ, LLP. Based in Miami, Mr. Diaz in sharp contrast to publicly traded U.S. multinationals
focuses on international trade and business transactions, operating in Latin America, whose shareholders typically
complex commercial, civil, and criminal litigation and arbi- demand immediate returns.
tration matters. The firm operates offices in Miami, Florida, Because most Chinese entities are unfamiliar with
Shanghai, China, Frankfurt, Germany, Mexico City, Mexico, Latin America as a region, and its diverse nations and
and Caracas, Venezuela - as well as affiliate offices in Bo- cultures, negotiations tend to move slowly. Traditionally,
gota, Colombia, and São Paulo, Brazil. www.diazreus.com, the Chinese have been wary of “foreigners” and it takes
www.chinalat.com
May 2010 LATIN AMERICAN LAW & BUSINESS REPORT 12

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time of overcome that heritage of distrust. In fact, the an oil well or a lithium salt lake that has no infrastructure
objective of any substantive negotiation session with in place and no existing production. Those deals tend to
the Chinese is to nudge them slowly from a position of be far more complex – and time-consuming. After all,
suspicion to one of trust. the Chinese must acquire the land, the exploration and
In most cases, China has a strong bargaining position exploitation rights and put in the infrastructure to remove
during the negotiation process, thanks to its immense the resources from the ground and make them usable for
buying power and long-term financial resources. But Chinese industry.
Latin Americans should realize that there is also intense
competition for desired resources from U.S., European,
Japanese, Korean and other foreign investors. That works While the Chinese are also interested
to the benefit of Latin Americans in the negotiation process, in price, they often spend more
and promotes greater interest on the Chinese side.
With their long-term perspective, unfamiliarity with time negotiating other terms of the
the region and lack of trust, the Chinese tend to be very
patient negotiators in business transactions. They also
agreement.
take a more formal approach to negotiations, in contrast
to American casualness. That includes a polite tone of For Latin governments, creating new jobs is a priority
speech during negotiating sessions, wearing business in these types of “ground-up” transactions. Usually, the
attire and avoid face-to-face confrontations. It also means Chinese are willing to employ a local workforce under
that Chinese negotiators may need to communicate with their own management. During the negotiations, this is
their superiors in China before adjusting their position or a point the Chinese will often concede as an incentive to
reaching a tentative deal. getting better pricing or other terms in the contract.
At the same time, the Chinese are usually aggressive To manage their investment risk in these types of
in staking out their position and reluctant to make transactions, the Chinese are often more comfortable
concessions when it comes to terms and conditions. While with mining and exploitation agreements that begin on
Latin American negotiators prefer to settle one issue at a a small scale and grow over time, as the relationship
time, creating a sense of forward momentum, the Chinese develops and flourishes. With a lithium salt lake, for
often go back and forth in what seems to be a random example, the Chinese might focus initially on acquiring
fashion. That makes it unclear whether a certain issue has the rights. Then, they would send in a team of geologists
been settled or not – a frustrating position for the Latin and chemists to determine the extent and quality of the
American side. desired natural resource. If everything meets Chinese
Like most sellers, getting the best price is usually expectations, then the investment may expand. If not, the
the primary goal of a Latin American negotiator. While Chinese might delay payments, allow the contract to lapse
the Chinese are also interested in price, they often spend and move their team to a different location.
more time negotiating other terms of the agreement. From a Latin American perspective, it is important to
Again, it’s important to understand that they are looking include penalty and incentive clauses in these contracts.
beyond the immediate contract and are concerned with Many Latin entities also require a termination clause in
the longer-term implications of the transaction – how the contract. If the Chinese have competed a certain action
will this relationship develop over time and how long by a particular date, one of the contracting parties can
will it last? terminate the agreement.
While each deal is different, the Chinese typically Any business agreement should also include a dispute
pay somewhere between 10 and 30 percent of the total resolution clause that goes into effect if there is a serious
upfront. Virtually all business transactions are done in disagreement between the two sides. A Chinese sovereign
U.S. dollars. However, this is not an issue for either side, or state-owned entity will require that any disputes be
since Latin Americans prefer this form of payment and litigated in China under Chinese law. However, most Latin
the Chinese have ready access to dollars in their own American entities would prefer to arbitrate disputes in a
sovereign reserves. third-party jurisdiction, such as London or Panama. These
Because Chinese entities are usually not buying types of arbitration matters are rarely, if ever, handled in
finished goods, the actual price for the commodity the United States.
– and size of the initial payment – typically depends Finally, it is vital to understand that building long
on processing and transportation considerations. For term personal relationships is essential to the success
instance, a larger payment would be expected when of major business and investment transactions. Like
the Latin American entity processes a raw material Latin Americans, the Chinese put a high value on
– aluminum, iron or gold – into a compact material that getting to know their suppliers, business partners and
can readily be transported to China. professional colleagues. It may take years to develop those
However, Chinese entities are also interested in relationships, but the potential rewards clearly justify the
developing new sources of supply, such as a copper mine, investment of time and energy on both sides. o
May 2010 LATIN AMERICAN LAW & BUSINESS REPORT 13