Global Tumult Has Investors Turning to Latin America, Do They Like What They See?
A geopolitical transformation is occurring at warp speed. A new multipolar order seems to be taking hold, one in which the United States, Europe and China solidify their roles as superpowers with their own spheres of influence.
This is an environment prone to more frequent conflict between nations. At the same time, it presents new opportunities for international cooperation. As governments intensify their focus on national security, they are reevaluating their sources of food and energy and increasingly relying upon “nearshoring” and “friend-shoring” – the relocation of production to geographically convenient, partner nations.
In this context, Latin America could be a potentially more attractive investment destination. After all, the region is relatively insulated from the direct fallout of geopolitical conflicts that dominate the world today, the United States versus China, NATO versus Russia, the West versus the East. It is also endowed with natural resources that could allow it to capitalize on the commodity bonanza. Finally, it has a rich base of human capital, among other desirable attributes.
After years of low economic growth and amid high income inequality, local populations are deeply dissatisfied with the status quo.”
There is a catch, however: After years of low economic growth and amid high income inequality, local populations are deeply dissatisfied with the status quo. They have recently put in power leaders who, at least in rhetoric and campaign promises, have expressed a certain disdain toward the private sector and foreign investment.
Luckily for investors, these newly elected leaders have so far opted for a more pragmatic approach since taking office, illustrating what a three-time New York governor famously said of politics: “You campaign in poetry; you govern in prose.” Chile’s President Gabriel Boric appointing the well-respected Mario Marcel as finance minister is just one example of this.
You campaign in poetry; you govern in prose.”
The reality is that Latin American leaders today face a number of constraints in enacting their lofty campaign promises. For one, global liquidity conditions are changing, and financing is becoming harder to come by. Less widely recognized is the fact that Latin American governments have committed to offering foreign investors a range of legal protections under bilateral investment treaties and free trade agreements with investment chapters.
Bilateral investment treaties in particular safeguard foreign investments and provide a way to resolve disputes in a neutral arbitration forum, such as the International Center for Settlement of Investment Disputes (ICSID). This has helped create an environment that puts investors on a more level playing field in resolving disagreements with governments.
Over the past three decades, Latin American countries have concluded multiple bilateral investment treaties. Argentina and Chile, for example, have each signed more than 40 such treaties, including with the United States and many European countries. Peru and Colombia have negotiated over 35 bilateral investment treaties in total.
Most of these agreements embrace the following basic principles:
- Protection from direct expropriation, safeguarding investments against expropriation by the state unless it is for a public purpose, nondiscriminatory, according to due process, and against the payment of a prompt, adequate and effective compensation.
- Protection from indirect expropriation, shielding investments from state actions whose aggregate effect amounts to a deprivation of investment ownership.
- Fair and equitable treatment, granting broad protection of investors’ legitimate expectations, and protecting them against discriminatory or arbitrary measures; denial of justice or due process; or bad-faith conduct.
- Free transfer of investment and returns, allowing investors to transfer their investments and returns without delay, in a convertible currency and at an exchange rate applicable on the transfer date.
The commitments that states make in bilateral investment treaties are readily enforceable by investors. In fact, foreign investors have time and again prevailed in their claims against Latin American states in ICSID cases.
For instance, in CMS v. Republic of Argentina, the tribunal found Argentina liable for breaching investment protections enshrined in the U.S.-Argentina bilateral investment treaty when the state “entirely transform[ed] and alter[ed] the legal and business environment” that the claimant had relied on. In Glencore International A.G. et al v. Republic of Colombia, the tribunal found that the conduct of Colombia’s Comptroller General Office was unreasonable and impaired the claimants’ investment in breach of the Swiss-Colombia bilateral investment treaty. Finally, in Señor Tza Yap Shum v. Republic of Peru, the tribunal found Peru liable for breaching the China-Peru bilateral investment treaty when the state’s tax authority imposed measures amounting to an indirect expropriation of the claimant’s investment.
As these cases and many others demonstrate, Latin America’s investment climate is in some ways more secure than it might appear. Indeed, as investors consider the region for “nearshoring” and “friend-shoring” opportunities, it will likely remain an attractive investment destination. The rhetoric that recently elected leaders have employed against international private investment is discouraging, but thanks to existing constraints and legal safeguards, it appears to represent more bark than bite.
See CMS Gas Transmission Company v. Republic of Argentina, ICSID Case No. ARB/01/8, Award dated 12 May 2005, ¶ 275; see also id., p. 139 (Tribunal’s Decision Section), ¶ 1.
See Glencore International A.G. and C.I. Prodeco S.A. v. Republic of Colombia, ICSID Case No. ARB/16/6, Award dated 27 August 2019, ¶ 1687(2).
SeeSeñor Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Award dated 7 July 2011, ¶ 170; see also id., p. 120 (Tribunal’s Decision Section), ¶ 1.
About the Authors
Latin American Program
The Wilson Center’s prestigious Latin American Program provides non-partisan expertise to a broad community of decision makers in the United States and Latin America on critical policy issues facing the Hemisphere. The Program provides insightful and actionable research for policymakers, private sector leaders, journalists, and public intellectuals in the United States and Latin America. To bridge the gap between scholarship and policy action, it fosters new inquiry, sponsors high-level public and private meetings among multiple stakeholders, and explores policy options to improve outcomes for citizens throughout the Americas. Drawing on the Wilson Center’s strength as the nation’s key non-partisan forum, the Program serves as a trusted source of analysis and a vital point of contact between the worlds of scholarship and action. Read more