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China Expands its Strategic Portfolio through Debt Trap Diplomacy

In the 2018 National Defense Strategy report, the US denounced China for leveraging “predatory economics,” referring to their use of debt trap diplomacy. Through its Belt and Road Initiative (BRI), China has oftentimes been a live-saving, generous lender, particularly to developing economies. However, it has become clear that by leveraging accumulated debt on these poorly drafted, expensive projects, China has been acquiring strategic assets and gaining political influence over debt-incurring nations. Specifically, China has been applying economic concessions or political agreements with countries in return for debt forgiveness. As a result, China’s presence along key maritime corridors have expanded drastically through its financial takeover of strategic ports around the world.

According to The Economist, the primary aim of President Xi Jinping’s foreign policy is “to make Eurasia (dominated by China) an economic and trading area to rival the transatlantic one (dominated by America).” With more than 60 participating countries spanning across Africa, Asia and Europe, the BRI has announced investment as high as $8 trillion covering projects in transportation, energy and more. 

Developing countries with limited financing are most vulnerable to partnering in the BRI through economically unsound projects, dismissing significant risk in its future inability to pay and debt overhangs. Eight countries, including Djibouti, the Maldives and Pakistan, are at “particular risk of debt distress” in debt trap diplomacy, according to the Center for Global Development (CGD). Strategic geopolitical hotspots, these countries are opportunities for China to stretch its global reach. 

While formally adopted in 2017, the BRI, in spirit, has been endorsed by China for many years. Yet, the initiative and the risk of debt trap only became more publicly aware with the port handover in Sri Lanka last year. Furthermore, with Pakistan seeking its 18th bailout from the International Monetary Fund (IMF), its primary lender, China, has come under focus. 

Sri Lanka, an island nation south of India with a GDP of $81.32 billion, which represents less than one-percent of the US GDP, handed its southern Hambantota port to China at the end of last year, after incurring more than $8 billion in debt and potentially jeopardizing its sovereignty. The 99-year lease on the port alarmed India as concerns for Chinese military activity on the island challenges India’s national security. While the Sri Lankan government initially assured neighbors that no military activity would be present, Quartz reported in June that Chinese submarines were identified there. As Sri Lanka incurred further debt, now estimated at $13 billion, the country was forced to give up leverage. 

Shortly after the takeover, the port saw the arrival of Japanese defense minister Itsunori Onedera who wanted the port to be “free of military activities.” The reaction, among others in Asia Pacific, echo a general unease felt with heightening Chinese exertion of power on the nautical front. In addition to island-building in disputed waters where China contested its Southeast Asian neighbors’ sovereignty, China has also failed to come to an agreement with India on sharing water along a major river route that starts in China and eventually flows into the Bay of Bengal, delivering critical water supply to India. 

The port case reflects a debt concern shared by other countries with corrupted governments and eager politicians willing to naïvely shake hands on deals that others were unwilling to make. Take for instance the geopolitical predicament in Pakistan. The largest BRI offspring, the China-Pakistan Economic Corridor (CPEC) along China’s modern Silk Road, costs an estimated $62 billion. Part of the deal with China includes expansions of the Gwadar port in the south coast and $30 billion worth of power plants to boost Pakistan’s economy. 

Despite expectations of economic prosperity through the BRI, Pakistan has been forced to take its financial issues to the International Monetary Fund (IMF) where they hope for a 13th bailout in three decades. The US, IMF’s largest shareholder, has pressured the Fund not to issue a loan “unless Pakistan publishes full details of the loans it has taken from China to pay for… [the] infrastructure scheme,” the Financial Times reported. In fact, severely limited in options, Pakistan recently announced that it would share its financing details with the IMF. 

Earlier this month, the Financial Times exposed a quote from a Pakistani cabinet minister who expressed desire to renegotiate unfavorable deals made with China. Both countries involved threw a fit. “CPEC has not inflicted a debt burden on Pakistan,” China’s foreign minister Wang Yi told the Financial Times. The expose revealed tensions in the debt-incurring nation, surely to be found in other countries where their debt with China has grown enormously out of proportions. 

Less in the limelight are similar stories of debt traps in Africa and Asia, where countries have had varying levels of success in renegotiating their loan structures. 

In Kenya, China looms over the port of Mombasa, the largest port in East Africa, where China has financed $4 billion on a 300-mile railway connecting the capital to the Indian Ocean. Worth one-fifth of its national budget, it’s the most expensive infrastructure undertaken since independence. 

While China has long superseded the US in investment in Africa, there are potential threats to US presence where it exists. Djibouti, for instance, is in danger of ceding control of a port to China along a strategic route to the Suez Canal. This could impact the ability to resupply and refuel navy ships at a nearby US military base. 

Photo credit: Debtbook Diplomacy by the Belfer Center for Science and International Affairs

The list continues in Europe, where a Chinese firm acquired Eastern Mediterranean’s largest port for $436 million from cash-strapped Greece last year. The port of Piraeus is a key terminal for vessels traveling between Asia and Europe. The China Global Television Network lauded the deal, “where the maritime silk road meets land.” Needless to say, the port also provides opportunities to make headway into Europe, given that at least ten express trains depart weekly to Hungary, Slovakia and other parts of Eastern Europe. 

Notably, some countries are beginning to push back. On a four-day state visit to China in August, Malaysia’s new Prime Minister Mahathir Mohamad cited “unequal treaties” that were made by his predecessor through the corrupted state investment fund called 1Malaysia Development Berhad. Approximately $20 billion worth of BRI projects were placed under review, including an East Coast Rail Link to connect ports across Malaysia. Another project that was part of the deal included gas pipelines that were overtly corrupted. Nearly 90 percent of the project value, or approximately $2 billion, had already been realized on the books though less than 15 percent of the construction had finished. 

According to CGD, in Asia alone, $26 trillion in infrastructure investments are needed to bridge an infrastructure gap that exists globally on a much larger scale. The BRI is the world’s largest committed efforts to tackle the issue. However, the potential benefits are shrouded by debt instability and corruption charges. When governments incur too much debt, there is a downward spiral leading to debt restructuring and reduction. Moreover, practically, this pegs away from revenue potential and stalls development, incurring additional cost and more.

Above all, sovereignty is at stake. Large country debt tips off national crises that are difficult to recover from. For instance, the debt trap instigates a credit crisis, in which the country’s risk premium increases, impacting its overall financial health. Economic instability then diminishes its currency, its ability to compete globally, and impacts its citizens. That said, a debt trap puts countries into a significantly disadvantaged position, giving them no leverage in demands made by lenders. In turn, their sovereignty is critically eroded and assets are taken. Handing over ports in particularly strategic locations to a foreign power not only means handing over country soil but also means, in part, its independence. 

In these reckless scenarios where there have been blatant disregard for due diligence, at least in these initial deals, it has been difficult for the US to stand by passively. As previously mentioned, China’s geopolitical strategy impacts US presence and influence around the world. Moreover, with the current trade war, it has become even more sensitive for the US to monitor situations where countries are falling into the debt trap. 

While not a new concept altogether, debt trap diplomacy has been most fluently employed by China on a global scale. Ambitious in nature, the BRI is a vision not only to change the infrastructure landscape in nature but also to shift world order. Meanwhile, for developing countries, vigilance in the face of a tempting infrastructure pitch is evidently challenging. Yet, it is imperative that countries comprehensively evaluate their long-term stability as well as the risk to their sovereignty before signing away the papers.

Photo credit: Unsplash by chuttersnap

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