China’s Strategy Erodes American Hegemony in Latin America

China is using a clever strategy to leverage debt to obtain political advantage.  This strategy is undermining the historic United States centuries-old dominance of the region.

Central America’s geographical position is strategic as it enables China to ship goods to both the East and West Coasts of the United States and African and European markets.  South America is a largely undeveloped continent with substantial opportunities for market growth. Over the past 20 years, China has grown from one of the region’s smaller commercial partners to its second-most important as bilateral trade grew from $12 billion in 1999 to $306 billion in 2018.

​In 2013 China developed an international economic development Belt and Road Initiative (BRI) as a project linking Eurasia through physical infrastructure.  According to publicly available representations the BRI has the potential to reduce global trade costs 2.2% and shipping time 2.5%.  The BRI was also extended to Latin America.

​Since 2005, Chinese policy banks have provided more than $141 billion in loan commitments to Latin America and these loans have been extended at higher than market rates.  Chinese state-owned enterprises (SOEs) account for 70% of the contract value of BRI construction projects, so the loans essentially finance the development of Chinese international construction capabilities, further strengthening China.  Self-dealing opportunities arise from these arrangements.

The United States government counters with warnings the loans are encouraging a debt trap and that the projects are unsustainable and there certainly is an element of truth in this claim.  The United States has historic experience with the same strategy and exerting political and economic pressure as a result.

​Chinese-sponsored development includes an evaluation of environmental impact but there is substantial international concern about the efficacy.

Examples of the Chinese Latin America initiatives and effects include:

• China ‘gifted’ El Salvador a large sports stadium, library, and water treatment plant.  China also provided $19 billion in loans for the development of tourist sites, including building streets, parks, and a water system, as well as ports and harbor construction.  El Salvador then broke off diplomatic relations with Taiwan (following the Dominican Republic and Panama).
• Similarly, China gave Costa Rica a new soccer stadium in 2011.  The 35,000-seat stadium, named Estadio Nacional, cost $105 million to build but the construction was all provided by Chinese workers.  Costa Rica canceled its diplomatic dealings with Taiwan two weeks after the official opening of the new stadium and signed a free trade agreement.
• In Ecuador, China developed and constructed a 1,500-megawatt capacity hydroelectric dam called Coca Codo Sinclair and is developing other hydroelectric projects intended to make Ecuador independent of power imports from adjacent countries.  In total China has loaned Ecuador $19 billion for bridges, highways, irrigation, schools, health clinics, and a half dozen other hydroelectric dams.  To secure the debt China gets to keep 80% of Ecuador’s oil as many of the contracts are repaid in petroleum, a strategic move to secure future energy supplies.
• Venezuela’s oil guaranteed at least $50 billion in loans that China provided since 2007, of which as much as $25 billion are outstanding.  China’s support has helped stabilize the Maduro government and mitigate the recent United States regime-change attempts.  In turn, Venezuela provides a market for Chinese arms sales.  

Ecuador's Coca Codo Sinclair Hydroelectric Dam

​The strategy is singular and intriguing in that in the end it involves minimal investment and risk by the Chinese while helping build an empire and extend Chinese political influence and power.  The effect of this on power and influence by the United States is certainly negative and is a long-term strategic concern.  The United States continues investment in military hardware such as fleets of stealth fighters, new nuclear submarines, and aircraft carrier groups which require immense amounts of money to build and maintain.  As a policy matter, a wiser and longer-term view would involve efforts to counter Chinese influence in their debt-brokering strategy.

​Another considered viewpoint is the financing of infrastructure development is a good thing for Latin America.  Despite the environmental impact, these construction projects have the potential of improving lives and encouraging wealth accumulation.  Arguably the United States didn’t do a great job of stewardship in its hegemony in Latin America.  Policies of military intervention, regime change, and support of autocratic dictators resulted in distinct hardships on the populations.  Chinese influence will mitigate these unilateral interventions in the future and may benefit the region in the long run.

Values for Chinese investing were provided by https://www.brookings.edu/research/chinas-investment-in-latin-america/#:~:text=For%20the%20five%2Dyear%20period,%24250%20billion%20in%20direct%20investment.  Information on BRI in Latin America was discovered at https://www.atlanticcouncil.org/in-depth-research-reports/issue-brief/belt-and-road-in-latin-america-a-regional-game-changer/.  Documentation of the Costa Rican soccer stadium was found at https://psmag.com/economics/chinese-funded-costa-rican-soccer-stadium-explains-world-65667.  El Salvador infrastructure information can be found at https://www.reuters.com/article/us-el-salvador-china/china-signs-on-for-gigantic-investment-in-el-salvador-infrastructure-idUSKBN1Y7266.  Detailed information on Ecuador was located at https://www.nytimes.com/2018/12/24/world/americas/ecuador-china-dam.html
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