Is debt-trap diplomacy a legitimate issue for American businesses? In recent years, U.S. policymakers have expressed just such concerns. In a 2018 speech, Vice President Mike Pence sounded a warning that China was using a variety of tools, including debt diplomacy, to foster relationships with American allies and enemies alike.
“China uses so-called debt diplomacy to expand its influence,” Pence told the Hudson Institute. “Today, that country is offering hundreds of billions of dollars in infrastructure loans to governments from Asia to Africa to Europe to even Latin America. Yet the terms of those loans are opaque at best, and the benefits flow overwhelmingly to Beijing.”
Fast forward to 2021, and the Biden administration and the G-7 are working towards neutralizing Beijing’s increasing global clout. This November the government announced that it intends to invest in five to 10 infrastructure projects as part of a G-7 initiative to counter China’s Belt and Road Initiative. The projects are to be funded under the Build Back Better World initiative launched by the G-7 rich in June. Plans could be finalized during a G-7 meeting in December.
For its part, China stated publicly that there is “enormous space” for cooperation in improving infrastructure around the world. “Different initiatives don’t offset or replace each other,” Chinese Foreign Ministry spokesman Wang Wenbin said at a regular press briefing. “The world needs efforts to build bridges, not blow up bridges.”
What is debt-trap diplomacy?
Wikipedia describes debt-trap diplomacy as a “situation where a powerful lending country or institution seeks to saddle a borrowing nation with debt to increase its leverage over it.” The term was initially promoted by Brahma Chellaney, an Indian academic, in 2017. By extending extensive credit to the debtor nation, the lending nation purposely leaves the debtor nation challenged or unable to meet debt repayment. It does so with the purpose of extracting economic or political concessions. The term has been applied to the International Monetary Fund, and especially to China and its Belt and Road Initiative.
“By extending huge loans with strings attached to financially vulnerable states, it (China) has not only boosted its leverage over them but also ensnared some in sovereignty-eroding debt traps,” Chellaney stated in a 2021 op-ed piece.
What is the Belt and Road Initiative?
First announced by the Chinese government in 2013, the Belt and Road Initiative, or BRI is a key plank of Chinese foreign policy aimed at connecting China to the world via a complex network of roads, ports, and railways. It is also often cited in the West as the leading example of debt-trap diplomacy. The ambitious program spans around 2,600 projects in over 100 countries, all subsidized by Chinese loans. The program includes several initiatives, most notably the Silk Road Economic Belt, encompassing the Eurasian landmass into Europe and Africa, as well as the Maritime Silk Road – a network of ports and sea lanes. Newer initiatives include the Ice Silk road – a proposed northern Maritime route, and the super grip, which would include the development of six ultra high voltage electrical grids across various parts of Asia.
Arguments against debt-trap diplomacy concerns
Critics such as Deborah Brautigam of Johns Hopkins University, Lee Jones of the University of London and Shahar Hameiri of the University of Queensland argue that there is scant evidence to support concerns of debt-trap diplomacy.
They challenge the narrative surrounding Sri Lanka’s Hambantota Port, which is purported to be the leading example of debt-trap diplomacy. The conventional wisdom, they say, is that China knowingly loaned money to Sri Lanka to build the port, knowing that it would experience debt distress and eventually come to control it.
“This narrative is simply incorrect,” according to Hameiri. “The project was proposed by former Sri Lankan President Mahinda Rajapaksa, not Beijing, as part of his government’s corrupt and unsustainable development program. It quickly became a “white elephant”, however, creating vast surplus capacity and adding to Sri Lanka’s financial woes.” Sri Lanka’s debt distress arose, he argues, not from Chinese lending, but from excessive borrowing on Western-dominated capital markets, which had issued high-interest loans in the previous decade.
What’s next
Investment in global infrastructure can generally be considered a positive development, although there is certainly political and business risk involved with one country dominating investment in such projects. Whether China’s global infrastructure investments are part of a political strategy or simply the fruit of Chinese state-owned enterprises chasing business – often competitively, is still debated. The development of greater international competition for such projects, however, would reduce China’s regional dominance and provide more options for borrowing nations. It should also offer greater opportunities for international construction firms, goods and services in conjunction with those projects.
But what if debt-trap diplomacy is real and continues to grow? In the next installment, we will look at some of the supply chain implications for American businesses.
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