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The United States is Losing Latin America to China

August 15, 2019 Topic: Security Region: Americas Tags: ChinaLatin AmericaXi JinpingDemocracyGreat Power

The United States is Losing Latin America to China

In Latin America, hard power is of limited utility; soft power through economic and diplomatic influence will carry the day in the region.

HISTORICALLY SPEAKING, the United States has been sensitive about foreign powers involving themselves in the affairs of the Western Hemisphere. Yet with the collapse of the Soviet Union at the end of the Cold War, Washington seemed to forget about its “backyard” in the Americas. Instead, the U.S. foreign policy establishment focused on Eurasia, particularly after 9/11. Sensing an opportunity to attain influence in the region at the expense of the United States, China has stepped into Latin America—strengthening diplomatic ties, expanding trade relations and pouring tens of billions of yuan into infrastructure investments.

Beijing’s intentions were stated outright in a 2008 policy paper that, apart from a few China and Latin America hands, was largely overlooked at the time. Though China and Latin America are separated by the breadth of the Pacific Ocean, the paper stated that both sides “enjoy a time-honored friendship” and “are at a similar stage of development and face the common task of achieving development.” The region’s then mostly left-wing governments, often ignored and at times antagonized by the United States’ cavalier attitude towards them, welcomed China’s message of harmonious and collaborative development. After all, China’s own model of state-led economic development has advanced its economy by leaps and bounds over the past four decades, lifting over 800 million people out of poverty and significantly increasing the ordinary citizen’s standard of living. Latin American countries could not help but covet achieving similar results.

Now, over a decade later, China’s efforts have borne fruit. Beijing wields sizeable economic and diplomatic influence in the region, much to the consternation of a Washington that is now thoroughly hawkish on China. Yet despite this new attitude, American policy towards the region has not seen much of an improvement. Under President Donald Trump, the U.S. government has imposed tariffs, cut off aid to countries that do not do more to stop migration to the United States, and is seemingly determined to build a literal wall along the southern border with Mexico. But beyond the day-to-day whims of the Oval Office, there is a much deeper internal conundrum that U.S. policymakers must face: China has proven that government-led industrial policies can work. These have been so successful that they have lifted millions of people out of squalor and have enabled China to compete with the United States in economic development, high-tech industries and more.

In defending its preeminence over the New World, the United States will have to do more than merely recalibrate its regional policies: Washington’s political establishment will have to confront its own ideological assumptions—particularly those that inform its approach towards geo-economics. Doing so will require overcoming a long-held aversion to state-led economic initiatives and the notion that the free market holds unquestionable authority over matters of economics and finance. The best way to start this journey is to examine what, precisely, China has achieved down south.

CHINA’S POLICY papers from 2008 and 2016 are rather clear in proclaiming the “goal of establishing a comprehensive and cooperative partnership featuring equality, mutual benefit and common development with Latin American and Caribbean countries.” The emphasis on development is encouraging for Latin American governments, as it indicates that China wants to help address a sore need in the region—one that has always existed and continues to exist even now. With more than 60 percent of the region’s roads remaining unpaved, 70 percent of sewage going untreated, and unreliable power grids resulting in enormous losses in electricity, there is plenty of work to be done.

The United States is certainly aware of Latin America’s needs. It was only a few years ago that, in the 44th Annual Washington Conference on the Americas, then-Commerce Secretary Penny Pritzker noted that there are significant U.S. investment opportunities available in Latin America, especially in infrastructure. But while the United States must convince private companies to invest down south, China, with its state-owned enterprises (SOEs), can move and build faster. And so, with China signaling that it could commit to substantially increase its presence in the region, and that it stood ready to deploy billions of dollars to promote much-needed trade, investment and infrastructure development, how could Latin American governments possibly turn Beijing down? After all, this is a country that since 1978 has, according to the World Bank, “experienced rapid economic and social development. gdp growth has averaged nearly 10 [percent] a year—the fastest sustained expansion by a major economy in history—and more than 850 million people have lifted themselves out of poverty.” It is a track record that speaks for itself, and one that many developing nations wish to emulate.

China took up the invitation of Latin American governments and immediately got to work. Between 2000 and 2017, according to Red-ALC China, Chinese companies invested over $109 billion in Latin America; separately, the Inter-American Dialogue’s China-Latin America Finance Database estimates that, since 2005, Chinese policy banks (the China Development Bank and the Export-Import Bank of China) have disbursed more than $141 billion in loans, with 87 percent of those funds directed towards energy and infrastructure projects. A more recent report from the Inter-American Dialogue and Boston University’s Global Economic Governance Initiative puts the loan amount at over $150 billion, which exceeds the combined lending of the World Bank, the Inter-American Development Bank and the caf-Development Bank of Latin America.

Out of the aforementioned $141 billion in policy bank loans from 2005 to 2017, $96.9 billion (68.5 percent) has gone into energy-related projects, $25.9 billion (18.3 percent) into infrastructure development, $2.1 billion (1.5 percent) into mining projects and $16.2 billion (11 percent) into other ventures (including government bonds, trade financing, business development and more).

One might ask: why are the majority of these loans going to the energy sector? Perhaps the answer lies in the Global Energy Interconnection proposal put forward by State Grid Corporation of China Chairman Liu Zhenya. The plan, designated a “national strategy” by Chinese president Xi Jinping, can be described as the energy equivalent of the transportation infrastructure-focused Belt and Road Initiative: it seeks to build a global electricity grid mainly based on ultra-high-voltage (UHV)—a technology that enables electricity to be carried across enormous distances with greater efficiency than current high-voltage lines.

 

Who would control this grid? Chinese officials say that, like the Internet, “no one” would. Yet such a claim cannot be so readily accepted. For starters, China itself is, in the words of a study from the Paulson Institute, “intensifying its efforts to set indigenous standards for homegrown ultra-high voltage transmission technology” and seeking to “contribute to UHV standards internationally.” This sort of standards-setting in the international arena, along with the network effects that come with it, is concerning to Western political and security analysts. After all, this is a traditional area of great power competition, since states whose technology becomes the dominant standard can use it against others. By establishing a global standard in energy infrastructure, China could conceivably shut out American firms from entire markets due to a lack of technological interoperability.

Additionally, the best way to secure control, or at least influence, over this hypothetical global power grid would be through controlling or influencing the power plants that contribute to it. In Latin America, there are dozens of such projects: the San José hydroelectric plants in Bolivia, the Reventazón Dam in Costa Rica, two nuclear power plants in the Patagonia region of Argentina, the natural gas Martano power plant in Panama, and so on and so forth.

 

In addition to energy infrastructure, there is also the usual transportation infrastructure that is invoked by analysts when they discuss the Belt and Road Initiative. Chinese SOEs, such as the China Harbour Engineering Company, have been busy building and acquiring container ship terminals across the region, from the Panama Canal to Manzanillo in Mexico’s Pacific coast. Meanwhile, Chinese giants Huawei and ZTE have built telecommunications networks in many Latin American countries.

And all of these various projects, of course, have been or are being built by companies that are either close to China’s government or are outright SOEs.

THOUGH CHINA’S presence in the United States’ sphere of influence is troubling for Washington, it is hard to deny that Beijing isn’t helping the region meet its enormous infrastructure needs. But Latin American countries may not be benefiting as much as many think they are.

Take China’s loans as an example. Of the aforementioned $141 billion in loans calculated in 2017, $115.3 billion came from the China Development Bank (the remaining $25.8 billion from the Export-Import Bank of China). These loans have a higher interest rate on average than their international counterparts, leaving recipients having to pay back more over time. This comes with a presumed upside for developing countries though: unlike loans from Western institutions, Chinese loans do not have governance and environmental conditions attached to them. In other words, there is no need to conduct lengthy, time-consuming environmental surveys, cost-assessment studies, inordinate transparency measures and more.

Yet what has happened to Ecuador perhaps best demonstrates the kind of negative repercussions that can occur when massive loans are made to developing countries with no governance or environmental strings attached. According to data from the Inter-American Dialogue, as of late 2018, Ecuador has taken around $18.4 billion in loans from China’s policy banks—adding up to about a third of Ecuador’s public debt. This money was used to fund a number of projects, the largest of which (to the tune of $1.7 billion) is the Coca Codo Sinclair hydroelectric dam. Unfortunately, as an in-depth investigation by The New York Times has revealed, the Coca Codo Sinclair project has been an embarrassing disaster. For one, against all common sense, it was built near a volcano that has been active since the sixteenth century. Not only is the area seismologically active, but a 2010 independent review of the project “warned that the amount of water in the region to power the dam had not been studied for nearly 30 years.”