Why Latin America should be cautious about Chinese Belt & Road investment

Louie Parker | Latin America Fellow

Image Credit: Archivo Medios Públicos EP (CC)

In Bogotá, Colombia, construction is underway for a state-of-the-art metro system. However, this ambitious project will not feature the familiar German Deutsche Bahn carriages nor American engineering. Instead, the endeavour will have a distinctive eastern flavour, as the more than $4 billion USD contract was awarded to Chinese-led consortium.

This deal is just one example of China’s established and growing interest in Latin America. Since 2005, China has provided more than $137 billion USD in loans to the Latin America and Caribbean region. It is now Latin America’s second-biggest trading partner with bilateral trade at $307.4 billion USD in 2019, growing 18.9 per cent over the previous year.

These deepening ties are buttressed by China’s famous Belt and Road Initiative (BRI); a global development strategy aimed at enhancing China’s trade along the Silk Road, Asia and beyond. It is believed to have a price tag of over $1 trillion USD and is a cornerstone of China’s global strategy for 2050.

Colombia has not formally signed on to the BRI, but their reluctance to do so belies the initiative’s popularity in the region. Currently, at least 19 countries in Latin America and the Caribbean have signed up to BRI agreements of one form or another. These include the construction of two megaports in Peru, a fourth bridge across the Panama Canal, and a 20,000km underwater fibre optic cable connecting China to Chile.

These examples provide a tangible demonstration of the BRI’s success for China in Latin America. However, the momentum behind the initiative is as much rhetorical as it is numerical. Beijing has been quick to emphasise the ‘benevolent’ aims of the BRI; with President Xi Jinping describing it as an instrument to “provide splendour to human civilisation.”

There are parallels between Latin America’s economic aspirations and China’s economic rise of recent years. Just as China’s poverty rates were alarmingly high before President Deng Xiaoping’s market reforms of the 1980s, Latin America is also beset by endemic poverty. The United Nations notes that over 76 per cent of Latin America’s population belongs to low-income or lower-middle-income strata. This feature makes Latin American countries the ideal candidates for BRI investment, as their conditions align with its stated aim to “create more opportunities for developing countries… help them eradicate poverty and achieve sustainable development”.

However, Latin American countries should approach grandiose BRI projects with a healthy dose of caution and scepticism. As Peter Frankopan argues in his book The New Silk Roads, “the problem is not so much the principle of Chinese loans, but rather the practices that underpin them.” China offers cheap loans to developing nations for these large-scale projects with full knowledge that they are often ill-equipped to repay them. When this occurs, China can leverage this inability to its advantage.

Closer to home, the experiences of Asian countries are instructive of the perils of overextending small nations to BRI projects. In Sri Lanka, for example, the port of Hambantota was constructed by Chinese state-owned enterprises. The deal went ahead despite feasibility studies saying the port was not a worthwhile investment and Sri Lanka’s already ballooning debt. When Sri Lanka defaulted on its loan repayments almost immediately, it was left with no other option than to lease the port to a Chinese state-owned company for 99 years. In other words, a deft move by China and a desperate response by Sri Lanka.

So how can Latin American countries avoid getting caught up in this predatory system? The answer cannot be avoiding Chinese infrastructure investment altogether. Consider that Brazil, for example, has China as its largest trading partner. Besides, the appeal of Chinese BRI investment is easy to understand, and China should not be excessively castigated for engaging in a practice that is not only commonplace around the world, but also not illegal.

For one, Latin American countries should favour deals for individual projects rather than committing to the broader BRI memorandum of understanding. This affords these countries greater flexibility, as they are able to pick and choose the sources of infrastructure investment on a case-by-case basis.

When dealing with China, these countries should also push for greater clarity and transparency in the contracts that are drafted; particularly in relation to redress options. This would avoid naively walking into agreements with catastrophic indemnity clauses.

Most importantly, Latin American countries should seriously consider the necessity and extravagance of each proposed project. Cordial relations with China are undoubtedly desirable, and ports and dams can be a feel-good story for speeding up development and providing vital infrastructure to local citizens. However, a degree of caution goes a long way in protecting these countries from being indebted to the superpower of the East.

Louie Parker is the Latin America Fellow for Young Australians in International Affairs.

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