November 12, 2019

Analysis of Foreign Investment as a Precursor to Increased Soft Power: The Case of China in Central America

By Humayun Hassan

The 21st-Century Silk Road

In  2013, the Chinese president Xi Jinping announced the beginning of a new era for the global geo-economics. The Belt and Road initiative, which seeks to connect more than 65% of the world’s population and one-third of the GDP, directly to the Chinese market, is estimated to be completed by 2050. This ambitious plan aims to reinvigorate the ancient silk road, by building a network of land and maritime trade routes, connecting Asia, Africa, and Europe. If this project comes to fruition, as planned and marketed by the Chinese officials, it will, undoubtedly, make china the leader of the world’s geo-economic arena and cement its place as the “factory of the world”. This flagship project, however, is not the only indication of a clear change in the Chinese global geopolitical approach. From Deng Xiaoping’s strategy of maintaining a low-profile and never calming leadership, the country now seems to fully embark on president Xi’s vision of placing China at the global center stage. It is, perhaps, a continuation of the same strategy, when China suddenly develops soft-power and becomes one of the largest foreign investors in Central America, a place where it has had no footprint in modern-history.

Drawbacks and the Chinese ‘Debt Trap’

During the short time since its announcement, the Belt and Road project has had its fair share of criticisms as well. Many regard it as China’s response to the United States’ military interventionism. The critics of BRI base their arguments of the apparent secrecy and the exploitative conditions of the terms which are signed by countries that are a part of this initiative. It could, therefore, allow China to exploit these weak economies, by bargaining for things that may be far beyond the realm of simple economic investments. Although such rhetoric may be disregarded as the routine political opposition by China’s rivals, it is pertinent to consider the underlying themes, which are present in criticism offered by all groups. For most of the developing countries, Chinese investment is welcomed, as, unlike its western counterparts, China offers loans without many strict preconditions, pertaining to human rights, economic and political stability, and corruption in the country. It also provides developing countries an opportunity to become a part of a transcontinental trade route. For Sri Lanka and Pakistan, the BRI offers them a chance to turn their small fishing towns of Hambantota and Gwadar, into major deep-sea ports in the Indian ocean. For the Central Asian countries, the BRI Eurasian route may bring a new era of economic prosperity in the region.

A Double-edged Sword

On the contrary, debt-trap diplomacy of BRI, along with its financial and governance risk are issues that have already manifested their dire effects in various countries. As Montenegro strives to recover from the aftermath of its Chinese infrastructure debt, the situation looks grim. Since the country took the loan from The Exim Bank of China to build the Belgrade-Bar motorway, its debt to GDP has soared to almost 80%. Moreover, the terms of the contract allow China right to Montenegrin land, in case the country defaults.  A similar situation was observed in Sri Lanka, when China’s debt-trap diplomacy and Sri Lanka’s inability to pay off its massive Chinese loans, forced the latter to lease the port of Hambantota to China, for 99 years. In Zambia, the national airport was handed over to Chinese control, due to the country’s inability to pay off its debt.

From these examples, one observes a clear pattern, which is even more evident since the official beginning of the Belt and Road Initiative in 2013. Many of the developing countries which end up handing over their land, ports, or other national assets to the People’s Republic, China is either one the largest foreign direct investors, trade partner, or creditor.

Chinese Economic Ties with Central America

In Central America, China has been investing heavily in recent times and the nature of its embedment with these countries is strikingly similar to those with developing economies of the BRI. In Asia and Africa, China is a major trading exporter in Pakistan, Cambodia, Kenya, and Zambia. All of these countries are, in some way, succumbed to the excessive Chinese loans. It is pertinent to note that the Chinese trade with many Central American countries has experienced a considerable jump around the time of the initiation of the BRI. The following chart indicates how the trend of China’s exports to the regional countries, from 2010 till 2017:

Currently, the Chinese investment in central America is present in Honduras, El Salvador, and Nicaragua, primarily in infrastructure-related projects. Moreover, there are plans to invest in other Central American countries as well. Panama is a part of the BRI, whereas the Panamanian government is likely to issue a “Panda Bond” which will be sold in China. In Honduras, the Chinese workers constructed a dam worth $350 million. Similarly, in Nicaragua, a Chinese company recently installed a communications network in the country. With current projection and ongoing talks between the Chinese officials and those of the above-mentioned countries, China’s investment and soft power in the region are likely to increase in the coming years. For the host countries, all may not be well for they have many attributes similar to those that have fallen to the debt-trap diplomacy. Their dire infrastructure resembles that of Myanmar and Cambodia, their political unrest is similar to that of Pakistan and Kazakhstan, and their excessive debt echoes those of Zambia and Sri Lanka. Although a country’s debt-to-GDP is not a deterministic variable of its debt-servicing capacity, it does indicate their general direction in which a country is heading. With the ever-increasing reliance on Chinese loans and investment, inability to pay off the national debt, and the relative unwillingness of other major foreign investor to engage, it seems only a matter of time that Central America will be forced to concede permanent Chinese presence in their countries.

The Broader Context

From a strategic standpoint, Central America provides China an opportunity to not only broaden the scope of the 21st-century silk route to Latin America, but also an important maritime point for trans-oceanic shipping. Furthermore, any economic involvement in the central American sphere will allow China to counter the United States’ encirclement of China strategy, through the military presence in Japan, Afghanistan, and the South China Sea. Since the times of the Han Dynasty, China has kept its influence limited to Asia. It is arguably the first time in recorded history where an opportunity has presented itself for China to explore new frontiers, rebrand its image, and discover new arenas for exerting its soft power. The question then is whether the BRI is a precursor to a major shift in Chinese policy around 2013, where it uses the pretext of trade and investment in vulnerable countries to establish a permanent political and military foothold? If that is the case, then what may be the fate of Central America in the coming years? Is Chinese presence, in the American backyard, a precursor to the creation of a new geopolitical flashpoint in the western hemisphere?

In time, these questions may be answered. Yet, one thing is certain: the seemingly innocuous Belt and Road Initiative embodies a historic legacy, a comprehensive strategy, and a vision for the future, where China assumes the center stage of the world, in the latter half of the 21st-century.

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