China’s Latin American Power Play
By Julio Armando Guzmán
16 January 2023
China’s footprint in Latin America is large and growing. It is the region’s second-largest trade partner after the United States and the biggest sovereign lender to Latin American governments. Indeed, as a lender, China is overtaking long-standing multilateral financial institutions such as the World Bank and the Inter-American Development Bank in the region. Those two organizations are just barely edging out the $131 billion the Chinese extended in credit in Latin America between 2008 and 2019. All signs are that China will soon be the largest holder of debt in the region.
That should worry both Latin American and U.S. policymakers. The COVID-19 pandemic, flagging prices for commodities such as copper and soybeans, higher borrowing costs, and a stagnant global economy mean that Latin America is entering a period of low economic growth. Chinese investment in this environment will be hard to resist. But that money comes with strings attached. China is using its economic might to advance its foreign policy agenda, including persuading countries to stop recognizing Taiwan’s sovereignty. And the terms on which it lends often undermine democratic norms. That is particularly dangerous in a part of the world where institutions and democratic practices are often fragile.
The best way for Western governments to combat rising Chinese influence is by investing in Latin America’s human capital. Specifically, the United States and European nations should provide more scholarships for Latin Americans to study and research abroad, and they should use digital technology, such as online classes, to reach young leaders across the region. Competing with China primarily in terms of who pours more money into Latin America is a lost battle. For one thing, the West cannot rival China’s financial leverage. Moreover, the assumption that economic growth leads to democracy is flawed. In the end, durable democracy rests on values and ideas—a plane of competition on which China is severely disadvantaged. While China invests in mines, the West should invest in minds.
A GROWING FOOTPRINT
Some analysts suggest that Chinese investment might ease in the years ahead because its rate of economic growth is declining. In fact, the inverse is probably true. China recently started rebalancing its economy to increase productivity, moving from manufacturing to services such as telecommunications, electricity distribution, and banking. This effort is driving expansion of Chinese direct investment overseas, particularly in Latin America, a region with significant gaps in its private and public services. The change in Chinese focus is borne out by economic data. From 2005 to 2015, only ten percent of total Chinese investments went to services. After 2016, that figure jumped to 64 percent.
There is another reason to expect a more active Chinese presence in Latin America in the coming years: the region is headed for an economic crisis that China is primed to exploit. For the first time in 20 years, Latin America’s natural-resource-based economy will no longer benefit from favorable external conditions such as very high commodity prices, low interest rates, and vigorous global demand. This is particularly troubling considering that around three-quarters of Latin America’s GDP depends on those factors. To make matters worse, the pandemic has ravaged Latin American economies. Adjusting for birth rates, the International Monetary Fund’s projections for regional GDP per capita growth declined to 1.5 percent in 2022 and zero in 2023.
Governments across Latin America will need money, and fast. China is well suited to meet this burgeoning need: its government is skilled at providing lending contracts, funding large public infrastructure projects, and allocating direct investment. China’s institutional decision-making can skip democratic processes, which means deals are often sealed in short timeframes. In addition, in sharp contrast to the established practices of the World Bank and the International Development Bank, Chinese project approval downplays economic fundamentals, the borrower’s repayment ability, and environmental considerations.
Thus, in the next decade, China could become Latin America’s ace in the hole, providing the fiscal stimulus needed to cushion the effects of economic turmoil. Unfortunately for Latin America, the greater its economic vulnerability, the less political leverage its political leaders will have to resist keeping the economy afloat at any cost.
DARK DAYS AHEAD
A bigger Chinese footprint in their countries should worry Latin Americans for several reasons. Aside from its commercial dependence on minerals and foodstuffs, China has clear geopolitical interests in the region, most of them at odds with the values of liberal democracies. The authoritarian superpower is using its economic might to advance its foreign policy agenda, which ranges from racking up allies to support its political positions in multilateral settings to undermining democratic norms, institutions, and the rule of law in Latin America. A good example of the former is how four Latin American countries—the Dominican Republic, El Salvador, Nicaragua, and Panama—switched their diplomatic recognition from Taiwan to China in the last five years, a period in which China’s presence in these countries reached a peak.
A more disturbing example of the latter is the kind of conditions China imposes in its lending operations. These noxious provisions include confidential debt contracts, which in some cases prevent the transaction from ever being disclosed. It is also common for these loans to contain the requirement that Chinese leaders will be repaid before other creditors. The possibility of political intervention also looms over these loans: namely, China can terminate diplomatic relations and demand full repayment of its debt if the borrower country adopts a policy opposing its interests. These conditions are incompatible with national rules, international agreements, and democratic practices.
Because Latin Americans care about democracy and national sovereignty, China should face serious obstacles in its bid for control in the region. Accordingly, Western governments should work to ensure that the battle for Latin America is more about principles than economic need. Ultimately, principles and shared values define the future of nations. The key pillars of sustainable human development—effective governing institutions and the rule of law—are forged, above all else, by ideas.
Unfortunately, nondemocratic ideas are gaining traction across Latin America, largely because elected governments have performed so poorly. Democratic elites in the region have failed to carry out badly needed political reforms, such as strengthening political parties and implementing laws that address corruption in electoral processes. The lack of such reforms is one reason these governments have not been able to deliver sustainable development, contain rising inequality, and promote human rights. Latin American leaders have, for the most part, not been good emissaries for the message that democracy, despite its problems, is the best available option for progress—which makes it all the more important for democrats, inside and outside the region, to embark on a public campaign to educate the Latin American electorate. Western governments, in conjunction with Latin American democratic organizations, should attempt to explain the dangers of authoritarianism and strengthen civil society networks. All these efforts require investments in people more than in physical infrastructure—and this is an area where the Western world has distinct advantages over China.