Debt Diplomacy: A New Front in the US-China War?

Earlier this year the US agreed to open up a line of credit to Ecuador for the value of $3.5 billion. As the geo-political giant in the Americas, the US has a powerful political and economic interest in aiding nations in its area of influence: the loans are supposed to jumpstart the Ecuadorian economy through the monetization of certain state-owned assets in the telecommunications sectors, as well as potentially in the oil industry as well. However, as stated by Adam Boehler, chief executive of the US International Development Finance Corporation (DFC), the main purpose of the financing was to give Ecuador the chance to restructure its “predatory Chinese debt” .

In essence, the US has loaned Ecuador money in order to shift its debt repayment from China to itself. This falls into the playbook of debt diplomacy: a centuries old practice of using soft power to increase the lender’s political clout. In contrast to hard power, where military and economic strong powers are employed, soft power uses diplomacy and influence to achieve geopolitical goals. Economic interests are another big motivation to lend countries money, especially if you believe this might open up new markets for your economy. Over the last decades global powers like the US, the EU and China have conducted their foreign policy through private enterprises, direct investments, aid donations and development programmes. The old “I scratch your back with a couple billions, you scratch mine”.

While it might be tempting to try and deduct the current state of the US and China struggle from their foreign debt diplomacy, this article’s purpose is not that. Rather, we’ll try and explore and discuss the current narrative surrounding US and Chinese lending. Western geopolitical narratives are often wary of China’s growing global influence, and the villain role the country is often cast in is evident in the recent Ecuador case. In lending Ecuador American money specifically for the aim of repaying expensive Chinese loans, the US achieves a twofold win. First, it indicates that it does not like China meddling in what the US perceives as its own influence-area, and is prepared to intervene when that happens. Second, it posits China as a predatory moneylender, ready to leverage its credit to seize key resources or assets in the borrowing nations, and so the US takes up the role of debt “guardian angel”.

Is this reputation warranted? Well, as with everything the answer is more complex than applying a binary divide between good and bad, especially in polarised and complex relationships such as that between two competing world powers. Caution of Chinese loans may be warranted, especially because of the lack of transparency surrounding them.  Documentation regarding its capital exports is opaque and the data on its debt stock abroad is incomprehensive because there is no obligation to report information on lending to international financial institutions (IFIs) such as the World Bank or IMF. The result is a conspicuous amount of “hidden debt” that complicates any attempt to understand exactly how much money countries around the world owe to China. Furthermore, the Harvard Business Review believes Chinese lenders tend to apply market terms, which are less favourable and more expensive than the loans granted by international financial institutions such as the World Bank.

This, however, doesn’t justify labelling all Chinese lending as predatory: on several occasions borrowing countries have had the opportunity to restructure their debt or negotiate more favourable loan terms. In fact, Ecuador was able to postpone its payment of $900 million last year, citing economic troubles caused by the pandemic. It is clear that Chinese loans aim to prioritise China’s foreign policy and economic interests rather than those of the receiving country, however, it would be disingenuous to believe that US loans are made out of the goodness of its heart. Remember that conditions of the US deal to the Ecuadorian government included the monetisation of state assets, which in most cases coincides with privatisation. Furthermore, viewing IFIs as inherently neutral within the struggle for geopolitical influence is incorrect; critics have pointed to them being little more than extensions of US agencies. Studies have shown that the World Bank is heavily influenced by American considerations of foreign policy, and countries considered more in line with the US appear to receive better financing conditions.

This article does not wish to end where many do, in a variation of the nihilistic refrain “all options are bad therefore they must all be equally bad”. Not all loans are the same, but this article will not attempt to enter in the merit of whether US of Chinese backed loans are best. Simply, it wishes to stimulate reflection on the powerful tool that debt diplomacy can be in shaping and perpetuating narratives about geopolitical orders. It is clear that debt diplomacy has become an institutionalised foreign policy instrument, and as such it deserves further examination, especially in the context of our forever evolving financial landscape.