Washington has intensified its Latin American charm offensive (onus on the word “offensive”) by warning of the dangers posed by China’s increasing use of “debt trap” diplomacy in the region.
It’s clear who the message was intended for, given it was conveyed via a Spanish-only interview of the Commander of US Southern Command, General Laura Richardson, published by the Spanish edition of Voice of America. In the interview Richardson says that China is taking advantage of the growing economic vulnerability of many Latin American countries in order to offer them, among other things, high-interest loans that the countries will later struggle to service.
This, she says, is one of the strategies by which China is trying to expand its power and reach in the region. By helping to finance the construction of ports, telecommunications facilities and other infrastructure projects, China is saddling countries with huge amounts of unpayable debt. Battered by the ongoing economic slowdown and high global inflation, many governments in South America see these projects as a means of shoring up their finances. But in reality, says Richardson (translated below by yours truly), they are mortgaging their future:
“We call it a ‘debt trap’ that doesn’t help these countries in the long run. So we try to work with them and advise them on the pitfalls that could occur.”
Rank Hypocrisy
There may a kernel of truth to what Richardson says: China has indeed dispensed huge amounts in loans (over $840 billion, according to AidData) to developing and emerging economies, including in Latin America, as part of its global infrastructure development program, the Belt and Road Initiative (BRI). A few of those economies, including most recently Sri Lanka, are now defaulting on that debt and we’re yet to see how Beijing will respond if their number reaches a tipping point. There are also justifiable concerns regarding the lack of transparency of some of the Chinese government’s loan agreements.
Nonetheless, Richardson’s warning reeks of rank hypocrisy. After all, no country has done more to trap the economies of Latin America (and beyond) under an insurmountable mountain of toxic debt than the US. Since the 1980s over exuberant lending on the part of the largely US-controlled World Bank, regional development banks, US and European commercial banks and investors has repeatedly fuelled speculative booms that have quickly turned to bust. Once that happens, the IMF swoops in with a prescription for crippling austerity medicine.
Until the late 1970s, the IMF had played a relatively harmless role in Latin America as a lender of last resort concerned primarily with maintaining international currency exchange stability. But that changed in the 1980s as the IMF began intervening more and more in domestic economic policy making, as Alexander Main, the director of International Policy at the Center for Economic and Policy Research, documented in his 2020 essay, “Out of the Ashes of Economic War“:
As country after country in the Global South became submerged in debt crises provoked by a combination of easy lending of petrodollars, global recessions, and a sharp increase in U.S. Federal Reserve interest rates, the IMF swept in with bailout programs with unprecedented and painful conditions attached. In order to receive funding, Latin American and Caribbean governments were required to abide by an IMF-driven neoliberal agenda that included labor and financial market deregulation, massive public sector cuts, and the elimination of tariffs and other protectionist measures. While workers throughout the region took to the streets, a significant portion of domestic elites supported these measures, in part because they weakened the power of organized labor and allowed companies to buy up state assets at heavily discounted prices.
The Fund’s dogged insistence that crisis-hit countries double down on austerity has exacerbated poverty and inequality across Latin America. By advocating for the free movement of capital as well as a smaller role for the State, accomplished through privatisation and limiting the ability of governments to run fiscal deficits, the Fund has not only exacerbated boom-bust cycles; it has hampered governments’ ability to respond to them. Even the IMF itself acknowledged as much in its 2016 report “Neoliberalism: Oversold?”:
“Increased capital account openness consistently figures as a risk factor in [boom-bust] cycles. In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality… Moreover, the effects of openness on inequality are much higher when a crash ensues.”
A Case in Point: Tequila Crisis
This is precisely what happened to Mexico the last time it suffered a major crash, in 1994, when a sudden reversal of hot capital flows triggered the Tequila Crisis. Over the space of just a few months, the free-floating peso lost almost 50% of its value against the dollar, wiping out the savings of much of the country’s middle class and raising fears that collapsing asset values would push Mexican banks over the edge.
The Crisis threatened to engulf not only most of Mexico’s banks but also a number of Wall Street titans, including Citi and Goldman Sachs. Thanks to the hurried intervention of the U.S. Treasury Department (led by former Goldman co-Chairman Robert Rubin), the IMF and the Bank for International Settlements, Wall Street’s finest were saved, Mexico’s banks and other assets were bailed out and sold off at bargain basement prices, largely to US and European lenders, while the Mexican people were lumbered with untold billions of dollars of compounding debt they still service to this very day. In fact, Mexico still owes 1.4 trillion pesos, more than double the amount it did in 1999 (552 billion pesos).
The IMF may have fessed up to some of its errors, if indeed they can be described as errors, but it doesn’t seem to have changed them. In 2019, the fund signed a loan agreement with Ecuador, coincidentally just after the Moreno government had agreed to eject Julian Assange from its London embassy, straight into the outstretched arms of the Metropolitan Police. As reported at the time by Open Democracy, in an article featured on NC, the bill contained a number of provisions that aimed “to weaken and essentially render Ecuador’s capital controls ineffective.” The provisions allowed local elites to yank their money out of the country cost-free; they made tax avoidance and speculation easier; and they included regressive taxation measures that placed the lion’s share of the fiscal pain on Ecuador’s most vulnerable.
In other words, same old, same old, just as is playing out right now in Sri Lanka, where the Fund’s usual prescription of structural reforms, austerity measures, and a “firesale” of strategic assets is being offered in exchange for a bailout. Much is being made in the Western press of China’s role in Sri Lanka’s default in May yet in actual fact China accounts for just 10% of Sri Lanka’s foreign debt while market borrowings, mostly from institutional investors such as BlackRock and British Ashmore, account for 47%.
Abusing the Exorbitant Privilege
The US has also used its power as the issuer of the world’s dominant reserve currency — what is commonly known as “exorbitant privilege” — to narrow the economic policy choices available to governments in Latin America, as Vijay Prashad outlined in a 2018 interview with the Real News Network:
If the international agencies, if the banks, if the ratings agencies want to punish a country for breaking from the neoliberal consensus, it’s quite easy for them to do so. I mean, we’ve seen this happen quite strictly with Venezuela, where the ratings agencies, the banks, the International Monetary Fund, if they start to sniff and make a noise saying that we don’t like what you’re doing, then finance dries up. Then it becomes hard to use the dollar for trade. And you might even run into a sanctions regime.
That has already happened to three countries in the region: Cuba, Venezuela and Nicaragua. As Main notes, the sanctions, which in Cuba’s case date all the way back to 1962, are ostensibly meant to “advance human rights and liberal democracy and to weaken — and ultimately topple — the governments of a so-called Latin American ‘troika of tyranny,’ in former national security advisor John Bolton’s words. However, in all three instances, sanctions have ended up violating the human rights of ordinary citizens while failing — so far — to produce the political change advocated by the U.S. administration.”
In recent years, Washington’s abuse of its exorbitant privilege has gone into hyperdrive. As Michael Hudson noted in “America Shoots Its Own Dollar Empire in Economic Attack Against Russia,” it has backfired spectacularly:
The recent escalation of U.S. sanctions blocking Europe, Asia and other countries from trade and investment with Russia, Iran and China has imposed enormous opportunity costs – the cost of lost opportunities – on U.S. allies. And the recent confiscation of the gold and foreign reserves of Venezuela, Afghanistan and now Russia, along the targeted grabbing of bank accounts of wealthy foreigners (hoping to win their hearts and minds, along with recovery of their sequestered accounts), has ended the idea that dollar holdings or those in its sterling and euro NATO satellites are a safe investment haven when world economic conditions become shaky.
Shifting Sands
Meanwhile, in Latin America times are changing. As I’ve documented in a series of articles over the past year (such as here, here and here), the political, economic and geopolitical sands are shifting in Latin America and the Caribbean — and not in Washington’s favor. Five of the six largest economies in the region (Mexico, Argentina, Chile, Colombia and Peru) now have left-of-center governments in power, while in the largest, Brazil, former President Luiz Inácio Lula da Silva holds a comfortable lead in polls over his rival, the incumbent Jair Bolsonaro, just four months before presidential elections are scheduled to be held.
At the same time, China continues to increase its influence in the region. Between 2000 and 2020 China’s trade with the region grew 26-fold, from $12 billion to $315 billion. As Reuters reported a few weeks ago, if you take Mexico, the US’s second largest trading partner, out of the equation, China has already overtaken the US as Latin America’s largest trading partner. Excluding Mexico, total trade flows — i.e., imports and exports — between China and Latin America reached $247 billion last year, far in excess of the US’ $173 billion. By contrast, US trade with Mexico has increased from $496 billion in 2015 to $607 billion last year, while China’s has grown from $75 billion to $110 billion.
It is not just about trade. Chinese investment is also surging into the region thick and fast, though the pandemic has slowed the flow somewhat. Latin America is already the second largest recipient of Chinese direct investment after Asia. Twenty of the 148 countries that have joined China’s Belt and Road Initiative are in Latin America and the Caribbean. As Inna Afinogenova, a Russian journalist based in Spain who until recently was deputy editor of Russia Today’s Spanish website, reported for the Spanish news daily Publico, Chinese investment is coming into the region in all shapes and forms:
In Panama, the construction of a high-speed train line is under consideration as well as a fourth bridge over the Panama Canal. In Ecuador, two bridges and seven hydroelectric plants are being built. In Peru, there is the interoceanic railway project with Brazil and Bolivia. There are also plans to build a port in Chancay, on the Pacific, which would be the first Latin American port managed entirely by Chinese capital and would also be an important hub for trade in the South Pacific.
In the so-called “lithium triangle” of Bolivia, Chile and Argentina, several Chinese companies are involved in the extraction of lithium, which is key for new battery technologies. In Bolivia, for example, four Chinese companies are operating in the Uyuni salt flats.
China signed a $23 billion investment agreement with Argentina, one of China’s main partners in the region, in February. A few years ago there was even talk about building a Chinese-owned space station in Patagonia, a project whose purpose was, in theory, to enable astronomical observation and satellite tracking but the Argentine media have interpreted it as if it were practically a Chinese invasion, largely because the project received a green light at the time of “Kirchnerism”. In short, it was fiercely opposed for its possible military use, although both Chinese and Argentine officials insist it was meant purely for peaceful purposes.
China is also making big moves in the digital sphere. With the goal of helping developing countries close their digital divide, it has developed an entire program of digitalization and investments in Latin America’s tech sector. Anyone who goes to Latin America, to countries as diverse as Mexico or Venezuela, immediately notices the strong presence of Huawei. This Chinese company has invested hundreds of millions of dollars in telecommunications throughout the region.
Ham-Fisted Interventions
This has happened for a whole host of reasons. As I’ve noted before, China’s rise in the region coincided almost perfectly with the Global War on Terror. As Washington shifted its attention and resources away from its immediate neighborhood to the Middle East, where it frittered away trillions of dollars spreading mayhem and death and breeding new terrorists, China began snapping up Latin American resources, in particular petroleum, strategic minerals like lithium and food.
Governments across the region, from Brazil to Venezuela, to Ecuador and Argentina, took a leftward turn and began working together across various fora. The commodity supercycle was born. Since then China has become the most important trading partner for Brazil, Chile, Argentina, Peru, Venezuela, Cuba and even Panama, a country whose former president Manuel Noriega was ousted by a US military operation in 1989.
China’s business model is pretty simple: it uses its financial clout to forge closer economic and political ties with other countries. Unlike the US, it does not tend to meddle in internal politics in the region, or at least hasn’t until now. That may change if more and more countries begin to default on Chinese loans, as has already happened in Ecuador. But for the moment the Chinese are happy to let the money do the talking — and so too are many Latin American governments.
US officials have only belatedly begun to respond to this changing reality in its so-called “backyard” (or “frontyard”, as the current occupant of the White House calls it), but most of their ham-fisted interventions have only served to make matters worse. In August 2021, Richardson’s predecessor at the helm of US Southern Command, Admiral Craig Faller, accused China of taking advantage of widespread corruption in Latin America to further its own interests, in the process insulting both the peoples and governments of Latin America.
The Biden Administration then managed to further alienate many Latin American governments by excluding from the guest list of the recent Summit of Americas in Los Angeles the governments of Cuba, Nicaragua and Venezuela. This prompted a number of other heads of state from the region to boycott the event, including President of Mexico Andrés Manuel López Obrador. To make matters worse, the US tried to fill one of the empty seats at the event by inviting Pedro Sanchez, the prime minister of Spain, a country on the other side of the Atlantic Ocean that, together with Portugal, France, the Netherlands and Britain, once colonised just about every inch of Latin America and the Caribbean.
Now, the US is trying to ward off Latin American countries from doing too much business with China. But it all seems too little, too late, especially with Argentina, the recipient of the IMF’s largest ever loan, worth $56 billion, now talking about joining the BRICS. As Alexander Moldovan, a researcher on social movements and security in Latin America at York University, told Turkish state broadcaster TRT, China’s political approach, which generally respects national sovereignty (as long as you’re not Tibetan or Taiwanese), is popular among both right-wing populists like Bolsonaro and left-wing leaders like Cuba’s Miguel Diaz-Canel.
Even the president of Mexico, the US’ closest economic partner in the region, is trying to steer a more independent course for his country. Put simply, leaders in the region have grown weary of the “the history of gun-boat diplomacy” that overshadows US and European influence in the region, says Moldovan. They no longer want to be ruled by any one country, particularly by force.
Unfortunately, Washington does not seem to have got the memo. In her interview with VoA, Richardson underscores the need for the US to work militarily with its partners and allies in the region to counteract the growing influence of China and Russia: “We have to work with the armies and defense forces of our partners and allies, making them stronger and helping them overcome these intersecting challenges and threats.”
