Beijing’s debt-trap diplomacy likely to cost it dearly over the long term

Brahma Chellaney, Nikkei Asia

Brahma Chellaney is a geostrategist and author of nine books, including “Asian Juggernaut: The Rise of China, India and Japan.”

China’s debt-trap diplomacy, redolent of colonial-era practices, has claimed its latest victim — the small, resource-rich nation of Laos. Struggling to pay back Chinese loans, Laos has handed China majority control of its national electric grid at a time when its state-owned electricity company’s debt has spiraled to 26% of its gross domestic product.

Sri Lanka and Pakistan, meanwhile, are taking fresh loans from China to pay off old loans, highlighting the vicious cycle in which they find themselves trapped. Both have already been compelled to cede strategic assets to China.

Less than three years ago, Sri Lanka signed away the Indian Ocean region’s most strategically located port, and more than 6,000 hectares of land around it, on a 99-year lease to China. The Hambantota port’s transfer to Beijing was seen in Sri Lanka as the equivalent of a heavily indebted farmer giving away his daughter to a cruel money lender.

Pakistan has given China exclusive rights, coupled with a tax holiday, to run Gwadar port for the next 40 years. China will pocket 91% of the port’s revenues. Next to the port, which is located at the crossroads of the global energy trade, China plans to build a Djibouti-style outpost for its navy.

Tajikistan, whose borrowing binge from 2006 was followed by its ceding of 1,158 sq. kilometers of the Pamir mountains to China and then granting Chinese companies rights to mine gold, silver and other mineral ores, recently asked Beijing for debt relief.

Another country heavily in debt to China, neighboring Kyrgyzstan, also sought relief from Beijing last month before it plunged into political chaos. In Africa, a long list of states wanting suspension of their debt repayments to Beijing during the coronavirus pandemic includes Angola, Cameroon, Congo, Ethiopia, Kenya, Mozambique and Zambia.

Laos’s ambition was to become the battery of Southeast Asia by investing in hydropower development and exporting electricity. So, it agreed to give deep-pocketed Chinese state-run companies an important role in harnessing its rich hydropower reserves.

But today, Beijing has effectively taken control of Laos’s electric grid and, by extension, its water resources. This holds serious implications for environmental security and sustainable development in landlocked Laos, given how China’s heavy upstream damming of the Mekong River is already contributing to depleted river levels and recurrent drought in downstream areas.

China’s deal also arms it with tremendous leverage over a country with just seven million citizens. Beijing’s power to dim all lights in Laos leaves little wiggle room for its tiny neighbor, already reeling under its staggering debt obligations.

Meanwhile, as concerns mount that Sri Lanka could become China’s satellite state, U.S. Secretary of State Mike Pompeo is due to arrive there from New Delhi tomorrow to try and pull Sri Lanka into Washington’s camp. Pompeo will press the ruling Rajapaksa brothers to accept a Status of Forces Agreement and a $480-million, five-year Millennium Challenges Corporation aid compact, both controversial subjects in Sri Lanka.

But cash-strapped Sri Lanka’s recent decision to turn to its biggest lender China, rather than to the International Monetary Fund, for a large loan to avert a default on its debt raises a larger question: What makes some nations sink deeper into Chinese debt, despite the risks of mortgaging their foreign-policy autonomy to Beijing?

The answer is several factors, including the comparative ease of borrowing from China, with IMF lending normally carrying stringent conditions and oversight. China does not evaluate a borrower state’s creditworthiness, unlike the IMF, which will not lend if its assessment indicates that additional loans could drive the country into a serious debt crisis. Indeed, China is happy to lend until nations face a debt crisis because of the greater leverage it gives Beijing.

Typically, China starts as an economic partner of another country, only to gradually become its economic master. In fact, the more desperate a borrower country’s situation, the higher the interest rates it will likely pay on Chinese loans. China has a record of exploiting the vulnerability of small, strategically located countries that borrow big. One such example is the Maldives, where Beijing converted big credits into political influence, including acquiring a couple of islets cheaply in that Indian Ocean archipelago.

New runway built by China’s Beijing Urban Construction Group at the Velana International Airport in Hulhule Island, Maldives, pictured in September 2018.   © AP

Unlike some other heavily indebted states, the Maldives has been lucky to escape a Chinese debt trap. Since the Maldives’s election ousted its authoritarian president barely two years ago, India has stepped in to bail it out with generous budgetary support and a recent aid package.

China’s strategic use of debt to hold vulnerable states captive to its wishes may seem to mesh well with its vaunted focus on the long run. But the wider pushback against its imperial overreach, coupled with the corruption and malpractice in many of its Belt and Road projects, suggests that Beijing could be securing near-term advantages at the expense of its long-term goals.

Negative views of China have reached historic highs this year. The rising public distrust of China even in partner countries, and the fact that many Belt and Road projects are still not financially viable, have resulted in a declining number of new projects. Cumulatively, China is likely to pay a high price for its debt-trap diplomacy, even as the states it has ensnared are bound to suffer.

© Nikkei Asia, 2020.

Despite US President Donald Trump’s undermining of US alliances, his administration has made significant progress in bringing together the Indo-Pacific’s leading democracies. And now that China has forced India’s hand, a new strategic arrangement in the region is almost a foregone conclusion.

Brahma Chellaney, Project Syndicate

The Quad, a loose strategic coalition of the Indo-Pacific region’s four leading democracies, is rapidly solidifying this year in response to China’s aggressive foreign policy. Following a recent meeting of their top foreign-policy officials in Tokyo, Australia, India, Japan, and the United States are now actively working toward establishing a new multilateral security structure for the region. The idea is not to create an Asian version of NATO, but rather to develop a close security partnership founded on shared values and interests, including the rule of law, freedom of navigation, respect for territorial integrity and sovereignty, peaceful dispute resolution, free markets, and free trade.

China represents a growing challenge to all these principles. At a time when the world is struggling with a pandemic that originated in China, that country’s expansionism and rogue behavior have lent new momentum to the Quad’s evolution toward a concrete formal security arrangement.

Of course, the Quad’s focus also extends beyond China, with the goal being to ensure a stable balance of power within a “free and open Indo-Pacific.” That concept was first articulated in 2016 by then-Japanese Prime Minister Shinzo Abe, and has quickly become the linchpin of America’s regional strategy.

While all of the Quad partners agree in principle on the need for a free and open Indo-Pacific, it is Chinese expansionism that has catalyzed their recent actions. China is forcing even distant powers like the United Kingdom, France, and Germany to view a rules-based Indo-Pacific as central to international peace and security.

France, for example, has just appointed an ambassador for the Indo-Pacific, after unveiling a new strategy affirming the region’s importance in any stable, law-based, multipolar global order. And Germany, which currently holds the European Council presidency, has sought to develop an Indo-Pacific strategy for the European Union. In its own recently released policy guidelines, it calls for measures to ensure that rules prevail over a “might-makes-right” approach in the Indo-Pacific. These developments suggest that in the coming years, Quad members will increasingly work with European partners to establish a strategic constellation of democracies capable of providing stability and an equilibrium of power in the Indo-Pacific.

After lying dormant for nine years, the Quad was resurrected in late 2017, but really only gained momentum over the last year, when its consultations were elevated to the foreign-minister level. US Secretary of State Mike Pompeo said this month that, “once we’ve institutionalized what we’re doing, the four of us together, we can begin to build out a true security framework, a fabric that can counter the challenge that the Chinese Communist Party presents to all of us.”

The Quad’s future, however, hinges on India, because the other three powers in the group are already tied by bilateral and trilateral security alliances among themselves. Australia and Japan are both under the US security (and nuclear) umbrella, whereas India not only shares a large land border with China, but also must confront Chinese territorial aggression on its own, as it is currently doing. China’s stealth land grabs in the northernmost Indian borderlands of Ladakh earlier this year have led to a major military standoff, raising the risks of further localized battles or another 1962-style frontier war.

It is precisely this aggression that has changed the strategic equation. Chinese President Xi Jinping’s authorization of People’s Liberation Army incursions into the Himalayas has forced India itself to take a more confrontational position. It is now more likely than ever that the Quad will shift gears from consultation and coordination to become a de facto strategic alliance that plays a central role in a new multilateral security arrangement for the region.

This new architecture will bear little resemblance to America’s Cold War-era system, which rested on a patron-client framework, with the US as the “hub” and its allies as the “spokes.” No such arrangement would work nowadays, for the simple reason that a country as large as India cannot become just another Japan to the US.

That is why the US is working to coax India into a “soft alliance” devoid of any treaty obligations. This effort will be on full display on October 26-27, when Pompeo and US Secretary of Defense Mark Esper visit New Delhi for joint consultations with their Indian counterparts. Most likely, this meeting will conclude with India signing on to the last of the four foundational agreements that the US maintains with its other close defense partners. Under these accords, both countries will be committed to providing reciprocal access to each other’s military facilities, securing military communications, and sharing geospatial data from airborne and satellite sensors.

Moreover, having held multiple bilateral and trilateral military exercises with its Quad partners, India has invited Australia to next month’s “Malabar” naval war games with the US and Japan. This will mark the first-ever Quad military exercise; or, as the Chinese communist mouthpiece Global Times, put it, “it would signal that the Quad military alliance is officially formed.”

US foreign policy has always been most effective when it leverages cooperation with other countries to advance shared strategic objectives. Despite President Donald Trump’s undermining of US alliances, his administration has built the Quad into a promising coalition, and has upgraded security ties with key Indo-Pacific partners, including Taiwan, Japan, South Korea, Australia, Thailand, and India.

More fundamentally, the Quad’s consolidation is further evidence that the Xi regime’s aggressive policies are starting to backfire. International views of China have reached new lows this year. Yet the Chinese foreign ministry – doubling down on its “wolf warrior” diplomacy – recently dismissed as “nonsense” Pompeo’s plan to forge an international coalition against China. “He won’t see that day,” the ministry declared. “And his successors won’t see that day either, because that day will never, ever come.”

But that day is coming. The Quad once merely symbolized an emerging international effort to establish a discreet check on Chinese power. If Xi’s increasing threats toward Taiwan lead to military action, then a grand international coalition, with the Quad at its core, will become inevitable.

Brahma Chellaney, Professor of Strategic Studies at the New Delhi-based Center for Policy Research and Fellow at the Robert Bosch Academy in Berlin, is the author of nine books, including Asian Juggernaut; Water: Asia’s New Battleground; and Water, Peace, and War: Confronting the Global Water Crisis.

© Project Syndicate, 2020.