To what extent is Chinese aid a debt trap and challenging the sovereignty of Ecuador and El Salvador?
Being in debt is not a new phenomenon to Latin America. During the 1940s-1970s, many Latin American countries adopted the Import Substitution Industrialization model which encouraged domestic investment, industrialization, and public spending. Particularly during the 1970s, US commercial banks lowered their required credit ratings which spurred Latin American countries to increase borrowing. Latin American governments took out huge loans from the International Monetary Fund, US banks, and other western institutions. However, in the past 15-20 years, Latin American governments have shifted away from US and traditional Western institutions for aid. Instead, they have turned to China, a far-away superpower who is keen on expanding its influence in the backyard of the United States. China’s impressive economic boom in the early 2000s increased its demand for goods and commodities from Latin America which largely benefitted Latin American nations, and ultimately helped many countries strengthen ties with China. In return, China invited many Latin American countries to be part of the Belt and Road Initiative (BRI), a development strategy of the Chinese government to invest in many countries. While the BRI has attractive terms and promotes economic development for nations in the region, China utilizes the BRI to economically imperialize Latin American nations and threaten their sovereignty as China asserts its soft power in the region. In this essay, I will first focus on resource-rich country – Ecuador, and analyze the impacts of Chinese monetary aid and the consequences of having outstanding debt obligations to China. Then I will shift to El Salvador, a Central American country that recently switched alliances to recognize China over Taiwan in a bid to increase monetary aid from China.
To understand why Ecuador has been consistently ranked as one of the countries in Latin America with the most debt to China, it is important to first understand the historiography of borrowing in Ecuador. The Pink Tide started at the turn of the century as Latin America saw many left-leaning presidents take power. From Michele Bachelet of Chile to Rafael Correa of Ecuador, the spectrum of Pink Tide governments was wide and diverse; however, they all strived to improve equality and increase living standards for the poor. A self-proclaimed socialist leader, Correa rallied the National Assembly of Ecuador to push for increased public spending in order to modernize Ecuador. This included consistent welfare payments, higher wages, and more development projects across Ecuador. However, everything comes at a cost, and in order to fund his regime’s high expenses, Correa relied on the “extractive model” and heavy borrowing from China. Compared to his predecessors, Correa strongly criticized US foreign policy with anti-imperialist speeches and relied less on the United States and western institutions for foreign aid to “free it from the orbit of the United States”.[1] Therefore, when he became president in 2007, he turned to China who was at the same time looking to purchase commodities like oil and expand its influence in Latin America through the BRI. As an OPEC member since the 1970s, oil constitutes the mainstream of revenue for the Ecuadorian government and Correa was ready to exchange oil for monetary aid. Since 2010, Chinese banks have provided the Correa regime with $18 billion in financing through 16 separate loans to fund development projects in return for Ecuadorian oil.[2]
Indeed, China’s monetary aid through the BRI has helped Ecuador construct development projects including rebuilding an airport in the coastal city of Manta and constructing a highway to connect two northern Ecuadorian provinces. Unlike western development institutions like the IMF which have long and complex processes for obtaining credit, Chinese banks are willing to turn a blind eye to liquidity and structural problems when granting loans. Compared to the IMF which takes 2-3 years for evaluating loans, it only takes approximate 3-6 months for a Chinese bank to grant a loan.[3] In Manabí, one of Ecuador’s poorest provinces, the local government borrowed $20.7 million from the Export-Import Bank of China to reconstruct a local airport in order to boost the local economy and its competitive edge.[4] The capacity of the new airport will double and generate more than 800 jobs, with aspirations that the airport will make Manta a “South American gateway for all of the Asia-Pacific”.[5] With the financial support of China, Manta’s new airport will serve as an axis of development and a gateway for new business opportunities. The Quininde-Las Golondrinas Highway is another example of positive influence of Chinese economic development in the region. The 33.8km long highway will connect the province of Esmeraldas to the Imbabura, allowing farmers to transport goods from inner cities to the Pacific coast. Talks of the construction of the highway date back to the 1970s, however, a lack of monetary liquidity from the government prohibited the construction of this highway. With the monetary aid of China, these 2 northern Ecuadorian provinces will finally be connected. Gustavo Yacelga, the project manager of the highway agrees China is playing a fundamental role in bringing much-needed development in the region. “This is an accomplished goal. People in this area feel they have realized their dream, which is the construction of a roadway that was relegated for many years,” said Yacelga.[6]
It is true that without the financial support of Chinese money, many development projects in Ecuador would have been impossible. However, there is a lack of consciousness regarding the intentions of the Chinese government and the long-term consequences of “too good to be true” deals with China. By analyzing the case study of Coca Codo Sinclair, one of the eight Chinese funded hydroelectric dams in the Amazon basin, it is evident that the Chinese government’s intentions lie beyond foreign aid and that its objective is economic imperialism. Signed using an “oil-backed loan” by Rafael Correa for $1.7 billion in Chinese loans, the dam was constructed mainly by Chinese engineers and workers who claimed it would produce a third of the Ecuador’s electricity, a whooping 8.8 billion kWh of electricity per year.[7] However, the project was filled with failures, including its incapacity of producing more than 50% of the promised gw hours, environmental pollution, overspending and corruption, and flooding. Nevertheless, the Ecuadorian government still must pay back its debt, in full.[8] It is extremely unjust that the Chinese-built dam only produces 50% of its capacity, yet the Ecuadorian government must pay its debt in full. This deal creates the risk of falling into a debt trap as it directly increases the financial burden of the government as it must repay its debt to Chinese banks and find alternative ways to provide electricity for the country. Coca Codo Sinclair is just one of the many failed development projects funded by Chinese money. It is evident that China uses “too good to be true” loans along with development projects to assert its power over the economies of developing countries like Ecuador.
Many aspects of this “oil-backed loan” were deemed by international economists as a bad deal for Ecuador, as it allowed China to control Ecuador’s most valuable export which could cause Ecuador to fall into a debt trap. Ray and Chimienti (2016) explain Ecuador’s oil-backed loan with China as follows: “China Development Bank (CDB) lends money to Ecuador, which, in exchange, gives a prescribed amount of oil to China’s oil companies. The companies pay for the oil at current market rate.”[9] However, Chinese loans are issued from commercial banks and not development organizations. Hence, Chinese loans have a much higher interest rate of 7%, compared to 3% of the IMF or other western development organizations and shorter maturity dates of just 8-15 years.[10] For example, the interest rate of the Coca Codo Sinclair project was 7% for 15 years from its total loan of $1.8 billion, meaning the yearly interest payment was $125 million.[11] It is important to keep in mind that Coca Codo Sinclair was just one of the eight hydroelectric dams and one of the many projects funded by Chinese loans. With such high interest rates, Correa committed Ecuador to export approximately 80% of its oil or approximately 72,000 barrels of oil per day to China to service its total debt of approximately $18 billion.[12] With oil accounting for an average of 48.17% of its total share of exports, the Chinese took control of Ecuador’s main source of revenue.[13] The oil-backing aspect of the loan serves as a “big win” for China, as it not only controls Ecuador’s main export and revenue source, but it also allows Chinese oil companies to enter the oil trading industry to compete with big commodity companies like Glencore. Chinese oil companies often act as the middleman and upsell Ecuadorian oil to other countries at higher prices, raking in the difference between the wholesale and retail price. On the other hand, it serves as a “big loss” for Ecuador. Almost half of its exports are “gifted” to China, meaning its revenue is significantly reduced, hindering its ability to payback its debt and forcing the government to cut public spending for social services.
There are many other aspects of the oil-backed deal that make Ecuador vulnerable and prone to economic imperialism from China. Being unable to sell oil to other countries, Ecuador loses its competitiveness on the international market as it is unable to take advantage of price arbitrage. As China buys 80% of the oil, it creates a monopsony over Ecuadorian oil and sets the price for Ecuadorian oil as other countries cannot bid on Ecuadorian oil. This creates a significant competitive advantage for China and a loss for Ecuador. The former Minister of Energy of Ecuador argued that “in direct oil sales, Ecuador loses when there is no bidding, because there are no competitors that improve the price of crude oil”.[14] Another major issue with oil-backed deals is evident when we examine changes in oil prices. Oil is a commodity that has some of the greatest price fluctuations, as it is heavily influenced by economic and political factors. When the price of oil drops, the loan terms require Ecuador to export more oil barrels to China to make up for the loss in price, causing Ecuador to be in an extremely vulnerable position. Many economists predict that it is unlikely the next Ecuadorian government will meet the obligations of the loan deal, meaning Ecuador’s debt to China will have to be negotiated and concessions will have to be made by Ecuadorian authorities. This gives China a strong bargaining power to sway Ecuador ever closer to China’s political and economic orbit, in its bid to increase its influence as a global superpower.
Turning to another country in the region, El Salvador recently switched allegiances to recognize the People’s Republic of China (PRC/China) over the Republic of China (Taiwan) in exchange for more monetary aid from China. Just 5 years ago, Taiwan had a strong foothold in Central America, where Panama, the Dominican Republic, El Salvador and Nicaragua all recognized Taiwan instead of China. However, China’s growing soft power successfully influenced all these countries to adopt the “one China” policy, switching allegiances to China. The case of El Salvador is extremely interesting because China’s rapid influence in the country emerged only recently, and politicians are worried that China’s aid and investment strategy are directly threatening the sovereignty of El Salvador through its bid to purchase ports, islands and even government officials.
As a result of recognizing China in 2018, El Salvador received 3,000 tons of rice and $150 million for 13 infrastructure projects as a “thank you” gift from the Chinese government.[15] With President Bukele’s recent visit to China, he successfully negotiated for another $500 million from China “without conditions” for development projects including a sports stadium, national library, and water treatment facilities. Critics claim that by taking China’s “gift”, president Bukele signed El Salvador up for China’s Belt and Road Initiative (BRI) and many critics are also questioning whether there is a quid pro quo. Despite the skepticism, it is important to note that China’s money and assistance is indeed very important for the El Salvadoran economy and can increase living standards in the country. In the wake of the COVID-19 pandemic, the Chinese government coordinated a deal for Chinese pharmaceutical company Sinovac to provide 2 million doses of CoronaVac to El Salvador. The Chinese government also donated an additional 150,000 doses of the same vaccine along with $250,000 USD in cash to the Salvadoran government for humanitarian aid.[16] Another benefit of Chinese support is that El Salvador’s exports to China have rapidly increased since it switched allegiances. From 2019 to 2020, El Salvadoran exports to China increased by 106% and this number is expected to increase in the future.[17] For a small country that has traditionally been dependent on the United States, it is evident that there are numerous short-term benefits to developing good relations with China as increased exports along with monetary aid can help boost its economy.
While there are many benefits of Chinese monetary aid and support, the long-term consequences and implications of foreign aid are not being analyzed enough. Particularly, China has been advancing its influence in the region by leasing ports from other countries to create special economic zones. In Latin America, the Chinese already own ports in Mexico and Uruguay, posing a serious threat to the US. China turned its attention to El Salvador in 2018 when Chinese state-backed firm Asia-Pacific Xuanhao sought a 100-year lease for the port area of La Unión, which amasses to 13 percent of El Salvadoran territory.[18] La Unión is a strategically important area situated in the Gulf of Fonseca, bordered by El Salvador, Nicaragua and Honduras. With Nicaragua also recently switching allegiances to recognize China over Taiwan, the Gulf of Fonseca is now an extremely important area for the Chinese to control in order to expand its influence in Central America. The Chinese offered El Salvador to create a special economic zone in La Unión, while requesting tax exemptions valid for 30 years for Chinese companies.[19] At first appearance, a foreign-funded special economic zone may seem attractive for many developing countries as it can increase trade and commerce, boosting government revenue. However, it would also mean conceding control and sovereignty of the region to China as it owns the port until the end of the lease. In the El Salvador case, if the economic zone is built, the Chinese government can treat the economic zone as its own territory, effectively owning a part of El Salvador. According to Evan Ellis, professor of Latin American Studies at the U.S. Army War College Strategic Studies Institute, Chinese authorities can impose its own laws and trading policies and “would exclude U.S. and European companies, allowing Chinese port operators, Chinese shipping companies, and likely Chinese service providers to dominate the zones.”[20] In return, China offered President Bukele $200 million to build a “surf city” which includes an airport and a tourist area of over 2,800-square-kilometers between the ports of La Libertad and La Unión.[21] If China successfully leases La Unión from El Salvador, it would essentially control 13% of the country and a significant portion of the economy, directly threatening and eroding the sovereignty of El Salvador.
La Unión is not the only project China is pursuing in El Salvador. Beijing’s BRI and dollar diplomacy in El Salvador also extends to Perico Island, an island off the shore from La Unión. For the past 30 years, Chinese-Salvadoran investor Bo Yang has been buying up land in the region.[22] While Bo Yang claims he is an individual investor with no relations with Beijing, US government officials claim that Bo Yang is China’s agent in El Salvador. He bought half of Perico Island by offering local islanders $7,000 each to relocate.[23] The deal went through at the end of 2019 and now Yang owns half of Island Perico. The US State Department believes the Island will be used for China’s construction of the economic zone. The NBC also obtained a 46-page presentation which claimed the economic zone would be a $3 billion project encompassing 1,700 square miles.[24] It is evident that Chinese monetary aid comes at a heavy cost for developing countries as they either pay huge debts or make other concessions including territorial concessions. China’s strategy of asserting its influence in El Salvador not only includes land, but also extends to manipulating government officials. The US State Department released a document of El Salvadoran officials “who have knowingly engaged in acts of corruption”.[25] Ezequiel Milla Guerra, former mayor of La Unión was on the list as he “engaged in significant corruption by abusing his authority as mayor in the sale of Perico Island to agents of the People’s Republic of China in exchange for personal benefit.” China’s influence is growing at an alarming pace and its infiltration into government ranks has gotten many people worried. From switching allegiances to recognizing China over Taiwan, selling national territory to Chinese nationals and accepting monetary aid with “no conditions”, El Salvador has placed itself as easy prey for China’s dollar diplomacy as it slowly asserts its soft power over Latin American nations.
There is a Chinese quote “天下沒有白吃的午餐” which translates to “There is no free lunch in this world”, and it is becoming more evident for many Latin American countries that Chinese monetary aid comes at a cost. In its bid to increase its global influence, China has been using its dollar diplomacy to influence Latin American countries to join the Belt and Road Initiative. While there are obvious economic benefits in joining the BRI and taking the “free lunch”, there are also hidden long-term repercussions that will only surface in the future. For Ecuador, Chinese money aided the construction of multiple development projects which boosted the economy. However, by agreeing to an oil-backed deal, Correa made a huge mistake of gifting its most valuable export to China. Now, the repercussions are visible, and the debt burden is getting heavier each day. Recently elected president, Guillermo Lasso will likely have to negotiate to restructure Ecuador’s debt with China and make further concessions. China, on the other hand, is the big winner in this deal as it continues to receive Ecuadorian oil for free. In the case of El Salvador, the repercussions may not be visible yet, but China successfully advanced its political agenda by isolating Taiwan. Even if the “gift from China” came with no conditions or strings attached, Salvadoran authorities should analyze the long-term effects of leasing La Unión to China and rethink its decision of allowing foreign nationals to purchase land within its own borders. If China successfully leases La Unión, it would be a great achievement for the Chinese as they can control the port and potentially station its navy in the backyard of the United States.
[1] Lucci, Juan José. Review of Are China’s Loans to Ecuador a Good Deal? The Case of the Sopladora Hydro Project.
[2] Ordoñez, Franco. “The White House Sees a New $150 Million Loan in Ecuador as Way to Compete with China.” NPR, NPR, 2 Oct. 2021.
[3] Sundquist, James. “Bailouts from Beijing: How China Functions as an Alternative to the IMF: Global Development Policy Center.” Global Development Policy Center Bailouts From Beijing How China Functions as an Alternative to the IMF Comments, 1 Jan. 1968.
[4] Yu, Liang. “China’s BRI Provides Development Opportunity for Ecuador.” Xinhua, 9 Apr. 2019.
[5] Yu, Liang. “China’s BRI Provides Development Opportunity for Ecuador.” Xinhua, 9 Apr. 2019.
[6] Yu, Liang. “China’s BRI Provides Development Opportunity for Ecuador.” Xinhua, 9 Apr. 2019.
[7] Lucci, Juan José. Review of Are China’s Loans to Ecuador a Good Deal? The Case of the Sopladora Hydro Project.
[8] Casey, Nicholas, and Clifford Krauss. “It Doesn’t Matter If Ecuador Can Afford This Dam. China Still Gets Paid.” The New York Times, The New York Times, 24 Dec. 2018.
[9] Ellis, Evan. “China and El Salvador: An Update.” China and El Salvador: An Update | Center for Strategic and International Studies, 22 Mar. 2021.
[10] Lucci, Juan José. Review of Are China’s Loans to Ecuador a Good Deal? The Case of the Sopladora Hydro Project.
[11] Casey and Clifford. “It Doesn’t Matter If Ecuador Can Afford This Dam. China Still Gets Paid.” 24 Dec. 2018.
[12] Schneyer, Joshua, and Nicolas Medina Mora Perez. “Special Report: How China Took Control of an OPEC Country’s Oil.” Reuters, Thomson Reuters, 26 Nov. 2013.
[13] Lucci, Juan José. Review of Are China’s Loans to Ecuador a Good Deal? The Case of the Sopladora Hydro Project.
[14] Rodas Saá, Christian. “Ecuador’s Trade and Investment Relationship with China Under the Correa Administration.” Ohio University, 2018.
[15] Ellis, Evan. “China and El Salvador: An Update.” China and El Salvador: An Update | Center for Strategic and
International Studies, 22 Mar. 2021.
[16] Renteria, Nelson. “China to Donate 150,000 Sinovac COVID-19 Vaccine Doses to El Salvador.” Reuters, Thomson Reuters, 4 Apr. 2021.
[17] Ellis, Evan. “China and El Salvador: An Update.” 22 Mar. 2021.
[18] Pelcastre, Julieta. “China Seeks to Consolidate Domination Plan in El Salvador.” Diálogo Américas, 7 Apr. 2022.
[19] Casey and Clifford. “It Doesn’t Matter If Ecuador Can Afford This Dam. China Still Gets Paid.” 24 Dec. 2018.
[20] Smialowski, Brendan. “China Exerts Growing Power Right on America’s Doorstep.” NBCNews.com, NBCUniversal News Group, 4 Sept. 2021.
[21] Ellis, Evan. “China and El Salvador: An Update.” 22 Mar. 2021.
[22] “US Designates 2 Salvadorans for Helping China, Corruption.” AP NEWS, Associated Press, 2 July 2021.
[23] Ellis, Evan. “China and El Salvador: An Update.” 22 Mar. 2021.
[24] Smialowski, Brendan. “China Exerts Growing Power Right on America’s Doorstep.” 4 Sept. 2021.
[25] Salvador, U.S. Embassy San. “Report to Congress on Foreign Persons Who Have Knowingly Engaged in Actions That Undermine Democratic Processes or Institutions, Significant Corruption, or Obstruction of Investigations into Such Corruption in El Salvador, Guatemala, and Honduras.” U.S. Embassy in El Salvador, 1 July 2021.
