Seduced by China, Central America Overlooks Risks

Overindebtedness, corruption, and loss of strategic infrastructure are some of the dangers the region is exposed to.
Gustavo Arias Retana/Diálogo | 21 September 2018

Transnational Threats

Taiwanese diplomats lower the flag of their embassy in Panama City, concluding a farewell ceremony, June 14, 2017. Panama cut diplomatic relations with Taiwan to establish closer ties with China. (Photo: Rodrigo Arangua/AFP)

China’s advance into the Central American region is undeniable. In the last decade, half of the countries belonging to the Central American Integration System (SICA, in Spanish) broke off relations with Taiwan to establish diplomatic ties with China. The rational of Central American presidents is the same: The Asian nation offers a myriad of business opportunities. Nevertheless, Chinese interests in the region go far beyond trade; its expansion strategy poses risks that are rarely discussed.

According to professor Carlos Murillo, researcher at the National University of Costa Rica’s School of International Relations, to understand the role China wants to play in Central America means being aware that the Asian country’s intentions are no longer simply to steal partners from Taiwan. Rather, China’s plan is to increase its influence in strategic areas worldwide, allowing it to consolidate political and military power.

“China is going through a commercial and economic expansion phase, which is characteristic of powers aspiring to global hegemony in the early stage of establishing a political, strategic, and military presence. This is evidenced by its search for ports to project China’s naval power and its participation in Russian military maneuvers,” Murillo said. “Beijing understands that Central America and the Caribbean are the United States’ backyard, and it intends to increase its presence not only to develop diplomatic relations and export large quantities of goods, but also to forge strategic ties with armed forces and other key sectors.”

Alejandro Barahona, a political scientist with a Master in International Relations at the University of Costa Rica, agrees with Murillo that Central America’s strategic location is what interests China the most. “Central America has a geostrategic position between North America and South America and between Europe, Africa, and Asia; this is very important,” Barahona said. “It’s also in the Panama Canal’s approach area and in the traditional area of U.S. influence.”

In the region, China showed the most interest in Panama, establishing relations in June 2017. The reason is clear: A great deal of the world’s trade goes through the Panama Canal, a vital economic and military hub.

Chinese conglomerates are building container terminals, ports, cruise terminals, and a thermal power plant near the canal. A Chinese holding also won the bid to build a fourth bridge across the canal. In addition, the Chinese embassy in Panama would be located in Calzada de Amador, an area adjacent to the canal that was once under U.S. control when the country managed the crossing between the Pacific and Atlantic oceans.

On September 7, 2018, the U.S. consulted its chargé d'affaires in Panama, Roxanne Cabral, about the relationship between the Central American nation and China. It also summoned U.S. ambassadors in the Dominican Republic and El Salvador, the other SICA member-countries that along with Costa Rica have diplomatic ties with the Asian country. 

Double-edged loans

Juan Carlos Hidalgo, public policy analyst for Latin America at the Cato Institute in Washington, D.C., said Central American countries should consider the risk that Chinese infrastructure loans are not always as advantageous as they seem. In other regions, the Asian country used these loans to subject countries to its own interests and manage their strategic infrastructure, such as ports and railroads.

“What people should be careful about, as we saw in Africa and South Asia, is that China seeks economic relations that aren’t transparent,” Hidalgo said. “There are well-founded allegations that China promotes an irresponsible indebtedness to fund infrastructure projects. China offers unfavorable loans to developing countries that, in the long run, cannot repay their debts and consequently become vassal states. In many cases, China takes over important economic and military infrastructure.”

China uses this strategy with many countries that are part of a project known as “the new silk road,” a Chinese government’s initiative to connect Asia, Oceania, Europe, and Africa by way of roads, railroads, and oil and gas pipelines. Countries that are part of the route, such as Pakistan, Tajikistan, Kyrgyzstan, Laos, Montenegro, Mongolia, Djibouti, and Sri Lanka, are indebted to China to develop projects and now face serious financial problems, or had to hand over the management of strategic infrastructure to China. For example, Sri Lanka was unable to repay a loan of $1.4 billion, forcing it to hand over control of its strategic Hambantota port for 99 years.

In April 2018, Christine Lagarde, managing director of the International Monetary Fund, warned about the indebtedness China generates with these projects. “It may cause a problematic increase of debt, challenging the balance of payment of many countries,” she said. 

Breeding ground for corruption

According to analysts, another risk is China’s management of “economic aid” and the way it carries out business. Chinese practices can be an ideal breeding ground for corruption.

“A great deal of the influence earned based on economic aid ends up fueling corruption in ruling classes,” Hidalgo said. “Economic aid of this kind never ended well in Latin America.”

For example, Costa Rica is investigating alleged irregularities in a contract the country signed to build an oil refinery with Chinese funding. Some irregularities include the conduct of the environmental survey, salary bonuses to 26 Asian executives, travel expenses, meetings, business lunches, and houses rented to Chinese employees.

Other, more subtle forms of corruption are changes in foreign policy due to the relationship with the Asian nation. “The relationship with China often led authorities to compromise their foreign policy, such as on the defense of human rights or democracy,” Barahona said.

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