Economy International

Debt Trap Diplomacy Explained

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International trade has been an invaluable way for countries to make money and obtain goods. From 3,000 BC to the Roman Empire to the Age of Exploration and to modern-day, trade has been focused on commodities and other valuable goods. The countries that controlled the trade routes were able to obtain great wealth and power.

One country that has gained great wealth and power on the global stage in recent years is China. As a result of its domination of trade and manufacturing, China has risen to the second-richest country in the world behind only the United States.

China has been dominating world affairs due to this control over manufacturing and trade. However, it faces rising competition from other world powers such as India, Japan, and the US. China has made headlines for its recent economic activities that are slowly giving it increasing control of developing areas. This is all part of their Belt and Road Initiative.

China’s Belt and Road Initiative is growing rapidly

China’s Strategy

China employs a strategy known as debt-trap diplomacy, also known as the Chinese money trap. This is where China gives loans to underdeveloped or developing countries in order for them to develop their infrastructure. If a country can’t pay back their loans by a certain time period, China takes control of its trade routes. China desires to rebuild a type of Silk Road, a network of trade routes that connected southeast and east Asia with the Arabian peninsula.

The Silk Road was known for mainly Chinese goods being traded with the West. These goods helped bring great wealth to both China and the countries that traded with China. It also helped China control trade on the Asian continent during the time. This control over these trade routes brought great wealth and stability to China, which is something the Chinese are trying to recreate today by using debt-trap diplomacy. 

The trade routes

Loans to Asia 

China is known to be the global superpower based in Asia. China dominated Asian affairs for years and still continues to dominate as it is the largest economy in Asia and second-largest in the world. Asia is also home to many developing countries and is classified as on the poorer side. This makes Asia fertile ground for China to plant their economic seed and dominate the continent for years. 

One country that China has given billions of dollars in loans to was Sri Lanka. Sri Lanka used this money to build roads, skyscrapers, bridges, and other infrastructure that made the country wealthier and more economically progressive. However, when it came time to pay back the loans with interest, Sri Lanka could not pay back the full amount. This resulted in Chinese ownership of several infrastructure projects that helped grow Sri Lanka’s economy in the first place. By doing this, China is gaining increasing ownership in countries like Sri Lanka, and they are redirecting the economic activity back to them in order to become more powerful and influential in world affairs.

Indonesia

Another country that shows Chinese domination in the area is Indonesia. In 2003, a $445 million project known as the Suramadu bridge was built by a number of Indonesian companies working with China Road and Bridge Corporation and China Harbor Engineering Co. Ltd. In 2011, the $1.5 billion Sumatra coal railway was built. Finally, the $5.5 billion Jakarta-Bandung high-speed rail was built in 2015. These three examples are part of the many projects China has funded in Indonesia.

In April 2018, Indonesia signed five contracts worth $23.3 billion for national infrastructure projects. March 2019 was when China and Indonesia executed an investment plan of $91.1 billion for 28 projects under the Belt and Road Initiative. All of these heavy investments show China’s increasing grip on Indonesia as all of those loans will come at a cost. The cost being that China will be able to control a lot of state-owned assets or other infrastructures that are crucial to the Indonesian economy. 

African Countries

Since Africa is a developing continent, there is a vast opportunity for rapid economic growth in the future. Countries like Nigeria and Egypt are expected to be in the top 15 economies by 2050, beating countries such as South Korea, Spain, and Italy. This represents a huge economic opportunity for China as they can also profit from the huge growth taking place in Africa. As a result, China has heavily in African countries in order to gain this future economic prosperity.

China is now one of Africa’s largest trade partners, and they are making economic moves that are reminiscent of British colonialism in Africa and Asia. China takes raw materials from these developing nations in Africa, converts them to finished goods and then sells them at higher prices in African markets. 

Kenya

One country that has been one of China’s targets is Kenya. Kenya’s debt to China ranges from 21% – 70%. Although this is a big range, the best case scenario is that China owns ⅕ of all Kenyan external debt. This one example shows China’s increasing control over developing nations. Kenya has also raised their worries about China’s moves to control an important seaport in the country, called the port of Mombasa, as a result of their extensive loans. This would cause China to be able to control Kenya’s only international seaport and the largest seaport in East Africa. Essentially, they could influence Kenya’s economy if they control such a strategic seaport. 

South Africa

South Africa is one of the fastest growing economies in the world and is the second richest country in Africa after Nigeria. This has been another country targeted by Chinese loans as South Africa owes 4% of its annual GDP to China. The country has received multiple loans from China.

One of these loans has been a $2.5 billion funding of the state-owned electrical utility Eskom. This loan occurred during the presidency of Jacob Zuma, the current president of South Africa. The China Development Bank also provided a $25.8 billion loan in order to stimulate the South African economy during the Cyril Ramaphosa presidency. 

Other African countries that have large debts to China include Nigeria, Zambia, Djibouti, Republic of the Congo, and Egypt. Nigeria owes $3.1 billion out of its total $27.6 of foreign debt to China. A more alarming figure is that Zambia owes $7.4 billion out of $8.7 billion of foreign debt to China. 

South American Countries 

Although Africa shows Chinese domination more than South America, it is still a place where China is investing. South America has been a place that is rapidly developing and becoming more prosperous. Countries like Bolivia, Venezuela, and Peru are all countries where China can make large investments due to the lack of good infrastructures in those countries. All of those countries are still developing or have stagnated growth, which represents an opportunity for Chinese investments.  

One country that shows this more than any other is Ecuador. In 2008, Ecuador defaulted on $3.2 billion of debt. This caused Ecuador to be avoided by many countries for a lifeline, until China came to make a deal. Since 2008, Ecuador has received $11 billion in Chinese loans for projects in order to develop mining, oil, energy, and infrastructure projects. In 2013, China solely financed 61% of government financing needs in Ecuador. This allowed China to control 90% of Ecuador’s oil shipments as an exchange for their loans.

Chinese loans are causing countries to give up state-owned assets in order to pay back these loans that they need. State assets help define the economies of countries and are what countries thrive on. For example countries like Ecuador thrive on oil and since China will own a very large percentage of it, they will gain control of a large part of Ecuador’s economy. 

Conclusion

Providing funds to developing nations in order to help build their infrastructures is a good idea. Since China has a great amount of wealth, providing these funds help improve the economies of poor countries. The loans have also proven to stimulate the economy of many developing nations and helped them when they were struggling.

However, the increasing Chinese influence on the developing world is very similar to the colonial-era moves that European countries used to rule the world. If this influence continues, countries in Africa, Asia, and South America will start calling Beijing their capital. 

About the author

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I am a rising senior at Dublin High School. My interests lie in investing, financial literacy, and entrepreneurship.

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