Tillerson to Latin America: Beware of China

Rex Tillerson has made 18 foreign trips since he was confirmed as secretary of state on February 1, 2017: Only one them, a two-day visit to Mexico City early in his tenure, was south of the U.S. border.

Tillerson was back in Mexico City on Friday, the first stop in his first multi-country tour of Latin America and the Caribbean. But while U.S. officials were planning his trip, Chinese Foreign Minister Wang Yi met late last month in Chile with 33 members of the Community of Latin American and Caribbean States and invited them to become part of China’s Belt and Road Initiative, a massive infrastructure plan that aims to connect China to its Asian neighbors and farther afield. Chinese investment in these countries has gone beyond raw-material extraction to car manufacturing, tech, and telecoms.

China’s trade with and investment in the region deepened at around the time of the great recession of 2008. Between 2015 and 2019, it plans to invest $250 billion in direct investment in the region and about $500 billion in trade. It’s well on its way: China is already the largest trading partner of Argentina, Brazil, Chile, and Peru.

As I’ve previously written, countries in Africa, Asia, and Latin America have a hard time securing international financing because of poor governance, corruption, and their economic policies. But China goes to them, builds desperately needed roads, railways, and ports, and uses these new facilities to transport raw material to feed its growing economy and population. China is an attractive investor not only because it has a policy of non-interference in the domestic affairs of its partner countries but because its projects are completed at a speed that developing nations are unused to. More importantly, perhaps, it offers to finance these projects on easy terms. But there’s always a catch, Tillerson said Thursday at the University of Texas, his alma mater.

“China, as it does in emerging markets throughout the world, offers the appearance of an attractive path to development,” he said. “But in reality, this often involves trading short-term gains for long-term dependency.”

The case of Sri Lanka is illustrative. The Chinese financed and built a massive port in Hambantota that failed to draw the traffic that was expected. Sri Lanka had to lease the port back to China for 99 years and repay Beijing with money from the lease. There are counterexamples, as well: As David Dollar, a senior fellow at the Brookings Institution, wrote in a recent paper: China had to renegotiate loan terms in favor of Venezuela because Caracas “was unable to service the original loan once the price of oil fell.” Ultimately, China stopped making new loans to the country and direct investment in Venezuela fell to nearly zero.

Still, critics of U.S. policy in Latin America point out that the countries in the region have few alternatives but look to China for investment. Multilateral lending institutions such as the World Bank and the International Monetary Fund impose strict conditions related to governance, rule of law, and corruption to lend money. These institutions are still dominated by the U.S., and all but a few Latin American countries will pass their rigorous standards for lending. Enter China, which is working to increase its own soft power around the world.

Kevin Gallagher, Director of the Global Development Policy Center at Boston University, told the BBC the region was long over-dependent on the U.S. “Neither China nor the U.S. can make the region prosperous,” he said. “The region needs its own plan to partner with its old and new allies, without which it could accentuate its external vulnerabilities with both China and the U.S.”

But Tillerson, in his remarks in Texas, said China does not “reflect the fundamental values shared in this region.” He said: “The United States stands in vivid contrast. We do not seek short-term deals with lopsided returns. We seek partners with shared values and visions to create a safe, secure, and prosperous hemisphere.”

While that may be true, the Trump administration’s backsliding on the global trading system the U.S. created is hardly going to give confidence to the region’s growing economies. Writing in The Washington Post, Stephen Kaplan, a fellow at the Latin American Program at the Wilson Center, noted that as the U.S. retreats from that system, “China invests in both trade and geopolitical influence—pushing free trade and multilateralism, as the U.S. once did.”

“China is experimenting with market-based solutions, and moving incrementally in its international economic efforts, much as it did during its domestic development,” he wrote. “Its approach to global economic affairs appears to be more pragmatic than ideological—and may be more likely to defend than upend the liberal economic order.”

Tillerson acknowledged that trade with China had brought benefits, but he said it has also harmed countries’ “manufacturing sectors, generating unemployment and lowering wages for workers.”

“Today, China is gaining a foothold in Latin America. It is using economic statecraft to pull the region into its orbit,” he said. “The question is: At what price?”