Countering China’s Debt Trap Diplomacy in South Asia

At the end of last year, Sri Lanka was forced to give up one of its largest ports to China. The island nation owed China over a billion dollars, and its only way out was to surrender control of the port.

Unfortunately, the Hambantota port plan had been doomed from the start; analysts had predicted that it would fail, and that’s exactly what it did. But former Sri Lankan president Mahinda Rajapaksa didn’t care much for what the analysts thought, so he repeatedly asked China for loans. China repeatedly granted them. By 2017, the debt was too much for the current Sri Lankan government to deal with, so they cut their losses.

This project is one of many initiated through China’s ambitious Belt and Road Initiative (BRI), which plans to invest more than $1 trillion in developing countries over the next decade. BRI is especially exciting to China’s underdeveloped neighbors because unlike IMF loans, Chinese loans come with no strings attached. All they require is that the country pay China back – with interest, of course.

China’s Growing Sphere of Influence in South Asia

Sri Lanka is not the only country that has found itself severely indebted to China. Eight other countries around the world, including the Asian countries of Pakistan, Tajikistan, and the Maldives, are at risk of falling victim to China’s “debt trap diplomacy.” Pakistan may be China’s next victim. Newly-elected Pakistani Prime Minister Imran Khan is expected to ask the IMF for a bailout in the coming months, as Pakistan has found itself bogged down in debt as a result of China-Pakistan Economic Corridor (CPEC) projects. If the IMF doesn’t grant Pakistan the money, it is wholly possible that China will take control of Pakistani infrastructure, just as it did to Sri Lanka.

At first glance, it seems that these cautionary tales should be a wake-up call to any country that is currently taking out loans from China. But upon further deliberation, it becomes clear why countries continue to engage with China and accept their loans: China’s massive investments are simply too good to turn down. The BRI presents a unique opportunity for these countries to develop, and it is easy to see why they would be tempted to bite off more than they can chew.

Nepal, for example, continues to be enamored with China. China has already invested over 16 billion dollars in Nepal, which amounts to more than five times the amount India has offered. For a land-locked, least developed country like Nepal, it would be foolish to turn down such an opportunity.

Maldives has also been strengthening its relationship with China. Maldives signed a Free Trade Agreement with China last December, eliminating tariffs on over 95 percent of goods. Additionally, the country has accepted so many Chinese loans that about 10 percent of the annual Maldivian budget is reserved for paying China back. Unsurprisingly, the Maldivian people are not thrilled about this; in February, they took to the streets to protest President Yameen’s Chinese connection. Yameen responded by declaring a state of emergency and arresting Supreme Court judges that he felt had wronged him. Although Chinese investment certainly helped Maldives develop, the country may have been better off without it.

Nonetheless, other countries will continue to accept Chinese loans. China announced in April that it plans to expand CPEC into Afghanistan, to the tune of a 50 billion dollar investment. Considering Afghanistan’s current state, it would be astonishing if it turned the money down.

Even Sri Lankan president Maithripala Sirisena, who ran in 2015 on a platform of reducing ties with China, remarked in May that “The tremendous assistance provided by China to the economic and social development of this island nation is highly appreciated by the Sri Lankan government and its people.” Remember, May was only five months after Sri Lanka handed its port over to China.

Responding to China’s Advances

It has become clear that countries across South Asia will continue to eagerly accept Chinese loans, knowing full well that they are at risk of sacrificing their sovereignty. One can’t help but wonder: what will the global superpowers, especially India and the United States, do about it?

India has decided to step up and play China’s game. In July, the Airports Authority of India announced that it was planning to acquire a 70 percent stake in Sri Lanka’s near-deserted Rajapaska International Airport. This serves both as a business opportunity and an opportunity for India to check China’s influence, as the airport is in Hambantota, right next to China’s port.

But India, whose GDP is merely one fifth of China’s, won’t be able to contest China alone. If the United States doesn’t commit more fully to the welfare of South Asia, Chinese soft power will continue to grow, and China’s Sphere of Influence will continue to look eerily similar to that of the Soviet Union during the Cold War.

This isn’t to say the US should pursue a 21st century Marshall Plan in South Asia – it has neither the money nor the political will to freely dole out grants to developing countries. That said, it seems like common sense that the U.S. should look to increase its investment and influence in the region instead of pushing South Asia even further into China’s grasp. Unfortunately, the latter option seems to be the one this administration has chosen.

The White House released a report in June on Chinese Economic Aggression, which exposed dozens of China’s manipulative and unfair practices toward American companies. The report, which was spearheaded by Trump’s right-hand man when it comes to trade, Peter Navarro, is comprehensive and illuminating.

But the President’s response to the problems identified in the report has been directly counterproductive. Trump’s tariffs hurt countries around the world, not just China. Thus, they have isolated America’s Asian allies and trade partners diplomatically, and pushed them toward China commercially. The tariffs certainly will hurt China, but they won’t be enough to make China back down. Instead, China will continue devaluing its currency replacing American imports with Asian ones. Additionally, China slashed tariffs on South Asian countries right after Trump raised his own, which will allow China to capture even more Asian trade. The United States is now starting to face the only threat more concerning than an aggressive China: an aggressive China surrounded by allies.

Seen from this point of view, it is no wonder that Modi has indicated in recent months that he would be interested in closer relations with China, a country that India has clashed with for decades. From the 1962 Sino-Indian War to the Doklam Standoff last summer, the two countries have had a fraught relationship to say the least. However, In the wake of Trump’s growing trade war, India offered to export soybeans to China to help them recoup their losses from rising tariffs. A couple of months later, Modi proclaimed, “I firmly believe that Asia and the world will have a better future when India and China work together in trust and confidence.”

Frankly, India’s change of course is justified. If the Trump tariffs represent the United States’ long-term China policy, a policy in which the U.S. charges at China without regard for who it tramples along the way, why wouldn’t India seek an out?

Furthermore, the American government has no clear plan to counter Chinese influence. At the moment, China is the only country with a clear strategy to gain influence in Asia and around the world. The Belt and Road Initiative, through investment and unconditional loans, is succeeding in providing China soft power, economic growth, and the opportunity to mount a serious challenge to American hegemony. Neither the U.S., nor the multilateral institutions it leads (Quad, NATO, etc), have a clear, unified, consistent plan. American policy has become alarmingly reactionary, while China is looking more like the country that drives global progress.

The Trump Administration only recently turned its attention toward power dynamics in Asia. Last week, Secretary of State Mike Pompeo announced America’s “Indo-Pacific Economic Vision” in which he promised a new investment package for the Indo-Pacific region, which amounts to $113 million. That’s a good start, but that’s million with an M – barely two thirds the value of Lebron James’s new contract. No wonder the Chinese effectively laughed off the plan; one Chinese foreign ministry spokesman responded with a Chinese proverb, noting that “it is better to take action than shout with a loud voice.”

If America wants to remain the only global hegemon, it must commit itself to its South Asian trade partners, both economically and diplomatically. It must start investing in South and Central Asia to counterbalance China’s BRI. The $113 million may be a drop in the bucket, but it is a step in the right direction. The U.S. must get rid of its tariffs regime, which will both strengthen its economic ties in Asia, and send a signal that its trade partners are valuable allies, not just collateral damage in its cage match against China.

Unless the United States commits to cooperation, it can expect China to continue expanding its influence throughout Asia and across the world. Without such a commitment, we can expect to see far more South Asian ports fall into Chinese hands in coming years. And in the long term, China may well mount a serious threat to American hegemony.