Debt-trap diplomacy is a form of economic coercion used by richer countries to force poorer, resource-rich or strategically placed countries into giving up their assets or yielding to political pressure.
The technique usually involves lending large sums of money to the target country, often at high interest rates. This quickly leads to an unsustainable debt burden for the borrowing country, which is then forced to negotiate terms with the lender country that are unfavorable.
In some cases, the target country may be required to hand over strategic assets such as ports or military bases, or make political concessions such as voting in favor of measures favored by the lender country.
Debt-trap diplomacy has been used by a number of countries throughout history, but has come under increased scrutiny in recent years as China has used it to gain influence in poorer countries around the world.
Critics argue that debt-trap diplomacy is a form of neo-colonialism, as it allows richer countries to maintain control over poorer countries through economic means.
Proponents of debt-trap diplomacy argue that it is a legitimate tool of foreign policy that can be used to further a country’s national interests.
What Concessions Are Demanded By China?
In exchange for debt relief, China requests several advantages or concessions. As an example, Sri Lanka was forced to relinquish control of the Hambantota port project to China for 99 years after amassing massive debt owed to Beijing. This action gave China influence over a key port near its regional rival India.
In another case, Malaysia’s Prime Minister Mahathir Mohamad canceled $22.3 billion worth of Chinese-backed infrastructure projects in 2018, including a railway line, after his country’s new government found that the terms of the loans were unfavorable. Some experts believe that Beijing uses debt-trap diplomacy as a tool to gain political influence or control over other countries.
Similarly, China built its first military base in Djibouti as part of the deal. Angola is repeating multibillion-dollar debt to China while also exacerbating economic issues.
China’s borrowing has been used to expand its influence across the globe and gain significant power in India’s neighboring countries, raising the country’s political and security risks.
China has used its economic power to expand its influence in neighboring countries, including through loans and investment. This has allowed Beijing to gain political allies and access to important natural resources. Additionally, China’s growing military presence in the region has increased its ability to project power and assert its interests. While this has positive implications for China’s regional security, it also raises the risk of conflict with India.
A new study has examined 100 loan contracts from China to 24 different countries, many of which are part of the Belt and Road Initiative (BRI). This initiative is an ambitious project that seeks to make China the dominant power in the world. The study found that China often uses exploitative lending practices, requiring countries to use Chinese products and labor instead of their own. This puts these countries in a precarious position, as they are unable to repay their loans or develop their infrastructure without help from China.
The study found that Chinese lending contracts go beyond the average international agreement, thereby giving China more control.
The Chinese-dictated contracts severely restrict the borrowing nations’ options, while giving complete discretion to China’s state-owned banks over any borrower. This includes the power to cancel loans or demand full repayment ahead of schedule, according to the study.
In 2011, China won 1,158 square kilometers of vital Pamir Mountains territory from Tajikistan in a debt-trap deal. One of the earliest successes of China’s debt-trap diplomacy. In return for debt forgiveness, Tajikistan granted Chinese companies mining rights to gold, silver, and other mineral ores. As the Chinese military installation in the Badakhshan province demonstrates, China has infiltrated Tajikistan as a result of tainted power brokers there.
The Sri Lankan Hambantota Port transfer to Beijing on a 99-year lease is one of the most well-known recent examples. Ironically, the 99-year lease was popularized by European colonial expansion in China during the 1800s. In Sri Lanka, the transfer of the Indian Ocean’s most strategically positioned port in late 2017 was perceived as a farmer offering his daughter to a moneylender.
Not even Pakistan, China’s only strategic ally after its falling out with North Korea, has been spared from Beijing’s “debt-trap diplomacy.”
Pakistan owes a lot of money to China, so they have given China exclusive rights to run Gwadar Port for the next four decades.
China will pocket 91 percent of the port’s revenues. It also plans to build near the port a Djibouti-style outpost for its navy.
In small islands, China has converted huge loans into the buying of whole islets through special development rights. China has seized a handful of islands in the Maldives and one island in the Solomon Islands’ South Pacific territory.
Meanwhile, the European Union has refused to provide aid to tiny Balkan state Montenegro for mortgaging itself to China.
Many of BRI’s completed projects have unsuccessful project records, with some being considered not financially viable. Consequently, President Xi Jinping’s signature initiative has been associated with corruption and malpractice allegations.
China will continue to promote BRI because it is central to its debt-trap diplomacy. By lending money to smaller, financially weak countries, China can gradually expand its footprint in those states until they become economically dependent on Beijing. This allows China to wield more influence on the global stage. Although there has been some criticism of BRI, Xi’s regime is unlikely to abandon the initiative entirely. Instead, it will probably make some adjustments in response to the concerns raised.
In recent years, China has been increasingly criticized for its “debt-trap” diplomacy, in which it allegedly uses loans to lure developing countries into economic dependence. Critics say that this strategy is part of a broader effort by Beijing to expand its influence around the world.
China has rejected these accusations, arguing that its loans are made on commercial terms and are meant to help other countries develop their economies. Chinese officials have also pointed out that many Western countries have provided similar loans to developing nations in the past.
Despite China’s denial, there is growing evidence that its debt-trap diplomacy is real and is having harmful consequences for countries around the world. In some cases, countries have been forced to hand over control of strategic assets, such as ports and railways, after defaulting on their loans. This has led to concerns that China is using debt as a tool to gain political influence in other countries.
Responses to China’s debt-trap policy
There have been a number of responses to China’s debt-trap policy, with varying opinions on the best way forward. The B3W Initiative is one response that has proposed creating a new Bretton Woods agreement in order to reorient the global financial system. The Blue Dot Network (BDN) is proposing reforms to the World Trade Organization in order to make it more responsive to current economic conditions. And Global Gateway has called for an international conference on debt and development to discuss the best way forward.
There is no easy solution to the problem of China’s debt-trap policy, but it is clear that the international community needs to come together to find a way forward. Only by working together can we hope to find a way to address this issue in a constructive and effective manner.
B3W Initiative
The G7 countries announced the ‘Build Back Better World (B3W) initiative’ at the 47th G7 summit to counter China’s Belt and Road Initiative. It aims to fill the infrastructure investment gap in developing and low-income nations, which has been increasingly dominated by China.
The initiative will be led by the World Bank, with a focus on quality infrastructure that is sustainable, resilient, inclusive and green. It will also promote transparency and good governance in infrastructure projects.
The initiative was announced amid growing concerns about China’s rising influence in the world, as well as its debt-trap diplomacy. The B3W initiative is seen as a way for the G7 countries to reassert their leadership in global affairs and counter China’s growing assertiveness.
Blue Dot Network (BDN)
The BDN initiative is a project that is sponsored by the United States, Japan, and Australia. It brings together governments, the private sector, and civil society in order to create high-quality standards for global infrastructure development. The project was announced in November 2019 at the Indo-Pacific Business Forum in Bangkok, Thailand.
The initiative has three core objectives:
- To promote quality infrastructure development that is sustainable, resilient, inclusive, and leads to economic growth and prosperity;
- To support member states in meeting their development needs; and
- To foster collaboration among the members of the initiative.
The BDN initiative is open to all countries in the Indo-Pacific region. It is a voluntary, non-binding initiative that does not entail any formal commitments.
The United States, Japan, and Australia are the founding members of the BDN initiative. The three countries will work together to promote the initiative and encourage other countries to join.
Global Gateway
The European Union has recently created the Global Gateway in an attempt to compete with BRI.
The European Union (EU) has created the Global Gateway in order to compete with China’s Belt and Road Initiative (BRI). The Gateway will focus on infrastructure development in Africa, Asia, and Latin America. It is hoped that the Gateway will promote EU values and standards in these regions.
India has not directly borrowed money from China. However, India is the top borrower from the Asian Infrastructure Investment Bank, a multilateral bank in which China is the largest shareholder (26.6% voting rights) and India is the second (7.6% voting rights) among other countries.
The vote share of China allows it to exercise super-majority veto power on issues that require a two-thirds majority. Loans provided to India could also enable Chinese firms to enter and gain experience in the rapidly growing Indian infra market.