China’s Debt Diplomacy Will Get a Coronavirus Boost

Political decisions made in China at the beginning of the COVID-19 outbreak took a situation that could have been containable and made it an unstoppable global pandemic. The immediate social, political, and economic consequences will be with us for at least the next two years. But the indirect effects may permanently shift the world.

These effects will be felt particularly acutely in China’s growing sphere of influence, where Beijing has largely deployed a debt-based model of imperial control. As these countries frantically attempt to manage the economic and financial consequences of the pandemic, they will struggle to service their debts to Beijing—which will expect more favors, and the ceding of more sovereignty, as the cost of debt relief.

Beijing is unlikely to pause and consider the consequences of squeezing these countries at such a vulnerable moment. And this presents a potentially new U.S. administration with the opportunity to regain some moral leadership as the more benevolent of the two dominant global empires by leading a program of international debt relief and reconstruction through its own, venerable Bretton Woods infrastructure. Right now, China, with its relief flights and medical outreach, is winning the soft power battle against a United States that has only just begun to tackle the problem at home. Even as American politicians attempt to reshape the U.S. economy and society to handle the virus, they need to be thinking about the future.

Counting the cost of the pandemic is premature at this point. It’s still not clear how the disease will continue to evolve and spread through the global population, nor how to model the effects of the diverging national policies taken to handle it. Nevertheless, an initial figure of some $2.8 trillion has already been floated.

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Economic suffering is inevitable; as unemployment numbers grow and small businesses stare down the barrel of bankruptcy, it’s already arrived for many. Some may be more resilient than others, but dependent developing countries such as Liberia and Niger are going to be especially vulnerable. Their capacity to respond to the pandemic will be constrained by their relatively limited resources. And preexisting exposure to debt can put them in a real bind when forced to make choices between the lives of their citizens and becoming even more vulnerable to powerful creditors, most notably China.

The role of debt in China’s expansion of its sphere of influence along the Belt and Road is already well documented and understood. So-called “debt-trap diplomacy” has already seen Sri Lanka effectively lose sovereign control of one port on the Indian Ocean. Djibouti, Tajikistan, Kyrgyzstan, Laos, Maldives, Mongolia, Pakistan, and Montenegro have all been identified as at risk of similarly losing sovereign control over areas of interest to China, as they all already owe more than 45 percent of their gross domestic products to Beijing over Belt and Road projects.

Even as the Chinese, European, and U.S. economies struggle under the costs of the pandemic, they at least have large enough, diverse enough, robust enough economic bases that their overall internal structures and their relative positions in the geopolitical pecking order are unlikely to be affected. Poor countries with small, undiversified, fragile economic models can be utterly broken by the global economic shock. That will leave them at the mercy of Beijing.

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And Beijing is becoming adept at translating outstanding debts into foreign assets—the most flagrant example being the Hambantota port project in Sri Lanka. Despite every feasibility study showing that the project was not viable and after traditional lenders such as India and the World Bank turned it down, Sri Lankan President Mahinda Rajapaksa approached China, which was more than happy to green light every request. When the port project failed as expected and Colombo could not service its debt, Beijing enthusiastically took control of the port under a 99-year lease, along with 150,000 acres of land around it.

We could be looking at permanent concessions of sovereign territory—for example, around the Chinese base in Djibouti and deals similar to Hambantota in Pakistan, Maldives, and perhaps even in the Caribbean—if the United States does not intervene to counteract such demands. China has learned from the experience of the Macao and Hong Kong concessions in past centuries and understands the value of controlling such ports near target markets in order to expand its own empire. And it will not let such an opportunity for expansion pass it by—even as it carries the weight of moral responsibility for the global spread of COVID-19.

By contrast, in the wake of the devastation of World War II, the United States pioneered a model of global hegemony based on sponsoring economic reconstruction. As the Cold War developed, this model of hegemony became an increasingly tight-fisted model of imperial control due to the need to contain the rival Soviet empire, but the lessons of the initial successes of the Marshall Plan and the Bretton Woods system should not be forgotten. Given the relative economic might of the United States, helping entire continents out of economic devastation is relatively cheap—and pays economic and security dividends for decades.

At the same time, this pandemic also illustrates the need for active U.S. global involvement along the lines of the Marshall Plan model. In the globalized world in which we live, any number of things happening on the other side of the planet will have swift and profound consequences for the homeland: from our health to our economy and our political system. Had we successfully promoted more open societies around the world, like we did in South Korea—which is leading the charge in combating the disease—both our health and our economy would now be in much better shape, for example.

China is likely to fail to appreciate the pressures the pandemic will have on its newly acquired client states along the Belt and Road.

Conversely, China is likely to fail to appreciate the pressures the pandemic will have on its newly acquired client states along the Belt and Road, and it is likely to squander its influence and soft power in many regions with its established practice of weaponizing debt. The arrogance of the Chinese tone has been obvious in its dealings with the rest of the world, with the People’s Daily trumpeting the virus cases that have overtaken those in China—at least on paper—and attempts to use China’s manufacturing capability to force political concessions from others.

If China continues down this path, this will present the United States with an opportunity to weaponize debt forgiveness. This would likely happen through the Bretton Woods institutions, the International Monetary Fund and the World Bank, which could offer effective debt relief (call it “debt restructuring”) to countries that are buckling under Chinese-issued debt. If the approach is taken, it would mark a second dawn for America as a “benevolent empire,” after two decades of Washington trying and failing to impose its will on the world through its overwhelming military prowess.

For this to work, however, Washington may need to be under a different administration. Whatever your view of the Trump administration, it represents, in its own words, an “America first” vision of hegemony, which is not compatible with the post-World War II model of American preeminence as a benevolent empire—nor with the moral leadership to be claimed in the aftermath of this global crisis.

For the past two decades, as the United States drifted toward the psychological safety blanket of militarism—where it felt that its unassailable military might meant it did not have to concern itself with the other complexities of global power—China moved in on the global stage as a potential partner ruled principally by economic rationality, which dictated cooperation with anyone who was willing to be friendly with Beijing.

But in recent years, as China has become more assertive militarily and begun to weaponize debt and other levers of economic power, that conceit has been exposed. China is not the cooperative, benevolent empire the rest of the world was looking for while the United States was self-indulgently flexing its militarily muscle around the globe.

The United States has been given a second chance to become the hegemon the rest of the world wants and needs it to be. If it has the wisdom to seize this chance, the world will be bound to it by the strongest kind of debt there is: a debt of gratitude.