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Debt-trap diplomacy is a fallacy

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image source: Janne Suokas / gbtimes.com

Authors: Zhao Qingtong and Paul Wang

To certain extent, the US scholars and politicians are truly creative and innovative in making new concepts. After the “Thucydides trap”, “aid trap” or “cultural trap”, now prevails the notion of “debt-trap”. According to the recent remarks of the US Vice President Pence during the APEC summit last week, US Vice President Pence argued against China by saying that unlike the United States which is a democracy, China, as an authoritarian regime, has drowned its partners in a sea of debt, which is a coerce and a compromise of the independence”.

Over the past decade or so, China has promoted one of the most dramatic and geographically far-reaching surges in peacetime lending in history. More than one hundred primarily low-income countries have taken out Chinese loans to finance their infrastructure projects, alongside their productive capacity in mining and other primary commodities. It is true that many of those debts come from the Belt and Road Initiative, China’s massive effort to upgrade trade and transport infrastructure throughout Eurasia, Africa and ASEAN member states.

Yet, China’s trade policy involving its activities has been accused, for example, Pence harshly criticized China’s global infrastructure drive, known as the “Belt and Road Initiative”, calling many of the projects low quality that also saddle developing countries with loans they can’t afford. He argued that “the United States offers a better option, as we don’t drown our partners in a sea of debt since we do not offer constricting belt or a one-way road. When you partner with us, we partner with you and we all prosper.”

Now the question is what are Chinese loans to the Eurasia, Africa and many other ones all over the world? Actually much of the debate on China’s debt-trap to the developing countries has been misperceived or even wrongly presented, simply because little or no specific attention has been given to the nature and purpose of Chinese loans globally. First, using the cases of Tajikistan in 2011 that reportedly handed over land on its disputed border with China to repay some of its debts and Sri Lanka’s Hambantota Port Development Project, they have contended that China is or may use debt to gain economic and geopolitical leverage by trapping many other states in unsustainable loans. Second, they have suggested that African countries need a sustainable borrowing strategy if they are to meet the Millennium Development Goals.

Yet, although China is Africa’s largest trading partner and has spent billions of dollars in trade and investments without political strings attached, it is still not among Africa’s top creditors. According to the World Bank, between 2015 and 2017 Africa’s external debt payments increased, yet, among external debt owed by African states, 35% is to multilateral lenders, 32% to private lenders, about 20% to China, and 13% to other governments. Besides, interest rates are higher on private-sector loans, which account for 55% of interest payments, compared with China’s 17%. In addition, it is reported that China is not Africa’s largest donor. That honor still belongs to the United States. Chinese loan finance is varied. Some government loans qualify as official development aid. Other Chinese loans are export credits, suppliers’ credits, or commercial, not concessional in nature.

Equally, it is crucial to understand why African countries go for Chinese loans. African countries are not borrowing from China for consumption and luxury, they are investing in critical sectors. Much as China has demand for natural resources, job creation and the need for markets abroad, African countries simply need infrastructure projects. In this, China has financed more than 3,000, largely critical, infrastructure projects in different African countries.

In both theory and practice, it is widely-held that the appropriate external debt of a country can actually assist and improve its economic development. In today’s fierce international competition, the country which can attract large, low cost and sustainable foreign funds, will be the one to gain a competitive edge. Such a development reflects its financial prowess, not weakness. Given this context, it is worth underlining one of the reasons why China, since its “reform and openness” in 1978, has grown to become the second largest economic system in the world.

Accordingly, it is self-evident that the debt-trap diplomacy played by China through the Belt and Road Initiative (BRI) has been perceived wrongly and even a fallacy. Economically speaking, there is a significant difference between national and foreign debt. For a nation to raise funds, the central government can issue treasury bonds. The debt generated by this means from home and abroad according to the CIA data is about normal in those countries involved. National debt proportion in GDP is only related to the size of the government bonds that has nothing to do with China. Hence, external debt is strictly the liability of residents of a country for contractual repayment to non- residents. It must be excluded from direct investments and corporate capital.

Also, many BRI nations have long received loans from European nations, the United States, Japan and even India. It is therefore intriguing why such investments from Western nations, Japan and India, with nearly identical “debts” are regarded as “sweet pies,” while those from China are “debt traps”? For sure, it is because of unceasing foreign investments, China has steadfastly maintained the same economic policies in four decades. But, if nations along the BRI route often change their policies, and therefore cannot absorb low-cost and sustainable investments, they will surely be faced with questionable economic developments.

That can be one of the hard lessons for China to share with the rest of the world in reflection of its 40-year reform and openness.

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Washington- Pyongyang: A third attempt?

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During a recent meeting with his South Korean counterpart Moon Jae-in at the White House, US President Donald Trump said that while a step-by-step agreement with North Korea concerning that country’s nuclear program remained on the table, his administration was still focused on “the big deal.” Trump announced plans for his third meeting with the North Korean leader Kim Jong-un, but added that this would require “lengthy preparation.” The South Korean president likewise spoke about the need for the US and North Korean leaders meeting again shortly and underscored the need to maintain the current pace of negotiations.

The response from Pyongyang did not take too long in coming. In a keynote address on April 12 to the Supreme People’s Assembly in Pyongyang, which had earlier officially named him “the supreme representative of all Koreans,” Kim Jong-un said: “If the United States finds a solution acceptable to us, and proposes a meeting between the DPRK and US leaders, we are ready to agree to this once again. I won’t hesitate to sign an agreement, but only if it is written in a way that meets the interests of the DPRK and the United States, is fair and mutually acceptable.”

The April 12 session of the North Korean parliament was attended by a large delegation of the Russian State Duma deputies. Immediately after that, it became known that President Vladimir Putin would meet Kim later this month during a stopover in Vladivostok on his way to Beijing. The North Korean leader’s increasingly frequent political contacts with his Russian and Chinese counterparts reflect a desire to coordinate positions ahead of the next round of the US-North Korean talks.

Well, is there any reason for optimism about the outcome of the forthcoming parley? If so, then it must be extremely cautious. Indeed, in the span of  just a few months, Washington and Pyongyang have gone from general promises of denuclearization in exchange for security guarantees made during the June 2018 summit in Singapore, to a failed attempt to agree a roadmap for this process at the Hanoi summit in late February 2019.

Past experience shows that Washington’s attempts to make Pyongyang agree on everything at once were in principle doomed to failure for obvious political and technical reasons.

First off, it has been the factor of time. While Donald Trump hurried to clinch a “big deal” before his first term in office runs out (and not being sure about a second one), his North Korean counterpart was not interested in making this happen for exactly the same reason: as the most recent history shows, a new occupant of the White House often finds it easy to undo what his predecessor has achieved.

Equally obvious are technical reasons why there is no way to fast-track denuclearization of the Korean Peninsula. The deal on the Iranian nuclear program took years of negotiations and was the result of a mutual compromise (meaning that it is highly unlikely that a deal like this can be achieved in full, much less at once).

Under the present circumstances, any further US-North Korean negotiations would look like a walk across a minefield. If it were up to me, I would suggest the following way to go.

During the third Trump-Kim summit (which, if unsuccessful, will most likely be the last), to adopt a mutually accepted denuclearization roadmap that would say exactly which nuclear weapons and their delivery vehicles are to be eliminated, above all, those capable (albeit hypothetically) of reaching US territory.

The sides should also draw up an exhaustive list of facilities of North Korea’s nuclear (and, possibly, missile) programs that would be stopped or eliminated based on the principle of “proving the existence” there of nuclear  elements, rather than “proving their absence.” The latter verification path will take us nowhere because, to meet this requirement, Pyongyang would be forced to eliminate all of its engineering and other modern industries. In other words, to return to the pre-industrial era – something it will hardly ever agree to.

And, most importantly, there should be a compulsory and phased implementation of the stated goals. Pyongyang’s next move towards abandoning its nuclear technology should be accompanied by a partial and phased lifting of sanctions imposed on it by the UN Security Council, primarily those, which are damaging the peaceful sectors of the North Korean economy and are hampering the inter-Korean dialogue.

Each of these UN sanctions contains a concrete procedure for their suspension of lifting. At this stage the Security Council is already entering the game as all further negotiations on the denuclearization of the Korean Peninsula will depend on the agreed position of its permanent members (including the five officially recognized nuclear states).

Here it would be highly advisable to consider the proposal made by Kazakh President Nursultan Nazarbayev at a special session of the UN Security Council on the non-proliferation of weapons of mass destruction in January 2018, whereby the official five nuclear states could offer North Korea security guarantees within the framework of the UN Security Council as an important condition for creating an atmosphere of trust and ensuring successful progress towards denuclearization.

By the way, the third US-North Korean summit (if it happens at all) could be held in a trilateral format, as President Moon Jae-in has previously suggested. This would reduce the likelihood of yet another failure and would help ensure speedy security assurances for North Korea in exchange for the country’s nuclear disarmament.

First published in our partner International Affairs

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BRI: Shared Future for Humanity

Sabah Aslam

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The terrestrial and maritime connectivity proposed by the Chinese government back in 2013 with six connectivity corridors reflects the vision of shared future for humanity. Belt and Road Initiative (BRI) is an omen of modern transformation of the globe. The journey of transition from geo-politics to geo-economics is itself a huge achievement. As geo-economics brought in the partnership and collaboration for mutual gains whereas geo-politics reflects competition, for instance, arm race.

BRI a network of terrestrial and maritime passages encompassing (1) the New Eurasian Land Bridge connects Western China to Western Russia; (2) the China-Mongolia-Russia Corridor, from Northern China to Eastern Russia; (3)the China-Central Asia-Western Asia Corridor, links China to Turkey; (4) the Corridor from Southern China to the Indochinese peninsula up to Singapore; (5) the China-Pakistan Economic Corridor; and (6) the Bangladesh-China-India-Myanmar Corridor. In other words BRI is one of the longest connectivity route from the Chinese coast to Singapore to Gwadar up to the Mediterranean. Among all the above mentioned projects, CPEC is a model project with so much in its credit.

CPEC is the flagship project of the Belt & Road Initiative. CPEC is a mutually agreed initiative including 4 key areas of cooperation i.e. energy projects, infrastructure development, Gwadar Port, and industrial cooperation. This cooperation has further strengthened the time tested friendship. China – Pakistan strategic cooperation is an essential ingredient for the South Asian peace recipe. CPEC, not merely focus on commerce and trade but also include social development projects as well. Pak-China Friendship Hospital, Pak-China School, Gwadar Airport, and many more are prominent examples of this initiative. The first phase of CPEC is almost complete and is all ready to enter into the second phase. The first phase was comprised of energy and road projects whereas the second phase might also entails agriculture, education, health, water and much more. Here in our case, when there is an atmosphere of non-kinetic threats, development is the only option. Internal harmony and peace can only be achieved when there is no sense of deprivation. In addition, inclusion of third party in CPEC project, and also connecting it with the Central Asian Republics and Russia is also a progressive move. Opening it for the private business sector and creating 80,000 jobs, all are signs of social uplifting and gradual development. CPEC is an inclusive project for Pakistan and for the region.

China is focusing on and playing a key role in connecting the continents. Being an emerging power, China, considers the role of regional connections vital for the global peace and prosperity. Hence, BRI is a positive-sum cooperation. It’s a platform for dialogue, and developing new paths of cooperation encompassing government to government, people to people, business to business and media to media relations. BRI is the, opening up and connectivity, with an aim on promoting global peace and cooperation, and building a global community with a bright future for mankind. Moreover, it promotes connectivity through passages of commerce and trade. There is also a shift in the international balance, leaning towards east from west, considering it a breath of fresh air. Belt and Road Initiative is turning the myth “21st Century is the Asian Century” into reality.

BRI is a network of exchange, exchange of happiness and prosperity, exchange of knowledge and technology, exchange of expertise to perform well for mutual interests. It is the beginning of the inclusive global future. Hence, it is the time for profound change and reforms. For growth, for being dynamic, change is normal. So, reforms, propel states to accomplish goals not only at national level but international level too. The way BRI brought countries and regions together, enhancing trade, developing state of the art infrastructure, boosting investment, strengthening cultural ties, and people to people exchanges, all making BRI, the Central Nervous System of the world.

The true essence of BRI is regional integration, a horizontal, non-vertical integration with no hegemonic designs with an aim to limit the world recession damage. Furthermore, as the second BRI forum is scheduled in late April this year, there is much more to come. As mentioned, BRI is a pie, having share for all; it’s not a debt trap. In order to win the confidence of all the partnering states, and to lessen the suspicion, China is trying to avoid the ‘debt traps’. Though, there is no such state in unsustainable Chinese government debt pressure. It basically provides equality based cooperation, and a green & sustainable development. Second BRI forum is the right time to kickstart the “Second Phase” of Belt & Road. Many foreign heads of state and government, and thousands of delegates will be attending the Belt and Road Forum for International Cooperation, or BRF.  As mentioned by Chinese Foreign Minister Wang Yi, “it will include a series of events, such as leaders’ round table, high-level meeting, and thematic forum, CEO conference, under the theme of Belt and Road cooperation shaping a brighter shared future. There will also be more side events, including 12 thematic forums focusing on practical cooperation, and for the first time a conference organized specifically for the business community”.

The globe has already been struck by two major economic depressions. Asian continent also faced one in 1997 when East and Southeast Asia was crippled economically. The world direly needs a remedy in order to sustain the global economy which can only be done through economic and cultural interconnectivity.BRI aims to be a torch bearer in order to bring the financial benefits to the globe. The global prosperity is need of an hour in modern world order but this can be achieved through collective efforts.

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China: Via Portugal into Africa and Latin America

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Portugal is a major geographical link in the European leg of China’s New Silk Road project (NSR). A visit by Chinese President Xi Jinping to Lisbon on December 4-5, 2018 produced seventeen cooperation agreements thereby reaffirming the two parties’ readiness to expand economic partnership.

China is Portugal’s top trading partner in Asia, with bilateral trade steadily on the rise amounting to $5.6 billion in 2017. The volume of Chinese investment in the Portuguese economy has reached $ 10.2 billion. Simultaneously, the influx of tourists from China to Portugal has gone up by 40% and from Portugal to China by 16%. The Chinese Embassy in Lisbon has described the current state of Sino-Portuguese relations as the best since the establishment of diplomatic relations in 1979.

The livening up of Sino-Portuguese relations is key to Beijing’s comprehensive strategy of boosting cooperation with Portuguese-speaking countries. Adopted fifteen years ago, this strategy has brought about an increase in the volume of trade between the PRC and the Portuguese-speaking nations by more than 19 times – from $ 6 billion in 2002 to $ 117.6 billion in 2017.

In this context, an economic union with Lisbon is designed to geographically complete the European sector of the New Silk Road project (NSR) given the location of Portugal as the western tip of the European continent. Also, such an alliance is set to project Chinese economic influence through Portugal to countries of Africa and Latin America.

China is number one trading partner of three Portuguese-speaking countries: Brazil (trade turnover in 2018 at $ 29.5 billion), Angola ($ 26 billion) and Mozambique ($ 168 million).

The port of Sines – Portugal’s sea gate to the Atlantic and Africa – carries a particular importance with its well-developed infrastructure and all the facilities to be used as a transit point for Chinese products bound for America and Africa. Another important point is the Azores, a part of Portuguese territory stretching deep into the Atlantic. Lisbon has consented to Beijing’s participation in the construction of scientific and logistics infrastructure in the archipelago, which is tantamount to a stronger Chinese economic presence in the region.

Lisbon favors joint participation with Beijing in investment projects in Portuguese-speaking Africa. African countries have expressed a similar intention. In January 2019, the Angolan Parliament ruled to abolish double taxation with Portugal, China and the United Arab Emirates.

Lisbon-mediated cooperation with Portuguese-speaking countries will enable Beijing to guarantee food security. According to UN reports, Angola is among the top five countries with the greatest agricultural potential (58 million hectares of arable land), Mozambique has 36 million hectares, of which less than six are cultivated, while Brazil is the main supplier of soybean, a popular food product for China (14 million tons in 2018).

In relation to China and within the NSR project, Portugal plays the role of an infrastructure and logistics counterweight to France, which is trying to shift the focus of French-Chinese cooperation in the direction of the Mediterranean and North Africa – to fight against terrorism in the Sahel region and provide investment support of the French-speaking Sahel “Five” (Chad, Mauritania, Burkina Faso, Niger, Mali).

Beijing is interested in moving via the Atlantic westward. From the geographical point of view, Portugal is a good partner here – cooperation with it takes China beyond the Mediterranean. According to the Chinese leader, for Beijing, Lisbon is a point of linking the land and sea segments of the NSR and a promising partner in the development of the “sea wave economy”.

The position of Paris regarding the NSR project is characterized as cautiously positive, envisaged by the Franco-German Aachen agreement of January 22, 2019 and affected by competition with Italy (Italian Trieste and French Marseille compete for the main port of the NSR in the Mediterranean).

The Aachen agreement diplomatically outlines the geopolitical axis Paris-Berlin, endowing the French-German relations with a special status. Against export-oriented German economy (in 2018, exports went up 3% against 2017, reaching $ 1.318 billion), Beijing’s economic activity in Europe is seen as a challenge.

Negotiations between French President Emmanuel Macron, German Chancellor Angela Merkel and European Commission Chairman Jean-Claude Juncker and China’s Xi Jinping on March 25-26 demonstrated the EU’s consolidated position and marked a successful attempt to secure common gains from building up cooperation between the EU (without Italy) and the PRC.

While France readily signed multibillion-dollar contracts with China and agreed to the opening of the Chinese market for French goods, it refrained from actively assisting the Chinese in pursuing transcontinental infrastructure projects as unwelcome for the economic health of the Franco-German duumvirate.

 First published in our partner International Affairs

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