In a welcome demonstration of bipartisanship, the U.S. Senate has renewed efforts to develop a comprehensive policy on China, producing a landmark bill. The 1,445-page U.S. Innovation and Competition Act (S. 1260) is the result of combining previously proposed legislation, notably the technology- and research-focused Endless Frontier Act and the more diplomacy- and security-focused Strategic Competition Act of 2021. This development is in stark contrast to the increasingly partisan nature of policymaking within the 117th Congress, demonstrating growing consensus around the importance of legislating for a new era of strategic competition with the United States and China at the center.
While U.S. policymakers have made mention of China’s influence in Latin America and the Caribbean (LAC) for decades, no practical set of alternatives has ever been offered. This bill offers an unprecedented opportunity to change that. Although efforts specifically geared toward LAC countries are a relatively small part of the overall legislation, they are critical for U.S. national security interests. No other region has such direct and daily impact on issues important to the United States as LAC, our hemispheric neighbors.
As the Senate brings this bill to a floor vote in the coming days, lawmakers should leverage this opportunity to delineate a U.S. framework to provide practical and tangible alternatives to the growing financing efforts of U.S. competitors in LAC. Whether funded directly by the U.S. government or by mobilizing external capital, the United States must elevate impacting countries’ balance sheets as a policy priority. Directly, the United States can increase efforts of the Development Finance Corporation and the U.S. Export-Import Bank and provide bilateral aid through USAID. However, the scale, efficiency, and sustainability of those levers are limited. To supplement those efforts, the United States should look to multilateral institutions to diversify financing burdens and facilitate greater investments at scale. Specifically, provisions within the U.S. Innovation and Competition Act to develop a new multi-year strategy for LAC and approve a capital increase at the Inter-American Development Bank (IDB) are two good places to start.
Chinese influence in LAC has grown dramatically in recent years. At the turn of the century, China was not within the top five extra-regional trading partners for LAC, and by leaps and bounds, the United States was the most prominent partner. However, by 2018, China was the second largest trading partner for the region. Though China’s trade flows with the overall region were still substantially smaller than flows to and from the United States, China became the top trading partner for major regional economies including Brazil, Chile, Peru, and Uruguay.
Beyond trade, China’s investments in LAC have at times outpaced the combined efforts of the World Bank, IDB, and CAF Development Bank. An overwhelming amount of this investment has gone to greenfield infrastructure and energy projects, likely in support of China’s broader Belt and Road Initiative (BRI), which 19 LAC countries have joined. A recent trend of equity investments also signals longer-term interests, especially in regard to maintaining influence on projects after construction ends.
As a result of increasing economic leverage in the region, China has also increased soft power ambitions, bolstering efforts to influence media and civil society groups. Increasing political influence in the region is also palpable as a spate of countries has reneged on formal diplomatic ties with Taiwan. Since 2017, the Dominican Republic, Panama, and El Salvador have broken ties with Taiwan, while their cooperation with China has strengthened. Today, only 15 countries have full diplomatic relations with Taiwan. Though 9 of these 15 countries are still from LAC, this number has shrunk more quickly than ever before.
Covid-19 provides an opportunity to reinvigorate U.S. attention to support LAC. The region has been one of the hardest hit in terms of both health and economic outcomes, and even before the pandemic, its economy was already struggling with sluggish growth rates. Nevertheless, the United States will have to move quickly. During the pandemic, despite slowing lending, China took major steps to provide both therapeutics and vaccines to LAC in a form of health diplomacy. To address this, the U.S. Innovation and Competition Act has several worthy features that should be maintained.
First, Sec. 3248 calls for the secretary of state to lead the creation of a multi-year regional strategy. This provides an opportunity to create U.S. policy that is positive, forward-looking, and rooted in the understanding that LAC countries are equal partners—possibly in the spirit of a second iteration of an Alliance for Progress or Alliance for Prosperity. The 2021 Summit of the Americas hosted by the United States is a good place to begin building momentum.
Second, Sec. 3250 refers to a proposed capital increase at the IDB, which would be a strategic move to increase multilateral financing for LAC. Since its creation in 1959, the IDB has served as the single most credible and catalytic institution to support development through collective action in the Americas.
The IDB has not had a capital increase since 2010, whereas the World Bank has scheduled capital reviews every three years. The IDB’s 2010 increase was largely in response to increased demand after the financial crisis and was arguably too small to adequately meet demand in the region, which in turn increased opportunities for China.
In 2020 alone, the IDB mobilized $21.6 billion across the region, including $1 billion for vaccine acquisition and distribution. However, without a capital increase, the annual lending portfolio will decrease to $14 billion, while demand is estimated at over $25 billion. The proposed capital increase could be targeted toward Covid-19 recovery, fill this demand, and help avoid a “lost decade” for LAC. Resources could be also used for greater disaster preparedness efforts and for the newly launched IDB climate facility. Furthermore, as the pandemic continues to rage, they could be used to buy and deliver more Covid-19 vaccines.
If smart lending through the IDB does not fill the financing gap for LAC, other lending will. Even if the proposed capital increase was double the size of what is currently proposed, the net cost to the United States would be miniscule—equivalent to less than 4 percent of what the United States currently provides to LAC annually. Looking to the long term, the capital increase process is also a moment for discussion about broadening the number of non-borrowing shareholders, including countries such as Australia, India, and Taiwan.
Third, beyond preventing China from having predatory lending opportunities in LAC through providing alternative mechanisms, the United States needs to mobilize efforts to get countries out from under Chinese debt. Since 2005, China has committed $137 billion in loans to the region. Chinese infrastructure loans in particular have been rife with problems. In Ecuador, a dam financed by China has been plagued with corruption, lethal malfunctions, and negative economic impacts felt by everyday citizens. The situation even motivated renegotiations on $900 million dollars of debt to be repaid in oil. While Ecuador represents an extreme case, this experience is not unique, as other Chinese projects have also been cited for their lack of sustainability and labor standards. Sec. 3250 of the Senate bill proposes creative options to address this Chinese debt that also merit support.
Strategic competition with China in LAC is about balance sheets—not bullets. As it currently stands, LAC countries will simply have no choice but to continue collaborating with China. It is time for a strong bipartisan pivot regarding China and LAC. The proposed U.S. Innovation and Competition Act in the Senate provides pragmatic and competitive economic alternatives which are squarely aligned with short-term and long-term U.S. interests.
Originally published on csis.org.