Beyond Buzzwords: Unpacking Chinese Economic Engagement in Latin America

Last November, President Biden addressed the leaders of eleven countries at the inaugural Americas Partnership for Economic Prosperity (APEP) Leaders’ Summit. In framing this new initiative, he claimed that Latin American countries had “a real choice between debt-trap diplomacy and high-quality, transparent approaches to infrastructure.” Biden’s quick reference to “debt-trap diplomacy” called attention to the elephant in the room—Chinese economic engagements throughout Latin America.

Large countries and international financial institutions (IFIs) regularly extend credit to developing countries to finance costly infrastructure projects. “Debt-trap diplomacy” describes a predatory strategy where the creditor country banks on the borrower’s inability to repay them, extracting economic or political concessions when they default. Shortly after the term emerged in 2017, “debt-trap diplomacy” became the Trump administration’s go-to buzzword to characterize Chinese economic engagement across the Global South.

Almost seven years later, this fearmongering depiction remains prevalent in US rhetoric. Accusations of similar Chinese behavior in Latin America have permeated both public and elite opinion. As countries like Ecuador and Venezuela face significant debt distress and look toward debt renegotiation, many Western observers—including President Biden—have been quick to conflate any Chinese lending to developing countries with a concerted effort to counteract US influence, despite scant proof of intentionality. It seems much of the Western world may have normalized an oversimplified anti-China sentiment that remains deeply misinformed.

Two Views of Chinese Economic Engagement

Latin America has become an increasingly prominent frontier for two competing spheres of influence: China and the West. While US involvement in the region has much deeper roots, China’s 2001 accession into the World Trade Organization (WTO) heralded a new era of booming Chinese economic engagement. In just two decades, China’s annual trade with Latin America has skyrocketed from $12 billion to $310 billion. Today, two conflicting views dominate political discourse on the nature of Chinese economic engagement.

The first view is central to Western rhetoric: China “exports authoritarianism” by leveraging its asymmetric economic advantage over developing countries. This view suggests that Chinese economic statecraft favors autocratic regimes, thereby incentivizing countries looking for development assistance to lean toward China on political matters. Since the expansion of China’s Belt and Road Initiative in 2013, China has become an enticing economic partner for underdeveloped countries in Latin America, pushing many to drop their recognition of Taiwan in exchange for increased economic engagement with China. When Honduras dropped its recognition of Taiwan, Beijing greeted the switch by promptly negotiating financing for an ambitious Honduran hydroelectric dam project.

The second view reflects Chinese rhetoric: Chinese aid to developing countries comes with “no political strings attached,” suggesting Beijing’s objectives are economic and developmental rather than political. Beijing advertises a less invasive countermodel to typical Western lending structures, which often attach political and economic conditions with the intent of promoting the responsible use of development funds. By extending loans with political conditionality, Western institutions define what counts as a “responsible use of development funds” in their own terms, thereby imposing norms and values that may not be compatible with certain local contexts. This view pushes international scrutiny back onto the West; in Beijing’s eyes, the West “exports” liberal democracy through its lending practices and, in doing so, infringes on the sovereignty of developing nations dependent on said funds.

Evaluating the validity of these two views holds major strategic implications for approaching Chinese influence in Latin America and beyond. The first view suggests that Chinese economic statecraft is inherently at odds with Western ambitions to safeguard liberal democratic norms, which means that countering China is necessary to mitigate democratic backsliding. The second view suggests that Chinese economic statecraft is apolitical, implying that Western rhetoric exaggerates the actual political threat of China’s economic engagements as an excuse to scare countries away from China’s growing sphere of influence. So, is Chinese economic engagement—in Latin America and elsewhere—a political strategy to counter Western dominance?

What the West Gets Wrong: How China Chooses Which Countries To Engage With

If China were truly “exporting authoritarianism,” Beijing’s economic engagement would squarely map onto measures of democracy. Specifically, we could expect China to send more aid to authoritarian countries in Latin America and less aid to more democratic ones. However, leveraging data gathered by the AidData research lab at William & Mary, which has tracked over two decades of official Chinese loans and grants, this hypothesis seems to lack empirical support.

Table 1.1: Effect of Democracy Polity on Chinese Economic Engagement in Latin America. Image Description: Tabular representation of results in R.

There seems to be a very loose negative relationship between democratic polity score and Chinese economic engagement. However, the correlation shows no statistical significance even after controlling for country-year fixed effects and developmental assistance needs (proxied using population total, GDP per capita, and annual GDP growth). The same holds even when distinguishing between official Chinese developmental assistance (ODA) and other official flows (OOF) [Tables 1.2, 1.3]. There exists a loose negative correlation, suggesting China may be lending aid to more authoritarian countries, but there is insufficient statistical significance behind these trends to suggest a coherent pattern, let alone an intentional strategy.

Furthermore, the “debt trap diplomacy” view pervasive in Western countries suggests Chinese economic engagement might prey on weaker states, deliberately engaging with fragile governments with the expectation that Beijing may extract political concessions if they default. Yet, mapping Chinese economic lending onto data from the Fragile States Index (FSI) yields similarly inconclusive results.

Table 2.1: Effect of FSI on Chinese Economic Engagement in Latin America. Image Description: Tabular representation of results in R.

There seems to be a loose trend wherein China lends more to countries with higher FSI scores, but no statistical significance appears even after controlling for various potential confounders. In fact, dividing Chinese economic engagement into ODA and OOF even offers evidence for the opposite—as states become less fragile, China lends more developmental aid (ODA) [see Appendix Tables 2.2, 2.3]. Contrary to the predominant Western narrative, Chinese economic engagements do not appear to be a strategic effort to “export authoritarianism,” otherwise there would be more salient patterns in where China chooses to allocate its capital.

Instead, Chinese engagements may be driven by commercial and domestic interests, rather than political ambitions. Beijing has long sought commodity exports from Latin America, which has provided much-needed natural resources to fuel both its domestic energy demands and its powerful economic growth. Accordingly, Beijing’s largest trade relationships to date are with countries that boast large commodity sectors.

China’s recent prioritization of climate and sustainability policies, implemented under President Xi in 2017, is apparent in its increased reliance on renewable energies and sustainable technologies. China has made a concerted effort to increase its share in the electric vehicle (EV) market, seeking greater involvement in Latin America’s “Lithium Triangle”—which includes Argentina, Bolivia, and Chile—to support this goal. The “Lithium Triangle” holds more than 60% of the world’s lithium reserves—crucial inputs for green energy technologies like EV batteries. By contrast, China owns only 7% of the world’s lithium resources but accounts for around 60% of the global EV market. It seems likely that, rather than being driven by political motives as the “exporting authoritarianism” view would suggest, Chinese economic engagements in Latin America are driven more by domestic and commercial priorities.

What China Gets Wrong: The Political Strings Behind “No Political Strings Attached”

That said, the Western view is not the only narrative riddled with oversimplification. There are two complications with the arguments behind Beijing’s “no political strings attached” countermodel.

First, there seems to be minimal evidence of the IFIs engaging in the opposite manner—distributing aid contingent on how democratic recipient countries are. Like China, the World Bank regularly lends aid to countries in the Global South, providing aid through the International Development Association (IDA) and distributing loans through the International Bank for Reconstruction and Development (IBRD). Examining relationships between the World Bank’s lending programs and democratic polity scores in Latin America yields similar observations. Both the IDA and IBRD seem to lend more as countries become more democratic, but there is not enough statistical significance to suggest this reflects an established pattern [see Appendix Tables 3.1, 3.2]. These findings remain consistent when swapping out democratic polity scores for FSI scores, suggesting plausible anecdotal evidence for these lending differences but insufficient proof to argue these trends represent intentional strategies [see Appendix Tables 4.1, 4.2].

Second—and more importantly—just because China’s strategy might not prioritize spreading autocracy does not mean its lending practices do not engender, perpetuate, or exacerbate democratic backsliding in recipient countries. Western powers often impose economic sanctions and attach conditions to development financing as methods of shortening the lifespan of authoritarian regimes without intervening militarily. Had the U.S. still exercised undisputed liberal hegemony, sanctions like these could be effective; the survival of developing economies would depend on maintaining good relations with the liberal international order, so following their political conditions would often be necessary. However, as Beijing presents its desirably lax countermodel, the bargaining power of Western actors and institutions decreases significantly. Now, instead of staying beholden to Western conditionalities, autocratic leaders can turn to China as an alternative source of development financing to boost their legitimacy.

The threat to democracy is exacerbated by these countries growing dependent on China, which affords Beijing increased political leverage. This dynamic creates a vicious cycle of anti-democratic behavior, international isolation, and dependency on China. As autocrats gain a firmer hold on power thanks to unconditional Chinese developmental financing, Western pressures to democratize become increasingly demanding; meanwhile, as Western pressures to democratize mount, autocrats are more likely to rely on Chinese aid. In fact, Latin American countries with stronger economic ties with China vote against Washington’s interests with approximately 30% frequency in the UN Human Rights Council. In the Organization of American States (OAS), Washington’s influence on voting matters declined by 26% among Latin American countries economically dependent on China from 2001 to 2021.

One way of corroborating this argument—that China’s apolitical lending incurs political consequences—is to check for reverse causality by comparing the effects of Chinese and World Bank economic engagements on the recipient countries’ FSI scores in subsequent years. Using a two-year lag, there appears to be a clear difference in the relative effects of Chinese and IFI economic engagement.

Table 5.2: Effect of World Bank Loans (IBRD) on FSI (2-yr lag) Worldwide. Image Description: Tabular representation of results in R.

Table 5.4: Effect of Chinese Economic Engagement on FSI (2-yr lag) Worldwide. Image Description: Tabular representation of results in R. 

Given the history of Western institutions attaching political conditionality to loans, it makes sense that there is a statistically significant negative relationship between World Bank loans and subsequent FSI scores of recipient countries in Latin America [see Appendix Table 5.1] and globally [see Appendix Table 5.2]. Contrastingly, Chinese economic engagement in Latin America has a positive, albeit statistically insignificant, correlation with FSI ratings [see Appendix Table 5.3]. Globally, Chinese economic engagement exhibits the same positive correlation with FSI ratings but with high statistical significance [see Appendix Table 5.4]. Countries receiving assistance from the World Bank become less fragile while those receiving loans and aid from China become more fragile.

On the one hand, China’s lack of conditionality means that developing countries are not forced to comply with unrealistic or ill-advised political conditions. As discussed earlier, such conditions can have adverse effects when donor countries do not account for cultural and political nuances. On the other hand, however, the same lack of conditionality also means that China’s loans undermine Western efforts to destabilize authoritarian regimes.

What We Get Wrong: Taking Reductionist Narratives At Face Value

Whether in Latin America or elsewhere, Chinese economic engagement is neither inherently autocratic nor devoid of “political strings.” Chinese developmental assistance is likely not a coherent political strategy the way Western rhetoric depicts it to be. At the same time, that also does not preclude China’s alternative lending model from incurring democratic costs.

For both China and the West, framing their rhetoric around oversimplified narratives makes sense; it paints a straightforward picture that draws countries toward them and away from their opponent. Yet, that strength is also precisely the problem. When great powers jump to attack their competitor rather than portray situations for how they are, they attribute malice indiscriminately and close off avenues for potential cooperation.

We need to escape the false binaries engendered by great power competition. Ultimately, the US-China rivalry constitutes an important yet secondary priority in Chinese economic engagement, and rhetoric needs to change to treat it as such. In Latin America and beyond, only by recognizing the behavioral complexities of Chinese economic statecraft may the West craft an effective response to China’s growing influence without jeopardizing other nations and their developmental needs.

The views expressed in this article are those of the author and do not represent those of any previous or current employers, the editorial body of SIPR, the Freeman Spogili Institute, or Stanford University.