By Deborah Brautigam and Meg Rithmire at The Atlantic, source here: https://www.theatlantic.com/international/archive/2021/02/china-debt-trap-diplomacy/617953/

The narrative wrongfully portrays both Beijing and the developing countries it deals with.

China, we are told, inveigles poorer countries into taking out loan after loan to build expensive infrastructure that they can’t afford and that will yield few benefits, all with the end goal of Beijing eventually taking control of these assets from its struggling borrowers. As states around the world pile on debt to combat the coronavirus pandemic and bolster flagging economies, fears of such possible seizures have only amplified.

Seen this way, China’s internationalization—as laid out in programs such as the Belt and Road Initiative—is not simply a pursuit of geopolitical influence but also, in some tellings, a weapon. Once a country is weighed down by Chinese loans, like a hapless gambler who borrows from the Mafia, it is Beijing’s puppet and in danger of losing a limb.

The prime example of this is the Sri Lankan port of Hambantota. As the story goes, Beijing pushed Sri Lanka into borrowing money from Chinese banks to pay for the project, which had no prospect of commercial success. Onerous terms and feeble revenues eventually pushed Sri Lanka into default, at which point Beijing demanded the port as collateral, forcing the Sri Lankan government to surrender control to a Chinese firm.

The Trump administration pointed to Hambantota to warn of China’s strategic use of debt: In 2018, former Vice President Mike Pence called it “debt-trap diplomacy”—a phrase he used through the last days of the administration—and evidence of China’s military ambitions. Last year, erstwhile Attorney General William Barr raised the case to argue that Beijing is “loading poor countries up with debt, refusing to renegotiate terms, and then taking control of the infrastructure itself.”

As Michael Ondaatje, one of Sri Lanka’s greatest chroniclers, once said, “In Sri Lanka a well-told lie is worth a thousand facts.” And the debt-trap narrative is just that: a lie, and a powerful one.

Our research shows that Chinese banks are willing to restructure the terms of existing loans and have never actually seized an asset from any country, much less the port of Hambantota. A Chinese company’s acquisition of a majority stake in the port was a cautionary tale, but it’s not the one we’ve often heard. With a new administration in Washington, the truth about the widely, perhaps willfully, misunderstood case of Hambantota Port is long overdue.

The city of Hambantota lies at the southern tip of Sri Lanka, a few nautical miles from the busy Indian Ocean shipping lane that accounts for nearly all of the ocean-borne trade between Asia and Europe, and more than 80 percent of ocean-borne global trade. When a Chinese firm snagged the contract to build the city’s port, it was stepping into an ongoing Western competition, though one the United States had largely abandoned.

It was the Canadian International Development Agency—not China—that financed Canada’s leading engineering and construction firm, SNC-Lavalin, to carry out a feasibility study for the port. We obtained more than 1,000 pages of documents detailing this effort through a Freedom of Information Act request. The study, concluded in 2003, confirmed that building the port at Hambantota was feasible, and supporting documents show that the Canadians’ greatest fear was losing the project to European competitors. SNC-Lavalin recommended that it be undertaken through a joint-venture agreement between the Sri Lanka Ports Authority (SLPA) and a “private consortium” on a build-own-operate-transfer basis, a type of project in which a single company receives a contract to undertake all the steps required to get such a port up and running, and then gets to operate it when it is.

The Canadian project failed to move forward, mostly because of the vicissitudes of Sri Lankan politics. But the plan to build a port in Hambantota gained traction during the rule of the Rajapaksas—Mahinda Rajapaksa, who served as president from 2005 through 2015, and his brother Gotabaya, the current president and former minister of defense—who grew up in Hambantota. They promised to bring big ships to the region, a call that gained urgency after the devastating 2004 tsunami pulverized Sri Lanka’s coast and the local economy.

We reviewed a second feasibility report, produced in 2006 by the Danish engineering firm Ramboll, that made similar recommendations to the plans put forward by SNC-Lavalin, arguing that an initial phase of the project should allow for the transport of non-containerized cargo—oil, cars, grain—to start bringing in revenue, before expanding the port to be able to handle the traffic and storage of traditional containers. By then, the port in the capital city of Colombo, a hundred miles away and consistently one of the world’s busiest, had just expanded and was already pushing capacity. The Colombo port, however, was smack in the middle of the city, while Hambantota had a hinterland, meaning it offered greater potential for expansion and development.

The Canadian project failed to move forward, mostly because of the vicissitudes of Sri Lankan politics. But the plan to build a port in Hambantota gained traction during the rule of the Rajapaksas—Mahinda Rajapaksa, who served as president from 2005 through 2015, and his brother Gotabaya, the current president and former minister of defense—who grew up in Hambantota. They promised to bring big ships to the region, a call that gained urgency after the devastating 2004 tsunami pulverized Sri Lanka’s coast and the local economy.

We reviewed a second feasibility report, produced in 2006 by the Danish engineering firm Ramboll, that made similar recommendations to the plans put forward by SNC-Lavalin, arguing that an initial phase of the project should allow for the transport of non-containerized cargo—oil, cars, grain—to start bringing in revenue, before expanding the port to be able to handle the traffic and storage of traditional containers. By then, the port in the capital city of Colombo, a hundred miles away and consistently one of the world’s busiest, had just expanded and was already pushing capacity. The Colombo port, however, was smack in the middle of the city, while Hambantota had a hinterland, meaning it offered greater potential for expansion and development.

The Canadian project failed to move forward, mostly because of the vicissitudes of Sri Lankan politics. But the plan to build a port in Hambantota gained traction during the rule of the Rajapaksas—Mahinda Rajapaksa, who served as president from 2005 through 2015, and his brother Gotabaya, the current president and former minister of defense—who grew up in Hambantota. They promised to bring big ships to the region, a call that gained urgency after the devastating 2004 tsunami pulverized Sri Lanka’s coast and the local economy.

Before the port episode, “Sri Lanka could sink into the Indian Ocean and most of the Western world wouldn’t notice,” Subhashini Abeysinghe, research director at Verité Research, an independent Colombo-based think tank, told us. Suddenly, the island nation featured prominently in foreign-policy speeches in Washington. Pence voiced worry that Hambantota could become a “forward military base” for China.

Yet Hambantota’s location is strategic only from a business perspective: The port is cut into the coast to avoid the Indian Ocean’s heavy swells, and its narrow channel allows only one ship to enter or exit at a time, typically with the aid of a tugboat. In the event of a military conflict, naval vessels stationed there would be proverbial fish in a barrel.

The notion of “debt-trap diplomacy” casts China as a conniving creditor and countries such as Sri Lanka as its credulous victims. On a closer look, however, the situation is far more complex. China’s march outward, like its domestic development, is probing and experimental, a learning process marked by frequent adjustment. After the construction of the port in Hambantota, for example, Chinese firms and banks learned that strongmen fall and that they’d better have strategies for dealing with political risk. They’re now developing these strategies, getting better at discerning business opportunities and withdrawing where they know they can’t win. Still, American leaders and thinkers from both sides of the aisle give speeches about China’s “modern-day colonialism.”

Over the past 20 years, Chinese firms have learned a lot about how to play in an international construction business that remains dominated by Europe: Whereas China has 27 firms among the top 100 global contractors, up from nine in 2000, Europe has 37, down from 41. The U.S. has seven, compared to 19 two decades ago.

Chinese firms are not the only companies to benefit from Chinese-financed projects. Perhaps no country was more alarmed by Hambantota than India, the regional giant that several times rebuffed Sri Lanka’s appeals for investment, aid, and equity partnerships. Yet an Indian-led business, Meghraj, joined the U.K.-based engineering firm Atkins Limited in an international consortium to write the long-term plan for Hambantota Port and for the development of a new business zone. The French firms Bolloré and CMA-CGM have partnered with China Merchants and China Harbor in port developments in Nigeria, Cameroon, and elsewhere.

The other side of the debt-trap myth involves debtor countries. Places such as Sri Lanka—or, for that matter, Kenya, Zambia, or Malaysia—are no stranger to geopolitical games. And they’re irked by American views that they’ve been so easily swindled. As one Malaysian politician remarked to us, speaking on condition of anonymity to discuss how Chinese finance featured in that country’s political drama, “Can’t the U.S. State Department tell the difference between campaign rhetoric that our opponents are slaves to China and actually being slaves to China?”

The events that led to a Chinese company’s acquisition of a majority stake in a Sri Lankan port reveal a great deal about how our world is changing. China and other countries are becoming more sophisticated in bargaining with one another. And it would be a shame if the U.S. fails to learn alongside them.

Deborah Brautigam is Bernard L. Schwartz Professor of International Political Economy at the School of Advanced International Studies at Johns Hopkins University

Meg Rithmire is F. Warren McFarlan Associate Professor at Harvard Business School.

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