The US Rivalry With China Gets Closer to Home

By Allison Fedirka


Summary

Central America and the Caribbean have found themselves in an exceptional position lately. Though these subregions don’t typically figure into global power dynamics, an intensifying trade war between China and the United States has two of the world’s leading powers vying for their partnership. And Beijing has already turned some heads in the area. A growing number of steadfast U.S. allies have turned toward China by breaking with Taiwan. In June 2017, Panama rescinded its recognition of Taiwan’s independence and adopted a “One China” policy. The Dominican Republic followed suit this May, as did El Salvador in August. In response, the U.S. recalled its chief diplomats serving in the three countries Sept. 7 for consultations. Later that month, U.S. Vice President Mike Pence warned Central America of the dangers of getting too close to China.

That China is coming into Latin America and buying up natural resources is well-known. But the extent of China’s influence and its potential threat in these areas remains in question. This Deep Dive looks at how the U.S. and China stack up against each other in Central America and the Caribbean and at why Beijing’s recent advances have gotten Washington’s attention.
 
China’s History in Central America and the Caribbean
Compared with its presence in other parts of the world, China’s strategic engagement with Central America and the Caribbean is a relatively recent phenomenon. Beijing started establishing diplomatic ties with many countries in the Americas only during the 1970s and 1980s, after concentrating on domestic affairs for the first few decades after the Chinese Revolution to build its economy and cement its political system. In the 1990s, China’s trade with Central America and the Caribbean increased, and since then Beijing has solidified its economic and political influence there. Even so, it didn’t formulate a coherent policy for dealing with the subregions until 2008 – a telling omission considering how much Beijing likes publishing policy papers.

China’s initial activities in the Americas focused on exploiting loosely shared and complementary interests. The government’s 2008 policy paper highlighted the region’s untapped natural resources, a particular draw for China given the ravenous demand for commodities its large population and developing economy created. As emerging markets, states in Latin America (including Central America) and the Caribbean boasted much higher growth potential than did countries with developed economies, and their need for development translated to investment opportunities for Chinese companies.

But Beijing’s interest in the subregions wasn’t purely economic. The 2008 policy also emphasized that its partners in Central America and the Caribbean should abide by the One China principle by recognizing Taiwan as a part of China, rather than as a sovereign state, and treating it accordingly. The text describes the One China principle as the “political basis for the establishment and development of relations between China and Latin American and Caribbean countries and regional organizations.” Once the countries and organizations had satisfied that requirement, and once China had established the political ties necessary to support its economic endeavors there, they could move on to strengthening their cooperation in defense and security.
 
 
China has since updated and elaborated on its regional policy, but the foundations are largely unchanged. In 2014, a second policy paper on Latin America and the Caribbean revealed that Beijing had made the political inroads it was after and affirmed that its main focus in the region was still economic. Chinese President Xi Jinping debuted a new cooperation framework for them in July of that year, dubbed “1+3+6.” The name referred to Beijing’s strategy for the region, the China-CELAC Cooperation Plan (represented by the number one), along with the three economic drivers underlying the collaboration – trade, investment and financial cooperation – and the six industries prioritized for funding and attention. (Those industries – energy and resources, infrastructure construction, agriculture, manufacturing, scientific and technological innovation, and information technology – run the gamut of China’s strategic interests.) Most recently, in September of this year, China unveiled four guiding principles specifically intended to enhance its ties with Central American and Caribbean states. Chinese State Councilor and Foreign Minister Wang Yi reiterated his country’s special interest in the area, calling for renewed cooperation in education, technology, tourism, media and sanitation. He also took the opportunity to encourage local states to stand together against unilateralism and protectionism, a not-so-subtle dig at the U.S.
 
How the U.S. and China Stack Up 
Yet despite China’s diplomatic and financial investment in Central America and the Caribbean – and its efforts, verbal and physical, to undermine U.S. influence in the subregions – the United States still holds more sway there. The U.S., in fact, holds its own in the three economic drivers highlighted in Xi’s 1+3+6 policy.
 

Trade
We’ll start with trade, but first a word on terminology. Reporting on Central America and the Caribbean frequently lumps them with Latin America into a single category, consisting of 33 countries that include states with large populations and economies, such as Brazil and Mexico, alongside many small nations, some of them islands. The result paints a misleading picture. Consider, for instance, that the Dominican Republic, Panama and Guatemala – the three largest economies in Central America and the Caribbean – have a combined gross domestic product equivalent to just one-fifth of Mexico’s, and one-tenth that of Brazil. For our purposes, we will focus on Central America and the Caribbean, exclusive of the North and South American countries that often get thrown in under the banner of Latin America. The corresponding trade figures for these countries will be commensurately modest, given their size.

For the countries of Central America and the Caribbean – developing economies that by and large rely on exports of raw materials, agricultural products and basic manufactured goods – the United States is by far the most important trade partner. It supplied approximately one-third of the $30.77 billion worth of goods regional trade bloc the Caribbean Community, or Caricom, imported in 2017 and purchased an equivalent share of its $16.8 billion in exports. China, on the other hand, supplied only 6 percent of Caricom’s imports, though it is the bloc’s third-largest source for them. (Because of the number of countries in the subregions, the most efficient way to measure trade is to look at trade blocs.) The situation was much the same for the Central American Integration System last year: Of the bloc’s $78.8 billion in imports, the U.S. accounted for just over 43 percent and bought 48 percent of its $51.58 billion worth of exports. China, at a distant second place, furnished just 18 percent of the bloc’s imports and purchased less than 1 percent of its exports.

The U.S. has several advantages over China in the area, and it can use these strengths to maintain its dominance in the Central American and Caribbean markets. Its proximity to these subregions, for example, helps keep logistics costs down and supports just-in-time delivery models. By contrast, the distance separating China from the area means that imports, whether food or manufactured goods, will have a heftier price tag than they would in the U.S. In addition, American consumers can more easily purchase Caribbean or Central American goods because the U.S. has more free trade agreements with regional countries relative to China – something Beijing hopes to change. Finally, Central American and Caribbean countries produce and export many of the same low-cost manufactured goods that Chinese companies make at home. China’s push toward high-tech manufacturing is still a work in progress, and much of what it produces would have to compete with imports from the Caribbean or Central America. Since trade in part determines Beijing’s ability to influence events in the subregions, China’s reach there is limited compared with that of the U.S.
 
Investment
Similarly, for all the talk of Chinese firms buying up resources in Latin America, the U.S. is still outpacing China in foreign direct investment in the Caribbean and Central America. The importance of FDI to the area cannot be overstated. Most Central American and Caribbean countries depend on outside funding to spur and sustain economic development. And though sources of FDI in Latin America vary from subregion to subregion, the U.S. leads the pack in Central America and the Caribbean. It invested more in Central America and in the Dominican Republic in 2017 than any other country, increasing its share by 9 points over the previous four-year average. Other Latin American countries were the second-largest FDI contributor to the subregion, followed by European states. China’s contributions trailed so distantly that they were included only under the “other” category.
 
China has, of course, been investing heavily in nearby energy and transportation projects, but mainly in South America, not in Central America or the Caribbean. It also led investments in the region when measured by the total value of mergers and acquisitions. Once again, though, South America (namely Brazil) accounted for the vast majority of that activity. Chinese investments in Central America and the Caribbean begin to register as significant only when measured over the course of several years.
 
 
The reason foreign investment in the subregions attracts so much attention worldwide is that FDI there is growing, while FDI in Latin America overall is declining. In 2017, FDI in Central America jumped 4.4 percent year-on-year to hit $13.08 billion, and in the Caribbean, it increased by a whopping 22 percent to a total $6.07 billion. The rest of Latin America, meanwhile, experienced a 3.6 percent contraction year-on-year in foreign investment, marking the third year in a row that FDI fell. Most of the FDI growth in Central America and the Caribbean comes from increased investment from U.S. and European firms in manufacturing and services following the collapse of the commodities market in 2014. The trend does have exceptions, however; most of Jamaica’s FDI last year came from China and went to tourism and mining.
 
 
Finance
Like investment, finance is critical to Central American and Caribbean states that otherwise would struggle to pay for major development projects. China started actively financing projects in the broader region in 2005, primarily through the Chinese Development Bank and China Eximbank. Since then, Trinidad and Tobago, Jamaica and Costa Rica have been the leading recipients of Chinese funding in the Caribbean and Central America (though South America has been the main focus of Bejing’s attention and assistance). Xi even set aside $3 billion in 2013 to fund projects in nine Caribbean states, including hospitals, transportation infrastructure and an industrial park.

Chinese financing appeals to Central American and Caribbean states for a couple of reasons. For one thing, China isn’t afraid of lending to risky borrowers that have trouble accessing international capital markets. For another, its loans, albeit typically made at slightly higher interest rates, don’t come with the policy conditions institutions such as the International Monetary Fund frequently attach to their finance deals. China will even drop its interest rates under the right circumstances, as it has recently promised to do for Cuba with its offer of interest-free, concessional financing for infrastructure projects in the country. These factors help explain why even with a decline in lending over the past few years, China’s total financing in Latin America since 2005 outstrips that of the World Bank, the Inter-American Development Bank and the Andean Development Corporation for the same period.
 
Why All the Fuss?
All told, the U.S. seems to have little cause to worry about China’s activities in Central America and the Caribbean. In trade and investment, after all, it still leads Beijing comfortably. And even in finance, China does not have a decisive edge. But Washington clearly finds Beijing’s advances and promises of increased cooperation in the area unsettling. That’s because of where and how China is upping its involvement.

Since gaining independence, the U.S. has worked to keep foreign powers away from the Americas. It adopted the Monroe Doctrine in 1823 to discourage more European colonization nearby and added the Roosevelt Corollary some 80 years later to deter European states from seizing or intervening in South American countries to settle debts with them. In the intervening years, the U.S. went to war with Spain, stripping it of most of its remaining territory in the Western Hemisphere. With Spain out of the picture, a modern navy at its disposal and much of the rest of the continent in disarray, the United States emerged as the uncontested power in North America, a status it has enjoyed ever since.

Washington rarely encounters outside powers vying for influence in its near abroad. When it does, though, its response is strong and swift. (Think: Cuban Missile Crisis and the Bay of Pigs.) China’s growing presence in Central America and the Caribbean is close to setting off the alarm, reminding Washington perhaps too vividly of the Soviet Union’s attempts to chip away at U.S. influence in the area during the Cold War. Beijing may not have the economic clout with these subregions that Washington does, but the mere presence of a rival in the area is something the United States won’t tolerate.

Furthermore, the kinds of projects China targets in Central America and the Caribbean have raised hackles in the U.S. What Beijing’s investments in the area lack in scale, they make up for in strategy. The most illustrative example of this tactic is Panama. The Chinese government is positioning itself to secure land holdings at both ends of the Panama Canal, a critical artery for facilitating and expediting maritime trade. After Panama rejected its proposal to build an embassy on the Amador Peninsula, near the mouth of the canal, Beijing struck out to find the next-best location. It is also trying to build a cruise port near the strategic waterway and considering constructing oil facilities off Panama’s Pacific coast. And on the Atlantic side of the canal, Chinese companies are helping to fund electricity projects and to get a free trade zone off the ground in Colon.

These plans don’t sit well with Washington. The U.S. has been protective of the Panama Canal ever since its construction, serving as the de facto guarantor of all that passes through it. It took Washington until 1977 to agree to turn the canal over to Panama and another 20 years to actually relinquish it. Under the terms of the canal neutrality deal, moreover, the United States can intervene in Panama if it determines that the waterway’s security is at risk. China’s interest in the canal doubtless has put that portion of the agreement front and center in the minds of Panama’s leaders, who must walk a fine line to reassure Washington without jeopardizing their country’s ties to Beijing.

Elsewhere in the area, China has plenty of other irons in the fire. For example, it is heavily invested in building ports and maritime facilities, such as La Union, a commercial port in El Salvador. Its participation in the project has ignited debate over whether China could eventually use the port for military purposes, much as it has done with the ports it helped finance in the Indian Ocean and along the Horn of Africa. Beyond maritime infrastructure, Beijing has its sights set on energy opportunities in the region, expanding its presence in Trinidad and Tobago’s upstream oil refining and liquefied natural gas operations. The two islands have been eyeing China as a possible replacement for the U.S., which has decreased its energy imports from Trinidad and Tobago as its domestic oil and natural gas industry has become more self-sufficient. China’s growing involvement in the area’s energy resources could enable it to help provide oil and natural gas to Central American and Caribbean countries in desperate need of an affordable supply line. Many of China’s projects in the subregions serve the needs of the host countries in some way, a characteristic that makes them all the more valuable to the target states.

Aware of China’s encroachment in the Caribbean and Central America, Washington has taken steps to try to stop it. The U.S. Congress has introduced legislation to allow the State Department to downgrade, suspend or alter U.S. assistance to any government that revokes its recognition of Taiwan’s independence. The measure would give countries in Central America and the Caribbean that still recognize Taiwan a reason to think twice about welcoming China with open arms, since many of them still depend on the U.S. for economic and security aid. In addition, Congress also recently passed the Better Utilization of Investments Leading to Development Act in a bid to keep up with China’s development lending around the world. The bill proposed measures to modernize and streamline U.S. lending procedures for energy and infrastructure projects.

The response from Central American and Caribbean countries has been mixed. States like Panama and Costa Rica are bearing their commercial and security ties with the U.S. very much in mind and working to stay on good terms with Washington. El Salvador is divided on the issue: Some groups see promise in partnering with China, while others think the move would sell out their country by setting it up to fall into another Chinese debt trap. Other states are trying to turn the U.S.-China rivalry to their advantage. In September, the Honduran president invoked Beijing and its burgeoning interest in his country and in the same breath bemoaned Washington’s policies toward Central America, including changes to temporary immigration protections and funding cuts.
 
Another Weapon in China’s Arsenal
Therein lies the beauty of the Caribbean and Central America, from China’s perspective: The subregions give Beijing yet another way to gall Washington as their trade war wears on. China can’t go dollar-for-dollar with the United States in tariffs, and its domestic economic considerations limit the array of tools it can use to counter the U.S. But its activities in the regions surrounding the U.S. give it a bargaining chip it can use with Washington. To that end, it will keep tailoring its activities in the area to best ruffle the U.S., rather than trying in earnest to eclipse the country’s economic presence in Central America or the Caribbean.

Likewise, the local states understand that the U.S. is in no danger of losing its sway with them. Still, the U.S. now finds itself in the unusual position of needing to devote more resources to Central America and the Caribbean. And where it might once have resorted to military measures to get the job done, today Washington prefers economic interventions to exert and project its power. To keep China from muscling in on its turf in Central America and the Caribbean, the U.S. may have to reach deep into its pockets.


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