‘Dollar Diplomacy’ Reborn: The Geopolitical Implications Of Chinese Foreign Direct Investment

Geordie Jeakins
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On August 15, 1934, the last remaining United States Marines departed Haiti, bringing an end to almost two decades of American occupation of the Caribbean country. This action represented the fulfilment of the ‘Good Neighbor Policy,’ announced by President Franklin Delano Roosevelt the year before, whereby the United States would respect the sovereignty of Latin American countries. The new policy was a radical shift in America’s attitude toward its southern neighbours. In the previous decades, the United States Marines had undertaken frequent military interventions in Latin America for a variety of reasons. In some cases, such as the invasions of Mexico, flexing American military muscle was considered necessary to restore stability to regions wracked by political infighting, revolution, or civil war. However, in most instances, American intervention was motivated by economic and commercial considerations.

For more than three decades, American actions and attitudes towards Latin America were governed by the doctrine of ‘Dollar Diplomacy,’ first introduced during the Taft administration. This foreign policy attempted to safeguard American interests by exerting its economic influence, often in the form of American-backed loans for modernization projects like railroad-building. In addition, American multinational corporations, often fruit companies, were given control over large portions of the local economy in exchange for providing financial support. When the national governments attempted to redress these imbalances or failed to pay back their loans, Washington intervened, frequently culminating in lengthy occupations.

‘Dollar Diplomacy’ thus represented the logical application of American economic clout for political ends. This type of foreign policy, despite being officially disavowed by President Roosevelt in 1934, continued to have some influence over American attitudes towards Latin America for decades, until security and ideological considerations took precedence during the Cold War. However, in the 21st century, ‘Dollar Diplomacy’ is making a comeback, though it is coming not from the economic power of the American Greenback, but from the Chinese Yuan.

Much like the United States a century ago, China is currently spending gargantuan amounts on foreign investments across the world. Although the specific objectives vary between cases, this ‘Yuan Diplomacy’ or ‘Renminbi Diplomacy’ has much the same motivation as its American predecessor: ensuring political influence through commercial activities. The Chinese Development Bank and Export-Import Bank are doling out loans and investments around the globe at a furious pace, increasing Chinese influence in the process. In most cases, Chinese loans come with the condition that the recipients buy Chinese-manufactured goods, use Chinese labour, or provide China with preferential access to the recipients’ commodity exports. In other cases, access to facilities come at the price of Chinese credit, such as in Djibouti, where China recently opened its first overseas military base. In still other cases, Chinese loans are used as a political lever to change a country’s official stance on issues like the South China Sea or recognition of Taiwan as an independent state.

This investment activity has important benefits for receiving countries. In many cash-strapped regions, Chinese funds represent the only significant foreign investment in their economies, allowing for crucial economic diversification. Many African, Asian, and Latin American countries afflicted by internal instability—instability that would scare away Western investment—have benefited from the inflow of Chinese credit. Additionally, Chinese money comes with few of the conditions that accompany loans from Western lenders like the IMF. As a result, countries are able to accept these funds without enacting politically unpopular austerity programs.

Nevertheless, there are real concerns about this process of ‘Yuan Diplomacy.’ For one, the sheer scale of Chinese loans could be dangerous for the fiscal solvency of recipient countries. Pakistan, for instance, is predicted to owe Beijing $19 billion USD by 2019, while the debt servicing alone is expected to account for roughly 0.5% to 1.0% of the country’s annual GDP. Because the terms of Chinese loans are far more politically palatable than the IMF structural adjustment programs, recipient countries are more likely to continue relying indefinitely on this source of credit. Without taking the necessary actions to increase revenues and decrease expenses—actions which IMF loans would require—these debts are likely to continue expanding, threatening a complete financial collapse if the Chinese credit ever dries up. In fact, some observers are concerned that this ‘Yuan Diplomacy’ will actually cause this sort of financial collapse in the future. Although Chinese accounting practices are purposely secretive, some have speculated that the rapid outward investment represents dangerous capital flight. Many Chinese are concerned that their country’s meteoric economic rise is unsustainable, and that they must diversify their assets overseas to survive a predicted collapse. Ironically, however, this capital flight may help create the exact conditions of this feared economic downturn, since tightening credit may cause a squeeze on the faltering economy.

For now, the benefits of Chinese investment, both from the perspective of officials in Beijing and in receiving countries, surpass any trepidation. However, it will be incumbent upon Chinese political leaders to take the necessary steps to transition to sustainable foreign investment in order to avoid a painful economic crash.