China’s strategic influence is growing in the Americas

Last year Panama became the second Central American country to establish diplomatic ties with China. This is the latest example of how Chinese investment in the Latin American and Caribbean (LAC) region has afforded Beijing closer political ties. As the US reduces its influence south of the border, China’s economic ventures will pay dividends at the expense of its rival.

China’s Central American strategy

China’s advancement in Central America dates back to 2007, when Costa Rica became the first Central American country to establish diplomatic relations with Beijing. Since then, economic relations between both countries have developed, helping to promote China’s regional brand. Economically, China has presented itself as an attractive partner. In 2008, China purchased Costa Rican bonds in excess of $300m, offered the country aid worth $130m, and funded the $105m construction of the Estadio Nacional. Meanwhile, on March 2 Chinese state media claimed that China will finance the expansion of a highway connecting Costa Rica and the Caribbean.

Chinese activity in Costa Rica is not limited to finance. In terms of culture, students at the University of Costa Rica can study Chinese and enrol in Chinese cultural programmes. The Chinese government has also promoted the development of Chinatown in San José, Costa Rica’s capital.

Costa Rica has set an example to follow

Through the relationship with Costa Rica, China’s influence across the region has strengthened, encouraging other countries to pursue closer relations with the Asian giant. In recent years, Chinese investment in Panama has grown substantially. China is the second biggest user of the Panama Canal, which is crucial to its trade routes.

Significantly, China’s economic potency in Panama has generated close political relations between both countries. Last June, Panama formally established diplomatic relations with Beijing. Last November, Chinese President Xi Jinping and Panamanian President Juan Carlos Varela discussed the prospect of a free-trade agreement between China and Panama. After that meeting, Zhao Bentang, head of China’s foreign ministry Latin America division, declared Beijing would ‘assist Panama’s economic and social development to the best of our capacity.’ China’s inroads in Central America are not limited to Costa Rica and Panama.  In other ventures, China is financing a 170 mile Nicaraguan canal which will connect the Caribbean Sea with the Pacific Ocean. Meanwhile, in Honduras Chinese firms have shown interest in investing in hydroelectric projects.

China, Taiwan, and Central America

Given that Central America does not constitute a large market, economic interests alone do not explain China’s regional engagement. Rather, the geopolitical significance and geographic location of Central America underpin China’s financial overtures to countries in the region.

One cannot examine China’s interests in Central America without taking cognizance of its conflict with Taiwan. China sees Taiwan as a breakaway province. It does not recognise Taiwan’s sovereignty and believes that one day Taiwan will be reunited with the mainland.

Significantly, Central America represents the most concentrated global region of support for Taiwan. Out of Taiwan’s twenty diplomatic allies, ten are located in Central America and the Caribbean. Taiwan’s presence in Central America has become more conspicuous amid China’s growing interest in the region. Last year, Taiwan President Tsai Ing-wen toured Central America to reinvigorate political ties.

Beijing’s ‘One China’ policy is central to China’s strategy in Central America. The maintenance of diplomatic relations with Taiwan by these ten countries effectively precludes them from establishing political ties with China. For Costa Rica and Panama, cutting political ties with Taiwan was, thus, an essential prerequisite for establishing diplomatic relations with Beijing.

China believes it can persuade Central American countries to abandon support for Taiwan through economic incentives. This policy, to erode Taiwan’s international legitimacy and place it in further isolation, is central to China’s political and economic strategy here.

The wider region

China’s Central American interests coincide with its growing influence across Latin America. Resulting from its ‘Go Out Policy’ developed in the late 1990s, China has become a pivotal economic partner for Latin American countries through access to natural resources, foreign markets, and the diversification of Chinese firms.

China’s interest in Latin America, like Central America, is both economic and political. From 2000 to 2012, China-Latin America trade rose from $10bn to $270bn. For Brazil, Chile, and Peru, China has replaced the US as their most important trading partner. Chinese banks have been a significant source of regional finance. In exchange for oil, China has loaned in excess of $65bn and $21bn to Venezuela and Brazil respectively. China is the region’s biggest creditor and has eroded Washington’s financial power in times of economic hardship in the region.

Latin America forms part of China’s global Belt and Road Initiative (BRI). On January 22, Santiago hosted the second meeting between China and LAC countries in a bid to strengthen economic and political ties. Speaking to representatives of 33 countries, Chinese Foreign Minister Wang Yi confirmed that the region is ideal for China’s BRI plans.

Washington’s loss is Beijing’s gain

China’s economic and political gains across the LAC region contrast with North America’s reduced influence. Although the US remains the biggest economic player in Latin America, the 2008 global recession negatively affected its regional commitments. Between 2000 and 2010, the US’ share of Latin American trade fell 14%. More recently, President Donald Trump’s decision to pull out of the Trans-Pacific Partnership (TPP) and introduce import tariffs on steel and aluminium has further damaged trade relations with the South. In contrast, embracing free trade, multilateralism and globalisation, China has pledged to increase trade and investment with Latin America.

China’s ventures south of the Rio Grande and its increasing global influence appear to have escalated tensions with the US. Speaking ahead of his visit to Latin America in February, former Secretary of State Rex Tillerson warned against far-away powers ‘that do not reflect the fundamental values shared in this region’. Moreover, Washington views Beijing’s economic policies in Latin America as China’s attempt  to ‘challenge American power’. From Beijing’s perspective, Washington’s decision last June to sell arms to Taiwan indicate hostility to one of China’s core global principles.

Overall, through establishing successful economic and diplomatic relations with countries in Latin America, Beijing seeks to portray China as a beneficial and reliable partner and persuade other countries to strengthen diplomatic ties. Considering China’s economic commitment to the region over the next decade, other Central American countries will likely abandon ties with Taiwan in return for Chinese aid and investment. Furthermore, China’s growing regional influence coincides with growing tension between Washington and Beijing. As the world’s two leading powers face a potential trade war, the LAC could become a battleground as China continues to enhance its global economic and political image.

This article first ran on Global Risk Insights, and was written by Niall Walsh.