25 October 2018
by SUBRATA MAJUMDER
China’s debt trap diplomacy is escalating trade colonialism as indebted nations cede control over land and resources
China’s Belt and Road Initiative (BRI) is feared to be a cobweb of debt trap for emerging economies. China woos small and weaker nations with infrastructure loans and when their debts are not paid, it captures their land and resources. There is little room for debt relief under the Chinese terms of development loan. So far, eight countries have fallen prey to the debt trap: Djibouti, Tajikistan, Kyrgyzstan, Laos, Maldives, Mongolia, Pakistan, and Montenegro, according to a study by the Centre for Global Development.
In addition, there are other weaker nations on their way to fall prey to the debt trap. They are Nepal, Bangladesh, and Myanmar. India is not party to the Belt and Road Initiative. Even then, it is not far from the ripple effect of Chinese debt trap. In 2017, Sri Lanka plunged into a debt trap, which led to handing over of its Hambantota Port to China. African nation Djibouti is tending to cede its control on a key port, which is linked to a Beijing-linked company. Malaysia’s newly-elected Prime Minister Mahathir Mohammad visited China to say ‘no’ for any further Chinese development loan. He said that Malaysia was cancelling the US $20 billion East Coast Rail Link project – a massive Belt and Road project. Tonga’s Prime Minister Akilis Pohiva said that Pacific Island nations should request China to wave the debts.
There is a real danger of clouding over the leaders of African and small nations in Southeast Asia, which accepted substantial development loans from China as a part of their participation in Belt and Road Initiative, to fall into the debt trap. When these leaders lose power, the successive governments plunged into huge debt and are stuck with the task of repayment. Indonesia is a case in point. The debt trap will push these nations in financial turmoil and deter financing their own development projects.
Chinese loans ushering debt trap is viewed as a surreptitious attempt to spread Chinese economic outreach in Southeast Asia. The growing burden of debt will open new scope for China to dominate the terms for enhancing trade and investment in the debt-ridden countries, which will eventually lead to Chinese economic colonialism in these countries. This will pose a strong challenge to India to expand trade and investment relations with ASEAN through new initiatives by the development of connectivity between Northeast and ASEAN.
Chinese Belt and Road initiative and ASEAN Master Plan for Connectivity (AMPC) have several commonalities to bring countries closer to one another. Nevertheless, they are not without concerns. Better connectivity between China and ASEAN will bolster the scope for China to enter ASEAN market and the growing debt burden of these nations will help it monopolise trade and investment, leaving less scope for India to enter this market.
Chinese debt trap means losing the sovereignty of ASEAN nations. Debts are turning into equity and the ownership finally goes to China. Besides losing trade opportunities, it will create security concerns as well. For example, with the transfer of the ownership of Sri Lanka’s Hambantota Port, China aggravated the security concern for India. The port is likely to be used for China’s military base.
The debt trap should be an additional concern for India to join RCEP (Regional Cooperation for Economic Partnership), the biggest trade block in the world. There is all possibility that RCEP will take a shape by this year-end, after failing two deadlines.
China is the biggest stakeholder in RCEP, which includes ASEAN 10 + 6 (China, Japan, Australia, South Korea, New Zealand, and India). At present, India has a trade deficit with RCEP. Given China’s predominance in RCEP, the major concern for India is that China’s trade colonisation will cause headwinds to India’s trade expansion in RCEP.
In 2017-18, RCEP accounted for 64.4 per cent of India’s global trade deficit. China was the main reason for the imbalance with RCEP. It alone accounted for 60.4 per cent of India’s trade imbalance with RCEP. The surge in debt burden will increase India’s vulnerability in the trade block. Instead of gaining, it would impart a reverse impact on India. It will peer for a major import market for China and its colonised partner-countries.
The spillover impact will prove a double whammy for India. In other words, China and its debt trapped nations will be the game changer in the trade block. Indian entrepreneurs fear that the debt-burdened nations would open more opportunities to China to reap the benefits of tariff concessions through back door. This is because India offers less coverage of traded items for tariff concessions to China.
Under the negotiations for RCEP, India offered three-tier tariff concessions. India offered elimination of tariff on 80 per cent traded goods with ASEAN countries and 62.5 per cent to Japan and South Korea as it has FTAs with these countries. To China, Australia, and New Zealand, India offered elimination of tariffs on 42.5 per cent traded goods, since it does not have FTAs with these countries.
It was perceived that the three-tier tariff structure would restrict Chinese exports to India under the trade block. But a closer view says the situation will change with the increasing number of Chinese debt-trapped nations. The debt-burdened nations will be forced to lay red carpet to China, after losing their bargaining power and help China to make backdoor entry to India. Eventually, these nations will witness a gushing flow of Chinese investment in their countries to enter the Indian market.
India will be the biggest consuming market in the trade block. This means that even though sensitive goods from China, such as electronics, may be excluded from tariff concessions under RCEP negotiation, they will find a new passage to enter India through debt-trapped nations. This will cause damage to the domestic industry and the country would witness an import surge of Chinese goods.