The U.S.’s Idea of Diplomacy With Ecuador Is a Multibillion-Dollar Loan Trap

On January 14, a U.S. government agency decided to pay off part of Ecuador’s debt to China so that the Latin American country could break ties with Chinese telecommunications firms. The U.S. International Development Finance Corporation (DFC), which is funded by the U.S. government, provided Ecuador with a loan of $2.8 billion. The DFC’s head, Adam Boehler, said that the large loan goes to Ecuador to “refinance predatory Chinese debt” and to strengthen Ecuador’s alliance with the United States. This move by the DFC is not economic as much as it is political. Ecuador’s development is secondary. What is primary is the U.S. desire to remove Chinese businesses and political influence from Latin America.

Boehler, a close friend of the Trump family, took over the DFC and has since driven a hard agenda in Latin America against China. The DFC was created by the U.S. Congress’ Better Utilization of Investments Leading to Development Act of 2018. Subsequent to this act and the formation of DFC, the U.S. State Department developed a project called América Crece, or “Growth in the Americas”; this project’s main goal is to use U.S. government funds—with private assistance—to edge out Chinese business interests from the American hemisphere. Ecuador is the most recent success of the U.S. policy.

Ecuador’s Debt and the 2021 Presidential Election

During the pandemic, the debt crisis in developing countries has become a serious problem. The total external debt held by developing countries is estimated to be $11 trillion. Ecuador’s share of this total debt is now roughly $52 billion. In mid-2020, Ecuador’s outgoing president Lenín Moreno tried to raise money through multilateral agencies and China to manage $17 billion of this debt, most of which would have to be paid to service the overall debt. Financial markets, unwilling to buy Ecuadorian bonds, balked; but Moreno offered to buy back some bonds in order to raise some capital. Collapsed oil prices that led to cuts in oil subsidies, a hefty loan from the International Monetary Fund at the cost of austerity measures, and mismanagement of the coronavirus pandemic battered Moreno’s legitimacy.

Ecuadorians will go to the polls on February 7 to elect a new president. Moreno is not running; his approval rating fell through the floor as a result of cascading crises, including evidence of grotesque personal corruption, that predate the pandemic. A September 2020 poll showed that the left-leaning candidate—Andrés Arauz—was ahead of a crowded field with close to 46 percent of the vote, which would allow him to win in the first round. Arauz is an economist who held two ministerial posts in the government of Rafael Correa from 2015 to 2017. He promises to reverse Moreno’s fealty to the United States and his subordination to the International Monetary Fund’s deflationary policies.

The U.S. bid to buy out part of Ecuador’s debt to China and to foreclose Ecuador’s ability to buy Chinese tech products comes during an election season. It appears almost certain that Moreno’s political orientation will be reversed by the next president. For that reason, the hasty deal cut between Quito and Washington will try to lock whoever wins the February 2021 election into a pro-U.S. and anti-China policy. This is a direct interference in the elections in Ecuador.

U.S. Policy Toward China in Latin America

The DFC’s Boehler is unlikely to survive into the administration of Joe Biden. Boehler is a personal friend of the Trump family and brought few actual skills to his job. Biden will likely replace Boehler with a Democratic Party insider. After the deal with Ecuador was announced, Boehler said that this deal and the DFC’s América Crece will not be undone by Biden’s team. “This is not a Democratic priority or a Republican priority,” Boehler said. “This is an American priority.” Biden’s team, Boehler said, sees the América Crece instruments as “innovative.”

Part of the assault on China by the U.S. government has been to paint its loans to Ecuador as predatory. These loans, the U.S. officials say, create a “debt trap” and, as Boehler said, they leave Ecuador at the mercy of a “single authoritarian country.” Evidence for either the “debt trap” or of Chinese “influence” on Ecuador is non-existent. In fact, over the last six months of 2020, Chinese banks have been willing to put loan payments on hold until 2022 (this includes a delay on repayment on the $474 million loan to China’s ExIM Bank and on the $417 million loan to the China Development Bank). Ecuador’s Finance Ministry says that—as for now—the plan is for repayment to start in March 2022 and to end by 2029. Lenín Moreno took to Twitter to announce these two delays. There were no aggressive measures taken by these two banks nor from any other Chinese financial entity.

Ecuador took on debt worth around $5 billion from Chinese banks to finance several major infrastructural projects, including the construction of hydroelectric dams. These projects began when oil prices were high. President Correa leveraged oil income to help the transition away from fossil fuels toward renewable energy. The collapse of oil prices, the pressure on the country from the oil giants (particularly Chevron), and the political chaos in the country damaged Ecuador’s ability to advance these projects. Chinese banks, over this period, have accommodated the difficulties faced by Ecuador’s government to finance these debts.

Yet, it is based on the very existence of these loans that the U.S. government has made sinister claims about Chinese influence on Ecuador. It is well worth pointing out that China only holds 10 percent of Ecuador’s total external debt, but it is this debt that has been the focus of attention. It allows the U.S. to prosecute its rivalry with China and at the same time camouflage the real source of indebtedness, namely the IMF loans and loans to Western banks; neither the IMF nor the Western banks have been willing to be as generous about their credits as the Chinese banks.

Conditions

Chinese banks lent money for the construction projects. These funds came with no conditions. The U.S. government money, on the other hand, came with substantial claims on the government of Ecuador’s policy orientation. Quito has had to sign up for Washington’s “Clean Network,” a U.S. State Department project to force countries to build telecommunications networks without a Chinese telecom provider involved in them; this particularly applies to the high-speed 5G networks. Ecuador preemptively joined the Clean Network in November 2020. This opened the door for the DFC loan to Ecuador.

The deal with Ecuador is not seen as a one-time arrangement. Boehler said that this “novel model” can be used by other countries to “eject” China from the hemisphere. If Arauz becomes the next president of Ecuador, he will face the challenge of this U.S.-imposed conflict against China as one of the first obstacles to a fresh start for his country. President Moreno and former president Trump have already begun to sabotage the possibility for Arauz to solve the immediate problems of his people.