Strategic default: How to roll back China’s weaponization of capital investment

Originally published by the Washington Examiner:

China’s trade war with the rest of the world has unfolded through speedy expansion of a network of maritime choke points and deep water ports worldwide. Tariffs and unfair subsidies are part of that trade war, but the big story is about control of international shipping.

The United States, as the most powerful guarantor of freedom of the seas, tends to view China’s network of imperial maritime outposts as a Navy problem. But the Navy, especially in the Indian and Pacific oceans, is stretched dangerously thin, even with allies and partners.

And it isn’t just a naval problem, either. China’s weapon of first resort is debt-trap diplomacy and weaponization of capital. The strategy is to build huge seaport, airport, and land transport networks along strategic trade routes from Africa to South Asia to the Americas. The key is to make poor countries pay Chinese firms to build economically unfeasible infrastructure projects through high-interest loans from communist Chinese banks. When the countries can’t keep their crippling payments, Beijing takes physical control of the infrastructure.

This conquest through finance and corruption requires new strategic thinking for the U.S. and its allies to devise low-cost, high-impact solutions. One idea is to help small debtors simultaneously default under a U.S.-led safety net, leaving China to hold the bag.

China’s debt trap diplomacy and weaponized capital strategy has come full-circle in a major shipping choke point that we don’t think much about: Sri Lanka, an island nation off the southern tip of India. Most of the world’s shipping between Africa and the Middle East to East Asia traverses Sri Lankan waters.

While the U.S. pumped $2 billion in cash to help the Sri Lankan people fight diseases and strengthen institutions, the Chinese pulled cash out of Sri Lanka to pay Chinese companies to build the massive Hambantota deep-water port within eyesight of one of the world’s busiest sea lanes. When Sri Lanka couldn’t pay, the Chinese took physical possession of the port.

A chain reaction of political, constitutional, and economic crises immobilized the government, plunged the value of the local currency, and scared off foreign investors. Sri Lanka’s president fired the prime minister and named a successor; the country’s judiciary intervened to prevent either the fired prime minister or his successor from exercising any power until the supreme court decided whether the president had the right to dissolve parliament at all.

Solving the political impasse is one thing. Dealing with the underlying problem is quite another, as the newly installed American Ambassador Alaina Teplitz said this week in her first major interview with the Sri Lankan press. The impasse “is narrowing the array of options Sri Lanka will have going forward.”

A snap plebiscite to elect a new parliament can shorten that political crisis and improve the country’s options. “President Donald Trump has been very focused on fair and reciprocal trade” for “mutual benefit,” Teplitz said. “I don’t think that is bad advice for any country to consider.” Chinese debt-trap diplomacy and weaponization of capital are not fair or reciprocal trade. Sri Lanka might consider working with the U.S., Japan, India, and Europe to enable the country to default on its corrupted obligations to Beijing, without further damaging its economy.

A massive, sudden, coordinated default by those countries would cause a huge spillover effect within China’s Communist Party and the semi-private institutions that follow the party’s lead. Together, the small debtor countries and large democratic trading powers can bring China’s trade war to heel and hasten the end of Beijing’s weaponization of capital.

J. Michael Waller is vice president for government affairs at the Center for Security Policy. Follow him @JMichaelWaller.