Debtbook Diplomacy

China's Strategic Leveraging of its Newfound Economic Influence and the Consequences for U.S. Foreign Policy

Policy Analysis Exercise, Harvard Kennedy School

Executive Summary

Over the past decade, China has extended hundreds of billions of dollars in loans to countries that often can’t afford to repay them. Through a process the authors have termed “debtbook diplomacy,” China has begun to leverage this accumulated debt to achieve its strategic aims.

Three primary strategic goals the authors believe China could target with this technique are: filling out a “String of Pearls” to solve its “Malacca Dilemma” and project power across vital South Asian trading routes; undermining and fracturing the U.S.-led regional coalition contesting Beijing’s South China Sea (SCS) claims; and enabling the People’s Liberation Army Navy (PLAN) to push through the “Second Island Chain” into the blue-water Pacific.

The goal of this report is to analyze the future of debtbook diplomacy: which countries are vulnerable to Chinese coercion; how U.S. strategic interests will be impacted; and how U.S. policymakers can mitigate the effects of this strategy.

This paper identifies 16 potential targets of China’s debtbook diplomacy, grouped into three primary categories based on the three strategic goals outlined above: Debtbook West/String of Pearls; Debtbook South/SCS Influence; and Debtbook East/Second Island Chain and Beyond.

For Debtbook West, Pakistan, Djibouti, Myanmar, and Sri Lanka are identified as priority concerns: countries that have already ceded either a key port or military base to China, are continuing to sink deeper into its debt trap, and where U.S. interests are at stake.

In the second category, Debtbook South, no single country constitutes an immediate primary concern, given a lack of individual diplomatic clout, favorable relations with U.S., and/or relatively stable debt situations. However, the cumulative effects of Chinese debt holdings in Cambodia, Laos and the Philippines may give China a proxy veto in ASEAN, depriving the U.S. of regional support to contest Chinese SCS claims as China challenges the legitimacy of the U.S.-led, rules-based international order.

Finally, in the third category, Debtbook East, the Compact of Free Association (COFA) states pose the most immediate challenge, with the expiration of Compact funding threatening to drive these countries into China’s orbit. This would threaten the unfettered basing access and right of strategic denial the U.S. has enjoyed since World War II, and help the Chinese navy extend its reach past the First Island Chain into the blue-water Pacific.

For more than a half-century, U.S. interests in Asia have been underpinned by an effective naval monopoly over the Strait of Malacca and other key regional trading routes, a united coalition of South Asian partners, and an unfettered and exclusive presence in the Second Island Chain to project power and contain China’s navy. Debtbook diplomacy may play an important role in China’s multifaceted campaign to erode these strategic advantages and shift the balance of power in Asia.

To help the U.S. and its allies offset these consequences, this report proposes three sets of U.S. government recommendations for targeting and streamlining investment, strengthening alliances, and managing debt burdens. Targeting and streamlining investment should include continued efforts to coordinate U.S. private-public partnerships overseas by consolidating the Overseas Private Investment Corporation and USAID’s Development Credit Authority into a single entity, to recruit allies into joint investment ventures, and to focus limited resources in areas of comparative advantage like digital infrastructure. To strengthen alliances, the U.S. should bolster India’s role as a regional leader and and revitalize Quad- the loose U.S.-India-Japan-Australia network of maritime Asian democratic powers- by clarifying its mission as a rules-based collective and enhancing economic and maritime security cooperation amongst its members. To manage debt burdens, the U.S. should consider leveraging tariff relief and support for the Asian Infrastructure Investment Bank (AIIB) as bargaining chips to entice China into becoming a more-responsible creditor—through initiatives like the Paris Club and G20’s Sustainable Financing Agenda—and provide support for debt assistance and best-practice facilities hosted by multilateral institutions like The World Bank.

Beyond these tactical steps, the U.S. will need to answer difficult strategic questions about the shifting regional balance of power, prioritizing its truly vital interests and coordinating its finite resources to meet the most pressing challenges posed by debtbook diplomacy.