China continues to pull off big commercial and diplomatic coups in the US’ direct neighbourhood — this time with Ecuador, whose government is so closely aligned with the US that it recently asked Washington to directly intervene in its drug wars.
Yesterday (May 11), Ecuador became the latest in a series of Latin American countries to sign a free trade agreement with China. Beijing has already signed deals with Chile, Peru and Costa Rica, and is negotiating future agreements with at least five other Latin American states, including Uruguay, Honduras and El Salvador. As I reported last week, it is also taking advantage of the US’ near-shoring strategy by increasing its presence in Mexico.
The latest deal was signed by Ecuador’s Minister of Trade, Production, Investment and Fisheries, Julio Prado, and Chinese’s Trade Minister, Wan Wentao, after roughly a year of negotiations. The event was also attended by Ecuador’s embattled President Guillermo Lasso whose government is closely aligned with US, Ecuador’s largest trading partner, on most issues, particularly those pertaining to security.
But China is Ecuador’s second largest trading partner as well as its largest bilateral creditor and a major investor and participant in its energy and infrastructure sectors. In 2022, trade between the two countries witnessed double-digit growth for the second year in a row, with bilateral trade reaching $13.1 billion, up 19.7% year on year. Once the FTA comes into effect, as much as 90% of the goods traded between China and Ecuador will be exempted from tariffs. To protect Ecuadorian manufacturers, they will not include Chinese textiles and clothing, school shoes, flat ceramics, tires, furniture, sugar, rice , milk, potatoes and corn.
“This is an opportunity to further expand cooperation,” Wang Wentao said via video conference.
Beijing has been Ecuador’s main source of external finance for over a decade, a trend that dates back to former President Rafael Correa’s deepening of ties with China during his time in office (2007-17) as well as Ecuador’s virtual exclusion from Western sovereign credit markets in 2008 after Correa’s government defaulted on sovereign bonds deemed to be riddled with irregularities. Beijing was happy to fill the gap. According to the FT, Ecuador owes China around US$18 billion.
The economic partnership between the two countries intensified after they signed a memorandum of understanding in 2018, explained the Chinese Ambassador to Ecuador, Chen Guoyou, in February:
Chinese enterprises have actively participated in the development of local infrastructure such as electricity, transportation, petroleum, and mining, and strategic areas such as oil and mining, as well as the construction of hospitals, housing, schools, and other infrastructure projects…
At the end of 2018, the Chinese and Ecuadorian governments signed a Memorandum of Understanding on the joint construction of the BRI, which has further deepened the pragmatic cooperation between the two sides in various fields. Looking to the future, we look forward to further deepening cooperation in traditional areas such as trade, investment, and financing, as well as infrastructure, continuously expanding exchanges and cooperation in emerging areas such as 5G and new energy.
Debt for Nature?
This development is interesting for a number of reasons. First, Ecuador was one of the first countries in the world to default on Chinese bonds, which it did in April, 2020, under the presidency of Lenin Moreno, Correa’s successor who infamously handed over Julian Assange to the British police allegedly in exchange for a $4.2 billion loan from the International Monetary Fund, to which the U.S. is the largest contributor. In September 2022, Lasso’s government reached an agreement with Chinese lenders to restructure some $3 billion of debt.
In other words, China is perhaps a somewhat more forgiving creditor than Western governments have given it credit for in recent years. But some researchers and NGOs have also called on China to swap some of Quito’s debt for commitments to preserve Ecuador’s rich biodiversity in what is commonly called a “debt-for-nature swap”. Debt-for-nature swaps are typically a voluntary transaction in which an amount of debt owed by a financially distressed government of a country rich in biodiversity is cancelled or reduced by a creditor, in exchange for the debtor making financial commitments to conservation.
Debt-for-nature swaps first came to the fore in the late 1970s and early 1980s, as a domino chain of Latin American countries defaulted on sovereign debt in what came to be known as the “lost decade” for the region, but have waned since the 1990s. They now appear to be making a comeback after the COVID-19 pandemic and subsequent lockdowns plunged many of the region’s 33 countries back into unsustainable levels of indebtedness…
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Nick Corbishley 