One of the Few South American Governments Still Closely Aligned With Washington Just Signed a Trade Agreement With China

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 virus crisis plunged many of the region’s 33 countries back into unsustainable levels of indebtedness. Just a few days ago, Credit Suisse (now part of UBS) helped Ecuador seal the largest ever debt-for-nature swap, worth $656 million, involving the Galapagos Islands. From Reuters:

Ecuador sealed the world’s largest “debt-for-nature” swap on record on Tuesday, selling a new “blue bond” that will funnel at least $12 million a year into conservation of the Galapagos Islands, one of the world’s most precious ecosystems.

Having bought back roughly $1.6 billion of the country’s debt at a near 60% discount late last week with the help of Credit Suisse, Ecuadorean Foreign Minister Gustavo Manrique Miranda said biodiversity was now a valuable “currency”.

The FTA between China and Ecuador is also noteworthy because Ecuador is one of the last remaining governments in South America that is still closely aligned with Washington on a whole raft of issues, particularly security. Like El Salvador which also recently signed an FTA with China, it is also a fully dollarised economy. In fact, following the signing of the FTA with China Lasso sent a message to Washington reminding US policy makers that Ecuador had also sought to establish a free trade agreement with Washington but “with little success.”

At last year’s Summit of the Americas, held in Los Angeles, Lasso even proposed creating a “Plan Ecuador” to combat the rising lawlessness in the country. The plan, he said, would be modelled on Plan Colombia, the disastrous US-designed and -delivered drug-eradication program that burnt through $15 billion of “aid” funds during more than two decades, worsened the violence in Colombia, bathed more than a million hectares of farmland in a rich brew of toxic chemicals, including Monsanto’s “probably” carcinogenic weedkiller glyphosate, exacerbated illegal mining and organized crime while overseeing a significant upsurge in coca production.

Plan Colombia was such a costly debacle that it become effectively unexportable to other parts of Latin America and beyond, says Adam Isacson, lead investigator of the Washington Office on Latin America’s Defense Oversight program, which monitors U.S. cooperation with Latin America’s security forces: “The US looked at the Plan Colombia experience and hoped that it had found something it could apply in Afghanistan, or in Mexico, or Central America, and found out that it didn’t work there.”

But nobody seems to have told this to Lassa, who said in LA last summer:

The background is the same. We could probably call it something else, but in effect, Ecuador wants to present a Plan Ecuador to the United States.

Even Voice of America reported that Lasso’s comments had stoked controversy at the Summit as well as among many lawmakers back home. Ecuador’s former Foreign Minister María Isabel Salvador said the proposal “betrayed a lack of understanding and comprehension of what Plan Colombia meant in practice for that country.”

The Approaching Fall of Another Key US Client State?

Ecuador remains a key US client state in a region where US client states are increasingly few and far between and in many ways Lasso is a perfect partner. Stemming originally from the corporate world, where he headed operations for Coca Cola before setting up Banco Guayaquil with his brother-in-law, Lasso entered politics just over a decade ago. Together with close family members of his family, he was implicated in both the Panama Papers and Paradise Papers scandals. In December 2021 a majority of the country’s legislature voted against a recommendation to dismiss him following Pandora Papers revelations.

Lasso describes himself as of neither of left nor right, though he has expressed admiration for former Spanish PM José María Aznar‘s Silent Revolution, a series of liberal economic reforms. Lasso is also a member of the board of Aznar’s Atlantic Institute of Studies together with over half a dozen stalwarts of Latin America’s conservative right (e.g., Mauricio Macri, Felipe Calderon, Sebastian Piñera, Ávaro Uribe, Iván Duque and Jorge Quiroga). Lasso has also declared himself an enemy of the 21st-century socialism promoted by Venezuela and Cuba, once describing the Bolivarian Alliance for the Peoples of Our America (ALBA) as a “third world empire.”

But as happens every decade or two, the political sands have shifted in Latin America. And the general direction of travel is leftward. Between 2018 and today national elections have brought in left-of-center governments in seven of the region´s largest economies: Colombia (for the first time ever); Mexico (where AMLO, now in his fifth year in office, continues to command approval ratings of over 60%); Peru (whose democratically elected president, Pedro Castillo, was toppled a year later in an internal coup), Chile (whose young PM Gabriel Boric is struggling), Bolivia, Argentina and Brazil.

This trend has further exacerbated the US’ loss of political influence in the region although, as NC reader IECG notes in a comment below, this latest leftist tide may already be losing its momentum. At the same time, the US is falling behind China in three key areas, particularly in South America: trade, investment and access to strategic resources. Perhaps most worrisome for Washington, Beijing’s economic influence has grown even in countries with US-friendly governments. They include Ecuador and Uruguay, whose government is also chomping at the bit to sign an FTA with Beijing, seemingly regardless of the consequences it could bring for Uruguay’s membership of the South American trade bloc Mercosur.

In response to these developments, the Commander of US Southern Command, Army Gen. Laura J. Richardson, recently reminded the governments of the region, as well as the US’s two most important strategic rivals, China and Russia, that both the US government and military, and the corporations whose interests they serve, also have their eyes on the region’s strategic resources. Those resources include rare earth elements, lithium, gold, oil, natural gas, light sweet crude, copper, abundant food crops, and fresh water.

Since Lasso came to office in May 2021, Ecuador has received five visits by US state officials, including General Richardson, US Secretary of State Anthony Blinken a bipartisan delegation of US senators. In December Lasso visited the White House to discuss, among other things, “deepening economic and security cooperation” between the two countries. Crucially, the leaders also agreed to strengthen their “collaboration as Ecuador prepares to begin a two-year term on the United Nations Security Council.”

But Lasso, and his government, may not be around for much longer. This week, Ecuador’s National Assembly decided to proceed with an impeachment trial against Lasso for allegedly embezzling public funds.

With a public approval rating of just under 14%, no legislative majority, law and order breaking down across the country, and protests and scandals erupting all over the place, Lasso has two stark options: either face the impeachment vote head on, at the risk of failing to muster enough votes (a third of the house) to prevent his downfall; or deploy an untested constitutional clause — known as muerte cruzada (or “crossed death”) — that would disband the National Assembly and let Lasso govern by decree for six months. Then, new general elections would be held.

As the Council for Foreign Relations notes, “if Lasso falls, he will be replaced by his vice president, Alfredo Borrero, a little-known doctor who has all but vanished from the public since inauguration day. With a weak president in office, Correa and his legislative bloc would gain tremendous power.” And

Lasso has not ruled out the second option. But if he were to take it and consequently shutter Congress, both Correa, currently in exile in Belgium, and Leonidas Iza, the left-wing leader of the country’s largest Indigenous organization, have pledged to call mass protests. And remember: according to recent polls, Lasso commands the support of less than one-sixth of voters. As already happened in 2021 and 2022, protests and strikes could engulf the country and bring its economy to a standstill, albeit this time compounded by a constitutional crisis.

As another key US client state in South America begins to wobble, there is a distinct whiff of panic in the air. On March 1, 26 former heads of state and government from Latin America, Spain and Canada — all of them members of the  Democratic Initiative of Spain and the Americas (IDEA), a Florida-headquartered non-profit — signed a statement issued by IDEA warning Ecuador’s opposition parties, social organizations and National Assembly against removing Lasso as President, describing his “untimely and unjustified replacement” as “not convenient”.