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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 free trade 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 Washington on most issues, particularly those relating to security.

But China is Ecuador’s second largest trading partner, after the US, as well as its largest bilateral creditor. 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, while 60% of them will enjoy zero tariffs immediately.

“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 the Andean nation’s virtual exclusion from Western sovereign credit markets in 2008 after Rafael Correa’s government defaulted on sovereign bonds deemed to be riddled with irregularities.  Beijing was happy to fill the gap. According to Ecuador’s latest public debt report, it owes China nearly US$5 billion, or about 11% of its total external debt. Only multilateral institutions, like the Inter-American Development Bank and the IMF, hold larger shares of the country’s debt.

The economic partnership between the two countries intensified after the two countries 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 only to be awarded an IMF loan a couple of months later. 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 been alleging in recent years. But some researchers and NGOs have also called on China to swap some of Quito’s debt for its rich natural resources 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. Just a few days ago Credit Suisse (now part of UBS) unveiled the largest ever debt-for-nature swap, worth $656 million, involving Ecuador’s Galapagos Islands.

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 across a whole host of areas, particularly security. 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.”

A Key US Client State

Ecuador remains a key US client state in a region where US client states are increasingly few and far between. Between 2021 and 2022, a two-year electoral super-cycle brought in left-of-center governments in six of the region’s largest countries, including Colombia (for the first time ever), Peru (whose democratically elected president, Pedro Castillo, was toppled a year later in an internal coup), Chile, Bolivia and Brazil. This has further exacerbated the US’ loss of political influence in the region.

At the same time, the US has fallen behind China in three key areas, particularly in South America: trade, investment and access to South America’s strategic resources. Beijing’s economic influence has grown even in countries governed by right wing parties, such as Ecuador and Uruguay, which is also clamouring to sign a free trade agreement with Beijing.

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, or 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.


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