Factum Perspective: Lanka-Sino ties and criteria for ‘win-win’ economic diplomacy

China has long emphasized that its outward investment via the Belt and Road Initiative (BRI) is based on the principle of “win-win”. This is to say that Chinese investment is geared towards mutual benefit, and should not veer too far into the extremes of charity on the one hand, and exploitation on the other – the former leading to dependency, and the latter to pauperization.

Chinese investment, though often concessional, is still commercial and made with the expectation of accruing a financial return. Meanwhile, recipients of Chinese investment offer incentives such as equity on new infrastructure, or natural resources in lieu of cash, for investment in projects deemed too risky by Western corporations and multinational institutions.

In bilateral terms, win-win should be measured not just on a project basis, but also on the final balance sheets of commercial interactions between two countries. For example, though China runs a trade surplus with many developing countries, its outward investment through the Belt and Road Initiative (BRI) helps circulate a portion of this capital back into developing countries. Events such as the annual China International Import Expo (CIIE) also indicate that China is serious about increasing its imports.

Ideally, this is what any country that runs a large current account surplus should do, so as to avoid political conflict or the economic collapse of its trade partners. In contrast to China is Germany, which runs a massive current account surplus that destabilizes the European Union. Despite being Sri Lanka’s biggest source of imports, the Chinese side has not publicly commented on import restrictions, while EU envoys have warned Sri Lanka and deployed human rights concerns as a method of extra-economic coercion.

Hambantota Port and Port City

Lanka-Sino ties provide a reasonable template for what win-win economic diplomacy could look like. The Hambantota Port and the Port City Colombo projects are flagship BRI investments in Sri Lanka. The former is a deep sea port located ten nautical miles off one of the world’s busiest shipping lanes, while the latter is poised to be a service-oriented Special Economic Zone built on 269 hectares of land reclaimed from the Indian Ocean and annexed to the city of Colombo.

Hambantota Port, with its adjacent Industrial Park, will generate export-oriented manufacturing activity and also provide an outlet for agricultural exports from neighboring districts. Port City will focus on real estate, financial services, healthcare, and education. Both projects are high level foreign currency generators, the former focusing on primary and secondary sectors, while the latter focuses on the tertiary sector.

The complementary features of these two investments are made even more interesting when analyzing how they were financed. Hambantota Port was financed via loans amounting to 1.3 billion US dollars at interest rates between 2% to 6.5% from China’s EXIM Bank. These funds were presumably used to pay the principal contractor China Harbor Engineering Company (CHEC).

Had CHEC left with the money after fulfilling its contract, it would have been just like any other commercial project. But the company, which has a long history as a contractor in Sri Lanka, decided to stay on and become an investor and operator, investing 1.3 billion US dollars in the Port City Colombo project – the largest foreign direct investment in Sri Lanka’s history.

From a national accounts perspective, Sri Lanka received two major export-oriented infrastructure projects for virtually nothing. This is because the same amount borrowed to pay CHEC for building Hambantota Port was later reinvested by CHEC to build Port City Colombo. The net amount that is left for the Sri Lankan side to pay is interest on the original loan.

The Hambantota Port and Port City projects, far from being a debt trap, are positive examples of how countries can balance their bilateral balance sheets while maintaining commercial interests.

Win-win as economic diplomacy

Sri Lanka’s foreign currency crisis, the immediate cause of which is the COVID-19 pandemic which has lost the country around 3 billion US dollars in tourism revenue for two years in a row, has led the government to restrict imports and engage in bilateral currency swap arrangements to manage foreign currency reserves.

Avoiding the IMF and maintaining such a strategy requires navigating a diplomatic tightrope – it is difficult, but can be done. Sri Lanka’s current account deficit is primarily caused by its trade deficit of around 7 to 8 billion US dollars. India and China together account for half of Sri Lanka’s exports. Meanwhile, refined petroleum is Sri Lanka’s single biggest import item, accounting for 10% of the total, and is primarily sourced from India, Singapore, and Malaysia.

While countries like Germany may be unreasonable to demand Sri Lanka ease import restrictions, Sri Lanka is relatively powerless to challenge these countries alone. The fact is that despite Germany having an overall current account surplus, it runs a (minor) trade deficit with Sri Lanka as it is a major market for apparel exports, while Sri Lanka’s purchasing power is too low to import high-end German goods.

Therefore, Sri Lanka’s diplomats will need to work closely with their counterparts in countries such as India, China, Malaysia and Singapore with whom we run large trade deficits. Our diplomats must incentivize these countries to reinvest their trade surpluses in Sri Lanka as credit or FDIs. Negotiating import credit for fuel, attracting investments in domestic oil refining or renewable energy capacity are key areas which should be prioritized.

A scientific analysis of Sri Lanka’s external balance sheet with other countries can help formulate a stable foreign policy based on win-win policies. This can help defuse geopolitical tensions, and dispel perceptions of ad-hoc and unprincipled realignments with major power blocs which can only damage a country’s reputation as a trade partner and ally.