Ecuador's Trade and Investment Relationship with China Under The

Home , Central Bank of Ecuador, Exim Bank of China, Petroecuador, President of Ecuador, Rafael Correa

Ecuador’s Trade and Investment Relationship with China Under the Correa

Administration

A thesis presented to

the faculty of

the Center for International Studies of Ohio University

In partial fulfillment

of the requirements for the degree

Master of Arts

Christian S. Rodas Saá

August 2018

This thesis titled

Ecuador’s Trade and Investment Relationship with China Under the Correa

Administration

CHRISTIAN S. RODAS SAÁ

has been approved for

the Center for International Studies by

Yeong-Hyun Kim

Associate Professor of Geography

Arthur Hughes

Director, Latin American Studies

Lorna Jean Edmonds

Vice Provost for Global Affairs 3

ABSTRACT

RODAS SAÁ, CHRISTIAN S., M.A., August 2018, Latin American Studies

Ecuador’s Trade and Investment Relationship with China Under the Correa

Administration

Director of Thesis: Yeong-Hyun Kim

Globalization increases the integration of economies around the world.

Historically, this interdependence has been dominated by Western economies, but emerging economies such as Brazil, Russia, India, China, and South Africa (BRICS) now compete with the United States and Western European countries for the dominance of the global economy. This thesis analyzes the rising bilateral relationship between Ecuador and China under the Correa administration, in terms of international trade, foreign direct investment (FDI), and financial loans. The research was conducted using both quantitative and qualitative methods. Official documentary records, bilateral agreements, national and international newspapers, and government speeches were analyzed. In addition, statistics about trade and investment patterns were calculated from data provided by international trade and investment databases. Further, personal interviews with government officials and businessmen were conducted in Quito to identify the major concerns raised about China’s growing presence in Ecuador’s economy. The findings show that Ecuador’s asymmetric trade relation with China, based on Ecuadorian imports from China, is disadvantageous for Ecuador. Also, Chinese funding is provided on the condition that the project funded contributes to satisfying China’s needs and Chinese workers are employed. Similarly, Chinese financing to Ecuador is linked to vague oil pre- 4 sale contracts, which trigger opportunities for irregularities. The major finding of this work is that China has taken from Ecuador but does not reciprocate; this is an unsustainable relationship that will ultimately end badly for Ecuador. 5

TABLE OF CONTENTS Page

Abstract ...... 3 List of Tables ...... 7 List of Figures ...... 8 Chapter 1: Introduction ...... 9 Research Methods ...... 14 Public Archives: Official Documents and Newspapers ...... 14 Statistics: Trade, Investment, and Financial Loans ...... 16 Personal Interviews: Quito, Ecuador 2017 ...... 17 Limitations ...... 21 Chapter 2: Ecuador in the Global Economy ...... 23 Historical Background ...... 23 Importance of Oil in the Ecuadorian Economy ...... 27 Main Trading Partners ...... 30 Foreign Direct Investment in Ecuador ...... 33 Ecuador’s Public External Debt ...... 37 Chapter 3: China’s Trade with and Investment in Developing Countries ...... 43 Historical Background ...... 43 China’s Role in South-South Cooperation ...... 44 China in Africa ...... 46 China in Latin America and the Caribbean (LAC) ...... 49 China’s Trade with LAC ...... 51 China’s Foreign Direct Investment in LAC ...... 54 China’s Financial Loans to LAC ...... 56 Chapter 4: Ecuador’s Strengthening Trade and Investment Ties to China ...... 60 Political and Economic Background ...... 60 Ecuador’s Growing Relationship with China ...... 62 Ecuador’s Bilateral Agreements with China...... 62 Ecuador’s Trade with China ...... 72 Chinese Foreign Direct Investment in Ecuador ...... 75 Chapter 5: China’s Oil-for-Loan Investments in Ecuador ...... 80 6

Ecuador’s Growing Indebtedness to China...... 80 Ecuador’s Oil-for-Loan Deals with China ...... 83 Chinese Financial Loans for the Construction of Hydroelectric Dams ...... 86 Other Infrastructure Projects Funded by Chinese Loans ...... 91 Perspectives on China’s Role as the Largest Creditor of Ecuador ...... 92 Financial Loans ...... 93 Oil-for-Loan Contracts...... 95 Infrastructure Projects ...... 96 A New Course in Ecuador’s Bilateral Relations with China? ...... 100 Chapter 6: Conclusions ...... 102 References ...... 107

LIST OF TABLES

Page

Table 1. Organizations Interviewed ...... 18 Table 2. List of Interview Questions...... 20 Table 3. Share of Oil Exports in Total Exports of Ecuador...... 29 Table 4. Inflows of Foreign Direct Investment in Ecuador, by sector (2002-2016) ...... 36 Table 5. Ecuador’s Public Debt (2007-2016) ...... 40 Table 6. Principal Bilateral Agreements between Ecuador and China (2007-2015) ...... 64 Table 7. Ecuador's Imports from China. Principal Items (2009-2016) ...... 74 Table 8. Ecuador's Exports to China. Principal Items (2009-2016) ...... 74 Table 9. Chinese FDI in Ecuador, by sector (2002-2016) ...... 77 Table 10. China’s financial loans to Ecuador (2010-2016) ...... 82 Table 11. Ecuador’s Oil-for-Loan Deals with China ...... 84

LIST OF FIGURES

Page

Figure 1. GNI per capita vs oil prices...... 28 Figure 2. Ecuador’s main trading partners for exports...... 31 Figure 3. Ecuador’s main trading partners for imports...... 32 Figure 4. Major source countries of FDI in Ecuador (2002-2016)...... 35 Figure 5. Ecuador's public external debt as percentage of GNI (2016)...... 38 Figure 6. Financial loans - bilateral debt, countries...... 42 Figure 7. China’s exports to and imports from LAC (1992-2016) ...... 51 Figure 8. China's exports to and imports from LAC by country (2016)...... 53 Figure 9. China’s foreign direct investment in LAC, by country (2012) ...... 55 Figure 10. China's financial loans to LAC, by sector (2007-2016) ...... 57 Figure 11. China’s financial loans to Latin American countries (2007-2016) ...... 58 Figure 12. Presidents Correa and Jinping in Quito, 2016...... 67 Figure 13. Ecuador’s exports to and imports from China (1992-2016) ...... 72 Figure 14. Main Projects funded by China in Ecuador ...... 79 Figure 15. Ecuador’s national debt to China (2006-2016) ...... 81 Figure 16. Coca-Codo Sinclair hydroelectric dam ...... 87 Figure 17. Sopladora hydroelectric plant ...... 89 Figure 18. Ecuadorians’ level of trust in foreign governments ...... 99

CHAPTER 1: INTRODUCTION

Globalization increases the integration of economies around the world.

International trade, international finance, and multinational corporations are key components of this economic relationship among nations (Mingst & Arreguin-Toft,

2017). Historically, this interdependence has been dominated by Western economies: The

United States and countries of Western Europe like the United Kingdom, Germany, and

France; this phenomenon has been labeled Western hegemony. However, in recent years, emerging economies such as Brazil, Russia, India, China, and South Africa (BRICS) have evolved as an attractive alternative for international trade and foreign direct investment (FDI), mainly through the framework of South-South Cooperation (Dicken,

2016). As a result, the United States and Western European countries now compete with nations like China for the dominance of the global economy.

The past two decades have witnessed a dramatic growth in the Chinese economy.

The country’s growing investment in infrastructure and manufacturing has significantly raised levels of demand for natural resources such as oil and natural gas (Ellis, 2009;

Gallagher, 2016; Roache, 2012). In an effort to meet its vast and unprecedented need for natural resources, China has established strong bilateral and multilateral relations with various countries in the developing world, including Africa (Brautigam, 2009; Sun, 2014) and Latin America and the Caribbean (LAC) (Harris & Arias, 2016; Jenkins, 2012).

Indeed, China’s trade, investment and financial loans to many Latin American and

African nations have substantially increased since 2000, which has allowed China to become an attractive alternative to traditional Western partners (Trinkunas, 2016). 10

China’s economic expansion in Latin America was stimulated by a new political period in Ecuador (Ray & Chimienti 2016). After Rafael Correa became President in

2007, the country adopted new political and economic approaches, which sought new trading partners and lenders to replace traditional Western finance institutions influenced by the United States. In 2008, the Ecuadorian government defaulted on part of the country’s national debt with the International Monetary Fund (IMF), claiming irregularities in the conditions of the financial commitment (Correa, 2008). This decision impacted Ecuador’s international reputation, and the country lost access to international financing, particularly from traditional lenders (Porzecanski, 2010).

Ecuador’s default generated a unique opportunity for China’s expansion in Latin

America, resulting in China becoming Ecuador’s second largest trading partner for imports and the largest creditor under the framework of South-South Cooperation

(Narins, 2012). Ecuador has signed multiple agreements with China over the last decade, in areas such as agriculture, mining, energy, infrastructure, and technology transfer

(Ministry of Finance of Ecuador, 2017). Further, Ecuador received financial loans and credit lines from China between 2010 and April 2016, some linked to the pre-sale of oil

(Sanderson & Forsyth, 2013). As Gallagher (2016) noted, financial loans are the main mechanism Chinese leaders employ to direct funding to Ecuador and secure access to natural resources. With these loans, the Ecuadorian government has undertaken a number of infrastructure projects including the Coca-Codo Sinclair and the Sopladora hydroelectric projects, and various highways. 11

However, Ecuador’s increased economic ties to China over the last decade have raised concerns. In 2010, Ecuador’s debt to China represented only 1.2% of Ecuador’s

Gross Domestic Product (GDP), while in 2016, this amount rose to 8% (Ministry of

Finance of Ecuador, 2017). Ecuador’s debt to China amounted to US $8.1 billion in 2016, which accounted for 32% of Ecuador’s total external debt. This abrupt escalation prompted worries of repeating the old mistakes that led Ecuador to severe economic crisis during the 1980’s and 1990’s.

The vast majority of China’s loans to Ecuador have been focused on infrastructure projects, which include legal requirements to purchase Chinese products and hire Chinese workers, reducing those financial benefits to the Ecuadorian economy. In addition, the financial agreements with China are linked to pre-sale of oil contracts, without clearly defined provisions. The vagueness has fostered concerns regarding Chinese bad practices, environmental degradation (Cori & Monni, 2014; Ray & Chimienti, 2016), and potential corruption. Another offshoot of Ecuador’s financial reliance on China is the trade deficit, which amounted to US $2 billion in 2016.

The scenario in Ecuador is not unique considering the growing economic spread of China into Latin America and other developing regions. The China Development Bank

(CDB) and Export and Import Bank of China (EXIM) have expanded FDI and trade in many parts of the world. Much of this expansion has been focused on countries with weak governance indicators1, or poor access to international capital markets (Trinkunas,

1 Rule of Law Index. Governance Indicators. http://info.worldbank.org/governance/wgi/#reports 12

2016). In South America, Brazil is the largest market for China, followed by Venezuela,

Ecuador, and Argentina (Jenkins, 2012; Dollar, 2017)

There are numerous studies about China’s growing financial stake in Latin

America (Jenkins, 2012; Ellis, 2013; Gallagher & Myers, 2014; Dollar, 2017; Trinkunas,

2016) or Africa (Brautigam, 2009, 2011; Xiaoyang, 2011; Dollar, 2016; Sun, 2014), especially for the larger economies like Brazil (Cardoso, 2013; Klinger, 2015), Mexico

(Hernández, 2012; González García, Mendoza Cota, & Juanjuan, 2015), and Argentina

(Laufer, 2013; Oviedo, 2015). Analyses about China’s oil-for-loans transactions include

China in the developing world (Alves, 2013; Meidan, 2016; Gholz, Awan, & Ronn,

2017), and particularly in Venezuela (Sun, 2014; Wang & Li, 2016). However, little is written about the smaller economies like Ecuador (e.g., Narins, 2012), or is limited to focused social and environmental issues related to resource (oil) extraction (Ray &

Chimienti, 2016).

This paucity of information regarding Ecuador as it relates to the potential impact of growing trade and investment relationships between Ecuador and China from 2007 to

2016, and the assessment of government officials and businessmen’s perceptions of the rising bilateral relationship is the purpose of this study.

The following research questions are considered:

1. How has the Ecuador-China economic relationship developed in the past

decade?

2. How and why has the Chinese government increased investment in

infrastructure projects in Ecuador? 13

3. What concerns have been raised about China’s oil-for-loan investment in

Ecuador?

It is the objective of this research to explore the development of the Ecuador-

China economic relation, particularly Chinese investment for infrastructure projects in

Ecuador and the ever-growing amount of Chinese loans, which have higher interest rates and shorter maturity dates than those provided by traditional lenders. Personal interviews with government officials and businessmen in the private sector allow for an assessment of the different perspectives on the impact caused by China’s growing presence in

Ecuador. Considering the deficit in Ecuador's trade balance with China and the conditions linked to Chinese loans, the Ecuador-China economic relationship presents risks that will be detrimental to Ecuador in the medium and long term.

This thesis is organized into six chapters. Chapter 1 is a brief introduction containing the political and economic context to support the arguments of this research, and the methodology used to gather and analyze the data required to answer the research questions. Chapter 2 addresses Ecuador’s participation in the global economy, particularly the importance of oil for Ecuador and its main trading and financial partners.

Chapter 3 examines China’s growing presence in the developing world through trade and investment relations, especially in Africa and Latin America and the Caribbean. Chapter

4 assesses Ecuador’s strengthening trade and investment ties to China during the past decade and analyzes the evolution of the bilateral relation between the two countries in terms of trade agreements and investment for infrastructure projects. Chapter 5 looks at

China’s financial loans to Ecuador in depth and it provides differing perspectives on 14

China’s role as the largest creditor of Ecuador, based on personal interviews conducted with government officials and private company employees in Ecuador. Chapter 6 summarizes research findings and provides recommendations based on pertinent literature on the topic and the perceptions of stakeholders and experts.

Research Methods

Mixed quantitative and qualitative methods were used to answer the research questions of this study (Starr, 2014). Official documentary records, bilateral agreements, national and international newspapers, and government speeches regarding Ecuador’s trade and investment relationship with China were analyzed. In addition, statistics about trade and investment patterns were calculated from data provided by international trade and investment databases, including the United Nations Comtrade Database (UN

Comtrade), the United Nations Conference on Trade and Development (UNCTAD), the

Central Banks of both countries, and the China-Latin America Finance Database. Finally, personal interviews with government officials and businessmen were conducted in Quito,

Ecuador, between May and August 2017. During the field work, ten people were interviewed: six businessmen and four government officials.

Public Archives: Official Documents and Newspapers

Several sources were consulted to determine what the Ecuadorian and the Chinese government’s claim regarding their growing bilateral relationship over the past decade.

Official documents from both governments were obtained through official websites. In the case of Ecuador, the Good Living National Plan (2009-2013; 2013-2017), presidential decrees, government speeches, and official statements and reports were analyzed. These 15 documents were retrieved from the websites of the Presidency of Ecuador, and the

Ministries of Finance and Foreign Affairs. As for China, the information was gathered from official documents issued by the Chinese government, including the State’s Council

Policy Paper on Latin America and the Caribbean, the CELAC – China Cooperation Plan

2015-2019, and the 13th Five-Year Plan of China. This information was obtained from the websites of the Ministries of Finance and Foreign Affairs of China. Official documents and presidential speeches related to the State visit of Xi Jinping to Ecuador in

2015 were also assessed.

In addition to official documentation, this work analyzed articles from national and international newspapers in order to identify projects and initiatives implemented within the Sino-Ecuadorian relationship over the last decade, and to explore the different perspectives on the growing bilateral partnership between both countries. With regards to

Ecuadorian newspapers, “El Comercio”, “El Universo”, and “El Telégrafo” were the main sources. In the case of China, the English versions of Xinhuanet, China’s official news agency, and the Beijing Review magazine were explored in order to learn China’s perception on Ecuador in terms of trade and investment. However, the vast majority of

Chinese articles only address China’s political and economic ties with Latin America as a whole, rather than China’s bilateral relationship with Ecuador. Articles from Ecuadorian and Chinese newspapers, corresponding to the period 2006-2018, were acquired via their official websites. Key search terms such as ‘Ecuador and China’, ‘Ecuador’s trade with

China’, ‘Chinese investment and infrastructure projects in Ecuador’ were used to narrow 16 the results. Articles from the American The New York Times and international news agency Reuters were used as support material.

Statistics: Trade, Investment, and Financial Loans

This work focused mainly on the period 2007-2016 because these years witnessed a substantial increase in the bilateral relationship between Ecuador and China. However, previous years were also included in different figures of this research, with the ultimate purpose of analyzing the evolution of trade and investment indicators over time. The latest data available in the diverse international trade and investment databases were used for each section of the study.

For trade statistics, data for exports and imports were collected from the United

Nations Comtrade Database (UN Comtrade). This study uses the UN nomenclature called

Harmonized Commodity Description and Coding Systems (HS) to manage and classify data about the most traded products between countries. For foreign direct investment

(FDI), this study concentrated on Chinese FDI to Ecuador because of the work of Narins

(2012), which found that Ecuadorian FDI to China has been minor throughout the relationship. The Central Bank of Ecuador and the United Nations Conference on Trade and Development (UNCTAD) databases were the main sources used to collect Sino-

Ecuadorian FDI data.

It should be stressed that China’s FDI is not necessarily properly calculated, as

Chinese investment is distributed from Hong Kong, and many times it is directly linked with foreign aid or financial loans (Dollar, 2016). In the case of loans China granted

Ecuador, data were collected from the China-Latin America Finance Database provided 17 by the Inter-American dialogue, and reports issued by the Finance Ministry of Ecuador.

World Bank Indicators (WDI) were also used as supporting materials.

Personal Interviews: Quito, Ecuador 2017

Personal interviews were conducted with government officials and businessmen to determine the claims and future perspectives of Ecuadorian public and private sectors, and to identify the major concerns raised about China’s growing presence as Ecuador’s largest creditor. Interviews were carried out in Quito, Ecuador, between May and August

2017. Questions and answers were drafted in Spanish and then translated into English.

Participants were identified through a snowball sampling method, starting from personal contacts in Ecuador’s Ministry of Foreign Affairs and the Chamber of Commerce located in Quito. Subjects’ responses are based on their own experience and expertise in

Ecuador’s trade and investment relationship with China. Interviews were analyzed so as to identify topics common to subjects’ responses, taking into account existing literature of international relations and the information examined in this study.

The main data collection technique used in this research was the semi-structured interview, which “has a determined order of open-ended questions but also provides opportunities for both interviewer and interviewee to discuss some topics in more detail”

(Mathers, Fox, & Hunn, 1998). Then, interviews were analyzed applying the Grounded

Theory method, which aims to classify information by themes (Berg, 2001). Data analysis was carried out through line-by-line coding, in order to identify common patterns among the answers provided by businessmen, which were later contrasted to those of government officials. In addition, field notes were also used as supplemental 18 materials for the analysis. In order to learn Ecuadorians’ perceptions about China’s growing presence in the country, results from the Latin American Public Opinion Project

(LAPOP) survey were analyzed as a complementary tool for the study.

A total of fifteen participants ⎯ seven businessmen and eight government officials⎯ were identified through the snowball sampling method, which started from personal contacts in the Chamber of Commerce in Quito and the Ministry of Foreign

Affairs. Potential interviewees were contacted through phone calls through which the study was explain. After the explanation, they were asked to participate in the research.

During this process, three individuals ⎯ one businessman and two government officials⎯ could not be reached. Further, two government officials preferred not to take part in the study quoting the corruption scandals ⎯ Petrochina and Odebrecht⎯ revolving around the government. Ten interviewees agreed to participate in the study.

They belong to the following organizations:

Table 1

Organizations Interviewed Government Officials Businessmen

Ministry of Electricity and Renewable Energy Chamber of Commerce, Quito

Ministry of Finance Huawei

Ministry of Foreign Affairs

Ministry of Transportation and Public Works

Meetings were arranged with those interviewees who agreed to participate in the study. Interviews were carried out in public locations or at the office of the interviewee.

Before starting the interview, participants received a consent form which did not require their signature. In addition, they were told that they could stop the interview at any time if they did not feel comfortable answering the questions. A brief summary of the study was also provided. The same set of questions was used to interview both government officials and businessmen, as the goal of the study was to find common topics in their responses, and to contrast their perceptions on China’s growing presence in Ecuador. Responses were typed in a computer, so as to record participants’ opinions quickly and accurately.

Table 2

List of Interview Questions Questionnaire

Why do you believe the bilateral relationship between Ecuador and China has rapidly grown during the last decade?

What changes have you noticed in the relationship between Ecuador and China, regarding international trade, foreign direct investment, and debt in the last decade?

What do you think are the potential risks and benefits for Ecuador that may result from the partnership with China in the medium and long-term?

Do you consider China to be Ecuador's main trading partner? Provide a brief explanation.

What advantages and disadvantages do you notice in the indebtedness with China?

Do you consider that Chinese loans contribute to economic development for Ecuador in the long-term? Provide a brief explanation.

Do you consider that the foreign debt that Ecuador has with China has created dependency of Ecuador with the Asian nation? Provide a brief explanation.

How do you categorize the bilateral relationship between Ecuador and China from

2007 to the present? Positive, Negative, Irrelevant

Once all interviews had been carried out, they were analyzed to find topics shared by all interviewees, whether their opinion was positive or negative. Then, within each topic, the different viewpoints were assessed to find common ground and discrepancies 21 among participants. Special attention was given to the concerns raised about China’s growing presence as Ecuador’s largest creditor.

Limitations

The methods chosen to carry out this study may face limitations. The use of the snowball method for selecting participants for the study limits the sample to a small group that may not be representative of the whole party of businessmen and government officials. Furthermore, working with human subjects involves the consideration of participants’ subjectivity. For instance, the political ideology of each participant may affect the way in which they perceive actions and measures implemented during Correa’s administration. Also, the responses of government officials may be biased, as they might not want to compromise their position in governmental institutions.

Even though statistics constitute quantitative interpretation, they also posed limitations to this research. The way China presents its figures is not clear, as China’s information about FDI and financial loans, for example, is vague and incomplete. This is not only the case for official Chinese websites, but also for UN websites, where parts of the information are not up to date. Also, most of China’s FDI goes to Hong Kong, before it is sent to the final destination (Sun, 2014). This trail distorts the real figures of China’s investment around the world. Similarly, China’s investment in Latin America goes first to tax havens, such as the Virgin Islands and Cayman Islands, where it is reallocated to other countries (Dollar, 2016). Further, the methodology implemented by Gallagher and

Myers (2017) to build the China-Latin America Finance Database regarding the amounts of Chinese loans to Latin America considers both loans granted to Latin American 22 countries and approved credit lines, while the Finance Ministry of Ecuador only records the amounts the country has received and does not take into account credit lines, which generates discrepancies on debt data from both institutions.

Most importantly, Ecuadorian official documents are not readily accessible. In the case of oil pre-sale contracts between Ecuador and China, many terms and conditions are confidential. While Correa’s Presidential decrees and statements refer to the agreements signed with the Asian country, the provisions are not available to the public, as they are considered sensitive information (Personal Interview, Government Official, Ministry of

Finance of Ecuador). Further, it must be stressed that newspapers, magazines, and news agency websites could be ideologically biased, which is why the information obtained was scrutinized, and suspect. 23

CHAPTER 2: ECUADOR IN THE GLOBAL ECONOMY

This chapter presents a historical background of Ecuador’s economy and addresses Ecuador’s participation in the global economy, particularly the importance of oil for Ecuador. Further, it looks at Ecuador’s main trading and financial partners in depth, and the evolution of the country’s public external debt over time.

Historical Background

Located along the Pacific Coast of South America, Ecuador is a small country with a population of approx. 16.5 million, an upper-middle income economy and a Gross

National Income (GNI) per capita of US $5,820 (World Bank, 2016). Historically, the

Ecuadorian economy has been based on exports of primary products such as banana, cocoa, flowers, and shrimp (Naranjo, 1995). However, the “oil boom” that occurred in the early 70’s led Ecuador to start exporting crude oil (OPEC2 estimates: petroleum export value, US $5.4 billion; export of petroleum products, 31,000 barrels/day; crude oil reserves, >8.2 billion barrels; crude oil exports, 415,000 barrels/day). Since then, oil has been the main product for the Ecuadorian economy (Fontaine, 2006).

After becoming a Republic in 1830, Ecuador developed new strategies to enter the global economy, aided by the country’s comparative advantage, which consisted of natural resources such as fertile soil and warm and wet climate (Ayala, 2008). This allowed the nation to focus its attention on agriculture and growing global demands for agricultural products. According to Naranjo (1995), growing exports of cocoa and banana bolstered the Ecuadorian economy. Increased agricultural production in Ecuador attracted

2 http://www.opec.org/opec_web/en/about_us/148.htm 24 the interest of larger markets like Europe and the United States, which ultimately became the main trading partner of Ecuador and other Latin American countries after World War

I (WWI), displacing Great Britain, which was then responsible for most international trade and foreign direct investment in the region (Acosta 2006).

The United States became the largest trading partner with Ecuador through agricultural products such as cocoa and banana (Ayala, 2008). The bilateral relationship between the two countries grew through trade and investment and expanded to different sectors over the years (Acosta 2006). American companies did invest in Ecuador’s oil reserves during the 1930’s, but the amount of extracted oil was not substantial at that time, therefore, investment focused on products like bananas. According to Larrea

(1987), more than 50% of banana exports to the USA were once controlled by two

American companies: The United Fruit company and the Standard Fruit company. In subsequent years, the relation between Ecuador and the United States became even stronger.

After years of searching for oil in Ecuador, the US company Texaco found large reserves of oil in the Ecuadorian Amazon, and an era of economic prosperity began

(Acosta, 2006). The “oil boom,” beginning in 1972, completely transformed the

Ecuadorian economy from an agro-export model to an oil-export model. As Larrea

(1987) noted, “this was a cornerstone in Ecuador’s history,” and resulted in Ecuador gaining an international reputation as an oil exporting country, with subsequent increases in international financing and economic improvements. The “oil boom” generated unprecedented incomes for Ecuador, and petroleum became a pivotal element for the 25 country’s economic growth, representing more than 18% of the Gross Domestic Product

(GDP) and more than 50% of the country’s exports for several years (Naranjo, 1995).

The oil revenues and international financing were not managed properly (Ayala,

2008). Instead of generating policy changes that would have created sustained development, oil profits made the nation more vulnerable to external sources of lending and, in general, international market fluctuations. In the 1980’s and 1990’s, this vulnerability, due to fluctuating oil prices impacted Ecuador’s economy significantly

Acosta (2006). The “Two Lost Decades” in Ecuador record the economic recession post-

1983’s oil-price instability.

As stated by Vicuña (2000), exogenous and endogenous factors, and the lack of solid economic policies, caused the crisis during this period. Indeed, excessive external indebtedness, the volatility of oil prices, and natural disasters such as a 1987 earthquake, helped trigger the economic crisis. Endogenous factors such as political instability, the productive structure of the country, and the war with Peru in 1995, worsened the country’s economic situation. In addition, the economic policies implemented by changing administrations with political biases produced more difficulties, rather than stabilizing the economy. During the “Two Lost Decades”, Ecuadorian GNI per capita stagnated, real wages fell, devaluation of the currency (Sucre) increased to unprecedented levels, there was double digit inflation, and high levels of unemployment and poverty affected more than 75% of Ecuadorians (Naranjo, 2004).

The crisis of the Ecuadorian financial system in 1999 was the most serious event during this period (Ayala, 2008). The lack of banking regulations or sound financial laws 26 prompted liquidity and solvency problems for several financial institutions. The Central

Bank of Ecuador (CBE) assumed these financial costs and therefore, the Ecuadorian economy collapsed (Naranjo, 2004). As a result, Ecuador adopted the US dollar as the official currency in 2000, which stabilized Ecuador's economy by lowering inflation rates and increasing the trust of people in the financial system (Acosta, 2006). Furthermore, world oil prices increased, generating higher revenues for the Ecuadorian government.

However, Ecuador's political instability ⎯ eight presidents in less than ten years⎯ continued until 2006 despite the country's economic growth brought on by dollarization

(Pachano & García, 2013).

After several periods of political instability that affected the most vulnerable sectors of the Ecuadorian population, Rafael Correa was elected president in 2006 and took office on January 15, 2007. As an alternative to the traditional neoliberal model that ruled the Ecuadorian economy in recent decades, Correa’s administration proposed a development model based on the “Socialism of the 21st century”, which promotes a higher involvement of the government in the economy (Dieterich, 2006). The government of Rafael Correa aimed to constrain the presence and intervention of the

World Bank and the IMF in the Ecuadorian economy and sought new economic and political partners, moving away from the Bretton Woods institutions and the United

States (Weisbrot, Johnston, & Merling, 2017). Correa expressed his position against imperialist policies and proclaimed that his government's plan included reducing dependence on the United States and regaining the sovereignty of Ecuador (Correa,

2008). 27

Importance of Oil in the Ecuadorian Economy

As a result of its newly found vast oil reserves, Ecuador’s economic history changed drastically (Ayala, 2008). Ecuador’s inclusion in the Organization of Petroleum

Exporting Countries (OPEC) in 1972 allowed the country to increase its participation as an oil supplier in the international market (Larrea, 1987). In addition, the government launched the first Hydrocarbons Law in 1978, which increased oil revenues for the

Ecuadorian administration. In 1989, Petroecuador, Ecuador’s major public oil company, was created and the government gained ground in oil production (Naranjo, 1995). Since then, oil production has been managed through Petroecuador and multinational corporations (Naranjo, 2004).

Ecuador’s oil production has been fairly constant since the boom in the 1970’s

(Acosta, 2006). However, oil revenues are subject to volatility of the commodity price in the international market. Any exogenous or endogenous shock, for example, significantly affects the price of oil (Larrea, 2016). Higher or lower prices distort the Ecuadorian economy proportionally. According to Betancourt and Gonzalez (2014), when prices are high, the government can apply a loose economic policy, like tax reductions. Similarly, when oil revenues are robust, public spending increases significantly, as if oil prices will remain high indefinitely. However, when oil prices fall unexpectedly, the Ecuadorian economy wobbles. Figure 1 shows oil’s direct impact on the Ecuadorian economy. The commodity prices (US Dollars) are shown together with Ecuador’s living standard, measured by the Gross National Income (GNI) per capita.

7000 120

6000 100

5000 80 4000 60 GNI

3000 Oil Price US US Dollars US US Dollars 40 2000

1000 20

0 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Years GNI Percapita Oil Price

Figure 1. GNI per capita vs oil prices. Sources: World Bank, Central Bank of Ecuador.

Ecuador’s GNI per capita in the 1970’s rose sharply as oil prices rose. From 1972 to 1982, Ecuador’s GNI grew from US $600 to US $2,430 until the “Two Lost Decades”, when oil prices and GNI per capita decreased significantly into the late 1980’s, reaching its lowest value in 1990 (GNI, 1,370). Even though different internal and external factors prompted this recession, Acosta (2006) argues that oil prices played a fundamental role in the crash of Ecuador’s economy. Furthermore, Naranjo (2004) states that the instability of oil prices during the late 1990’s also contributed to the financial crisis the country faced in 1999. During the first decade of the 21st Century, oil prices grew significantly, bolstering the Ecuadorian economy once again until 2014 (Larrea, 2016). 29

Oil has had a significant impact on the Ecuadorian economy since the “oil boom” starting in 1972 through 2002 despite the fact that the vast majority of Ecuador's oil exports are crude oil instead of refined petroleum products. Larrea (2016) argues that

Ecuador’s second “oil boom” between 2006 and 2015 was due to high world oil prices.

During this period, historic maximum prices exceeded US $100 per barrel (December

2011). However, since 2015, oil prices have fallen as the result of an oversupply in the international market, which is reflected in a decrease of the GNI per capita from US

$6,150 in 2014 to US $5,820 in 2016.

Table 3

Share of Oil Exports in Total Exports of Ecuador. Year Total Exports Oil Exports Share ( US $ Billion) (US $ Billion) (%) 2000 4.8 2.1 44.46 2001 4.6 1.7 37.06 2002 5.0 1.8 36.56 2003 6.0 2.4 39.30 2004 7.6 3.9 51.25 2005 9.9 5.4 54.68 2006 12.7 6.9 54.48 2007 13.8 7.4 53.83 2008 18.8 10.6 56.16 2009 13.9 6.3 45.33 2010 17.5 9.0 51.18 2011 22.3 11.8 52.81 2012 23.9 12.7 53.29 2013 25.0 13.4 53.74 2014 25.7 13.0 50.60 2015 18.3 6.4 34.67 2016 16.8 5.1 30.09 Source: Central Bank of Ecuador. 30

As shown in Table 3, oil exports are vital for Ecuador’s economy, accounting for between 37-54% of exports from 2000-2014. Even during the financial crisis of 2009

(global financial crisis), oil accounted for around 45% of exports. The sudden drop in

2015 and 2016 mirrors the sharp fall in world oil prices from US $84 in 2014 to US $34 in 2016.

Larrea (2016) notes that Ecuador’s limited export diversification has generated a dependency on oil, which could jeopardize the country's future economy. In an effort,

Ecuador has now implemented multiple strategies to diversify exportable products. The establishment of bilateral and multilateral agreements, and the participation in regional economic blocs are the most important strategies of Ecuador to strengthen its economy by increasing exports of non-oil products (Betancourt & Gonzalez, 2014).

Main Trading Partners

In addition to its traditional trade relationship with the United States, Ecuador is a member of two regional blocs: the Andean Community (CAN) and the Latin American

Integration Association (ALADI). Ecuador also joined the World Trade Organization

(WTO) in 1996 (Acosta, 2006). Furthermore, Ecuador signed a bilateral trade agreement with Chile, a partial trade agreement with Guatemala, and a commercial cooperation agreement with Venezuela, and is a beneficiary of the Generalized System of Preferences

(GSP), mainly with the United States. In addition, Ecuador also engaged in a free trade agreement with the European Union (EU) in January 2017.

Figure 2. Ecuador’s main trading partners for exports. Source: UN Comtrade (2017).

As shown in Figure 2, the United States is the predominant export market for

Ecuador (particularly through the purchase of crude oil), even though the level of exports has decreased in recent years. In addition, CAN members Colombia and Peru have also purchased Ecuadorian products in significant amounts (UN Comtrade, 2017). While Peru has imported crude oil from Ecuador since 2001, Colombia has traditionally imported several Ecuadorian agricultural products. In the case of Chile, its interest in Ecuador’s 32 products results from the free trade agreement signed by the two countries in 1994, which has also bolstered Ecuador’s oil exports within South America (Naranjo, 2004). Figure 2 also shows that China was grouped with “others” as a destination for Ecuadorian exports in 2001 and only increased to 4% in 2016, but as shown in Figure 3, grew from 3-19% of

Ecuador’s imports for the same period.

Figure 3. Ecuador’s main trading partners for imports. Source: UN Comtrade (2017).

The United States has remained fairly constant and Ecuador’s main trading partner during the 2001-2016 period despite a drop in exports. Colombia has also played a significant role but was displaced by China as Ecuador’s second largest trading partner for imports in recent years (Fig. 3). Gallagher, Irwin and Koleski (2012) assert that bilateral agreements signed by the Ecuadorian government with China substantially bolstered Chinese exports to Ecuador. Along with the United States, China, and

Colombia, countries like Brazil, Chile, and Peru have supplied Ecuador with a wide variety of goods. Paradoxically, the main products Ecuador imported were refined oil and other oil refined goods, which represented 14% of Ecuador’s total imports in 2016.

As shown in Figures 2 and 3, despite the emergence of new partners, such as

China and Vietnam, and the continued presence of regional partners (Chile, Colombia, and Peru), the United States remains the dominant trading partner with Ecuador. In 2016

Ecuador exported US $16.8 billion in goods, 32% going to the United States, with Chile

(7%), Vietnam (7%), and China (4%) being important. Ecuador’s imports during the same year amounted to US $16 billion, with the United States representing 23% of this value, and China and Colombia accounted for 19% and 8%, respectively.

Foreign Direct Investment in Ecuador

Acosta (2006) states that the endowment of natural resources of Andean countries such as Ecuador is the driving force that attracts Foreign Direct Investment (FDI) from other nations. Several policies implemented by the Ecuadorian government have encouraged FDI to Ecuador. For instance, the “Modernization Act” signed in 1993 was approved as the legal basis for privatization, substantially increasing the amount of 34 investment (Naranjo, 2004). However, Ecuador’s financial crisis in 1999 impacted the economy in multiple ways and FDI was not an exception, resulting in Ecuador being ranked as a high-risk country and the subsequent withdrawal of invested capital (Jacome,

2004). Fortunately, the adoption of the US dollar as the official currency contributed to the stabilization of the economy and FDI returned to Ecuador (Ayala, 2008).

Since the “oil boom” in the 70’s, the vast majority of investment that Ecuador received has been focused on the mining and quarrying sectors. American oil companies such as Chevron and Occidental Petroleum (Oxy) have led FDI into Ecuador. The

Canadian company EnCana also played a significant role in the oil sector during the last part of the 1990’s (Larrea, 2016). Narins (2012) stressed the importance of the oil pipeline that began operating in 2003 due to significant increases in oil production and how this attracted higher levels of FDI (Villavicencio, 2014). However, the Ecuadorian hydrocarbon law was modified in 2006, increasing oil revenues to Ecuador by 50%, and making FDI less attractive to foreign investors (Mena Erazo, 2010).

Ecuador has faced legal problems with many multinational oil corporations, particularly with the American oil company Oxy, which stopped operating in the country in 2006 (Moreano, 2006). In subsequent years, the Ecuadorian government launched additional regulations regarding oil drilling that positioned Ecuador as the unique owner of extracted oil. This new law stated that the government would pay the foreign company a percentage for each barrel extracted, depending on the world price of oil (El Comercio,

2011). According to Ray and Chimienti (2016), the policy prompted confusion among stakeholders and some investors withdrew their capital. In particular, the United States, a 35 long-established investor, withdrew significant amounts of its investments between 2008 and 2011. However, in recent years, FDI from the United States has returned and in 2015 amounted to US $200 million.

600

400

200

0 USD USD Million -200

-400

-600 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Years

United States Brazil Mexico Spain Netherlands China

Figure 4. Major source countries of FDI in Ecuador (2002-2016). Source: Central Bank of Ecuador.

Amid political differences and new regulations about oil drilling, other industries in Ecuador received increased FDI. Indeed, Brazil, China, Mexico, the Netherlands, and

Spain increased their investments in different sectors of the Ecuadorian economy from

2002-2016 (Fig. 4). Mexico and Spain made significant investments in Ecuador’s telecommunications sector, through Claro and Movistar, and the Netherlands increased investment to the mining and flower sectors in recent years, reaching close to US $400 million in 2016 (CBE, 2017). As a result of multiple bilateral agreements, China has 36 steadily increased its investments in Ecuador’s oil sector, with Chinese FDI reaching its highest value in 2015 at US $114 million.

Table 4

Inflows of Foreign Direct Investment in Ecuador, by sector (2002-2016) (US $ Million) Mining Business Grand Year Commerce Construction Manufacturing and Others Services Total Quarrying 2002 109 70 6 67 487 44 783 2003 71 78 3 79 149 491 872 2004 39 103 39 115 385 155 837 2005 74 72 7 75 198 66 493 2006 89 32 8 90 -117 168 271 2007 85 92 20 99 -103 2 194 2008 142 120 50 198 244 303 1057 2009 -23 84 -13 118 6 138 309 2010 68 94 28 120 178 -322 166 2011 45 78 51 122 379 -30 644 2012 39 83 32 136 225 53 567 2013 118 110 69 138 253 39 727 2014 24 149 5 108 686 -199 772 2015 244 173 7 264 560 75 1322 2016 22 122 30 37 463 81 756 Source: Central Bank of Ecuador

Table 4 shows that the mining and quarrying sector has been a major source of

FDI in Ecuador. Multinational oil corporations such as Encana, Occidental Petroleum

(Oxy), and China National Petroleum Corporation (CNPC), among others, have played a key role in this matter. For example, since 2009 the development of several oil fields in the Amazon region have been awarded to Chinese companies, resulting in higher levels of FDI into the Ecuadorian oil sector. It should be noted that in 2008 and 2015, FDI in 37

Ecuador exceeded US $1 billion due mainly to investments in sectors such as business services, commerce and manufacturing (CBE, 2016).

Ecuador’s Public External Debt

Ecuador's external debt has affected the economic development of the country since its foundation as a sovereign state in 1830 (Acosta, 2006). Indeed, to achieve independence from Spain, Ecuador incurred massive external debt to the United

Kingdom. Such debt, also known as “the eternal debt,” was paid 150 years later with oil revenues generated during the “oil boom” of the 1970’s. However, as Naranjo (2004) posits, this boom was not only characterized by the growth of exports and high oil prices, but also by increases in external indebtedness. As a new oil economy with a high rate of economic growth, Ecuador obtained easy access to external financing. Acosta (2006) claims this excess liquidity allowed the Ecuadorian government to finance corrupt dictatorships, make payments to the bureaucracy, pay debt service, and invest in infrastructure projects that were never completed.

In the early 1980s, world oil prices fell drastically and access to external financing became more difficult as a result of exogenous factors, including high interest rates implemented by the United States (Hoffman, 1994). In an effort to continue receiving international loans and renegotiate its external debt, Ecuador signed fourteen letters of intent with the International Monetary Fund (IMF) from 1983 to 2005 (El Universo,

2016). The conditions stipulated in these agreements were directly related to the 38

Washington Consensus3 and required the implementation of macroeconomic reforms to correct the balance of payments problems of the debtor countries (Mingst & Arreguin-

Toft, 2017). These reforms, which included increasing taxes and reducing public spending, were called Structural Adjustment Programs (SAPs) and had a direct impact on people's welfare (Stiglitz, 2006). At the same time, the SAPs also generated a perception among people that the country was losing sovereignty because economic policies were imposed by international organizations (Naranjo, 2004).

40 % of GNI % of 30

0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Years

Figure 5. Ecuador's public external debt as percentage of GNI (2016). Source: Finance Ministry of Ecuador

3 The Washington Consensus is a set of economic and political prescriptions to foster development in developing countries. Its policies focus mainly on privatization, liberalization of trade, and open competition (Mingst and Arreguin-Toft, 2017). 39

Figure 5 shows Ecuador's growing public debt as a percentage of its GNI during the Two Lost Decades. The Ecuadorian external debt with international organizations such as the World Bank and the IMF, and with other countries, increased substantially from US $5.6 billion in 1983 to US $9.9 billion in 1990. At the same time, the country's

GNI declined as a result of falling world oil prices and the lack of sound economic policies. From 1990 to 1993, the Ecuadorian economy showed minor improvement, and debt increased to a lesser extent compared to previous periods.

Nonetheless, Ecuador's external debt increased again, reaching US $13 billion in

1995. From 1996 to 1999, debt levels remained stable, but Ecuador's economy collapsed in 1999, and debt rose to 74% of the country's GNI. Since 2000, this ratio fell sharply as a result of dollarization, which boosted economic growth. However, although world oil prices were high and prompted a significant increase on Ecuador’s GNI during Correa’s administration, the country’s external debt increased substantially from US $10.7 billion in 2007 to US $25.7 billion in 2016, which accounted for 27% of the country’s 2016 GNI

(Fig. 5).

Ecuador's current public external debt is composed of three elements: bonds and suppliers, and bilateral and multilateral debt (Finance Ministry of Ecuador, 2017). The category called bonds and suppliers includes financial obligations with international suppliers and Brady, Global, and Sovereign bonds. Bilateral debt refers to loans granted through government-to-government transactions. Finally, multilateral debt encompasses loans received from international organizations such as the Inter-American Development

Bank (BID), International Monetary Fund (IMF), Development Bank of Latin America 40

(CAF), and the World Bank. Table 5 shows the evolution of Ecuador’s public external debt between 2007 and 2016.

Table 5

Ecuador’s Public Debt (2007-2016) (US $ Billion) Type 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Bilateral 1.91 1.72 1.52 2.39 3.73 3.96 5.85 7.96 8.38 10.73 Multilateral 4.74 4.33 4.87 5.26 5.29 5.87 6.01 6.56 7.93 8.25 Bonds 4.14 4.16 1.12 1.02 1.03 1.05 1.05 3.06 3.92 6.71 Total 10.79 10.21 7.51 8.67 10.05 10.88 12.91 17.58 20.23 25.69 Source: Finance Ministry of Ecuador

As shown in Table 5, Ecuador’s public external debt has substantially increased over the past decade, reaching US $25.7 billion in 2016. The Ecuadorian debt with multilateral organizations during Correa’s administration stemmed from financial loans granted by regional banks, such as loans from the Inter-American Development Bank

(IDB) and the Development Bank of Latin America (CAF). In 2016, IDB and CAF granted Ecuador loans for US $4.6 billion and US $3 billion, respectively, which represents over 90% of Ecuador’s multilateral debt. To a lesser extent, the International

Bank for Reconstruction and Development (IBRD), which is part of the World Bank, and the Latin American Reserve Fund (FLAR) have also provided financing to Ecuador. It is worth mentioning that IBRD’s participation decreased significantly since Correa took office. Furthermore, Ecuador paid the country's debt to the IMF in 2007, which amounted 41 to US $22 million, and since then, Ecuador stopped receiving financial loans from this institution.

As regards bonds, in 2008 the Ecuadorian government defaulted on two outstanding external debt bonds worth US $3 billion, claiming debt conditions were illegitimate and immoral because the debt had been negotiated in the midst of the financial crisis in 1999 (The Economist, 2009). Therefore, Ecuador’s debt through bonds decreased significantly in 2009 (Table 5). Although debt default caused Ecuador’s international reputation to plunge, the country re-entered the international bonds markets in 2014, which allowed the country to obtain liquidity. Thus, the bonds debt increased to

US $6.71 billion in 2016. It must be stressed that bonds issued by Ecuador in 2016 have interest rates higher than 10% and maturity dates shorter than six years (El Universo,

2017).

Finally, bilateral debt constituted the main component of the country's public external debt, reaching US $10.7 billion in 2016, which represents 42% of the country's total public external debt (Table 5). Ecuador has received several loans from foreign governments and financial institutions from other countries, including the Unites States, the United Kingdom, and China (CBE, 2017). Figure 6 shows Ecuador’s bilateral debt creditors as of 2016.

Brazil Others Spain 2% 8% 3% United States 4% United Kingdom 7%

China 76%

Figure 6. Financial loans - bilateral debt, countries. Source: Finance Ministry of Ecuador.

During the last decade, China has significantly increased its participation in

Ecuador’s economy, becoming the country’s main creditor. As Jenkins (2012) noted,

Ecuador met the political and economic expectations of China; Chinese banks and companies considered that Ecuador could be beneficial for the Chinese economy, mainly as a key supplier of natural resources. Ellis (2013) points out that Ecuador and China signed multiple agreements, particularly focused on the oil sector and infrastructure projects. Figure 6 shows the importance of Chinese loans for Ecuador, compared to other countries. Ecuador’s debt to China up to December 2016 amounted to US $8.1 billion, outnumbering traditional lenders such as the United Kingdom and the United States.

CHAPTER 3: CHINA’S TRADE WITH AND INVESTMENT IN DEVELOPING

COUNTRIES

This chapter provides a historical background containing the political and economic context to explain China’s growth in the past decades. Further, it examines

China’s growing presence in the developing world through trade and investment relations, especially in Africa and Latin America and the Caribbean, to secure natural resources.

Historical Background

Deng Xiaoping’s election as the party chairman in 1977 was a turning point in

China’s development model. Indeed, Xiaoping’s administration implemented a series of economic reforms towards a more market-oriented economy (Weightman, 2011). China’s new policies incorporated a system of Special Economic Zones (SEZs), which played an essential role in attracting foreign direct investment and, eventually, in the rapid growth that China experienced since the 1980’s (Brautigam, 2011). These zones offered multiple incentives to attract investments from multinational corporations, including low taxation, flexible labor regulations, and the elimination of tariffs and trade quotas.

China’s government realizes the importance of outward foreign investment (Ellis,

2013) but, Buckley (2008) points out that only Chinese State-Owned Enterprises (SOEs) such as the China National Petroleum Group Corporation and Sinopec have been allowed to invest overseas. Indeed, China’s SOEs were the economic entities that obtained large- scale returns on investment in the 1980’s (Narins, 2012). Subsequently, in the mid-

1990’s, after a long period of attracting foreign direct investment and technology, China’s 44 government implemented a “going global” policy which consisted on finding new markets for Chinese goods and services and promoting the establishment of overseas industrial and trade zones (Brautigam, 2011).

As part of its going global strategy, China’s insertion in the World Trade

Organization (WTO) in 2001 paved the way for extraordinary economic growth and reinforced its position as a key stakeholder in the world economy (Ellis, 2013). Certainly,

China’s increased productivity, low labor costs, and copious investment have allowed

China to become a major economy with annual growth rates greater than 10% (Gallagher

& Porzecanski, 2010). According to Narins (2012), China’s trade with developed economies such as the United States and the European Union represents substantial revenues for the Chinese economy, which have provided China’s multinational corporations with large and profitable markets.

China’s Role in South-South Cooperation

In recent years, “China has become the largest exporter, the largest holder of foreign exchange reserves, the largest destination of foreign direct investment (FDI) and the second largest economy in the world” (Zhang, 2015, p. 408). As Turin (2010) notes,

China's economic model, also known as “Beijing Consensus,” has gained traction within the developing world. Indeed, Chinese state-driven growth has become an alternative to the traditional development model based on the Washington Consensus. For instance,

China has been exporting the idea of special economic zones to developing countries.

Mingst and Arreguin-Toft (2017, p. 345) claim that “using capitalist tools ⎯ the stock market and professional managers⎯ state capitalism and state enterprises invest capital 45 in its own markets and abroad.” Furthermore, the Chinese model encourages developing countries to actively seek independence from external pressure (Weightman, 2011).

China’s initiatives have been implemented according to the South-South

Cooperation (SSC) principles (SCPRC, 2016). Participants of South-South Cooperation seek to increase the power of developing countries in the global economy by creating the structure for a new multipolar international order which attempts to diminish the hegemonic role of the United States (Santander Campos, 2013). According to Harris and

Arias (2016), SCC aims to consolidate its position as an attractive alternative for the conventional model enforced by the North-South Cooperation (NSC). While the

Washington Consensus imposes certain political and macroeconomic conditions, such as the Structural Adjustment Programs (SAPs) suggested by the International Monetary

Fund (IMF), SSC promotes a new alternative to contribute to the economic growth of developing countries without interfering in their policy-making (Ramo, 2004). Indeed, as pointed out by Wenxing (2016), developing countries have embraced SSC due to dissatisfaction with international organizations such as the IMF and World Bank.

The Policy Paper on Latin America and the Caribbean, issued by China in 2008, states that “the move toward multi-polarity is irreversible and economic globalization is gaining momentum” (SCPRC, 2012). Globalization prompts the emergence of a new international order consolidated by the establishment of diverse forms of political and economic cooperation among developing countries. The association of Brazil, Russia,

India, China, and South Africa (BRICS), the Union of South American Nations

(UNASUR), and the Community of Latin American and Caribbean States (CELAC) are 46 relevant examples of different types of collaboration that emerged in recent years to neutralize the traditional hegemony of the Global North (Dicken, 2016). Moreover, the growing economic aid provided under the framework of SCC offsets the Official

Development Assistance (ODA) offered by the model of NSC (Harris & Arias, 2016).

Certainly, China plays a leading role in the consolidation of South-South

Cooperation within the new international order (Gallagher & Porzecanski, 2010). The

White Paper on China’s Foreign Aid, issued by the State Council of the People’s

Republic of China in 2014, states that China, as the largest developing country in the world, is the leader and pioneer of SSC. According to Jenkins (2012), Chinese foreign aid within the agenda of South-South Cooperation is linked to international trade, foreign direct investment, and financial flows conducted to the developing world. China strives for relations with other developing nations based on South-South and win-win cooperation without interfering in the economic, political, and social decisions of any country (Harris & Arias, 2016). China’s government emphasizes that initiatives and implemented policies are focused on poverty reduction and the consolidation of a new world order which encourages equality and solidarity among all nations (Zhu, 2012).

China in Africa

In an effort to consolidate its going global strategy, China’s government began seeking new markets for Chinese products and locations that embraced labor-intensive industries. According to China’s 11th five-year plan, issued in 2006, China aimed to establish more than 50 cooperation zones overseas in order to increase Chinese outward foreign direct investment and promote Chinese brand names (Brautigam & Tang, 2006). 47

As Sun states (2014, p. 6), “Africa fits perfectly in China’s Going Out strategy”, and

Africa’s endowment of natural resources, like oil and gas, is the driving force of China’s interest in the region. Moreover, Africa also represents an attractive market for Chinese products such as electronics and textiles, among others (Brautigam, 2015).

For this reason, political and economic ties between China and Africa, also known as Sino-African relations, have been strengthened through dynamic initiatives such as the

China-Africa Cooperation Forum (FOCAC) and the China-Africa Development Fund

(CADF) (Brautigam & Tang, 2011). Trade, foreign direct investment, loans and Chinese support for the development of economic and trade cooperation zones within African countries are key components of this strategic partnership (Sun, 2014). The seven special economic zones in Africa built with the support of China are found in Egypt, Zambia,

Algeria, Egypt, Ethiopia, Mauritius, and Nigeria. However, to date, the only zone that is fully operational is the Suez Canal in Egypt, while the others have faced multiple challenges related to lack of funding and disagreements among stakeholders (UNDP,

2015).

Although development of these economic zones has not been completed, the

SEZs have strengthened the trade and investment relationship between Africa and China

(Dollar, 2016); Sino-African trade substantially increased in recent years. Total trade between China and African nations has grown more than ten times over the last decade and grew from US $10 billion in 2000 to approximately US $300 billion in 2015 (WTO,

2016). China’s exports to Africa are mainly manufactured products, such as technological devices and textiles, whereas natural resources and energy are key components of 48

Chinese imports from Africa. By a large margin, crude oil is the star commodity within this partnership, which makes Africa the second largest oil supplier to China (Sun, 2014).

However, it should be stressed that despite China becoming Africa’s main trading partner in 2009, African nations are not among China’s top trading partners (UN Comtrade,

2017).

Similarly, China’s foreign direct investment (FDI) in Africa rose sharply in the last decade, reaching unprecedented amounts (US $5.5 billion in 2008) (Sun, 2014).

Brautigam (2011) indicates that the China-Africa Development Fund and the Forum on

China-Africa Cooperation have played a key role in Sino-African relations. Mining and quarrying are key for attracting China’s interest in Africa, and this sector accounted for around 30% Chinese total FDI in the region in 2014 (Sun, 2014). As a result of China's large investment contracts in countries such as Nigeria, Ghana, and Mauritius, the number of jobs has increased, and Chinese technology has boosted local labor skills. For instance, the Chinese company Telecommunications Huawei has trained many African engineers and has engaged them in a new technology era worldwide (Hirono & Suzuki,

2014).

Nevertheless, China’s investment in Africa is associated with financial loans and preferential export buyer’s credit (Sun, 2014). China has granted Africa more than US

$20 billion in terms of financial loans since 2009. Dollar (2016) asserts that China’s conditions upon credits for infrastructure plans stipulate that Chinese workers and contractors must be included in the project. In other words, China’s government uses financial loans as a mechanism to generate profits for Chinese firms and employment for 49

Chinese laborers. Brautigam (2011) states that loans provided by China to countries such as Angola and the Democratic Republic of Congo aim to secure Africa’s natural resources, mainly crude oil and copper. These and other countries with weak international reputations, which are not considered creditworthy, are major recipients of Chinese capital (Sun, 2014). For these nations, the China Development Bank and the Export-

Import Bank of China offer an attractive source of easy-access financing (Gallagher et al., 2012).

At first glance, Sino-African relations seem to be valuable for all stakeholders.

While China acquires natural resources and contracts for Chinese enterprises, African countries receive capital influx intended to fund costly infrastructure projects. However, multiple concerns have emerged from the tight ties between China and Africa

(Brautigam, 2011). Chinese exploitation of natural resources without satisfying environmental standards and the violation of domestic laws are significant grievances among African leaders and society. Sun (2014) claims that the amount of Chinese financial loans given to Africa could be daunting because of their magnitude, as probably

African countries do not have the financial capacity to repay these financial commitments. Furthermore, China’s companies operating in Africa are deemed competitors for African contractors and products. The China-Africa scenario is mirrored in Latin America and the Caribbean (LAC).

China in Latin America and the Caribbean (LAC)

Ellis (2013) notes that China’s investment model with Africa is similar with other developing countries. As part of its global expansion policy, China also established 50 strong political and economic ties with Latin America and the Caribbean (LAC). Jenkins

(2012) emphasizes the importance of China’s Policy Paper on Latin America and the

Caribbean, promotes Chinese economic relations with countries in the Western

Hemisphere through the principle of South-South cooperation, particularly in terms of international trade, investment, and multilateral financial loans. As Harris and Arias

(2016) indicate, the new alliance between China and Latin America gained strength through the creation of the China-CELAC Forum, an inter-regional cooperation initiative which aims to counterbalance the United States hegemony in the region.

As of 2001, economic and financial relations between China and Latin America increased substantially (Gallagher & Porzecanski, 2010). China is now the second most important trading partner for Latin America, only after the United States. Ray, Gallagher,

Lopez and Sanborn (2015) assert that China’s government has strengthened bonds with

Latin American nations whose political models are in line with the Chinese ideal of development. Venezuela, Ecuador, and Cuba are the most representative examples, all of them ruled by center-left or leftist regimes. However, China has not limited its interaction to countries that are aligned to Chinese ideology; on the contrary, China’s leaders have signed free trade agreements with Chile, Peru, and Costa Rica (Jenkins, 2012). The establishment of “strategic partnerships” with countries such as Brazil, Argentina, and

Mexico are also key components of the growing Sino-Latin American endeavors (Dosch

& Goodman, 2012). 51

China’s Trade with LAC

China’s international trade has substantially increased since it joined the WTO in

2001 (Elson, 2014). Commerce between China and Latin America is based on the exchange of Chinese manufactured goods for Latin American primary commodities

(Gallagher & Porzecanski, 2010). Chinese imports from Latin American countries are driven by China’s demand for raw materials, natural resources, and energy. Therefore, crude oil, soybeans, copper, and iron ore are the main commodities China purchases from nations such as Brazil, Argentina, Chile, Cuba, and Peru. Chinese exports to Latin

America consist of manufactured goods, including telecommunications and electrical equipment, data processing machines, optical instruments, and boats (UN Comtrade,

2017).

140

120

100

60 USD USD Billion

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Years

China's exports to LAC China's imports from

Figure 7. China’s exports to and imports from LAC (1992-2016) Source: UN Comtrade (2017) 52

Even though growth of Sino-Latin American trade over the last decade has been substantial (Fig. 7), compared to China’s trade with other parts of the world, LAC exports and imports represent a minor share. For example, in 2016 China’s total exports amounted to US $2.03 trillion, US $113 million of which corresponded to LAC, representing only 5.3% of total exports. Similarly, LAC exports to China in 2016 represented only 6.4% of China’s total imports, which amounted to US $1.5 trillion.

China’s demand for natural resources and raw materials increased world prices of primary goods, setting off the commodity boom in the 2000’s (Harris & Arias, 2016), resulting in a significant boost in revenues for many resource-exporting Latin American countries. Growing Chinese exports highlight China’s competitiveness in manufactured goods and its efficiency in obtaining new markets overseas. Trade between China and

Latin America decreased after the world financial crisis in 2008, but it continued to grow in subsequent years (Jenkins, 2012). Although the data shows that China has a surplus in the trade balance with Latin America in recent years, which reached US $10 billion in

2016, the scenarios vary from one country to another, as shown in Figure 8.

Figure 8. China's exports to and imports from LAC by country (2016). Source: UN Comtrade (2017)

China’s trade with Latin America is led by Chinese interactions with large economies such as Brazil, Mexico, and Chile (Ray et al., 2015). Brazil’s high stocks of natural resources and agricultural commodities have positioned the country as China’s main trading partner in the region (Jenkins, 2012). In the case of Chile, the free trade 54 agreement signed with China in 2006 accounts for the high levels of trade between both countries. As shown in Figure 8, Brazil and Chile have a trade balance surplus with

China. On the other hand, the significant deficit in the Mexican trade balance is the result of copious Chinese exports, which are driven by Mexico’s proximity to the United States market (Dollar, 2017). The impressive growth in Sino-Latin American trade is highly skewed towards China’s benefit (Ellis, 2013). While China became a major trade partner for many countries in the region, no Latin American nation is among China’s main trading partners.

China’s Foreign Direct Investment in LAC

Harris and Arias (2016) show that China’s foreign direct investment (FDI) in

Latin American countries has grown rapidly over the last decade. Similar to the trade pattern of Sino-Latin American relations, Chinese FDI (both greenfield, and mergers and acquisitions) in Latin America is promoted by China’s interest in securing natural resources in the region (Trinkunas, 2016). For example, China National Petroleum

Corporation (CNPC), Petrochina Minmetals, and Sinopec, are some of the Chinese companies operating in Latin American countries such as Brazil, Ecuador, Venezuela, and Argentina that focus on crude oil and gas extraction. While energy and mining sectors constitute the basis of China’s FDI in Latin America, other industries, including manufacturing and telecommunications, also attract Chinese capital.

Much of China’s FDI in Latin America is conducted through Hong-Kong or tax havens, such as the British Virgins Islands and the Cayman Islands (Jenkins, 2012), which accumulated US $30.85 billion and US $30.07 billion up to 2012, respectively, 55 and represented over 90% of China’s FDI outstocks in Latin America and the Caribbean.

Excluding tax havens, figure 9 shows the accumulation of Chinese FDI in the region, by country, until 2012. It should be noted that the 2012 figures are the latest available data in the report of the United Nations Conference on Trade and Development (UNCTAD) on

Bilateral FDI Statistics.

Colombia Panama 3% Mexico 5% 5% Venezuela Ecuador 29% 6%

Others 9%

Peru 10%

Brazil 20% Argentina 13%

Figure 9. China’s foreign direct investment in LAC, by country (2012) Source: United Nations Conference on Trade and Development (2014)

China’s investments in the region are focused on long-term projects within profitable fields, such as natural resources, infrastructure, and public works (Elson,

2014). China invested significant amounts in Venezuela (US $2.04 billion), the country with the largest oil reserves in the region, and Brazil (US $1.45 billion). Argentina (US

$897.19 million) and Peru (US $752.87 million) have also attracted substantial capital 56 from the Chinese government, mainly for infrastructure projects that promote the extension of China’s initiative “One belt, one road”. Similarly, Ecuador, a small economy but with large reserves of crude oil, has received significant amounts of Chinese FDI (US

$407.63 million) for projects that vary from hydroelectric to the construction of universities such as “The City of Knowledge” Yachay Tech (Correa, 2016).

Ray et al. (2015) highlight the importance of the Nicaragua Canal project financed by the Hong Kong Nicaragua Canal Development Investment Company (HKND

Group) among the main projects sponsored by China in Latin America. The HKND

Group made a total investment of US $40 billion in 2013, an unprecedented amount for

China’s FDI in Latin America. Furthermore, the construction of the hydroelectric power station Coca-Codo Sinclair in Ecuador (US $2.2 billion), even though it is not among the largest investments of China in the region, represents an emblematic example of China’s relevance for many countries in Latin America (El Telégrafo, 2016). Although Chinese

FDI in Latin America grew in recent years, Chinese FDI in Latin American countries are still relatively low compared to China’s FDI to other recipients around the world. For example, China's investment in the LAC region in 2012 represented only 12% of China's total outstocks in the same year (US $531 billion).

China’s Financial Loans to LAC

China’s loans are driven by China’s expansion of FDI in the region (Trinkunas,

2016), i.e., China grants significant amounts of economic resources as long as the projects benefit Chinese laborers and companies (Sun 2014). Moreover, China’s financial model consists of commodity-backed loans, particularly crude oil and minerals: recipient 57 nations agree to provide natural resources in exchange for financial loans (Dosch &

Goodman, 2012). This strategy has helped Chinese multinational corporations secure multiple contracts and exploitation rights in countries such as Ecuador, Venezuela,

Argentina, and Brazil.

1% 10%

Energy 18% Infrastructure Other Mining 71%

Figure 10. China's financial loans to LAC, by sector (2007-2016) Source: Gallagher & Myers (2017)

China’s loans to the region have focused on projects within the energy industry in

Latin America (US $105.8 billion) (Fig. 10); oil and gas extraction, hydroelectric dams, and coal plants are projects that receive considerable attention. Similarly, infrastructure projects (US $27 billion) such as railroads, train lines, and marine terminals have been supported by Chinese capital. The category ‘Other’ includes government bonds and education projects, even budget deficits have been covered with China’s aid (Gallagher &

Myers, 2017). 58

Others Ecuador 7% 12%

Venezuela 41% Argentina 12%

Brazil 28%

Figure 11. China’s financial loans to Latin American countries (2007-2016) Source: Gallagher & Myers (2017)

China consolidates bilateral agreements with developing countries through large financial loans provided by the China Development Bank (CDB) and the Export-Import

Bank of China (EXIM Bank), both Chinese policy banks (Dussel, 2016). According to

Gallagher and Myers (2017), Chinese lending offered by the CDB and the EXIM bank, in some cases, exceeds the amounts granted by traditional lenders in the region, e.g., the

World Bank and the Inter-American Bank of Development. Figure 11 shows that Chinese lending to Latin America, which has reached US $150.4 billion4, concentrated on

Venezuela (US $62.2 billion), Brazil (US $42.1 billion), Argentina (US $18.2 billion),

4 The methodology implemented by Gallagher and Myers to determine the amounts of Chinese loans to Latin America considers both loans granted to Latin American countries and approved credit lines. 59 and Ecuador (US $17.4 billion). Bolivia, Trinidad and Tobago, Jamaica, and Mexico, among others, have also received financial loans from China, which are grouped under

‘Others’ in Figure 11 (Gallagher & Myers, 2017).

As Trinkunas (2016) notes, the aforementioned nations are deemed not creditworthy in the international system and therefore have difficulty finding loans from traditional lenders such as the World Bank and the International Monetary Fund. In some cases, Chinese financial loans have been seen as a “bailout” for many countries in the region and China has been called “the global lender of last resort” (Durden, 2015). It is worth highlighting the case of Ecuador, which despite being one of the smallest economies in the region, has received more than US $17 billion in Chinese loans and lines of credit during the last decade.

CHAPTER 4: ECUADOR’S STRENGTHENING TRADE AND INVESTMENT TIES

TO CHINA

This chapter assesses Ecuador’s strengthening trade and investment ties to China during the past decade. Further, it analyzes the evolution of the bilateral relation between the two countries in terms of trade agreements and investment for infrastructure projects.

Political and Economic Background

The Ecuador-China economic relationship officially started in January 1980, when then-President Jaime Roldós Aguilera formally established diplomatic ties with

China (Herrera & Lee, 2017), but the first official cooperation agreement between both countries was not signed until 1994. Since then, the relationship remained moderate until

China entered the World Trade Organization in 2001, resulting in increased trade with

China (Gallagher, 2012), mainly concentrated on Ecuador’s imports from China (Ray &

Chimienti, 2016).

The Ecuador and China partnership has expanded at a significant pace since 2006, when the Chinese joint venture Andes Petroleum Corporation acquired the US $1.42 billion assets and pipeline of Encana, a Canadian Oil Company operating in the eastern part of the Oriente Basin in Ecuador (Encana, 2006). According to Ellis (2013), the

Chinese purchase represented a milestone in Ecuador’s relationship with China. Indeed, the Andes Petroleum Corporation became the most relevant foreign oil company operating in Ecuador by securing the production of 75,000 barrels of oil per day with 143 million barrels of proven reserves (Moran, 2010). As a result, significant amounts of 61

Ecuadorian oil were exported to China’s market (Narins, 2012). This year also marked the beginning of Rafael Correa’s term as president under the democratic-socialist party.

In an effort to carry out change in the Ecuadorian economy, Correa’s administration launched a new National Constitution, which prioritized human development and environmental protection over economic growth (Constitución

Nacional, 2008). Along with the new Constitution, Ecuador issued a government plan called the “Good Living National Plan” (GLNP) that emphasizes the importance of setting aside the ideals of the Washington Consensus and the orthodox concepts of development (GLNP, 2009). In fact, Objective 5 in GLNP 2009-2013 states “Foreign policy should be reoriented from North-South relations to South-South relations.”

Furthermore, the Ecuadorian government expressed its desire to consolidate symmetrical bilateral and multilateral relations among equals, without the interference of hegemonic nations (GLNP, 2013). As Cori and Monni (2014) argue, Ecuador’s foreign policy seeks to establish long-term relationships that prioritize the country’s sovereignty and follow

GLNP guidelines.

President Correa defined Objectives 10 and 11 of the GLNP (2013-2017) as key components to generate sustainable development (Correa, 2016). Objective 10 promotes the transformation of the productive matrix, that is, to modify its productive sector in order to diversify the economy and increase productivity (GLNP, 2013). Ecuador intended to generate products with added value, particularly in five strategic industries: refinery, shipyard, petrochemical, copper metallurgy, and steel (SENPLADES, 2015).

Similarly, Objective 11 sought to ensure the sovereignty and efficiency of strategic 62 sectors for industrial and technological transformation (GLNP, 2013). The policies and guidelines of the Ecuadorian government focused on the transformation of the energy matrix through the efficient management of renewable and non-renewable natural resources, and the elimination of the regulations imposed by multinational corporations of hegemonic nations (GLNP, 2013).

Ecuador’s Growing Relationship with China

The political and economic reforms paved the way for the establishment of

Ecuador’s economic ties to China (Narins, 2012), mainly due to Correa’s leadership

(Gamso, 2015). Ecuador’s government implemented an economic and political model which conformed to China’s ideals of establishing a new global order through South-

South Cooperation. In fact, Ecuador’s poor international reputation ⎯ after failing to meet its financial obligations⎯ and public policies, led by high levels of public spending, which fit neatly into China’s interests in Ecuador (Herrera & Lee, 2017). As Narins

(2012) emphasizes, Ecuador’s proximity to the Pacific Ocean and the country’s oil reserves met China’s main objectives: expansion to other markets in the region to access new sources of trade and investment. President Correa traveled to Shanghai in 2007, with the purpose of strengthening trade and investment ties with China and promoting

Ecuador’s admission to the Asia-Pacific Economic Cooperation Forum (APEC) (Salas,

2007).

Ecuador’s Bilateral Agreements with China

Table 6 summarizes the principal bilateral agreements signed by Ecuador and

China in diverse areas, from 2007 to 2015. Prior to this period, the number of agreements 63 was limited. Trade between Ecuador and China was strengthened mainly by two agreements: The Cooperation Agreement, signed in 2000 between the Chinese Council for the Promotion of International Trade, the Ecuadorian Chamber of Commerce and the

National Committee of the Council of Economic Cooperation of the Pacific (Ecuador -

PECC); and the Cooperation Agreement, signed in 2002 between the China Commission of Economic Arbitration and International Trade and the Chamber of Commerce

Ecuador – China.

Table 6

Principal Bilateral Agreements between Ecuador and China (2007-2015) # Year Ecuador- China Bilateral Agreements (2007-2016) Area Agreement of Cooperation in the Hydrocarbon Sector, 1 2007 between the Mining Ministry of Ecuador and the State Mining Commission of Development and Reform of China 2007 - 2012. Opening of Ecuadorian chambers of commerce in Shanghai and 2 2009 Commerce Guangzhou Commercial Agreement for the construction of the Toachi 3 2010 Energy Pilatón Hydroelectric Plant Financing Agreement of Phase II for investment projects in 4 2011 Infrastructure Ecuador 5 2011 Agreement for the construction of the Villanaco Project Energy Commercial Agreement for the trans Andean railway 6 2011 Commerce rehabilitation project Commercial Agreement for the construction of the 7 2011 Commerce Delsitanisagua Hydroelectric Power Plant Agreement of Economic and Technical Cooperation between 8 2011 Economy China and the Republic of Ecuador Agreement for the construction of two Hydroelectric Projects: 9 2011 Energy Mazar Dudas and Quijos Agreement for the construction of the "Minas San Francisco" 10 2011 Energy Hydroelectric Project 11 2011 Contract to develop the 96MW Esmeraldas II power plant Infrastructure Contract for the second phase of the implementation of the 12 2011 Infrastructure Integrated Security Service project ECU-911 Agreement of Economic and Technical Cooperation between 13 2012 Economy China and the Republic of Ecuador Commercial Agreement to increase Ecuadorian exports to 14 2012 Commerce China and attract Chinese Investment to Ecuador Commercial Agreement to foster trade of shrimps, bananas, 15 2012 Commerce cacao, pineapple, mango and lemon Agreement to foster science and technology and improve Science and 16 2012 higher education (scholarships) Technology Agreement to participate in the construction of the refinery 17 2013 Energy "Refinería del Pacífico" 18 2013 Agreement to Avoid Double Taxation Economy 19 2014 Cooperation Agreement to increase international trade Commerce Commercial Agreement for the construction of the Coca-Codo 20 2014 Commerce Sinclair Hydroelectric Plant 21 2015 Agreement to eliminate visa requirements (visa waiver) Tourism Source: PROECUADOR 2017. Note: Pre-sale of oil and financial loans are not included. 65

According to the Ministry of Foreign Affairs of Ecuador, China opened a line of credit in 2009 to promote the trade of agricultural products (Ministry of Foreign Affairs of Ecuador, 2017). In the same year, the opening of Ecuadorian chambers of commerce in Shanghai and Guangzhou was announced (PROECUADOR, 2017). In 2010, after signing an agreement of economic cooperation, Ricardo Patiño, Foreign Minister of

Ecuador, stressed that “our relationship with China is sovereign, respects our dignity as a country [...] it is a relationship of respectful brother countries” (El Universo, 2017). In

2012, both countries signed bilateral agreements to foster economic and technical cooperation, increase trade, and reinforce security aspects. Similarly, in 2013, Ecuador and China signed an agreement to avoid double taxation, and the subsequent year,

PROECUADOR and the Chinese Council for the Promotion of International Trade

(CCPIT) signed an agreement to bolster trade in multiple sectors (PROECUADOR,

2017).

In January 2015, the presidents of Ecuador and China established a historic

Strategic Partnership, which promotes political trust, strengthens cooperation in broader dimensions, and encourages international trade and investment initiatives (Andes, 2017).

China’s President stated, “The establishment of strategic partnership precisely reflects the level of China-Ecuador relations and will boost the development of the ties” (Chinadaily,

2016). As part of the new Strategic Partnership, both Presidents announced the signing of new bilateral agreements in diverse areas, including energy, mining, and agriculture, during Correa’s second visit to Beijing (PROECUADOR, 2017). 66

President Correa affirmed that Ecuador's relations with China were strategic and complementary, as the alliance was vital to change Ecuador’s energy and productive matrix (El Universo, 2017). At the same time, according to Ecuador, it allowed a shift from an oil-dependent economy to a knowledge-based economy (Correa, 2016).

Similarly, Xi Jinping, the first Chinese President to officially visit Ecuador, stated that

China’s bilateral relations with Ecuador were the paradigm of China’s efforts to strengthen ties with the Community of Latin American and Caribbean States (CELAC)

(Angulo, 2016). In 2016, Ecuador became part of the group of nations (including Brazil,

Argentina, Venezuela, and Peru) that improved ties with China to a Comprehensive

Strategic Partnership, that is, the collaboration between both countries went beyond economic and political ties, and included cooperation related to science and technology, education, culture, and arts, among others (Ministry of Foreign Affairs of Ecuador,

2017).

Figure 12. Presidents Correa and Jinping in Quito, 2016. Image from: La República (2016) www.larepublica.ec

The Ecuadorian government signed further bilateral agreements with China during Xi Pinging’s visit to Quito in November 2016 (Fig. 12). According to Ecuador’s

Ministry of Foreign Affairs, the agreements involved diverse fields such as financing, politics, communication, culture, extradition, and strategic production (Ministry of

Foreign Affairs of Ecuador, 2017). Correa’s administration has defined China as a strategic partner for Ecuador in terms of development and funding for emblematic projects, including hydroelectric dams, highways, hospitals, and public works (Garzón,

2016). Moreover, China aimed to help Ecuador boost its capacity to achieve independent development (Narins, 2012). President Correa asserted “Unlike the International 68

Monetary Fund or the World Bank, China prioritizes non-interference and non- conditionality towards beneficiary countries, and at the same time provides technology transfer” (Correa, 2016).

In addition to stating that “Ecuador serves as a paradigm for relations with other countries in the region,” President Xi Jinping also stressed the importance of mutual political interests and the high level of trust between both nations. Additionally, China’s leader claimed that economic collaboration must be mutually beneficial, and projects executed with Chinese resources must contribute to Ecuador’s development and increase the living standards of the Ecuadorian people. He recalled his own words during the 2015

China-CELAC Forum (MFAPRC, 2015):

[…] we need to commit ourselves to the cooperation principle of acting as equal partners. Countries big and small all have their own merits. China and CELAC members, however different in size, strength and level of development, are equal members of the China-CELAC Forum family. We may come together […] so as to lay a solid political foundation for overall cooperation. […] we need to ensure open and inclusive cooperation. In conducting the cooperation within the China- CELAC framework, it is important to give full account to different interests and needs of various parties and accommodate each other's comfort level. We welcome active participation in China-CELAC overall cooperation by other regional organizations and multilateral institutions in Latin America and the Caribbean. The forum will therefore contribute to not only solidarity and collaboration between the two sides, but also South-South cooperation and development and prosperity of the world. […]

Among the bilateral agreements signed in November 2016 in Quito, China’s

President stressed the importance of the memorandum of understanding (MOU) associated to the reparation of hospitals and households affected by the earthquake that hit Ecuador’s coast in April 2016. According to the Ecuadorian Ministry of Foreign 69

Affairs, China gave Ecuador more than US $150 million for this disaster, which was the largest development assistance in the history of the country (El Telégrafo, 2017). Along with the agreements signed for earthquake relief, Ecuador and China used the opportunity to sign new financial agreements. Guillaume Long, Chancellor of Ecuador at the time, stated that the agreements mainly consisted of Chinese credits intended to change

Ecuador’s productive matrix and strengthen the productive capacities of both countries.

Similarly, Correa’s administration emphasized the importance of the agreement signed between the Ministry of Industries and Productivity of Ecuador and Ministry of

Commerce of China because it promotes the production and investment in strategic sectors including energy, infrastructure, mining, manufacturing, agriculture, and science and technology (El Telégrafo, 2017). The agreement aligned perfectly with Objective 10 in GLNP (2013-2017), which drove an initiative to transform the productive matrix and to promote new sectors with high productivity levels in order to decrease oil dependency

(GLNP, 2017).

Another bilateral agreement was signed between Ecuador’s National Secretariat for Policy Management and the State Ethnic Affairs Commission of China. The purpose of this agreement was to foster cooperation in terms of ethnic issues and encourage technical collaboration in areas such as culture, education, economy, and communication.

(El Telégrafo, 2017). Furthermore, China’s government has demonstrated interest in strengthening Ecuador’s research capacities through training sessions, technology transfer, and technological development (Araujo, 2016). Research initiatives were established between the Defense Industries of China (Great Wall and China Asia Pacific 70

Mobile Telecommunication Satellite) and Ecuadorian Research Institutes, particularly the

Ecuadorian Space Institute (Díaz, 2013). In addition, these Ministries also signed the agreement on Cultural Cooperation between Ecuador and China for the period 2017-2020

(Ministry of Foreign Affairs of Ecuador, 2017).

The following excerpt summarizes the Joint Declaration, drafted after the consolidation of the Comprehensive Strategic Partnership and the establishment of bilateral agreements between Ecuador and China during Xi Jinping’s visit to Ecuador in

November 2016:

The Ecuadorian Party reaffirms its firm commitment to the One China policy. The Chinese Party expresses its support to Ecuador in its active exploration of the road to development […] Both Parties shall explore the full potential of complementarity of the economy and bilateral trade, promoting its sustained, stable and balanced growth […] Both Parties will strengthen cooperation in productive capacity and investments, and will execute important cooperation projects in the areas of hydrocarbons, mining, infrastructure, hydraulic works, communications and finance. Collaboration will also be actively explored in the fields of agriculture, petrochemicals, shipbuilding, metallurgy and papermaking, among others. The Chinese Party is willing to promote its cooperation towards technology transfer, in order to help Ecuador, accelerate its industrialization process and increase its capacity for independent development […]

The ambassador of China to Ecuador, Wang Yulin, declared that the economic and political cooperation between Ecuador and China had produced substantial benefits for both countries, as their economies are highly complementary and have potential for cooperation in areas such as energy, mining, agriculture, and technology (Xinhuanet,

2016). According to China’s Embassy in Quito, more than ninety Chinese companies operate in multiple sectors in Ecuador, including oil extraction, mining, and infrastructure 71 of strategic projects. Furthermore, the Chinese president recognizes human mobility as another sign of the strong ties that exist between Ecuador and China (Xinhuanet, 2018).

The Ministry of Foreign Affairs of Ecuador indicated that around seventy thousand ethnic

Chinese currently live in Ecuador. As stated by Ray and Chimienti (2016), this phenomenon was the result of a growing demand for Chinese workers to take part in infrastructure projects in Ecuador and the visa waiver agreement approved by both governments in 2015.

Ecuador’s government has stressed the importance of strengthening trade and investment relations with China, as the economic expansion of China represents an opportunity for many developing countries to regain their sovereignty and bolster a self- reliant development (Correa, 2016). Correa’s administration emphasized the common interests that Ecuador shares with the second largest economy in the world. At the same time, President Correa underlined China’s relevance for the integration initiatives of

Latin American countries such as the Union of South American Nations (UNASUR) and

CELAC (Beijing Review, 2016). Similarly, President Xi Jinping pointed out that bilateral relations with Ecuador align to the Chinese 13th Five-Year Plan and perfectly fit with

China’s desire to collaborate with Latin America through South-South cooperation and win-win relations (Xinhuanet, 2016). As Ray and Chimienti (2016) suggest, through the signing of multiple agreements and several State visits from both presidents, Ecuador and

China have consolidated political and economic ties over the last decade. Indeed, China has become Ecuador’s second largest trading partner, and investment and financing have grown exponentially in recent years (Xinhuanet, 2018). 72

Ecuador’s Trade with China

Despite the slowdown in China’s economic growth since 2012, President Xi emphasized that total trade between both countries reached US $4.1 billion in 2015, meaning that bilateral commerce quadrupled in ten years (Beijing Review, 2016).

However, Ecuador has shown a significant trade balance deficit with China since 2000, which increased over time (Fig. 13). For instance, in 2016, Ecuadorian imports from

China reached US $939 million, while exports amounted to US $2.26 billion, a trade deficit of US $1.32 billion that year (UN Comtrade, 2017). One interviewee suggested

“Trade relations with China are asymmetric. Ecuadorian exports to China are substantially smaller compared to Ecuador’s imports from the Asian country” (Personal

Interview, Businessman, Chamber of Commerce of Quito).

3.50

3.00

2.50

2.00

Billion 1.50 USD Dollars USD 1.00

0.50

0.00 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Years Ecuador imports from China Ecuador exports to China

Figure 13. Ecuador’s exports to and imports from China (1992-2016) Source: UN Comtrade (2017) 73

Ecuador’s imports from China have grown exponentially over the last 15 years, and China is Ecuador’s second largest import trading partner behind the United States. As

Elson (2014) posits, the Chinese consortium Andes Petroleum Corporation, through subsidiaries such as China National Petroleum Corporation (CNPC) and Sinopec, plays an important role in Ecuador’s trade imbalance because its subsidiaries demand the import of Chinese oil-extraction machinery and equipment (Araujo, 2016), resulting in substantial import growth between 2011 and 2014 related to oil drilling.

Once the oil drilling equipment was in place, Ecuador’s imports of large structures from China decreased, which reflects the recent decline in imports from China in 2015 and 2016 (Fig. 13): imports of oil machinery reached US $90.08 million in 2012 but decreased to US $1.17 million in 2016 (Table 7). Most recently, imports turned to tubes, pipes, iron, steel, and boring or sinking machinery (Oil Machinery) are among the main Ecuadorian purchases from the Chinese market from 2009 to 2016. Along with machinery related to natural resource extraction, Ecuador also imported high volumes of car components, and electrical and technological devices including telephones and

Computers (UN Comtrade, 2017).

Table 7

Ecuador's Imports from China. Principal Items (2009-2016) (US $ Million) Product 2009 2010 2011 2012 2013 2014 2015 2016 Oil Machinery 3.54 19.71 56.46 90.08 36.24 17.23 10.41 1.17 Iron and Steel 3.67 3.97 10.52 18.05 34.83 37.37 49.66 27.48 Tires 41.93 66.87 69.49 80.03 81.19 76.51 61.84 52.87 Vehicles 5.03 19.89 56.24 61.64 96.93 94.52 50.46 34.73 Electric 21.34 12.43 18.94 23.63 40.70 61.50 56.34 30.71 Transformers Electric 5.56 9.01 17.85 26.97 41.53 40.36 29.95 29.18 Conductors Telephones 48.70 52.42 93.57 84.03 101.88 105.88 125.83 89.78 Computers 7.78 10.62 20.24 26.87 42.72 57.03 33.74 22.15 Source: UN Comtrade (2017)

Oil is the most exported product to China. As of the first oil shipment in 2003, and particularly after China acquired Encana in 2006, petroleum (i.e., crude oil and oils obtained from bituminous minerals) has constituted the main commodity in Ecuador-

China bilateral relations. However, in recent years, Ecuador did manage to diversify its exports to China (Table 8).

Table 8

Ecuador's Exports to China. Principal Items (2009-2016) (US $ Million) Product 2009 2010 2011 2012 2013 2014 2015 2016 Crude Oil 723.47 410.75 369.14 712.09 490.88 506.79 494.13 332.42 Bananas 3.12 1.41 5.26 30.96 21.32 186.49 220.97 126.16 Crustaceans 1.69 6.34 36.92 39.26 55.53 141.94 185.79 96.65 Precious Ores 0.00 0.00 0.32 21.35 25.69 72.48 103.22 147.81 Animal Flours 6.71 10.56 35.74 29.72 73.03 35.69 46.66 77.21 and Pellets Sawn Wood 13.82 33.34 25.57 9.43 4.36 19.53 52.55 38.95 Source: UN Comtrade (2017) 75

Banana exports increased sixfold in 2012, from US $5 million to US $30 million, and had an exponential growth in 2014 and 2015, reaching US $186 million and US $220 million, respectively. Similarly, crustaceans ⎯ shrimps, prawns, and fishmeal⎯ skyrocketed from US $6 million in 2010 to US $55 million in 2013 and 185 million in

2015. Precious ores jumped from zero in 2010 to US $25 million in 2013, reaching US

$147 million in 2016. However, although Ecuadorian exports to China seem to have diversified, oil remains the most exported commodity to China. For example, oil exports in kilograms (kg) went from 746 million (kg) in 2014 to 1,1 billion (kg) in 2016 (UN

Comtrade, 2017). However, the sharp fall in the price of crude oil since 2014 resulted in lower revenues for Ecuador, despite the fact that the amount of oil exported increased

(Table 8).

Chinese Foreign Direct Investment in Ecuador

President Xi Jinping (2016) refers to Ecuador as “a top destination for Chinese investment and financing in Latin America”. Ray and Chimienti (2016) suggest that most of China’s foreign direct investment in Ecuador has been conducted under the framework of mergers and acquisitions (M&A): Chinese companies purchased the assets of companies that already operated in Ecuador or acquired the majority stake in the enterprises (Krugman, Obstfeld, & Melitz, 2014). The purchase of Canadian corporation

Encana in 2006 by Andes Petroleum represents a good example of China’s FDI in

Ecuador through “mergers and acquisitions”. On the other hand, China’s greenfield foreign direct investment in Ecuador, which consists on starting operations and production facilities in a foreign country from the ground up, represented less than 10% 76 of the total FDI China allocated in Ecuador over the last two decades (CBE, 2016). The

Chinese multinational Corporation, Huawei Technologies, is an example of China’s greenfield FDI in Ecuador.

Herrera and Lee (2017) claim bilateral agreements signed by Rafael Correa and

Xi Jinping account for the increase in Chinese capital investment in Ecuador since 2010.

In addition to bilateral agreements, Narins (2012) highlights that Chinese oil companies such as CNPC and Sinopec continued to operate in Ecuador in spite of the amendments to the Hydrocarbons Law promoted by President Rafael Correa in 2010. Reforms consisted of changing participation contracts, in which oil companies kept part of the extracted oil, to service contracts, in which the Ecuadorian government owned 100% of the oil and only pays companies a fixed rate (Ministry of Hydrocarbons, 2010). While multinational oil corporations such as Petrobras (Brazil) and Perenco (France) stopped operating in Ecuador after the reforms, China’s state-owned oil enterprises prioritized long-term diplomatic relationships over minor difficulties and continued working in

Ecuador’s oil sector (Ray & Chimienti, 2016).

Table 9

Chinese FDI in Ecuador, by sector (2002-2016) (US $ Thousand) Business Mining and Grand Year Commerce Construction Manufacturing Others Services Quarrying Total 2002 8 12 0 3 15694 22 15740 2003 0 233 0 44 18960 455 19692 2004 1 311 0 22 -7580 -439 -7684 2005 4 1775 0 1 -21722 27 -19914 2006 40 -351 0 7 11297 945 11940 2007 2 -1551 3 0 85389 997 84840 2008 19 71 5 0 46440 3 46538 2009 351 349 1 4 55528 64 56297 2010 0 196 7 25 44691 41 44960 2011 2 1433 25 137 78484 47 80128 2012 55 346 1 65 85320 80 85867 2013 160 354 0 60 93752 1 94326 2014 48 387 28 3965 74541 63 79032 2015 20012 396 41 359 92915 154 113877 2016 -9550 187 4623 243 62255 77 57835 Total 11153 4149 4735 4935 735965 2538 763475 Source: Central Bank of Ecuador (2017) Note: Others include: Agriculture, Electricity, Community services and Transportation

China’s foreign direct investment in Ecuador is mainly concentrated in the mining and quarrying sector (Table 9) with oil drilling related activities accounting for 96% of

Chinese total net inflows in the Ecuadorian economy from 2002 to 2016 (CBE, 2016).

According to Cori and Monni (2014), CNPC and Sinopec have been the Chinese oil companies with higher stakes in Ecuador’s oil sector since 2006. By acquiring oil extraction rights in numerous blocks, and by winning multiple concessions in the provinces of Sucumbíos, Pastaza, and Orellana, both Chinese companies became the most relevant oil producers in Ecuador (Ray & Chimienti, 2016). In addition to oil blocks and concessions, CNPC and Sinopec acquired 36.2% of the Heavy Crude Pipeline, the 78 principal pipeline in Ecuador, (Luzuriaga, 2017). However, Chinese presence in the

Ecuadorian oil industry is not limited to the two-large aforementioned multinational corporations; smaller companies such as Changqing Petroleum Exploration Bureau and

Shengli Oil Field Highland Petroleum also provide oil services in oil fields including the

Atacapi Parahuacu in the amazon region (Luzuriaga, 2017).

As Herrera and Lee (2017) state, Chinese energy projects in Ecuador range from hydroelectric power stations to wind parks because “China conducts projects that satisfy its own needs: Chinese capital investment is directly linked to China’s provisioning project” (Personal Interview, Businessman, Chamber of Commerce of Quito). For example, the Chinese government has supported the establishment of eight hydropower plants in strategic locations, including the largest hydroelectric plant in Ecuador, Coca-

Codo Sinclair, inaugurated in 2016, which would improve the energy supply for their other projects, but Rafael Correa asserts that China’s participation in these projects propelled Ecuador’s development in the long-term (Correa, 2016).

Figure 14. Main Projects funded by China in Ecuador Source: New York Times 2017

As seen in Figure 14, along with high levels of investment in the oil sector, China has also invested in infrastructure projects which encompass hydroelectric dams, highways, and numerous public works, such as the mining project “Mirador” in the province of Morona Santiago and a wind farm in the province of Loja (Ministry of

Foreign Affairs of Ecuador, 2017). However, unlike Chinese foreign direct investment in the oil sector, which mainly consists of mergers and acquisitions, China’s investment in other sectors has been linked to financial loans provided by the China Development Bank

(CDB) and the Export-Import Bank of China (Exim Bank) (Gallagher & Myers, 2017). 80

CHAPTER 5: CHINA’S OIL-FOR-LOAN INVESTMENTS IN ECUADOR

This chapter looks at China’s financial loans to Ecuador in depth, particularly for the construction of hydroelectric dams and other infrastructure projects. Case studies of

Coca-Codo Sinclair and Sopladora projects are presented. The chapter also analyzes

Ecuador’s pre-sales of oil to China. Further, it provides differing perspectives on China’s role as the largest creditor of Ecuador, based on personal interviews conducted with government officials and private company employees in Ecuador.

Ecuador’s Growing Indebtedness to China

In recent years, China has become Ecuador’s largest creditor. Ecuador sought financing from China to carry out its economic plan and public policies, even though

Chinese loans had higher interest rates (7%) than those offered by traditional western lenders (3%) (Gallagher et al., 2012). However, loans for Minas-San Francisco hydroelectric dam and the transmission system of the Coca-Codo Sinclair power plant, among others, used the LIBOR (London Interbank Offered Rates) rate plus an additional rate, which ranges from 2.5% to 4.20% (Ministry of Finance of Ecuador, 2016). As

Gallagher and Myers (2017) state, interest rate and payment period, between 8 and 15 years, depend on the scale of each financial transaction. Figure 15 shows the evolution of

Ecuador’s national debt with China as a percentage of the GNI during the last decade. 81

9 8% 8

6 5% 5% 5% 5

4 3.2% % of GNI % of 2.9% 3

2 1.2% 1 0% 0% 0% 0% 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Years

Ecuador's National Debt to China

Figure 15. Ecuador’s national debt to China (2006-2016) (Percentage of Gross National Income) Source: Finance Ministry of Ecuador (2017)

Ecuador’s national debt to China has grown rapidly under the Correa administration (Fig.15). The amount of debt reached US $8.1 billion in 2016, representing 8% of Ecuador’s GNI (US $98.6 billion) and approximately 32% of

Ecuador’s total public external debt in the same year (US $25.6 billion) (CBE, 2017).

This significant increase is related to high levels of public spending, which amounted to

US $38.5 billion in 2016 (Montenegro, 2018). The government of Ecuador asserted

“China has played a key role in Ecuador’s development, since Chinese financing allows the country to complete emblematic projects aligned to the Good Living National Plan”

(Correa, 2016). 82

Table 10

China’s financial loans to Ecuador (2010-2016) Amount Date Purpose Lender (US $) 2010 Coca-Codo Sinclair hydroelectric dam China Ex-Im Bank 1.7B 2010 80% discretionary, 20% oil CDB 1B 2011 Sopladora hydroelectric dam China Ex-Im Bank 571M 2011 Renewable energy development CDB 2B 2012 Finance 2013 budget deficit CDB 2B 2013 Road to Quito airport China Ex-Im Bank 80M 2013 Minas-San Francisco hydroelectric dam China Ex-Im Bank 312M 2014 Finance Coca-Codo dam transmission system China Ex-Im Bank 509M 2015 Transportation, education, and health care projects China Ex-Im Bank 5.3B 2015 Finance 2015 Annual Investment Plan CDB 1.5B 2015 Replace kitchen stoves China Ex-Im Bank 250M 2016 Yachay education complex China Ex-Im Bank 198M 2016 Non-discretionary and infrastructure CDB- ICBC 2B Total 17.4B Source: Gallagher & Myers (2017) Note: Table 10 includes loans granted and approved credit lines

According to the China-Latin America Finance Database, Ecuador has received

US $17.4 billion from China since 2010 (Table 10). However, Fausto Herrera, Minister of Finance of Ecuador, argued that Ecuador only records the loans that have been officially executed by the government (Araujo, 2016). For example, as regards to the line of credit that was opened on January 6, 2015 with the Exim Bank of China (US $5.3 billion), Herrera declared that the government would only tap US $1.5 billion during

2015 (Reuters, 2015). Thus, Ecuador’s public debt to China, according to the Finance

Ministry of Ecuador, amounted to US $8.1 billion in 2016. China has provided several lines of credit to Ecuador since 2010, but unfortunately, the exact amount is unknown 83

(Araujo, 2016). The estimated amount of loans received approximates US $11.3 billion

(El Universo, 2017). Furthermore, most Chinese loans are linked to pre-sales of oil contracts, defined as “oil-for-loans deals” (Fiscal Policy Observatory of Ecuador, 2017), representing another obstacle in the procurement of accurate figures. The lack of transparency hampers the determination of the exact amount of loans Ecuador has received from China over the past decade.

Ecuador’s Oil-for-Loan Deals with China

Oil-for-loans deals between Ecuador and China started in 2009, when Petrochina granted US $1 billion to Ecuador in exchange of oil barrels for the next two years (Awan,

2014) (Table 11). Since then, Ecuador has signed eight contracts with China for the pre- sale of oil (Araujo, 2016). Four institutions are involved in oil-for-loans agreements:

Ministry of Finance of Ecuador, Petroecuador, Petrochina, and China Development Bank

(Villavicencio, 2014). These transactions have also been regarded as financial loans, since these agreements also have an interest rate and a maturity date (Araujo, 2015).

However, “it is difficult to discover financial details of the oil-for-loan deals, because

Chinese lenders do not publish systematic data like the International Financial

Institutions” (Gholz, Awan, & Ronn, 2017).

Ray and Chimienti (2016) explain Ecuador’s oil-for-loan deals with China as follows: “China Development Bank (CDB) lends money to Ecuador, which, in exchange, gives a prescribed amount of oil to China’s oil companies. The companies pay for the oil at current market rate: part of their payment goes to an account at the CDB to repay

Ecuador’s loan, and the remainder is paid to Ecuador” (p. 15). To reduce the risk of an 84 eventual non-payment, China requested the Ministry of Finance of Ecuador to maintain a mandatory minimum balance of US $130 million in Petroecuador's CDB account, from which China deducts the money to pay the loan. After Ecuador failed to meet contractual obligations5, the minimum balance was raised to US $200 million (Orozco, 2018).

Table 11

Ecuador’s Oil-for-Loan Deals with China Barrels Ecuadorian Chinese Payment Period (Million) Status Partner Partner July 2009 to July 2011 69 Paid Petroecuador Petrochina August 2010 to August 2014 51.8 Paid Petroecuador Petrochina June 2011 to 2016 118.8 Paid Finance Min CDB 2011 to 2019 Unknown - 2012 to 2020 Unknown - 2013 to 2017 Unknown - January 2016 to January 2021 76.3 Pending Petroecuador Unipec April 2016 to 2024 181 Pending Petroecuador Petrochina Source: Araujo/Petroecuador (2016)

President Correa emphasized that oil-for-loans deals contributed to Ecuador’s development because “they secure Ecuador’s oil market share, selling oil at market price plus a premium, and allow the country to access funding” (Correa, 2016). The Ministry of Finance of Ecuador noted that financial loans granted by China are not repaid with crude oil, but with money, and a government official claimed, “there is no oil guarantee

5 Ecuador could not fulfill oil pre-sale contract #2011203 because the Refinery of the Pacific did not start to operate. (http://www.elcomercio.com/actualidad/ecuador-venta-petroleo-petrotailandia-petroecuador.html). 85 in the two agreements and oil contracts with China do not jeopardize economic resources for upcoming administrations” (Personal Interview, Government Official, Ministry of

Electricity and Renewable Energy). However, the Fiscal Policy Observatory of Ecuador indicated that oil pre-sale contracts signed in 2016 were tied to credits subscribed between the Ministry of Finance of Ecuador and Chinese banks (Fiscal Policy

Observatory of Ecuador, 2017), which were signed the same day as oil pre-sale agreements, and both commitments have the same maturity date (Araujo, 2016).

One interviewee asserted that “oil pre-sale contracts with Chinese companies and banks have been subscribed without tenders” (Personal Interview, Businessman,

Chamber of Commerce of Quito). Former Minister of Energy of Ecuador argued that “in direct oil sales, the country loses when there is no bidding, because there are no competitors that improve the price of crude oil” (Araujo, 2016). Ray and Chimienti

(2016) posit that these contracts pose risks for Ecuador, as fluctuating oil prices could significantly affect the agreement. If oil prices fell, Ecuador would have to sell more barrels of oil in order to repay China’s loans. Further, Ecuadorian oil production (approx.

415,000 barrels per day) depends on exogenous and endogenous factors, such as new regulations issued by OPEC or technical problems in oil drilling machinery and equipment (CBE, 2016). Therefore, economic analysts, including Vicente Albornoz,

Dean of the Economic Department of UDLA, and Jaime Carrera, Secretary of the Fiscal

Policy Observatory of Ecuador, pointed out that it is unlikely that the next government will be able to meet the financial obligations to China; hence, Ecuador’s public debt with

China will have to be renegotiated in the future (Villavicencio, 2014). 86

Chinese Financial Loans for the Construction of Hydroelectric Dams

Multiple infrastructure projects were initiated and completed in Ecuador with

China’s financial support in recent years. Villavicencio (2014) noted projects were concentrated in the energy sector, particularly in the construction of hydroelectric dams.

“Coca-Codo Sinclair and Sopladora hydroelectric dams are emblematic projects for the country, and it would not have been possible to build them without Chinese funding”

(Personal Interview, Government Official, Ministry of Foreign Affairs). According to

President Correa, these projects allowed Ecuador to change its productive matrix and rendered the country more competitive in international markets, paving the way for sustainable development (SENPLADES, 2015). Nonetheless, “China mainly directs loans to projects looking after its own benefit. China’s interest in hydroelectric dams, for example, results from the energy they provide for China’s extraction projects in the region” (Personal Interview, Businessman, Chamber of Commerce of Quito).

Figure 16. Coca-Codo Sinclair hydroelectric dam Source: El tiempo 2017

The main purpose of the hydroelectric dam Coca-Codo Sinclair project consisted of building a source of sustainable energy using the flows of Quijos and Coca rivers, in the Amazon region (CELEC, 2016). Ecuador’s electric companies performed numerous analysis of the project’s economic viability, but it was not considered a relevant project until 2007, when it was included in the Electrification Master Plan of Ecuador 2009-2020

(PME) (CONELEC, 2009). The government asserted “PME was issued along with other relevant official documents, including the Good Living National Plan, in order to promote projects that help the country overcome the energy supply crisis” (Personal

Interview, Government Official, Ministry of Electricity and Renewable Energy). 88

Ecuador aimed to become energy self-sufficient and reduce oil imports for power plants (SENPLADES, 2015). Indeed, “the construction of the hydroelectric plant will generate income from the export of energy surpluses; this will improve the economic conditions of the country” (Personal Interview, Government Official, Ministry of

Electricity and Renewable Energy). In 2008, the project was brought into operation under the management of an Ecuadorian company, and in 2009, a Chinese company became the only foreign investor in the construction of the hydroelectric plant. The contract was signed between the Ministry of Finance of Ecuador and the Exim Bank of China, which granted Ecuador US $1.7 billion to gain absolute control of the project (El Telégrafo,

2016).

Coca-Codo Sinclair, the largest hydroelectric dam in Ecuador’s history, was inaugurated in November 2016 by Presidents Correa and Xi Jinping. According to the

Finance Ministry of Ecuador, the total cost of the hydroelectric plant was US $2.2 billion, and the government expected Coca-Codo to produce 1500 MW of energy (Finance

Ministry of Ecuador, 2017). Former Minister of Electricity and Renewable Energy of

Ecuador, Esteban Albornoz, asserted that the project would save Ecuador US $600 million per year (El Telégrafo, 2016). However, the project faced various drawbacks, including the flooding of a tunnel where thirteen workers lost their lives. “These events evidence some of the bad practices employed by Chinese companies, aggravated by the language barrier. The vast majority of Chinese laborers working in Ecuador speak little or no Spanish” (Personal Interview, Businessman, Chamber of Commerce of Quito).

Figure 17. Sopladora hydroelectric plant Source: El tiempo (2017)

Similarly, the Sopladora hydroelectric plant project (Fig. 17) was financed by the

Exim Bank of China in 2011, through a Chinese financial loan of US $571 million, with an interest rate of 6.35%, a maturity of 15 years, and a 4-year grace period (Ministry of

Finance of Ecuador, 2016). The Chinese consortium Gezhouba-Fopeca implemented the different phases of the project from 2011 until its inauguration in 2016 (El Telégrafo,

2017). Located between the provinces of Azuay and Morona Santiago, Sopladora is the second largest hydroelectric plant among the eight hydroelectric plants supported by

Chinese companies and banks, promoted by Ecuador’s government to change the energy matrix. Sopladora contributes to Ecuador’s National Interconnections System with 487

MW of energy (El Universo, 2017). At the same time, as President Correa noted, 90

Sopladora constituted an innovative project which employed technologies that reduced carbon emissions (Correa, 2016).

Esteban Albornoz asserted, “Ecuador will no longer import energy; on the contrary, we will export it” (El Telégrafo, 2016). Similarly, one interviewee suggested

“Sopladora hydroelectric power plant was another example of the efforts of Ecuador’s government to change the productive matrix. The project contributes to the “good living”, since electricity produced by Sopladora will improve the living standards of many

Ecuadorians” (Personal Interview, Government Official, Ministry of Electricity and

Renewable Energy). However, the Ecuadorian government announced that the Sopladora hydroelectric plant would be part of a bidding system as of November 2016 (El Universo,

2016). The objective behind this strategy was to generate economic resources to solve the financial problems caused by the earthquake (April 2016) and the fall in oil prices. The

Ministry of Finance of Ecuador specified that the hydroelectric plant had a value of US

$900 million, and the government was analyzing several proposals from the private sector (Finance Ministry of Ecuador, 2017).

In addition to financing Coca-Codo Sinclair and Sopladora hydroelectric dam projects, China participated in the construction of small-scale hydroelectric dams in

Ecuador, including Minas-San Francisco (Harbin, Chinese company), Toachi-Pilaton

(CWE, Chinese company), Delsitanisigua, Quijos, and Mazar-Dudas (China National

Electric Engineering Company), and Manduriacu. However, “as Ecuador accepts Chinese funding at any cost, several projects cannot be put into practice” (Personal Interview,

Businessman, Chamber of Commerce of Quito), resulting in only three operating 91 hydroelectric dams (Araujo, 2016). Although one interviewee pointed out that “the fall of world oil prices was the main reason the government could not finish the projects”

(Personal Interview, Government Official, Ministry of Finance), Quijos and Mazar-

Dudas projects, for instance, are stagnated because of breaches of technical and quality norms, and lack of adequate machinery and workforce (El Universo, 2017).

Other Infrastructure Projects Funded by Chinese Loans

China has provided financial assistance to support other infrastructure projects in

Ecuador. For instance, China Gezhouba Group Company Ltd. has managed the construction of Yachay University, “the city of knowledge, created for the development of research, science, and technological applications necessary to achieve the objectives of the Good Living National Plan” (Yachay, 2016). President Correa asserted “Yachay is the most important project in the history of the country” (El Telégrafo, 2015), which is why the government considered it convenient to fund the project through Chinese loans.

In 2016, China’s Exim Bank granted Ecuador US $198 million to fast-track the construction of the Yachay complex (Gallagher & Myers, 2017).

However, “despite China’s financial and technical support, Yachay is only a fantasy of the Citizen Revolution” (Personal Interview, Businessman, Chamber of

Commerce of Quito). A report issued by public enterprise Yachay EP in 2017 indicates that the complex lacks classrooms, laboratories, and basic services, and that buildings present design faults (Bravo, 2017). Researchers argued that Yachay facilities do not have the appropriate technology; therefore, they must travel to other countries to conduct their research projects (Rodríguez, 2017). One interviewee suggested that “Yachay is 92 facing problems because the government deemed high oil revenues as permanent income.

When prices fell, the country’s economy wobbled. In addition, the Chinese company in charge, Gezhouba, has a poor international reputation because of bad practices” (Personal

Interview, Businessman, Chamber of Commerce of Quito).

Transportation has also received China’s financial assistance through the enhancement of roads (Ministry of Transport and Public Works of Ecuador, 2017). The

China Civil Engineering Construction Corporation was the company in charge of completing road construction in Ecuador, including the new road to Quito’s airport

(Coallas-Tababela), the improvement of the Sigchos-Chugchilán highway, and the extension of the Ordoñez Lasso Avenue, among others (Araujo, 2016).

Finally, it is worth mentioning that China has become a strategic partner in the construction of the Refinery of Pacific, which is currently stalled due to lack of funding

(El Universo, 2017). China also supported education, science, technology, and innovation projects in Ecuador through programs such as the Prometheus project, a government initiative that seeks to strengthen research, teaching, and the transfer of knowledge through the involvement of foreign researchers (Prometeo, 2017).

Perspectives on China’s Role as the Largest Creditor of Ecuador

As a result of the aforementioned strengthening economic and political ties between Ecuador and China over the last decade, China has become Ecuador’s largest creditor which is directly related to oil pre-sale contracts and infrastructure projects (Ray

& Chimienti, 2016). But China’s growing presence in the Ecuadorian economy has raised different perceptions among different stakeholders involved in the dynamics of this 93 bilateral relation. So as to gain a deeper understanding of these perceptions, individuals from both the public and private sectors were interviewed. Interviews were analyzed to find topics common to all participants. Thus, the following themes were identified:

Financial Loans

Financial loans constitute the main aspect in the bilateral relation between

Ecuador and China. When asked about the growing indebtedness with China, participants provided different perceptions. Some interviewees stressed the importance of Chinese funds as they are readily available and represent a new source of funding, different from the traditional western lenders, including the United States, the European Union, and international organizations such as the World Bank and the IMF:

Obtaining credits through the World Bank and other financial institutions is a very long and complex process. Also, the procedure is subject to macroeconomic conditions, which are usually like those of the FMI. Chinese institutions, on the other hand, provide financial aid regardless of the political and economic policies of the recipient country. As China’s mechanisms do not interfere in Ecuador’s policy-making regulations, our sovereignty is not compromised (Personal Interview, Government Official, Ministry of Finance).

Another interviewee added that “China has emerged as an alternative to western funding.

Chinese funding has allowed Ecuador to dodge liquidity issues and implement several infrastructure projects” (Personal Interview, Government Official, Ministry of Foreign

Affairs).

In contrast, some interviewees raised concerns regarding Ecuador’s large indebtedness with Chinese institutions. Ecuador´s debt to China is deemed to be excessive due to the 6-7% interest rates, which are high when compared to those offered 94 by the IMF or the World Bank (2-3%). As one interviewee suggested, “Chinese loans are expensive because of their high interest rates and short maturity dates, which range from

8 to 15 years” (Personal Interview, Businessman, Chamber of Commerce of Quito).

Another participant asserted that “the amounts China granted Ecuador are so exorbitant, that it is very likely that the government may be unable to fulfill its obligations”

(Personal Interview, Businessman, Chamber of Commerce of Quito).

The discretionary nature of Chinese loans was quoted by some interviewees as an advantage. However, other participants considered it negative due to the intrinsic lack of transparency, as “there is no way to control how the money is spent and to which projects or initiatives it is allocated” (Personal Interview, Businessman, Chamber of Commerce of

Quito). Particularly, one interviewee claimed, “Chinese loans are often used to support the government’s elevated public spending” (Personal Interview, Businessman, Chamber of Commerce of Quito).

Several interviewees payed special attention to the fact that “Chinese loans are allocated to those sectors meaningful to accomplish China’s goals, such as hydroelectric dams and oil projects, which constitute their main energy source” (Personal Interview,

Businessman, Chamber of Commerce of Quito). Further, several interviewees raised a specific concern regarding oil as the guarantee for Chinese loans:

Most of loans Ecuador has received from China are backed-up with oil pre-sale contracts: China grants Ecuador a loan and, in exchange, Ecuador must send oil to China until the amount is paid off. This way, the repayment of the loan is directly linked to world oil prices, which are very volatile (Personal Interview, Businessman, Chamber of Commerce of Quito).

Conversely, one government official pointed out that “loans are not granted unless we provide any sort of guarantee. Thus, we can take advantage of our own natural resources to access funding that creates long-term development” (Personal Interview,

Government Official, Ministry of Finance).

Oil-for-Loan Contracts

Not only do financial loans and oil pre-sale contracts go hand in hand, they mutually support and sustain each other. As a government official explained,

the oil-backed loans model was not China’s invention. Many years ago, when the Chinese government could not easily access funding, China was in Ecuador’s shoes. Then, due to their unprecedented economic growth, they took that model and applied it in developing nations that owned the natural resources they needed. That way, it becomes a win- win situation: China lends us money, which we need to implement projects, and we export natural resources to them. No one loses (Personal Interview, Government Official, Ministry of Foreign Affairs).

Another official pointed out, “at a time when many countries are losing ground in the oil market, we ensure our market share by promising to sell oil to China, which pays

Ecuador the market price per barrel plus a premium and offers our country access to funding” (Personal Interview, Government Official, Ministry of Finance).

Yet, a participant stated that “the country committed its oil reserves for a fixed term during which there is a percentage of Ecuador’s oil production that cannot be sold to other countries. This is detrimental for the country, as there are no tenders that allow

Petroecuador to raise the oil price” (Personal Interview, Businessman, Chamber of

Commerce of Quito). Further, another businessman suggested that “once Petrochina has received oil from Ecuador, the company sells oil barrels to the United States, Chile, and 96

Peru, thus breaking the law” (Personal Interview, Businessman, Chamber of Commerce of Quito).

Another concern expressed by some participants results from the secrecy surrounding the oil pre-sale contracts. As an interviewee noted, “all provisions in oil pre- sale agreements signed with China are not publicly known in detail, so we never know if the pre-sale is linked to a loan or to Chinese investment. It is not fair that the population of a democratic country should mistrust their representatives” (Personal Interview,

Businessman, Chamber of Commerce of Quito).

As several participants claimed, the confidentiality of oil pre-sale contracts has led, in many instances, to irregularities:

Secret provisions in contracts enabled authorities to incur in corrupt practices. In 2012, Ecuador signed two agreements with Petrochina and Unipec for eight years, even though Petroecuador’s regulations only allow contracts for up to two years. Later, according to a report issued by Contraloría General del Estado (General Comptroller of Ecuador) in 2012, we found out Ecuador had lost US $48 million, after the implementation of a formula used to calculate the price of Ecuadorian crude oil (Personal Interview, Businessman, Chamber of Commerce of Quito).

But oil pre-sale contracts constitute only a fraction of Chinese investment: “as

China needs energy to power oil drilling, they have directed most of its investment towards energy-production projects” (Personal Interview, Government Official, Ministry of Electricity and Renewable Energy).

Infrastructure Projects

As mentioned above, China’s participation in Ecuador is visible through funding for infrastructure projects. One interviewee highlighted that “the construction of many 97 highways, which ease and fasten the transportation of raw material and manufactured goods, would have not been possible without their funding. China has allowed us to streamline our economy and, therefore, has contributed to the country’s development”

(Personal Interview, Government Official, Ministry of Transportation and Public Works).

Also, several participants stressed the fact that projects implemented through Chinese investment “have created thousands of new direct job opportunities” (Personal Interview,

Government Official, Ministry of Electricity and Renewable Energy).

Further, as Chinese projects involve the participation of Chinese workforce, “the presence of Chinese executives and workers has contributed to the creation of indirect sources of employment. They must settle in Ecuador for months, or maybe years, so they contribute to the real-estate sector and to domestic consumption” (Personal Interview,

Government Official, Ministry of Finance). Another participant also emphasized the importance of China’s presence for Ecuador’s labor market: “Chinese firms have created job sources that allow for technology transfer, which helps us create workers specialized in the production of innovative devices” (Personal Interview, Businessman, Huawei).

Nonetheless, a participant explained that “projects financed by China implement

Chinese work practices, which lead to poor working conditions, such as longer hours and low income. As a result, unions organized strikes, and projects have been stalled”

(Personal Interview, Chamber of Commerce of Quito). Another interviewee added that

“even though the government claims Chinese-funded projects boost employment, they fail to acknowledge that many job positions are only for Chinese citizens, who barely speak Spanish” (Personal Interview, Businessman, Chamber of Commerce of Quito). 98

Another concern expressed by some participants is related to the import of

Chinese products:

In projects funded by China, Ecuador must implement not only Chinese equipment, but also Chinese supplies, such as screws and nuts. These are not high-tech products, and they could easily be purchased from an Ecuadorian company to foster domestic production. By contract, Ecuador needs to buy Chinese products, which are much more expensive than products in the Ecuadorian market (Personal Interview, Chamber of Commerce of Quito).

After analyzing the interviews, some conclusions can be drawn. On the one hand, government officials highlight the importance of China’s growing presence in Ecuador’s as its larger creditor, since Chinese funding has permitted the implementation of infrastructure projects, which create job opportunities and contribute to the country’s development. Further, officials have also pointed out that contracts with China have allowed Ecuador to access international funding and secure its market share for oil in the long run. On the other hand, most businessmen warned about the potential consequences that could arise from the escalating bilateral relation between Ecuador and China. The main concern identified was the excessive amount of long-term debt Ecuador has acquired with China, which could result unpayable. Also, they pointed out that contracts’ provisions are unclear and, in some instances, unfair, as projects demand the use of

Chinese labor and supplies, undermining domestic industries and work market.

While this study is focused on stakeholders’ insights of China’s role in Ecuador’s economy, people’s opinion should also be considered. For this purpose, the survey 99 conducted by the Latin American Public Opinion Project (LAPOP) in Ecuador in 20146 was analyzed. According to the survey, and in line with the perception of government officials, more than 50% of respondents believe the Chinese government is Ecuador’s most reliable partner. As Pachano and García (2013) state, this sympathy might have arisen from the Correa administration’s rhetoric supporting China’s growing presence as an alternative to imperialist policies during the last decade as shown in Figure 18.

60 51.3 50 42 40

27.6 30 Average

0 Government of China Government of Iran Government of USA

Figure 18. Ecuadorians’ level of trust in foreign governments Source: LAPOP (2014) 95% Confidence Interval

6 The Latin American Public Opinion Project (LAPOP) conducted a survey in 2014 to determine the Ecuadorian population’s opinion regarding China’s participation in their country’s economy, for which 1,500 people were provided an electronic questionnaire. 100

A New Course in Ecuador’s Bilateral Relations with China?

Rafael Correa’s vice-president in 2007-2013, and the presidential candidate of the ruling party (Alianza País), Lenin Moreno was elected President of Ecuador in May 2017

(BBC, 2017). Moreno decided to distance himself from his predecessor and determined not to pursue several policies implemented by the previous administration (The

Economist, 2017). Regarding external debt, President Moreno stated that “Ecuador’s economic condition is critical” and Ecuador will need US $8 billion per year to repay the

“excessive indebtedness” that his administration “inherited” from Correa’s government.

President Moreno also regretted the many “white elephants” existing across various sectors of the economy as a result of mismanagement and claimed the government will adopt policies to reduce public spending and foster investment (Deutsche Welle, 2017).

President Moreno manifested that “we all know Ecuador’s economic situation has been challenging since 2015” due to a fall in oil prices, low raw material prices, and the appreciation of dollar, which added to the consequences of the earthquake of April 2016

(El Universo, 2017). Moreno also claimed that “as we had scarce liquid funds, the government resorted to internal and external financing. When the country faced a complex economic situation, decisions made were not accurately measured and the sustainability of our economy was taken to the extreme,” asserted Ecuador’s new

President, criticizing the previous administration.

In order to remedy the current economic situation, Moreno’s administration is focused on enforcing austerity measures in terms of public spending and optimization regarding the use of public resources, especially for staff recruitment, consulting, 101 advertising, transportation, and traveling, among others (El Universo, 2017). Further, the government is seeking to renegotiate the Ecuadorian debt to China so as to make oil available for spot sales and reduce the number of barrels that Ecuador has to send to the

Chinese market (Reuters, 2017). The renegotiations of oil pre-sale contracts between

Ecuador and Chinese companies Petrochina and Unipec began in October 2017.

The Ecuadorian government argues that the formula applied to calculate the price of crude oil included in the contracts is no longer valid, as it lacks a key component regarding the quality of the commodity (Pacheco, 2017). Ecuadorian representatives proposed a new formula known as “Platts” which would allow Ecuador to receive around

US $0.50 extra per barrel delivered to Chinese companies. However, Ecuador did not succeed, as both oil companies rejected the amendment in the contracts (Orozco, 2018). It remains to be seen whether the renegotiation of contracts will be effective and if Ecuador can fulfill its financial commitments to stay afloat in the global economy.

102

CHAPTER 6: CONCLUSIONS

This study has examined Ecuador’s ever-tightening economic relationship with

China during the last decade. Trade and investment ties between both countries rose sharply after the election of Rafael Correa as President of Ecuador in 2007. Correa’s administration ⎯ aligned with the principles of the 21st Century Socialism⎯ sponsored an economic model detached from foreign influences, particularly those imposed by the

United States. Since China was seeking new markets from which to obtain natural resources and new buyers for its manufactured products, Ecuador’s government regarded

China as an ideal trading and financial partner to support its development model. Rafael

Correa described bilateral relations with China as a “win-win” strategy, extremely beneficial for Ecuador. Similarly, President Xi Jinping claimed Ecuador was the paradigm of Sino-Latin American relations under the framework of South-South

Cooperation. However, this study concludes that although trade and investment relations between Ecuador and China experienced an unprecedented growth, concerns arise regarding the potential consequences resulting from this partnership.

Trade relations between Ecuador and China have substantially increased as of

2009, after both countries signed bilateral trade agreements. President Xi Jinping highlighted the fact that China became Ecuador’s second largest trading partner (Beijing

Review, 2016). Yet, after analyzing data retrieved from the UN Comtrade database,

Ecuador’s trade relation with China is mainly based on Ecuadorian imports from China.

Therefore, Ecuador’s trade balance with China reflects a sustained deficit, which in 2014 exceeded US $2 billion (UN Comtrade, 2017). As regards Ecuadorian exports to China, it 103 is not among Ecuador’s top ten trading partners: China represents less than 5% of

Ecuadorian total exports. This study concludes that this asymmetric trade relation between Ecuador and China is disadvantageous for Ecuador, unlike the relation between

Ecuador and the United States. Ecuador’s trade balance with the United States registers a consistent trade surplus, which amounted to US $2.3 billion in 2016 (UN Comtrade,

2017). Thus, the United States remain Ecuador’s main and most profitable trading partner. China has taken from Ecuador but does not reciprocate; this is an unsustainable relationship that will ultimately end badly for Ecuador.

Chinese foreign direct investment (FDI) in Ecuador has also increased over the last decade. After analyzing data provided by the Central Bank of Ecuador (CBE), this study found that the vast majority of Chinese FDI in the South American country has been conducted under the Mergers and Acquisitions (M&A) method. China’s multinational corporations, including the China National Petroleum Corporation (CNPC) and Sinopec, have played a major role in this matter, as most Chinese FDI in Ecuador has been directed to oil drilling activities. In addition to holding the highest stake in

Ecuadorian oil fields, China is also involved in the energy sector, particularly thorough the establishment of eight hydroelectric dams, which provide the energy China needs to extract oil for itself. Additionally, China’s FDI favors Chinese laborers and contractors, as FDI agreements demand the participation of Chinese workforce and the use of Chinese products and services in the projects funded by China.

This work concludes that the rationale behind China’s funding of infrastructure projects in Ecuador is that China only provides a “tied-aid”: funding is provided on the 104 condition that the project funded contributes to satisfying China’s needs and Chinese workers are employed (Sun, 2014). Other concerns have been raised among businessmen regarding the provisions in FDI agreements, as the use of low-technology Chinese supplies is detrimental to Ecuador’s domestic production and the employment of Chinese labor undermines the Ecuadorian labor market. Furthermore, this study discovered that only three of these projects are active and the remaining five hydroelectric dams are stalled or delayed due to lack of funding or bad practices, as in the case of Quijos hydroelectric dam.

As regards loans, high interest rates and short maturity dates render Chinese loans more expensive than those from traditional lenders, such as the FMI and the World Bank.

However, unlike financing from these institutions, Chinese loans are related to securing

Ecuador’s natural resources, which is why most Chinese financing to Ecuador is linked to oil pre-sale contracts: China provides Ecuador access to financing and Ecuador agrees to repay the loan with oil into the future, with interest. While it is true that Ecuador can seize its natural endowments to foster long-term development through infrastructure projects, and China’s funding is readily available to implement the plan, pre-sale contracts with China prevent Ecuador from having its entire oil production available for sale to other countries, as part of the production must be saved to repay the loan.

The lack of tenders for “on-the-spot” sales prevents Ecuador from raising the price of oil, which becomes counterproductive for the country’s economy. Further, the vagueness of pre-sale contracts, resulting from undisclosed provisions, make it hard to know whether the sale of oil is linked to loans or investments, and the secrecy triggers 105 opportunities for irregularities, as is the case of the use of a formula to calculate crude oil price, which resulted in a 48-million-dollar loss to Ecuador (Orozco, 2018). The lack of accountability fostered by Chinese practices has prompted opposition (Kalathil, 2018) in

Ecuadorian leaders and citizens, as they feel the government is making the exact mistakes they made in the past.

While the sample of this study is small, the study could be replicated in a larger and more diverse population to achieve results that are more representative of Ecuador’s reality. After analyzing the evidence collected, it can be concluded that the economic model proposed by the government of Rafael Correa, distant from Western dependency and influence, is merely a rhetoric strategy, as the United States remains the largest and most important trading partner for Ecuador. Correa’s government claimed Ecuador needed to regain the sovereignty previously surrendered to the United States, but economic policies implemented by this administration led the country to increase dependency on China as well. Further, the shift in the productive and energy matrices, goals proposed in the Good Living National Plan, were not met; Ecuador’s economy still relies on oil, as the main exported commodity. This dependency renders the economy unstable, as it is subordinated to the volatility of oil prices and the country falls short of other goods that can foster development.

Ecuador’s government failed to acknowledge the potential long-term consequences of accessing “readily available” financing. Thus, lacking a sound economic policy, Ecuador allocated loans for covering budget deficit rather than developing economic policies that would lead to Ecuadorian financial stability and sustainability; 106 there is no motivation to develop sustainable economic strategies and infrastructure when

Correa could simply keep returning to the “well” when more and more money was needed. What will be the outcome of this strategy once the “well” runs dry? Although the apparent benefits provide temporary economic relief, these mitigating measures bring about social, political, and economic problems in the long run. Indeed, as newly elected

President Moreno stated, the current economic situation of the country is critical, due to the outrageous debt levels reached by the previous administration. If Ecuador does not have the ability to renegotiate or repay Chinese loans, then the country’s debt service will continue to increase and economic stability will stagger for years to come.

Ecuador should create new strategic alliances within the global economy, setting aside political and economic ideologies that go against globalization, such as the

“Socialism of the 21st Century.” Ecuador needs to diversify its creditors to reduce the risk of running out of sources of financing. The government should obtain financial resources under conditions that do not jeopardize the economic stability of future generations, ensuring that the terms of the agreements are clear and concise. Further, Ecuador should implement sound economic policies that bolster productivity to be more competitive in the international market with value-added products. Governments should understand that oil is a non-renewable commodity and fluctuating oil prices greatly impact the economy.

When oil prices are high, such as during the “oil boom” in the 70’s and during Correa’s administration, the government should increase savings and invest wisely, according to the country’s economic capabilities, to avoid repeating past mistakes.

107

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