U.S. financial arm to counter China's influence backs off in Latin America

In an attempt to counter the influence exerted by China in the world through its credits and its Belt and Road Initiative, the United States reshaped its own public financing instrument abroad with the creation in 2019 of the US International Development Finance Corporation (DFC). Although the endowment of this agency has been increasing, this has not been the case for programs destined for Latin America, a region to which the US government has dedicated in 2024 a quarter of what it invested a decade ago, in contrast to the increase in allocations for other regions, such as Asia. Despite its rhetoric, the United States has not yet devised a coherent and lasting strategy to rival China's growing influence in much of its own hemisphere.

"We want to make sure that our closest neighbors know that they have a real choice between debt trap diplomacy and transparent, high-quality approaches to infrastructure and development," declared President Joe Biden in November 2023, at the Alliance for Economic Prosperity in the Americas (APEA) Leaders' Summit. Biden's statement showed U.S. discomfort with China's activity in Latin America and evidenced the growing geopolitical skill in the region. However, despite the rhetoric, the reality is that for regional leaders who see the United States as a potential ally and accelerator of their economic growth, the new initiative fell short. The absence of U.S. Trade Representative Katherine Tai from the summit reinforced the usual sense that Washington is not interested in making a competitive bid in Latin America, preferring instead to take care of business and obligations far from its neighborhood.

This perception is not entirely true, as it should not be forgotten that the United States is the country with the largest investment in Latin America, manager of one third of the foreign direct investment (FDI) received in the region. In 2023, 33% of the FDI that reached Latin American countries originated in the US, down from 42% in 2021 and 39% in 2022, but equally important, as indicated by the latest report ECLAC report. From agreement with the usual line, in 2023 the second individual investor was Spain, with 11% (from the EU as a whole came 22%). China, the source of only 4% of the FDI received by the region in 2021 and 3% in 2022, substantially restricted this already reduced activity in 2023, with imperceptible amounts.

But the FDI figure is misleading when it comes to assessing the 'political' influence that the great powers can exert. Unlike the United States, whose foreign investment is basically due to private initiative while public funds have been concentrated on aid to development to poor countries, China has turned to granting state loans to governments around the world, in a first phase (120 billion dollars to Latin American governments since 2005), and now, in a second phase, to financially endowing its companies to take a position in the various national markets. There is also the commercial chapter: China has become the first commercial partner of important economies, such as Brazil and Chile, snatching that place from the United States. In the space of twenty years, China has catapulted its influence in Latin America, with a strong presence in areas such as infrastructure, telecommunications and energy generation.

Investments in the leave

To reverse this status, Washington launched in 2019 the U.S. International development Finance Corporation(DFC ), created from a preceding agency. The U.S. Administration wanted to tailor this financial instrument to counter the global reach of the Belt and Road Initiative. The DFC presents itself as the counterpart that adheres to high standards of respect for the environment, human rights and workers' rights. While China uses its state financial muscle, the DFC builds partnerships with the private sector to finance solutions to the world's most critical challenges at development.

Since 2019, the DFC has promoted 117 projects for 15 countries in the region. The greatest beneficiaries of this capital have been Colombia, to which nearly $1.67 billion has been dedicated in 16 projects, followed by Brazil, with 11 projects and an income of $1.4 billion, and Ecuador, with $1.1 billion in 16 projects. The total budget earmarked for development in the Western Hemisphere between 2019 and 2023 amounted to $7.38 billion and could approach $8 billion cumulative by the end of 2024. The largest areas of approach are finance and insurance, technical scientific and professional services, as well as mining and agriculture. 

 Despite this, investment in Latin America has been declining over the last decade. At the beginning of the decade, the numbers reached US$2.12 billion, but in fiscal year 2023, they dropped to US$1.08 billion. By November 2024, the total was close to $500 million, predicting that the year would close with the lowest U.S. investment in a decade. This is not the case with Asian nations, where between 2019 and 2023 DFC investment reached $7.38 billion: although in the aggregate for those years this is a figure to that for Latin America, U.S. interest in Asia is on the rise. Since 2022, the DFC's investment in Asia has tripled the amount allocated to the Western Hemisphere. 

No strategy for the region

 One might think that, given the considerable advantage the United States enjoys in its relationship with Latin American countries in terms of geographic proximity, trade agreements and cultural and diplomatic ties, Washington would already have a coherent strategy aimed at its southern neighbors. However, it has failed to devise one. One manifestation of this is that each Administration tries its own approach to the region, such as the aforementioned APEA that Biden invented and that his successor will possibly replace with other acronyms.

The United States has tended to look to Latin America only when crises in the region directly affect U.S. interests, leaving the region in the background in Washington's usual diary . As result of this, the relationship with Latin America tends to be reactive, as if it were a management crisis. This puts the U.S. one step behind a rival that views the various regions of the world through an explicitly competitive lens.  

The DFC seemed to be the solution to this historic position of the North American giant, however, its initial design is at a crossroads, inhibiting the full scope of its ambitions. 

On the one hand, the DFC does not clarify whether its main goal is to be an institution of financial aid at development or a corporation explicitly aimed at making a competitive difference. To meet its own definition, the new spirit of the entity would seem to be more oriented towards the latter, however, those who manage the DFC are risk-averse and rather opt for low-impact projects. On the other hand, the DFC has new attributes that give it a much broader and more flexible mandate than its predecessor, the Overseas Private Investment Corporation (OPIC), to participate in projects of great strategic value to the United States. National security exemptions allow it to work in low- and lower middle-income countries. This no longer requires it to refund funds to department from the Treasury, something that affected OPIC so much that it crippled it and led to the cessation of operations.

Along the same lines, according to its guidelines, the DFC should prioritize support to low- and lower-middle-income countries (following the World Bank Index classification), and can only attend to middle-income economies if such financial aid represents a direct benefit to U.S. foreign policy interests. However, in the World Bank indicator, only three Latin American countries are classified as low or lower-middle income: Haiti, Honduras and Nicaragua. Many countries core topic are placed in higher income levels, either upper-middle or even high. That is why countries such as Argentina have not received projects since 2019, or countries such as Mexico and Brazil, which in past years had three or four major investments per fiscal year, have only received one in 2024. The strict and almost automatic compliance with the classifications becomes a bureaucratic obstacle that does not allow the United States to strengthen its presence in certain areas core topic of the continent.

It is clear that the United States has a number of advantages that allow it to compete with China in Latin America, however, to translate these factors into a competitive advantage will require political ambition to eliminate hindering processes and a willingness to embrace a broader issue of sectors that seek U.S. support. There is still unexplored potential for a closer partnership between the DFC and Latin America.