US-China: The Battle For Chancay
Over the last two decades, China has progressively expanded its footprint in Latin America, especially in Peru. From importing grapes, to mining copper, and acquiring electricity suppliers, Beijing is increasingly participating in various sectors of the Peruvian economy. While China’s involvement in Peru is driven by more than just financial returns, a particularly strategic move Beijing has made is acquiring the rights to develop and operate a port in Chancay, a city on the Peruvian coast - along with a 60% stake in it.
This deal has made Washington significantly uncomfortable - and has created considerable friction between the Chinese and Peruvian governments.
What is the geopolitical significance of the Chancay port project? And, why has it led to increased tensions between the US, China, and Peru?
Between China and the US
Latin America has long been a key part of US foreign policy, with Washington always maneuvering to maintain its dominance over the Americas. In the early 20th century, the US government’s focus was to keep the colonial ambitions of European powers vis-à-vis Latin America at bay. To do so, the US engaged with South American countries on different fronts and offered various incentives for local governments. And if the carrot didn’t work, there was always the stick. As the Second World War ended and as the Cold War was beginning to take shape, Washington had effectively transitioned from protecting its backyard from European colonialism to fending off the expansion of communism in Latin America. While the nature of the threat had changed, the playbook remained more or less the same: provide economic aid, establish trade relations, expand direct and indirect US political influence, and if need be, paramilitary covert action to remove regimes hostile to Washington’s interests. The Soviet Union eventually fell and the Cold War became history. Less than a decade later, a new threat was starting to emerge. This time, it was China.
In the early 2000s, China started to rapidly expand its economic footprint in Latin America. This was partially driven by Beijing's “Go Out” policy which was encouraging Chinese companies to invest overseas. The rationale was that the Chinese market was beginning to stagnate and that to fuel the growth of China’s economy, opportunities in foreign markets needed to be seized. Given that South America has very significant natural resources, Chinese investors, mostly state-backed, were particularly interested in this area of the world. However, Beijing's approach to investing in Latin America could not be more different than Washington’s. While the US was tying investments and loans to conditions linked to - usually unrealistic - human rights and democratic reforms, China was being more pragmatic and solely looking at numbers. The Chinese approach resonated rather well with Latin American leaders who were not particularly keen on seeing the US interfering in their domestic affairs.
In 2013, Chinese President Xi Jinping announced the Belt and Road Initiative (BRI), an ambitious global infrastructure project that aimed at boosting global trade and economic growth by better connecting Asia with Africa, Europe, and the Americas. The end goal was obviously to expand China’s influence on the world stage by providing developing countries with significant funding for key infrastructure projects. In the initial stages of the project, Latin America was not a major area of focus for the Chinese government, but that changed significantly after a few years. China’s focus in Latin America was mostly on ports, highways, and energy facilities. Governments in South America were understandably excited about China’s attractive and flexible financing options, which meant that reliance on the US as an economic partner for the region started to gradually decrease.
The US was not thrilled that its main competitor on the world stage, China, was expanding its economic footprint in Washington’s own backyard. Other than directly diminishing US influence over the continent, Beijing’s presence was perceived by Washington as a threat to national security. While China’s footprint in Latin America started to mushroom rapidly during the Obama years, the White House was more focused on its “pivot to Asia” policy, which meant that South America was largely neglected. This allowed Beijing to further penetrate the continent without much resistance. Interestingly enough, both the Trump and Biden administrations did a significantly better job at fending off China’s expansion in Latin America - respectively with the BUILD Act and the Build Back Better World initiative.
Peru is a perfect illustration of the competition between the US and China for influence over Latin America. Given its abundant natural resources, from copper to gold, silver, zinc, lead, coffee, cocoa, and fruits, Peru has attracted a very significant number of Chinese investors and companies. Today, China is Peru’s largest trade partner with the Peruvian mining sector being the most economically attractive aspect of the country. While the Peruvian government is obviously welcoming with open arms Chinese investments, it is also cautious about not becoming overly reliant on Beijing. Like most countries in the region, Peru has to perform a delicate balancing act between Washington and Beijing.
Port Intrigue
Chancay is a small coastal city located 80 km / 45 miles away from the Peruvian capital Lima.
During the Spanish colonial era, from the 16th to the 19th century, Callao was the main port of Peru while Chancay had minimal infrastructure. By the middle of the 20th century, Callao had relatively upgraded its capabilities while Chancay was still a small fishing village. Over the years, it became clear that Callao was not able to keep up with the shipping traffic and that something needed to be done to alleviate the congestion at Peru’s main port. In the early 2000s, the Peruvian government started considering the development of Chancay into a major port to redirect some of the traffic away from Callao. In the early 2010s, Chinese state-owned shipping company COSCO took notice of the project and signaled to the Peruvian government its interest in being involved. The project aligned perfectly with the BRI’s objectives since it was designed to strengthen trade routes between South America and Asia. COSCO eventually entered into a joint-venture agreement with Peruvian mining company Volcan to develop the port. As mentioned earlier, the Chinese company’s stake was 60%
The Chancay port development project is by far one of China’s largest investments in Latin America with an estimated $3.5 billion in total construction costs. The megaproject includes a dedicated 1.8-kilometer tunnel for cargo transit as well as a multipurpose terminal capable of handling containerized cargo, bulk cargo, and liquid cargo. More importantly, this terminal will be able to handle Ultra Large Container Vessels (ULCVs) of up to 18,000 TEUs (Twenty Foot Equivalent Units). TEUs essentially measure the capacity of container ships, and the higher the TEU, the larger the ship. No port in Latin America can accommodate vessels of this capacity, which would make the port of Chancay a major continental hub. The project will also allow shipping to become more efficient. Normally, ships from South America typically take over 45 days to reach Asia. The port of Chancay will allow ships to make this trip in 35 days, which is a very considerable difference in terms of speed.
By October of last year, 50% of the construction was completed, and the port is expected to be operational by the end of this year.
The project is objectively a win-win for both Peru and China.
For Peru, this project will create 7,500 direct full-time jobs, as well as thousands of indirect jobs and business opportunities in the city of Chancay. More importantly, this will position Peru as a key logistical center in Latin America, effectively boosting the country’s regional influence - as well as its revenue streams.
This project will allow Beijing to consolidate its footprint in a very resource-rich region, as well as expand its clout over the continent through its control of key infrastructure. The ability of the port to host ULCVs will most likely direct traffic away from other ports in South American countries - some of them strategically aligned with Washington. This will effectively further weaken US influence over the continent. The Chancay project will also allow Beijing to ship natural resources back to China at an unprecedented speed while at the same time creating an ideal entry point for Chinese goods to the broader Latin American market.
Despite the clear economic benefits for Peru, there has been some expected local pushback. Chancay has historically been a fishing village. Fishermen there were concerned that the construction project would limit their ability to work. Other more political groups were concerned about environmental impacts. This led COSCO executives to offer relatively attractive compensation packages. Now, most of the local resistance to the project seems to have gone away. However, that’s not only due to the payoffs, but also because legal proceedings were initiated against some of the most vocal opponents.
Unfortunately for the Peruvian government, opposition to the project wasn’t just domestic.
As the construction of the port progressed, Washington was becoming increasingly worried. US officials were certainly not thrilled by the idea of a major Chinese-controlled port on the Pacific coast of South America. The concern was that Beijing was de facto creating economic dependencies in order to erode the US sphere of influence. More specifically, the US government was anxious that China could leverage its influence over the port to pressure countries to make strategic concessions to Beijing. China’s control of the port also meant that it could potentially disrupt trade routes as a blackmailing technique. Under the Biden administration, US diplomats went on a charm offensive to convince Peruvian officials of the risks associated with this project, especially the possibility of a “debt trap”. Washington offered economic incentives for the Peruvian government to walk away from the partnership with China.
While the US diplomatic efforts did not yield immediate results, the dynamic between Peru and China began to subtly shift.
In 2023, a landslide at one of the tunnel construction sites in Chancay caused significant damage to local residential buildings. Construction was halted, and, in a surprising move, an investigation was initiated by Peru’s prosecutor's office. Such a development was simply not possible without the buy-in of the country’s top political leadership. This meant that the Peruvian government was starting to respond to Washington’s overtures and that attempts were being made to delay the project. At around the same time, Peruvian and Chinese negotiators started clashing about some of the language in the project’s contract. The two sides had agreed in writing that COSCO, effectively controlled by the Chinese government, would gain exclusive rights to operate the port. Peru was trying to backtrack on that commitment by saying that this was not its understanding when the deal was signed. Did the Peruvian government - and its army of lawyers and experts - really not read the contract’s fine print? Or was Peru reversing its course after several meetings with US officials?
Unsurprisingly, COSCO refused to budge and decided to stick to the agreed terms. The Peruvian government decided to escalate things and legally challenged the validity of the contract in March of this year. Attempts from the Chinese side to informally resolve the issue were not fruitful - until they were.
In May, it was officially announced that Peru’s President Dina Boluarte and Chinese President Xi Jinping would be meeting in Beijing the following month. In parallel to the announcement, the Peruvian government started changing its own laws in a way that would essentially render its legal challenge invalid. And then, a few days before the Peruvian leader flew to China, the legal complaint was withdrawn. What was driving this strategic U-turn in Peru’s thinking?
China essentially had made Peru an offer it couldn’t refuse. And this isn’t a Godfather reference. Simply put, the Peruvians understood that the US could not match China in terms of the economic incentives they could provide. In exchange for Peru not pressing its legal claims regarding the agreement with COSCO, Beijing was offering the following. One, a general framework to substantially increase Chinese investments into Peru as well as boosting bilateral trade. While no official numbers were given, some experts estimate that deal could translate into a $4-5 billion hike in revenue for the Peruvian state. Two, a trade agreement that would allow Peru to expand the range of agricultural products it can export to China. More specifically, the deal would allow Peru to export beef, which the Peruvian government estimates could add $3-4 billion to the economy over the medium term. Three, partnership agreements with Huawei and BYD, China’s top electric vehicle manufacturer. These deals cover a broad spectrum of things, from providing Peruvians with professional training, to direct investments, and the possible establishment of manufacturing plants in Peru.
Closing Thoughts
The economic benefits from these three agreements far outweigh the drawbacks that stem from COSCO exclusively running the port of Chancay. Once again, Beijing had managed to “outbid” Washington by offering foreign governments the right economic incentives - free from any lectures about human rights and democracy. Despite the economic challenges it is currently facing, China is unlikely to change its strategy in Latin America. This means that US influence over its own backyard will continue to decrease. Regardless of the outcome of the November election, the next administration will have to come up with a solid - and realistic - strategy to contain China in South America.
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