Hail, Marshall Islands… How Laos may benefit from foreign aid against the US

Aly Mourik/AP

Laos might not win any friends in the diplomatic dispute between the US and the tiny Pacific island state of the Marshall Islands, which was forced into debt by Beijing over its bid to join the Chinese development bank.

The US says it is distancing itself from the conglomerate called Asia Infrastructure Investment Bank, which offers generous terms, like loans with zero interest, to countries seeking to finance infrastructure projects.

China’s move saw the Marshall Islands ousted from the bank and replaced with a similar bank run by L2 Group, which sells bonds and loans its profits to the country, despite high levels of debt as a percentage of GDP.

Although some analysts took to Twitter to protest the Marshall Islands’ reputation as a pristine paradise defamed by its bonds, the Marshall Islands’ foreign minister has warned that China will benefit.

“Laos would not want to lose the US as a provider of large infrastructure and support package aid,” said Alexis Whitmore-Morey, assistant professor of economics at the Indiana University Kelley School of Business.

“US funding and services are more efficient than that of other countries because of the superior US system and the more advanced American economy.”

Because China’s loan is used to repay other loans, Laos risks repaying larger levels of the $500m, then the cost of maintaining debt-service payments, said Delos M Garcia of the Institute of Security Studies in Bangkok.

Mouclay says because of this, the bank would “continue to lose the Marshall Islands more and more money, then it would lose Chinese money”.

China’s swift march into the Pacific and its appeal to desperately poor countries against the US has raised new questions about the US’s role in the region, particularly with regard to the Marshall Islands, which depended on the US for years but recently switched to China for its debt arrangements.

“The new loan agreement I have seen is terrible. If the political situation did not have deteriorated, perhaps the U.S. would have consulted with us and eventually taken back its right to sign on the dotted line,” Kenneth Ponte, director of the Marshall Islands International Debt Settlement Tribunal, told the BBC in June.

Laos was founded by French Marines to protect the Malay peninsula in the 18th century, but since 2002, it has expanded to become a protectorate of China, which opposed the US during the Vietnam War.

It is thought to be the first time Laos has become a protectorate of another nation, and ironically, the attention is almost certainly unearned.

“China will benefit from the Marshall Islands exposure to its project,” Mourik told the BBC.

“The Marshall Islands may contribute too much on this trip, and it may not make a lot of difference, but it does help the Chinese to build their reputation.”

The Marshall Islands government maintains its ratings in Moody’s and Standard & Poor’s as high-grade, but many analysts agree that Laos has far more to gain from the relationship than the Marshall Islands.

“There is little question that Laos has a vested interest in seeing that the US does not become ‘cleansed’ from the Asian region,” said Garcia.

Many analysts believe that the Marshall Islands’ reputation in Asia will suffer in the case of a US government decision to not renew US support to the country.

The US may renegotiate the loan or else withdraw its support for the bond. Or the US may impose sanctions against China for undermining the Marshall Islands.

Either way, Laos will be the big winner, no matter what happens to the Marshalls.

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