What does Mexico Owe Trump and China? Latin America and Great Power Debt Diplomacy

Will the US government default on its national debt? This is the question now on the minds of every major economic actor in the world. As many commentators, including former Treasury Secretary Larry Summers, have noted, such a question evokes the history of economic dilemmas once characteristic of Latin America. Why, then, is there so little interest in understanding how Latin America wrestled with indebtedness as such? The region’s long history of debt management, after all, illuminates how diplomacy, finance, and international law are all bound up in the question of what nations owe one another. That logic applies to the US as much as it does to any other nation.

Haunted, like many of my generation, by the memory of the credit-fuelled financial crisis of 2008, and later following the debates around the much-vaunted arrival of the “Hamiltonian Moment” in Europe, which proposed the joint pooling of debt across the EU, I spent the past few years researching and writing Odious Debt, a 400-year political history of debt and default in the Hispanic world. The book showed how Latin American diplomats once sought to outlaw war over financial failure or default. If merchants enjoyed access to reprieve through bankruptcy law, why were Latin American nations deprived of a similar mechanism when facing insolvency?

In this post, I outline the main themes of the book and conclude with some insights that relate to present-day concerns. I begin with Hugo Grotius, the founder of international law, who created the ideas of both sovereign and odious debt. As Latin American jurists fought for their independence, they reworked Grotius’ ideas to establish a new constitutional order.

When unpaid debts became the pretext for legitimating the use of gunboat diplomacy, these Latin American jurists developed new doctrines in international law in order to find a peaceful resolution to the problem of insolvency. In trying to repay their debts, however, Mexican jurists, in particular, learned to leverage their obligations to European creditors by exploiting the rise of the United States as a global financial power. My goal is to explore the parallels between this past and the present, tracing how Latin America might react to the rise of a new financial superpower in the region, that is, China, and how multilateralism can be revived if international institutions can facilitate and implement new legislation on the resolution of international debt disputes.

Debt and Revolution

As he built the foundations of international law at the turn of the seventeenth century, Hugo Grotius reconfigured the moral economy of international relations when he argued that a monarch – the Spanish King Philip II – could go bankrupt. Where Spain had long used the threat of non-payment as an instrument of imperial policy, Grotius made a powerful link between sovereign insolvency and the moral failure of the state, noting the example of soldiers sacking Antwerp in the sixteenth century as a consequence of famine and unpaid wages.

In this way, Grotius tied tyranny, default, and imperial decline together into a critique of the Spanish Empire and a morality tale: default was an act of moral bankruptcy. A state was like a creditor, in his view, and defaulting on your creditors was to renege on your social contract with the people. By the 1730s, Montesquieu had observed that this was a story ‘everyone knew about’: Grotius’ metaphorical and rhetorical ploy was hugely successful. This narrative created the foundations for the idea of sovereign debt as both a moral and political obligation, and the mythical rise of the Netherlands constituting the beginning of the end of the Spanish Empire.

Grotius further argued that state succession should not alter a state’s obligation to pay its old debts. At the same time, he also proposed a theory of debt repudiation: surely, Grotius argued, the leaders of the Dutch Republic should not accept all of the tyrannical debts of the Spanish Empire. Grotius explained that contracts signed without the consent of the people or without their wellbeing in mind ought to be repudiated.

In the early nineteenth century, Latin American revolutionaries assiduously studied Grotius and his legal thought in order to establish how to gain the recognition of their independence. But they did not see themselves in Grotius’ portrait of imperial Spain’s decline. The creole leaders, descendants of the mix between Spanish colonisers and locals, had consolidated their power over the Spanish colonial administration after the Dutch Revolt. They had also watched the production of silver from the mines grow exponentially – far from being a period of decline, for the creole elites, this had been an age of Enlightenment. To legitimize their revolutions and defend sovereign independence, Latin American jurists therefore had to reform the principles of international law: redefining ideas of state succession, state responsibility, and, most crucially, international debts. Above all, they had to establish anew when it was moral to pay a debt, and when it was moral to default.

Who Owns What Debt to Whom?

During the 1820s-1830s, as Latin America’s constitutional founding fathers tried to resolve what to do about their colonial debts, civil wars erupted across the region, worsening their financial burden. Foreign loans contracted in London helped fund the conflicts. As war prevented governments from repaying them, these bills piled up. Divided, Latin American nations had to establish what brothers-turned-enemies owed one another.

Foreign intervention changed the meaning of debt, war, and peace. As European nations and the US began to use gunboat diplomacy to force the repayment of private claims, Latin American officials began to consider legal ways of resolving the joint problem of war and debt. One issue that emerged centrally was that the resolution of civil wars frequently turned on constitutional reform, and the disavowal of the acts of the former regime. When Latin American nations reformed their constitutions and asked that foreign creditors recognise these changes and renegotiate their loans, European and North American creditors asked their host governments to quell these demands through the threat of the use of force.

One of the most significant interventions which sealed the association between foreign debt and interventionism in the memory of Latin Americans was the rise of Maximilian I as emperor of Mexico. In the 1850s, divisions between Mexican conservatives and liberals reached a tipping point and led to the War of the Reform. After the liberals, led by Benito Juárez, emerged victorious in this struggle, his government considered how to reform the state’s structure, and it decided to postpone interest payments on Mexico’s foreign debts. At the 1861 London Convention, France, Britain, and Spain signed an accord to pursue a joint course of action, through a naval expedition to Veracruz, to compel the Mexican government into repaying these debts.

The French Emperor Napoleon III, hoping to exploit the weakness of a United States reckoning with its own civil war, and relying on the support of a number of Mexican conservatives, funded an expedition to make the Habsburg archduke Ferdinand Maximilian Joseph Maria of Habsburg-Lorraine into Maximilian I, Emperor of Mexico. However, Napoleon ensured Ferdinand Maximilian agreed to finance the entire expedition, including the cost of the preservation of the troops and the imperial court, through French loans. Once the US Civil War came to an end, Napoleon withdrew his military support for Maximilian and, when Juárez and his rebel troops successfully defeated Maximilian’s remaining forces, the Emperor was executed. The episode elicited the attention of Victor Hugo, who begged Juárez to spare Maximilian’s life, and Édouard Manet, who used it to sketch his famous painting of the event.

This complex imperial episode raised an even more complicated question: could Mexico be held responsible for debts contracted by an emperor imposed by a foreign army? It is worth noting that, at the same time, across the northern border, the US government had recently repudiated its confederate debts through the introduction of the Fourteenth Amendment: per section 4, ‘neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.’

Mexico’s own constitutional reforms, however, found no such recognition from European creditors. How then could Mexico reform its constitution and its foreign obligations in a way that could ensure that debt would never again be used as an excuse for empire? Juárez’s government eventually made the case for “moral bankruptcy”: refusing to honour debts tied to Maximilian’s regime, and renegotiating them decades later – when the rise of US financial superpower offered Mexico exceptional leverage.

The Rise of a Creditor Superpower

By the 1880s, Mexico’s economy was growing at great pace. General Porfirio Díaz, who had acquired fame as he helped Juárez defeat Maximilian’s forces, implemented vast economic reforms: the rise of industry, railway schemes, and new mining corporations generated huge gains for the elites. Porfirio Díaz also exacerbated the vast economic differences between the few and the many. In this context, officials in the Mexican government debated the strategic repayment of historical foreign debts to improve national credit. These included colonial debts, the original debts incurred in London to fund the pursuit of independence in the 1820s, and the loans of Maximilian.

In 1884, the Mexican Congress debated – over two weeks – the settlement of some of these contracts. Four key viewpoints emerged in the chamber. First, some deputies claimed, the debts owed to Spain, the handmaiden of Catholicism and the language of Cervantes, should be honoured. A second view, others countered, argued that Mexico should surely focus on those emancipatory British debts that granted these nations their freedom from Spanish rule. A third, more nuanced viewpoint emerged from this clash, as some deputies asked their peers to consider what repayment would help stimulate the investment of the new financial empire in town – the United States. What approach to the repayment of loans would stimulate the construction of the iron veins of railroads across Mexico?

Outside Congress, a fourth viewpoint emerged. Once the Mexican public heard that its government was considering honouring these foreign debts instead of honouring its obligations to the people and promoting their welfare, angry crowds gathered outside the chamber. Several citizens entered the building. Shots were fired. The session had to be suspended, and the police reports noted that there had been a number of casualties.

In the 1890s, Mexican government resolved these disputes by leveraging growing US investment interest to renegotiate its loans with the creditors of the Old World. Warnings of “debt traps” – the practice of lending to another nation to increase one’s leverage over said state, which one frequently hears today in discussions about China – were often evoked. But there was no question that the rise of the United States as a financial superpower in the early 1900s would enable Mexico to gain leverage over its European lenders and exert pressure to negotiate its old loans.

Indeed, in 1904, the US enabled Mexico to settle Maximilian’s debts and finance its emerging railroad system at the same time. The following year, Mexico adopted the gold standard and thus connected the peso to the fate of the dollar; industry and coin were now reliant on the US. By the 1910s, many came to regret relying on this “Good Neighbour” as US interventionism in Mexico, with the pursuit of oil, intensified. These interventions strained relations between the neighbours, eventually leading to Mexico’s robust defence of its economic sovereignty, grounded in principles of international law, during the Mexican Revolution. Mexico’s 1917 Constitution established the state’s ownership over all underground minerals, the right of Mexicans to receive land grants for the mining of the subsoil, and restricted foreign claims – an assertion of autonomy that would catalyse the expansive use of the Carranza Doctrine in the 1930s, redefining the meaning of non-intervention in hemispheric affairs.

China, Trump, and the Future of Multilateral Governance

Today, there is a new financial superpower expanding its influence across Latin America: China. With investments spanning Peru’s “megaport,” Mexico’s industrial corridors, and the “lithium triangle” which cuts across Argentina, Bolivia, and Chile, China’s growing financial influence in the region is undeniable – and drawing a great deal of press coverage. The US nearshoring of Mexico promised to counteract the rise of Chinese influence across the southern border, but Donald Trump’s tariffs are likely to create new opportunities for Mexico.

China’s rise as a financial superpower in Latin America generates a broader question for policy makers and international lawyers in the region: what type of obligations and responsibilities should govern relations between sovereign states in the region? Is China a threat, or can Latin America use its growing financial interest as leverage in renegotiating its diplomatic and economic ties with the US? So far, Latin America has remained close to the United States – but this could change if the EU, building on its recent trade agreement with a range of Latin American states, works with China to jointly develop other interests in the region; after all, per a report by the European Commission, the EU is “Mercosur's number one trade and investment partner.”

Faced with a new age of empire and emerging transactional trends in international relations, a revitalised multilateral diplomacy may offer the best path forward for the region, building on their mid-20th-century forebears. If multilateral governance structures can host a discussion about how to ensure that the deliberation over international debt disputes are more consistent, for instance by bringing China and most members of the Paris Club into closer dialogue.

New international legislation that acknowledges the long history of abuses through debt, but also the ways in which Latin American jurists developed sophisticated mechanisms to resolve disputes over insolvency disputes peacefully, could reenergise multilateral diplomacy and foster greater faith in the capacity of institutions such as the IMF to guarantee fair practices around the world. Ideas of climate and reparations for historical injustices may not gain much traction in Trump’s administration, but they speak to broader global debates that include discussions over the differences between Chinese government lending practices and the IMF and the World Bank.

These discussions over how to pay our debts reflect a growing need to reconcile old notions of the global moral economy with a changing world order. The multilateral order should heed the call to establish a new global hierarchy of obligations – by ensuring a fairer resolution to debt disputes. The multilateral order can demonstrate that it can act in good faith, and that its vision for the future trumps an outlook wherein most of the world is at the mercy of two superpowers. In an age where international relations are increasingly based on transactional exchanges, we must ask: what do we owe one another?