NEPAL, a small Himalayan country bordering China, was in talks with Beijing for infrastructure funding when the U.S. stepped in with a tempting offer. The American government promised USD500 million in grants to improve Nepal’s electricity grid and roads.  It is a huge amount for a country where most people earn around USD1,400 a year.

China was not happy with the U.S. getting involved in its neighborhood. But after five years of heated debate, Nepal accepted the deal in 2022 and added USD200 million of its own money.

Now, the future of the project is uncertain because the Trump administration has frozen foreign aid. Many Nepali leaders who supported the deal, despite being called U.S. puppets, are now wondering if they made a big mistake.

"This is shocking," said Rajendra Bajgain, a politician from Nepal's ruling party. "China will use this against us, saying, ‘Look, this is how America treats its friends.’

It is unclear if China has made a direct offer to Nepal following the U.S. aid freeze. However, Trump's decision to cut foreign aid is making it easier for China to strengthen its position in Asia. Countries like India, which rely on U.S. financial support to counter China, may now struggle.

The U.S. grant was part of the Millennium Challenge Corporation (MCC), a program started in 2004 under President George W. Bush. Although its annual budget is only USD1 billion, it funds projects worldwide, often to counter China’s influence in Asia and Africa.

Nepal planned to use most of the money to build a 200-mile power transmission line, connecting its grid to India’s and allowing it to sell extra electricity. The grant also included funds to repair 200 miles of roads, which is crucial in Nepal’s difficult terrain.

Some initial contracts have been awarded, and work has started on substations. But on Tuesday, after weeks of uncertainty, Nepal announced that the U.S. had suspended funding for at least 90 days. The MCC hopes to get a waiver from the U.S. State Department to continue eight major projects, including Nepal’s.

If the funding stops permanently, Nepal could face serious financial trouble. Breaking contracts could add to its debt, and it may also face penalties if it fails to deliver electricity to India as agreed. Large hydropower projects in Nepal would also suffer without the planned transmission line, said lawyer Semanta Dahal, who was involved in approving the grant.

Nepal agreed to the deal with the U.S. in 2017, overcoming strong Chinese influence. The country has a history of close ties with China, and critics of the grant feared it would make Nepal too dependent on the U.S. Some even warned that accepting the money might lead to U.S. military involvement in Nepal.

China fueled these fears. "Is this a gift or a trap?" asked Chinese Foreign Ministry spokesperson Hua Chunying. "It might look good now, but you’ll regret it later," she warned, quoting a Nepali saying.

Supporters of the deal argued that unlike Chinese loans, the U.S. grant had no hidden conditions, such as requiring Nepal to hire American contractors. They pointed to examples where Chinese-funded projects left poor countries struggling with debt.

Nepal itself faced a similar issue with an international airport built with a USD200 million loan from China. The project cost more than expected, and the airport doesn’t have enough passengers to generate the needed revenue. This loan came around the same time the U.S. offered its grant.

"It was a tough decision," said Nepalese MP Gagan Thapa. "There were many geopolitical challenges."

Nepal and the U.S. overcame these difficulties, believing the deal would benefit the Nepalese people. But now, with the U.S. pulling back, that benefit might not last long.