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    Infrastructure: The Key to the China Challenge

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    China has been recognized by Washington as the major rival to the United States in nearly every field. However, this isn’t the first time an Asian country has posed a threat to America’s economic dominance. In the mid-1980s, Japan built up a massive trade surplus with the United States, igniting a fierce backlash from both Republicans and Democrats over how it acquired US technology — often by theft, according to US officials — and how Tokyo used the government’s deep influence to push its companies into a dominant global position.

    But there was no nefarious scheme. In reality, Japan had made significant investments in its own education and infrastructure, allowing it to produce high-quality goods that American customers desired. In the case of China, American businesses and investors are covertly profiting by operating low-wage factories and selling technologies to their “partners” in China. American banks and venture capitalists are also active in China, funding agreements. Furthermore, with the Belt and Road Initiative (BRI), China’s infrastructure investment extends far beyond its own borders.

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    The BRI is Chinese President Xi Jinping’s hallmark foreign policy initiative and the world’s largest-ever global infrastructure project, funding and developing roads, power plants, ports, railroads, 5G networks and fiber-optic cables all over the world. The BRI was created with the goal of connecting China’s modern coastal cities with the country’s undeveloped heartland and to its Asian neighbors, firmly establishing China’s place at the center of an interlinked globe.

    The program has already surpassed its initial regional corridors and spread across every continent. The expansion of the BRI is worrying because it may make countries more vulnerable to Chinese political coercion while also allowing China to extend its authority more widely. 

    Infrastructure Wars

    US President Joe Biden and other G7 leaders launched a worldwide infrastructure plan, Build Back Better World (B3W), to counterweight China’s BRI during the G7 summit in Cornwall in June. The plan, according to a White House statement, aims to narrow infrastructure need in low and middle-income countries around the world through investment by the private sector, the G7 and its financial partners. The Biden administration also aims to use the plan to complement its domestic infrastructure investment and create more jobs at home to demonstrate US competitiveness abroad.

    The US government deserves credit for prioritizing a response to the BRI and collaborating with the G7 nations to provide an open, responsible and sustainable alternative. However, it seems unlikely that this new attempt would be sufficient to emulate the BRI and rebuild America’s own aging infrastructure, which, according to the Council on Foreign Relations, “is both dangerously overstretched and lagging behind that of its economic competitors, particularly China.”

    On the one hand, it’s unknown if B3W will be equipped with the necessary instruments to compete. The Biden administration has acknowledged that “status quo funding and financing approaches are inadequate,” hinting at a new financial structure but without providing specific details. It remains to be seen if B3W will assist development finance firms to stimulate adequate new private infrastructure investments as well as whether Congress will authorize much-needed extra funding.

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    Even with more funding, B3W may not be sufficiently ambitious. While the World Bank predicts that an $18-trillion global infrastructure deficit exists, the project will be unable to make real progress until extra resources are allocated to it.

    Also, the United States still lacks an affirmative Asia-Pacific trade policy. To compete with the BRI, the US will need to reach new trade and investment agreements while also bolstering core competitiveness in vital technologies such as 5G. It will also need to devote greater resources to leading the worldwide standards-setting process, as well as training, recruiting and maintaining elite personnel.

    On the other hand, China is often the only country willing to invest in vital infrastructure projects in underdeveloped and developing countries, and, in some cases, China is more competitive than the US as it can move quickly from design to construction. 

    Desire to Invest

    Furthermore, China’s desire to invest is unaffected by a country’s political system, as seen by the fact that it has signed memorandums of understanding with 140 nations, including 18 EU members and several other US allies such as Japan, South Korea, Australia and New Zealand. Even the United Kingdom, as a member of the G7, had a 5G expansion deal with Huawei that was canceled owing to security and geopolitical concerns. Nonetheless, the termination procedure will take about two years, during which time the Chinese tech behemoth will continue to run and upgrade the UK’s telecoms infrastructure.

    As a result, the BRI has fueled a rising belief in low and middle-income nations that China is on the rise and the US and its allies are on the decline. The policy consequence for these countries is that their future economic growth is dependent on strong political ties with China. 

    Unlike the US and European governments, which only make up for part of the exporters’ losses, Beijing guarantees the initial capital and repays the profits to the investing companies and banks. In addition, since there is no transfer of power and government in China, there will be virtually no major policy changes, meaning that investors will feel more secure. So far, about 60% of the BRI projects have been funded by the Chinese government and 26% by the private sector. 

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    For far too long, the US reaction to the BRI has been to emphasize its flaws and caution countries against accepting Chinese finance or technology without providing an alternative. Until now, this haphazard reaction has failed to protect American interests. The United States is now presenting a comprehensive, positive agenda for the first time. Transparency, economic, environmental and social sustainability, good governance and high standards are all emphasized in Build Back Better World.

    While providing a credible US-led alternative to the Belt and Road Initiative is desirable, the US must commit adequate financial and leadership resources to the effort. This is a good first step, but Washington must be careful not to create a new paranoia by demonizing economic and geopolitical rivals such as China and Japan to the point where it distorts priorities and leads to increased military spending rather than public investments in education, infrastructure and basic research, all of which are critical to America’s future prosperity and security.

    The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      Beijing’s BRI Hubris Comes at a Price

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      Despite more than 3,000 years of Chinese history, many of the world’s countries had little to no direct experience with China or Chinese investment prior to the launch of the Belt and Road Initiative (BRI). There was a presumption on the part of many governments that international best practices were well established and that China would be in compliance with those standards as it rolled out the initiative. As they now know, that often turned out not to be the case, but the fact that the Chinese business model is a mix of public and private sector participation, rules and regulations that are not necessarily logical or coherent and are often misunderstood has complicated matters.

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      For all concerned, the BRI has in many ways been a leap in the dark, since such an ambitious undertaking had never before been attempted. The Chinese government, and many of the nation’s companies active in the initiative, were, and remain, on a learning curve. The enforceability of Chinese regulations on private sector Chinese companies operating overseas can be inconsistent, and Chinese-built infrastructure has, at times, been found to be substandard. Regulations governing the practices of Chinese firms are frequently revised, leaving many organizations scrambling to keep up in the public and private sectors. It then takes a while for new guidelines to translate into practice abroad.

      BRI Financing

      BRI financing is highly dependent on loans from the China Development Bank, China Export-Import Bank and other state-owned commercial banks. China’s foreign exchange reserves are important sources of capital for these institutions. Although Beijing maintains the world’s largest aggregation of foreign currency, its foreign reserves have declined in recent years, which, when combined with its dramatically slowing economy, raises questions about the sustainability of BRI financing in the medium term.

      Under the presumption that foreign capital and support from multilateral financial institutions will be required to sustain BRI projects in the future, China’s Ministry of Finance established the Multilateral Cooperation Center for Development Financing with eight multilateral development banks and financial institutions. The center is expected to enhance the project financing process through a combination of better information sharing, improved project preparation and capacity building. The ministry has also developed the Debt Sustainability Framework for Participating Countries (DSF) of the BRI, collaborating with its counterparts from 28 partner countries. China’s DSF is virtually identical to the World Bank-International Monetary Fund DSF, which governs lending operations for the multilateral institutions and many bilateral lenders. That should increase its prospects for success.

      China’s effort is a significant step forward in guarding against the debt challenges associated with the BRI. Debt sustainability can only grow in importance for Beijing. As the BRI progresses, China will have no choice but to take steps to improve reporting transparency vis-à-vis financing, transaction structures and debt repayment. As for host governments that have become saddled with tens of billions of dollars of debt as a result of debt-trap diplomacy, their concerns have been widely shared with Beijing. Many of these nations have already become more discriminating BRI consumers. Although the trail of debt-related issues will certainly not diminish going forward, they will hopefully become less severe in time.

      The Chinese government has sought to integrate the BRI with its green growth agenda in an attempt to address criticism of its continued reliance on coal power and the lack of environmental oversight on Chinese infrastructure projects. Although Beijing has made great strides toward improving environmental and resource productivity, greater efficiency gains are vital to achieving a shift toward low-carbon, resource-efficient, competitive economies. Future progress will largely depend on the country’s capacity to integrate environmental aspects into the decision-making process for all its domestic and foreign policies to ensure that industrial and environmental policy objectives and measures are well aligned and mutually supportive.

      Reputational Risk

      At ongoing risk also is China’s reputation. The blowback it has experienced as a result of its rollout of the BRI from countries around the world has been unprecedented. The same may be said about its trade practices with the US and its response to COVID-19. Many of the world’s governments and people have simply lost confidence in Beijing, to the extent that they had confidence to begin with. The ball is squarely in Beijing’s court to raise the level of confidence the world may have in the future regarding what it says versus what it actually does. There is no better proving ground on that score than the BRI.

      A combination of hubris, a bulldozer approach to getting things done and a complete lack of sensitivity had worked well for the Communist Party of China at home for 70 years, and Beijing apparently believed that doing the same would work well overseas. While some aspects of Beijing’s original approach ended up yielding some positive results, President Xi Jinping’s move toward “BRI lite” in 2018 had to be taken with a grain of salt. He deserves credit for acknowledging some of the initiative’s pitfalls, but the Chinese government’s pivot must ultimately be considered too little and too late.

      If it wanted to more fully acknowledge the error of its ways, it would have offered to renegotiate every BRI contract that was clearly skewed in its favor rather than waiting to be asked to do so, award debt forgiveness on a broader basis and stop in its tracks any project under construction that is inconsistent with best environmental practices. That is clearly not going to happen.

      *[Daniel Wagner is the author of “The Chinese Vortex: The Belt and Road Initiative and its Impact on the World.”]

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More