by Jan Gerber

India

Napoleon Bonaparte once warned that when China wakes from its slumber, it will shake the world. This particular line of one of the great geostrategic minds of history has gained new eminence over the past few years. China is awake, and after decades of slow, surreptitious rise, it is now shaking Eurasia with the world’s largest infrastructure project since the Marshall Plan. The One Belt One Road Initiative, or Belt and Road Initiative (BRI), announced by Xi Jinping in late 2013 as the “New Silk Road,” is a grand political and economic scheme to connect the supercontinent of Eurasia with Africa through economic corridors on land and maritime trade routes on sea. Just as China is making an unprecedented leap in globalization, the United States is seemingly pulling out of the Eastern Hemisphere, refusing to join the Asian Infrastructure Investment Bank (AIIB) and the Trans-Pacific Partnership (TPP). However, as Parag Khanna, an international relations expert points out, the world will not wait for permission from the United States to globalize. As the indomitable forces of supply and demand all but nullify nation-state borders in Eurasia, China is providing the infrastructure to both channel this movement of migrants, goods and capital, and to control it. Thus, the U.S. now stands at a critical crossroads­­––if Washington allows China to proceed with the BRI without offering a free-trade alternative of its own, it will allow it to redraw the functional map of Eurasia and tip the balance of power in its favor. Moreover, we may see many of China’s BRI partners, like Pakistan, Laos, and Kyrgyzstan, fall into its sphere of influence, lured by the promise of quick investment and trapped by booming external debt and economic dependency. The scramble for the “World Island” is well underway, and so far China is leading the race.

What is the Belt and Road?

The Belt and Road Initiative is a rather simplified term for an amalgam of infrastructure investment projects spanning vastly different countries with equally diversified economic topographies. Its sinews are highways, high-speed railways, power grids, fiber optics, ports and airports, and gas and oil pipelines. Beyond the brick and mortar, it is also a conduit that facilitates the flow of ideas and culture, which requires international cooperation and trust. To convey the scope of this endeavor, one need only look at the numbers. The Initiative, as outlined in the official blueprint from 2015, would encompass 68 countries (now 71), cover 65% of the world’s population and 40% of the world’s GDP. Its predicted costs are measured in the trillions of dollars.

With this much capital investment, the risks are enormous, particularly because many BRI countries, especially those in Central Asia and South Asia, have unstable economies and shaky credit portfolios. Nonetheless, China ploughs ahead, due to major economic and political factors which dictate this outbound expansion.

First, China’s excess production capacity has been weighing heavily on its economic growth since the 2008 financial crisis. Firms with decades of experience in construction industries, mostly steel and aluminum, are now unproductive due to overinvestment. Moving this unused capital abroad, China stands to alleviate a major economic ailment while gaining influence and disseminating its own technological standards in the region. At the same time, it should be noted that China’s attempt to escape the impending ‘middle income trap” relies to a large extent on Beijing’s ability to transition the economy away from investment and toward services and innovation. Belt and Road, while a viable way to utilize excessive domestic production, is nonetheless an growth-driven investment scheme, laden with moral hazard, which may derail China’s economic transition or even plunge it into another crisis.

Further, Beijing needs to address the deepening socio-economic divide between the coastal provinces in the east of the country and the land-locked hinterlands in the west. Although the United States famously has a similar problem with the disparity between its coasts and the “fly-over” states, the Chinese economic inequality strictly coincides with separatist movements in the predominantly Muslim Xinjiang autonomous region. By linking the isolated and poverty-stricken peoples of China’s westernmost regions to Central Asia and the arable cradle, Beijing hopes to solve an existential political threat, separatism, through economic means. Case in point, the China Pakistan Economic Corridor (CPEC), a $46 billion infrastructure project, is a geoeconomic nexus in the One Belt One Road Initiative, linking the strategic port of Gwadar in Pakistan with the city of Kashgar in Xinjiang. In one stroke–– a gargantuan economic corridor––Beijing aims to connect the restive population of Xinjiang with neighboring regions and connect China directly to its energy imports from the Middle East through the port in Gwadar.

Finally, and crucially, there is no denying the major shift in China’s foreign policy ever since Xi Jinping took the helm in 2013. The old mantra of Deng Xiaoping, “hide our strength and bide our time,” has been swapped for Xi Jinping’s assertive vision of national rejuvenation, captured by the “Chinese Dream.” These are not empty slogans, either. Since 2013, China has quite literally changed the reality on the ground by claiming archipelagos in the South China Sea and constructing and militarizing artificial islands. The Belt and Road Initiative grows right out of this new, self-assertive foreign policy, and it is a crown jewel in Mr. Xi’s growing legacy. Although China may not be ready or willing to challenge the United States in the South China Sea or commit to a serious military presence outside of its borders, it does not need to do either. Intended or not, the BRI may prove a Trojan Horse for China’s economic partners––opening up their gates with investment and trade in exchange for their sovereignty. In formulating strategy approaches to the new Chinese movements, it would behoove Washington to look for the signs of such “soft power” in the initiative, measure its effects, and devise ways to counter it.

A Trojan Horse?

The most distressing of these is an attempt to make some of the BRI partners into de facto “vassals” of China through resource acquisition and debt-for-equity swaps which give China enormous amount of influence over the host countries. As mentioned, China is chafing to escape the middle-income trap. Through bilateral free-trade agreements, Beijing aims to export sophisticated manufacturing goods and standards, such as its high-speed rail, while it will import natural resources, like oil from Central Asia, and in effect make its trading partners dependent on its economy. Alternatively, China may demand the host country imports its goods as a contingency for extending loans. Since China is not a member of any multilateral creditor group, like the Paris Club, it does not observe internationally sanctioned approaches to debt sustainability and relief, which has resulted in the past in ad hoc resolutions to debt distress in BRI countries.

In a few notable cases in the past, this pattern meant the host country agreed to cede control of key national assets in exchange for debt write-offs when it was  unable to meet its debt obligations to China. In 2017, China managed to extract crucial strategic and economic concessions––a 99-year lease of for management of the Hambantota Port in Sri Lanka and a 40-year lease of the port of Gwadar, giving it access to the Strait of Hormuz and a military base of operations. Add to these “pearls” the port of Piraeus in Athens, which a Chinese ambassador to Greece called China’s “dragon head” in Europe, and the strategic logic of port acquisition becomes apparent.

Furthermore, because of the construction of the Hambantota Port and other debt-financed infrastructure projects, 95% of Sri Lanka’s 2017 revenue went to debt servicing instead of badly-needed domestic spending. The Center for Global Development, a U.S. think-tank, identified 8 BRI partners, including Djibouti, The Maldives, Laos, Pakistan and Kyrgyzstan, which are at a considerable risk of financial failure in light of future BRI-related infrastructure projects. Although these countries have worrying debt ratios to begin with, Chinese state-owned banks may well extend billions of dollars in loans, as long as the intended projects are realized, which poses grave moral hazard. Even if these partners too resort to concessions of ports and other assets, it will be a lose-lose situation for both sides, because China will not get its money back and the large infrastructure projects will still have to be finished. These precedents give a stormy outlook for the future, where many BRI countries may become dependent on Chinese credit and financially destabilized, leading to bad governance and corruption.

An American Alternative    

What does all of this mean for the United States? It is clear that in order to contain the disruptive effects of the Belt One Road Initiative or tap into its benefits, America must first engage with it. So far, neither the Obama nor the Trump administrations have shown serious interest in doing so. However, despite his decision to pull the U.S. out of the TPP, President Trump has recently publicly considered rejoining. Luckily for the U.S., the world actually is waiting for America. The remaining 11 original parties to the TPP revived the agreement in May 2018 as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), keeping most of the original provisions and the door open for the United States to join. Joining the CPTPP will yield economic dividends as well as political benefits to the United States and its allies. First, it will be the biggest trade agreement in U.S. history, covering 40% of the world’s GDP and one-third of global trade. This would be the biggest free trade zone on the planet, which would yield a $132 billion gain by 2030 for U.S. alone, mostly in agriculture, manufacturing, and services. At the present, with the U.S. out of the deal, it stands to lose $2 billion instead in the same timeframe, according to a study by the Peterson Institute.

Then, there are the strategic benefits, if not imperatives, of joining a multilateral free trade agreement such as the CPTPP. With the Belt and Road under construction, it is necessary for the U.S. to strengthen its economic and security cooperation with allies in the Asia-Pacific, such as Vietnam, Malaysia, and chiefly Japan. All party to the CPTPP, they will benefit from a rules-based, transparent and liberal approach to global trade championed by the U.S. At the same time, it will be an alternative to the BRI, forcing China to conform to international standards in order to compete for Asian markets. This will open up new opportunities for China’s satellites to escape its economic orbit and for China to upgrade its trade policy. In time, the United States may even consider joining the AIIB, as it should have done at its conception in 2014, and enforce higher standards of investment in the Belt and Road while charting a new course for Sino-American great power relations through a multilateral institution.

Above all, America’s commitment to assume a leadership position will send a clear message to Beijing that the “pivot” to Asia is no longer an empty phrase but a true tenet of the 21st century U.S. foreign policy.

 

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