By Antonio Graceffo
China’s Belt and Road Initiative (BRI) is losing its luster, paving the way for enhanced US diplomatic and economic engagement as a BRI alternative.
Chinese President Xi Jinping (習近平) unveiled the initiative in Kazakhstan in 2013 and it now involves 150 nations. In that time, China’s trade surplus with BRI countries has grown steadily, totaling US$197.9 billion for the first seven months of this year and expected to set a new record by the year’s end.
However, about 60 percent of BRI nations face economic distress due to rising trade deficits, increased debt and a slowing global economy, making China the lender of last resort. By the end of 2021, China had provided 128 rescue loans to 22 debtor nations, totaling US$240 billion. This included debt rollovers and extensions, with 5 percent interest rates, leading to accusations of debt-trap diplomacy when compared with the IMF’s 2 percent rescue loans.
The BRI is slowing down as Chinese investments drop. Previously at US$100 billion yearly until 2019, the total is now about US$60 billion to US$70 billion. China’s US$3 trillion foreign currency reserves remain flat, leaving less cash for new investments.
To support the weakening yuan, the People’s Bank of China is selling off dollars, indicating a focus on currency stability over fresh BRI loans.
Fewer countries are now accepting BRI loans due to several issues. Chinese builders typically claim up to 60 percent of project revenue and fail to generate local jobs. Opaque loans and bidding processes inflate costs for projects that do nothing to boost GDP, such as sports stadiums in poor nations. Some projects cannot cover loan repayments, such as a port in Sri Lanka or a power project in Pakistan. Incomplete projects prove useless, like a Ugandan power plant, a highway in Montenegro and Kenya’s railroad to nowhere.
A lot of Chinese construction is flawed, with Ecuador’s US$2.7 billion hydroelectric project deteriorating and Angola’s US$2.5 billion housing project becoming uninhabitable.
China’s global image has worsened in the past four years, partly due to BRI issues. Other factors include accusations of a COVID-19 cover-up, Beijing’s assertive foreign policy, South China Sea disputes, border conflicts with India, and domestic authoritarian policies discouraging investment and travel. These factors deter nations from the BRI and push them toward US diplomatic alternatives.
The US has made a few attempts to compete with the BRI, including the Indo-Pacific Economic Framework for Prosperity (IPEF), the US International Development Financial Corporation, the US Agency for International Development as well as US Department of Commerce programs through the US Bureau of Industry and Security. The benefit of accepting US aid over Chinese aid is that the former is not a veiled loan. For every US$9 of aid given by the US, only US$1 of debt is created. Dealing with China is the exact opposite. For every US$1 of aid China provides, it creates US$9 of debt.
Having said that, the US programs are extremely small in scale — the IPEF, particularly, is somewhat ill-defined and directionless — so they cannot take on the BRI directly.
China has spent US$1 trillion on the BRI and will need an additional US$8 trillion to complete it. The US will not engage in a foreign aid “arms race.” Instead, it offers diverse alternatives, eroding China’s appeal and addressing the BRI from multiple angles.
At the G20 Summit last week, the US partnered with Saudi Arabia, the United Arab Emirates and India for a railway and port network that would link India, the Middle East and Europe. Unlike the BRI, it involves multiple countries and is not fully funded by the US and, unlike projects financed with “free money,” all parties will have rigorously assessed the project’s feasibility before committing to it.
This serves as an illustration of how the US can offer viable alternatives to the BRI without engaging in a spending competition with China.
Historically, the US has shied away from multinational trade agreements, such as the Regional Comprehensive Economic Partnership. Instead, Washington prefers bilateral agreements in which it can grant countries, on a case-by-case basis, advantages that are in line with its foreign policy objectives. An example would be a recent agreement with Vietnam to upgrade their relationship to a Comprehensive Strategic Partnership. The agreement includes provisions covering trade, investment and national defense cooperation.
Worsening relations with China was one of the reasons that prompted Vietnam to enter the deal and once again, it cost the US very little to help improve Vietnam’s GDP and Vietnam did not have to go into debt.
The US trade war with China, as well as the China chip ban, is also benefiting Washington’s allies. The US is funding semiconductor workforce development in Vietnam, which would allow that country to accept some of the advanced manufacturing being diverted from China. Manufacturing is also being relocated from China to India, Indonesia and other parts of Southeast Asia, bringing those nations closer to the US.
In May, US President Joe Biden hosted the US-ASEAN Special Summit. In July, US Secretary of State Antony Blinken attended the US-ASEAN Foreign Ministers’ Meeting in Jakarta. And in November, the US is to host the APEC Creating Economic Opportunity Summit.
Through increased diplomatic engagement, and trade and investment diversion, the US is presenting an alternative to the BRI without outspending China and without adding to the debt burden of other countries.
Antonio Graceffo, a China economic analyst who holds a China-MBA from Shanghai Jiaotong University, studies national defense at the American Military University in West Virginia.
This article originally appeared in The Taipei Times on Sep 20, 2023
