Catching China by the Belt (and Road)

Chinese workers construct a shopping mall at a retail and office complex, part of a Chinese-backed building boom in Colombo.

Will the developing world fall under China’s sway? Many policymakers in Washington certainly fear so, which is one of the reasons they have created the new International Development Finance Corp. (IDFC), which is slated to begin operating at the end of this year. Like the Marshall Plan, which in the post-World War II years used generous economic aid to fight the appeal of Soviet communism in Western Europe, the IDFC aims to help Washington push back against Beijing’s sweeping Belt and Road Initiative.

The new institution should allow the United States to better align its commercial and development goals with its foreign policy in the developing world. But the IDFC will start at a significant disadvantage: relative poverty. Whereas the new IDFC will have about $60 billion in capital, the Belt and Road Initiative is a $1 trillion effort. By some estimates, Pakistan alone has already received more cash commitments from China than the value of the entire IDFC budget.

This shortfall raises the question of what else the United States should do if it’s serious about countering Chinese influence. The answer is to use a version of what some economists call the “judo strategy”- a method small firms deploy to compete against larger companies. Judo strategies tend to involve turning what is supposedly a competitor’s key asset - in this case, its size - against it. For example, smaller retail firms can outcompete bigger chains bogged down by costly bricks-and-mortar infrastructure by selling things more cheaply online. Or they can offer a personalized consumer experience that eludes firms operating at a larger scale.

U.S.-China competition

When it comes to U.S.-China competition, a successful U.S. judo strategy should consist of three building blocks. First, Washington should leverage the fact that China is violating well-established international norms with its lending policies. Second, the United States should draw attention to the corruption underlying the Belt and Road Initiative. And third, U.S. officials should creatively use IDFC resources to liberate countries that find themselves in Beijing’s financial clutches.

Before attempting to compete with China, however, the United States should study Beijing’s objectives - which are often misunderstood. The Belt and Road Initiative is as much a domestic initiative meant to address structural weaknesses in the Chinese economy as it is a grand foreign-policy strategy. Given a combination of poor demographics, growing international hostility to its trade policies, and the specter of weakening domestic demand, Beijing cannot rely on homegrown supply and demand to solve its current and future economic problems. The Belt and Road Initiative represents an attempt to use China’s enormous financial reserves to create new markets for Chinese goods, services, and unskilled labour. That’s why the use of Chinese labour to build Belt and Road infrastructure is so often part of the deal. Recipients of Chinese investments are effectively financing Beijing’s efforts to manage its internal economic problems. Understood this way, the Belt and Road Initiative reveals Chinese weakness rather than strength. And that’s why a judo strategy could be so effective.

The United States should start by using existing international norms - set by multilateral institutions such as the World Bank, the International Monetary Fund (IMF), and the Organization for Economic Cooperation and Development (OECD) - to constrain China’s predatory lending practices and the political leverage they bring. For example, the OECD has long-established norms against the use of tied aid - funds that require recipients to use that foreign aid to purchase goods and services from the donor. Tied aid is frowned on because it forces recipient countries to spend their money inefficiently. And even if Belt and Road funding - which primarily takes the form of loans - does not formally constitute foreign aid, Beijing often violates the spirit of that principle by mandating that infrastructure projects use Chinese contractors.

Washington should leverage these and other established norms of international development to isolate Beijing. China and the OECD’s Development Assistance Committee, for example, have formed a study group that gives China the ability to claim it is adopting best practices in foreign assistance. If China continues to neglect such practices, then the United States, which is the largest contributor to the OECD, should urge it to disband that group - in a very public fashion. Washington should also pressure the heads of the World Bank and IMF - two organisations that depend on its support - to highlight Beijing’s lending activities much more vigorously than they have done to date.

A second part of Washington’s judo strategy should be to highlight corrupt Belt and Road payments. Beijing has shown no scruples about using corrupt practices abroad to further its economic and foreign-policy agendas. A January 2019 investigation by the Wall Street Journal, for example, revealed how the Chinese offered to bail out a troubled Malaysian investment fund in return for infrastructure projects that would give their firms “above market profitability.” More generally, many Belt and Road partners, including Kazakhstan and Laos, suffer from endemic corruption.

So how should the United States respond? The IDFC could try to target local elites with financial inducements, but that’s a risky gambit; the United States should never be in the position of trying to out-bribe an adversary. Doing so is ethically reprehensible, and in a society as transparent as America’s, the media would undoubtedly expose the story, causing potentially irreparable harm to the IDFC’s reputation. Even if this weren’t a danger, Beijing is also probably much better than Washington at using corruption effectively; it has the recent experience.

Fortunately, there is another option. Corruption is rarely popular among citizens whose long-term economic health is being sacrificed to enrich corrupt officials. By relentlessly publicizing corrupt practices when they come to light, Washington can make such practices difficult for both Beijing and the recipient government to get away with. If China’s generosity is seen to come with the risk of political ruin, beneficiaries will start thinking twice before accepting its largesse.

Shining a harsh spotlight on those who profit from Beijing’s bribery is cheap, especially compared with compromising U.S. principles. It also draws on a long tradition in U.S. foreign policy. One of the keys to Washington’s success after World War II was its investment in elaborating international norms and standards that advanced its interests along with everyone else’s. And while the Trump administration has largely eschewed multilateral norms as the basis for its America First foreign policy, it’s time for Washington to recognize that these norms - which were largely created by the United States - serve the national interest.

U.S. financial markets

The final aspect of a judo strategy relies on U.S. financial markets, which can be exploited to release target countries from the onerous lending terms that China imposes on loan recipients. This is where the United States can step in by using the IDFC to help renegotiate agreements, either on behalf of the debtor country or by buying up and then refinancing the debt with longer repayment terms - something made possible by the depth and breadth of the West’s financial markets. A model here is provided by what the international community did with Latin American debt during the 1980s. Led by the United States, it created new financial instruments such as “Brady bonds” (named after former U.S. Treasury Secretary Nicholas Brady) to restructure the massive debt, reducing the payment burdens that countries such as Brazil faced.

- Foreign Policy 

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