Is China’s Belt and Road Initiative Strategic Genius, Arrogant Overreach or Something Else?
President Xi Jinping, the modern-day emperor of China, clearly has a deep sense of history. On September 8, 2013, he gave a speech at Nazarbayev University in Almaty at the invitation of Kazakh President Nursultan Nazarbayev. Xi quoted a Chinese saying — “[A] near neighbor is better than a distant relative” — and referred to Chinese envoy Zhang Qian.
Apparently, this legendary envoy of the Han dynasty came to Central Asia 2,100 years ago. In the words of Xi, Zhang’s “mission of peace and friendship” led to the “ancient Silk Road linking east and west, Asia and Europe.” Xi reminded the audience that his home province of Shaanxi was the starting point for this legendary trade route and Almaty was on it too. And he called for a modern reincarnation of the ancient Silk Road.
In what will go down as a historic speech, Xi promised to create an “economic belt along the Silk Road” that would benefit “the people of all countries along the route.” Thus was born the Belt and Road Initiative (BRI). Its five prongs included increased policy communication, improved connectivity across Asia, unimpeded trade, enhanced monetary circulation and better understanding among people of different countries.
Less than a month later, Xi gave another speech in Indonesia. Again, he invoked old ties going back to the Han dynasty. Importantly, he also invoked the 15th-century Chinese admiral Zheng He. This sailor from the era of the Ming dynasty made seven voyages and visited many key islands of Indonesia.
Replete with references to literature and shared memories of independence struggles, Xi quoted another of those proverbs for which his country is rightly famous: “[A] bosom friend afar brings a distant land near.” In a land still scarred by the shock therapy that the International Monetary Fund inflicted upon the country in 1997, Xi emphatically rejected the “one-size-fits-all development model,” reassuringly promising to respect the path Indonesia takes for its economy, politics and society. Instead of inflicting policy prescriptions like the IMF, President Xi promised China would “share opportunities for economic and social development with ASEAN, Asia and the world.”
What Is the BRI?
The Council on Foreign Relations (CFR) calls the BRI “the most ambitious infrastructure investment effort in history.” This effort involves “creating a vast network of railways, energy pipelines, highways, and streamlined border crossings, both westward—through the mountainous former Soviet republics—and southward, to Pakistan, India, and the rest of Southeast Asia.”
ChinaPower, an effort by the Center for Strategic and International Studies (CSIS) to unpack the complexity of China’s rise, captures the stupendous figures involved. About 4.4 billion people live in countries that have signed up for the BRI. They comprise 62% of the world population. The GDP of these countries is $23 trillion. Trade between BRI countries and China amounted to $3 trillion between 2014 and 2016. In the first half of this year, as per Bloomberg, “Beijing signed about $64 billion in new, mostly construction contracts, a jump of 33% from 2018.” What is this construction spree all about?
To understand China’s construction frenzy, it is important to remember that there are two prongs to BRI. One is rooted in China’s outreach to Central Asia. It aims to bring about a renaissance of the ancient Silk Route. The other is to build upon Zheng’s maritime voyages and create a network of ports that link China to the rest of the world. Asia and Africa are to be a particular focus. In addition to physical infrastructure, the Middle Kingdom will create 50 special economic zones à la Shenzhen, the first such zone established in 1980 as a result of Deng Xiaoping’s economic reforms of 1978.
Although a chemical engineer by training, Xi is a keen student of history. He remembers a time when China was the world’s largest economy in the world. Chinese silk, spices, jade, porcelain and other goods went West, while gold, silver, ivory, glass and various items came East. According to many analysts, the BRI seeks to create the infrastructure and system of trade that makes China top dog again.
Emulating their American counterparts, the Chinese speak of the BRI as benefiting everyone involved. If one is to believe Wang Yiwei of Renmin University, the Middle Kingdom seeks to “promote lasting peace, common security, common prosperity, openness and inclusiveness, and shared and sustainable development.” He argues that China would share “its development experience, but it will not interfere in the internal affairs of other countries.”
Wang claims the Chinese model “aims to promote a perfect combination between a functioning government and an efficient market, in which the visible and invisible hands both play their roles.” He asserts that ultimately the market would play a decisive role, but countries where the market economy has not developed would have an alternative to the failed free-market model peddled by the IMF, the US and the West.
Even as Wang reassures the world about the Belt and Road Initiative, many shudder in horror at its scale, scope and speed of the project. The CFR worries whether the BRI is “a plan to remake the global balance of power.” Could the BRI be “a Trojan horse for China-led regional development, military expansion, and Beijing-controlled institutions?”
So, what is the real story? Is the Belt and Road Initiative the benign win-win that Wang paints it to be, or is it a sinister plot for world domination by a secretive, authoritarian regime?
The Chinese Rise and the Americans Respond
Since 1978, China has experienced the biggest and fastest transformation in history. Its economy has grown exponentially. Deng’s experimentation with reforms has paid off handsomely. With its vast supply of labor, entrepreneurial energy and national ambition, China has come back with a bang on the world stage after two centuries in the shadows.
China’s economic rise is based on mass industrialization. Data from the World Bank tells us that exports went up from a mere 4.5% of GDP in 1978 to 36% in 1996. Since the glory days of 2006, Chinese exports have fallen to 19.5% of GDP as per 2018 figures, but even this diminished percentage tells us that much of the production of China’s factories is still shipped overseas. This export-led model has served the country well and, for the last few years, it has become the workshop of the world. This workshop has supplied the planet’s biggest market: the US. Access to this market has been critical to China’s rise.
So, why was the US happy to import from China? Part of the answer lies in the Cold War with the Soviet Union. American imports fueled the rise of South Korea, Taiwan and Japan after World War II. The free-trade order that Uncle Sam created locked its allies firmly into its own orbit. Countries that stayed out of the American solar system such as India, Vietnam and China remained poor.
When China took to reforms in 1978, the US was itching to wean the Middle Kingdom away from the Soviet Union’s bosom. In 1991, when the dysfunctional regime in Moscow completely collapsed, the US still saw benefits in incorporating China into its orbit. Uncle Sam was even willing to overlook the 1989 Tiananmen Square protests because its high priests bet that economic transformation would lead to political change in China’s timeworn land. Eventually, prosperity would make the Middle Kingdom more open, plural and democratic.
Thanks to this assumption, the US supported China’s entry into the World Trade Organization (WTO) in 2001. There was another reason for getting the Chinese into the WTO. Importing from the Middle Kingdom improved Walmart’s bottom line because Chinese goods were inevitably cheaper. After all, wages in this country of over a billion were less than in the US. Not only shareholders of Walmart but also American consumers were happy. After all, who does not want to buy more for less?
Not everyone won because of this arrangement. Many American workers lost their jobs when production moved to China or Mexico. The wise men in charge of the US economy told them that their pain was short term. Broad, uplit sunlands were just around the corner. Oracles like Bob Rubin and Larry Summers proclaimed that a more integrated world economy with freer movement of capital would lead to cheaper products, better paid jobs and a cleaner environment. In 1991, when Summers was at the World Bank, he proposed that many poorer countries were under polluted and toxic industries could move there from the first world.
When this memo was leaked in 1992, it caused a minor furor but most Americans bought into the gospel of trade. Even then there were some curmudgeons like Ross Perot, the populist 1992 presidential candidate. He inconveniently warned that wages would decline because of overseas competition. Even then, Americans were worried about fair and unfair competition. Perot saw “one-way trade deals” leading to a “giant sucking sound” of jobs going south. Unsurprisingly, this Texan billionaire’s warning was pooh-poohed away by economists at places like Harvard, Yale and Chicago. Even as Perot made his comment in the pre-election debate, George H.W. Bush and Bill Clinton proclaimed that trade was a win-win and smiled on.
Economists, the new temple priests of globalization, also said trade was a win-win. Clinton bought into this prophecy with the zeal of a new convert. In 1994, this Arkansas boy claimed trade would allow “all to reap the benefits of enhanced specialization, lower costs, greater choice, and an improved international climate for investment and innovation.” If greed was good in the era of Ronald Reagan, globalization was glorious in the age of Clinton.
In 2001, China’s entry into the WTO gave it an autobahn with no speed limit to zoom ahead. As the US got embroiled in Iraq, the Middle Kingdom dutifully followed Deng’s maxim: “[H]ide your strength, bide your time.” It industrialized much as the US did in the 19th century, by stealing industrial secrets, protecting key sectors and providing manufacturing with steroids such as massive infrastructure spending and cheap credit.
Eventually, China’s growth started making Americans nervous. Some started to worry about rising US current account deficits. Inevitably, the top dog was bound to push back and it duly did. After years of negotiations, Barack Obama signed the Trans-Pacific Partnership (TPP) in 2016, shutting out China from a gargantuan trade deal. Through the TPP, the US sought to seduce the Asian giant’s troubled neighbors away from its sinewy arms. This trade deal was a part of the Obama doctrine, which envisaged the US pivoting to Asia from the Middle East. Naturally, it caused China much concern.
If Obama chose jujitsu, President Donald Trump has opted for a bar fight. As this author observed in 2018, Trump has declared economic war on China. Under his administration, the mood in Washington has turned sharply against the Middle Kingdom. Thomas Friedman, the celebrity columnist of The New York Times, has declared that China deserves Trump. Now, China is no longer just making “toys, T-shirts, tennis shoes, machine tools and solar panels.” It is competing with the US in “supercomputing, [artificial intelligence], new materials, 3-D printing, facial-recognition software, robotics, electric cars, autonomous vehicles, 5G wireless and advanced microchips.”
In brief, Friedman agrees with Trump that China is now a rival. Its “subsidies, protectionism, cheating on trade rules, forced technology transfers and stealing of intellectual property since the 1970s [have become] a much greater threat.” In the old days, Friedman argues it did not matter if the Chinese were “Communists, Maoists, socialists — or cheats” but, now that it is a competitor, “values matter, differences in values matters, a modicum of trust matters and the rule of law matters.” Tellingly, a Democrat trumpeter is giving a clarion call for a new Cold War unleashed by a much-despised Republican president. To modify the words of a Nobel laureate, the times indeed are a-changin’.
Chinese Counter Response
Even as the US has struck to chop down the Chinese tall poppy, the Middle Kingdom has played its own set of cards. To counter Obama’s China containment policy, Xi did two big things. First, he launched Belt and Road Initiative in 2013. Second, his administration formulated a new “Made in China 2025” industrial policy in 2015. Seeking to avoid the middle-income trap and just make toys or tennis shoes for Friedman’s grandchildren, the Chinese decided to embrace high-tech manufacturing. Their policy sets out 10 high-tech industries as a national focus, including electric cars, advanced robotics and artificial intelligence.
In an earlier article, this author pointed out how high-tech manufacturing in brainbelts was putting the US and Europe back on the map. China seems to be aware of this trend. Hence, it is making sure that it does not get stuck in low value-added, low wage manufacturing. China has set targets, is providing subsidies and making foreign acquisitions to close the gap with the West. Its government has also forced foreign companies operating in China to share their intellectual property and intellectual know-how. Tellingly, intellectual and industrial espionage remains part of the Middle Kingdom’s modernization toolkit.
The Middle Kingdom still has a long way to go. People often forget that China’s per capita annual income is still a measly $8,000, much below the US figure of $56,000. China may have grown dramatically in the last four decades, but it is still markedly poorer than the US. And for years, this poor country has lent the rich one money. Over the years, China has accumulated huge dollar reserves. In part, it has done so to depress its currency, keep exports cheap and its factories humming. Yet this imbalance was never sustainable.
A few months before the financial crisis of 2007-08, this author argued that Americans could not keep consuming on Chinese debt. The “Yankee Doodle and Dragon Dance” had to end. That end is nigh for three reasons. First, American sanctions have dampened demand for Chinese goods. Second, high-tech smart manufacturing is making supply lines shorter and bringing back factories to the US. Third, an energy revolution has quietly transformed the US. It is the largest natural gas producer in the world with prices staying below $3.00 per million British thermal unit (Btu) since 2015. Cheap energy costs mean that many energy-intensive industries can move back to America. The savings in labor costs are outweighed by cheap gas.
David Petraeus, a retired general and former spymaster, put this figure into context by pointing out that the price for natural gas for America’s competitors is much higher. In 2014, he observed that the Japanese were paying $16-17, the Chinese $10-12 and the Europeans $9-12 in contrast to the Americans who were then paying around $3.70 to $3.80 per million Btu for natural gas. Since then, prices have declined and the “extraordinary comparative advantage” of the US has only increased. Bit by bit, the US is going to produce more and import less. So, China has no alternative but to try something else.
With so much excess capacity, the Middle Kingdom has come out with its version of the Marshall Plan. It is trying to create an Afro-Eurasian economic and trading area to rival the US-dominated transatlantic one. China’s big hope is that the BRI will create new markets for its goods. The country would be able to supply cement, steel and other goods as well as find useful activity for its high-speed rail firms. Just as British firms once built railways, roads and ports in Africa and India, Chinese ones are doing the same in Africa and Central Asia. These projects would remove infrastructural bottlenecks to trade and provide a big economic stimulus not only to China but to the wider region.
This investment is also a way to diversify China’s assets. For too long the Middle Kingdom stockpiled gargantuan dollar reserves and got little in return for its investment. Now, the country is investing its foreign exchange reserves in projects with greater risk but potentially higher return. It is choosing infrastructure because that is what it has the most experience with. After all, infrastructure investments worked in China. Why should they not work elsewhere?
There is another factor at play. Like Germany, China has contributed to what the Federal Reserve’s former chairman, Ben Bernanke, has called a “global savings glut.” Simply put, this means that desired saving exceeds the desired investment. China is using its excessive savings to stimulate domestic demand and invest abroad through the BRI.
China’s Three Big Fears
A two-part Deutsche Welle documentary chronicles how the new Silk Road is moving across high mountains in Asia and other exotic locations right into the heart of Europe. It compares China’s construction of roads, railways, bridges, tunnels and ports to Rome’s imperial roads. If one was to believe the Germans, China is a supremely confident power with a vision and energy to become the preeminent global power as it was for most of its history.
The Chinese do not quite have the same view as the Germans. When this author speaks to Chinese friends, he finds anxiety inextricably intermingled with pride. They have three big fears. Importantly, Chinese fears are reminiscent of the Japanese before World War II, who had built up industrial might but did not have captive markets in the form of colonies or sources of energy at home unlike the British.
China’s first fear is running short of energy. The Middle Kingdom might have coal, but it relies on the Middle East, Central Asia and Russia for oil and gas. The US Navy could block the Straits of Malacca in hours, bringing Chinese cars, trucks, trains and planes to a halt. Pipelines from Central Asia and Russia are plays to secure energy supplies. So are ports that China is building in Southeast Asia, South Asia and the Middle East. Centuries after Zheng He embarked on his legendary voyages, the Middle Kingdom is also belatedly investing in a modern navy. It has no choice. China is now a major trading nation in much the same manner as the US.
China’s second fear is unrest in Xinjiang. Throughout its history, the Middle Kingdom has experienced rebellions in restive regions and challenges to the unity of the country. It fears that the Muslim Uyghur minority might demand secession from the country and agitate for it. Therefore, Chinese authorities have launched a brutal crackdown and the region is under virtual lockdown. Approximately a million Uyghurs are estimated to be in reeducation camps.
Apart from the stick of repression, China is using the carrot of development to bring its restive region to heel. The BRI hopes to trigger economic growth in Central Asian countries such as Kazakhstan, Kyrgyzstan and Uzbekistan so that Xinjiang prospers as well. It also hopes that close ties with Central Asian countries will dampen separatist instincts. In the words of Suhasini Haidar, Xinjiang is “both at the heart of China’s biggest worries and is one of its greatest hopes.”
China’s third fear is that the US and its European allies might put in glass ceilings to stop its rise. Meng Wangzou, a top executive in Huawei, was arrested in Canada at the behest of the US, giving proof to this thesis. Intelligence agencies in the US, Britain and elsewhere have warned against the potential security risk that Huawei and other Chinese companies pose. Chinese investment, once welcomed, now causes disquiet in Europe and the US. In the battle of narratives, China believes that the West has painted its face jet-black to stymie its progress.
Many Chinese genuinely believe that Western media and intelligence agencies are fomenting discord in Hong Kong and resentment in places like Kenya or Sri Lanka. They believe that the West resents their rise and will do what it takes to stop it. Some of this fear is paranoia but some of it is real. There is a new wind blowing across the US. Like Friedman, many Americans do want to rub Chinese noses in the dirt and some of them work in the highest echelons of government. By investing in the BRI, the Chinese are taking out insurance against Western blowback.
In his own way, President Xi is trying to reassure not only the West but also the rest of the world. Even as Trump embraced protectionism, Xi’s 2017 speech in Davos sang paeans to economic globalization. He also proclaimed it had to become “more inclusive and more sustainable.” Xi sounded almost American when he spoke about “growing an open global economy to share opportunities and interests through opening-up and achieve win-win outcomes.” He repeated this message four months later when the inaugural global BRI Forum gathered in Beijing.
For China, the Belt and Road Initiative is not only about economics but also geopolitics. The BRI is part of a strategy to engage more deeply with the outside world. It expands the arc of Chinese influence and counters the anti-Chinese measures of the US.
Rivals and Risks
China’s BRI is causing unease not only in the West, but also in countries like Japan, Vietnam and India. All three have been involved in conflict with their larger neighbor. Just as China fears containment by the US with its bases in Japan, South Korea and across Southeast Asia, India is terrified of being encircled by China’s “string of pearls.” This term refers to the ports that China is building, which India suspects have not only a commercial but also a naval purpose.
Japan is taking the lead in countering the BRI. It has stepped in to replace the US with the collapse of the TPP. Japan has also teamed up with India to launch a $200-billion infrastructure plan for the broader Indian Ocean area. Funding power plants, railways, roads and ports as well as flexing military muscle seems to be Japan’s response to BRI.
Even in countries where China has invested big in BRI projects, there is resentment and, sometimes, backlash. In Pakistan, a suicide attack killed Chinese engineers in Baluchistan last year. In this allied country, the Chinese work and live under police protection. In Cambodia, Sri Lanka, Kenya, Hungary and elsewhere, China almost invariably faces criticism for pricing projects too high, disregarding local laws and importing labor instead of boosting local employment. Allegations of “debt-trap diplomacy” refuse to go away. The Sri Lankan port of Hambantota is used as a classic example of this diplomacy. Apparently, China won a 99-year lease for writing off Sri Lankan debt.
Along with rivals and resentment, China has to deal with turf wars at home. Just as different agencies and departments squabble in Washington, reports of fighting between foreign, commerce and defense ministries are rife in Beijing. China’s planning commission and provinces are also part of the fight club. Conflicts of interests are emerging between different companies involved in far-flung projects and the government. It might be fair to say that there is a certain incoherence to the sprawling efforts involved in the BRI.
Beijing is also having to balance divergent imperatives. One of the BRI’s aims is to gain better returns on China’s foreign exchange reserves. However, there are few profitable projects in Central Asia, Southeast Asia or Africa. Another aim is to plant the flag in key geostrategic locations. The Chinese have little experience in evaluating such locations. As a result, the BRI might be constructing too many white elephants with little economic or strategic value.
Yasheng Huang, a professor at the MIT Sloan School of Management, fears that the BRI has huge risks of debt default. Most countries do not have the cash to pay China back. They will ask for debt forgiveness and write-offs. China’s already burdened savers will ultimately be left with the bill. Apparently, only 28% of BRI investments in the first half of 2018 came from private sources, down from 40% for the same period in 2017. The fall in private money for the BRI shows that China’s policymakers, not business leaders, are making most big investment decisions, increasing risks to the taxpayer.
Like the former Soviet Union, communist China is still struggling to deal with religion. Most societies, democratic or authoritarian, accord a certain sanctity to religious belief. Some like Saudi Arabia use religion as soft power and profit enormously from being the custodian of holy sites. Every American politician invokes god in a supposedly secular country. The right to freedom of religion is enshrined in the constitutions of many countries such as Germany, South Africa and India. China’s treatment of Buddhist Tibetans might gain an occasional mention or fire up Hollywood celebrities, but its persecution of Muslim Uyghurs is capturing more global attention.
In particular, it is making Muslims around the world unhappy. This author has met many Arab, Iranian and Indian Muslims who seethe at China’s injustices against people who share their faith. Some of them talk of boycotting all Chinese goods. This creates tricky situations for China’s allies. Pakistani Prime Minister Imran Khan might claim that he does not know “the exact situation of the Uyghurs,” but Pakistani publications cover China’s actions regularly. China’s actions in Xinjiang might be increasing risks of attacks on its workers and engineers in Pakistan and elsewhere. Like the US, China might be able to work with elites, but it might lose public support in Muslim countries, weakening the intended impact of the BRI.
Even if Thomas Cavanna is right about the Belt and Road Initiative being “more coherent, potent, and resilient than many believe,” China suffers a gigantic disadvantage. For instance, it is building ports, railways and roads in Kenya, but it has little impact on the country’s culture. English is the language of government, people watch the English Premier League and most Kenyans pray to a white Jesus Christ. Despite one in three black men ending up in jail once in their lifetime, Kenyans dream of immigrating to the US, not China. This means that once the BRI projects are completed, the Chinese might vanish from Kenya like their medieval admiral Zheng He.
Finally, many Chinese themselves still look up to the West. Christian Dior and Christianity salve their bodies and souls. Xi’s own daughter did her undergraduate degree at Harvard. Far too many Chinese are still desperate to emigrate for a better life. The rich still move heaven and earth to get their wealth out of the Middle Kingdom. In contrast, the US attracts talent and wealth from around the world.
The Belt and Road Initiative might have energy, ambition and even vision, but it is not backed by an inspiring idea. That is its biggest limitation.
Courtesy : Fair Observer