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Wednesday, May 22, 2024

BRI: Responses of the US and EU

Haseeb-Ur-Rehman & Dr. Farwa Sial |

In contrast to other development funds and economic corridors, the Belt and Road Initiative (BRI) is distinct in its form as a product of dirigisme. It cannot be conceived as development aid or investment but a combination of concessional and commercial loans as well as subsidies which seek to utilise the surplus capacity of Chinese state-owned enterprises (SOEs) and private firms. These investments are ultimately geared towards promoting policy and geo-strategic goals, which should be seen as the basis for an emerging framework for a multilateral cooperation mechanism in its own right.

By comparison, the geo-economic ends of other global actors, particularly the US, have emerged incoherently and without the confines of a defined approach to economic statecraft and have been guided by disjointed ideology, short-term economic gain or reaction and private interests. All further obscured by being subject to the vicissitudes of domestic politics and further marred by fall-backs to the force of arms. To highlight this contrast, President Xi Jinping in both his 2013 announcements of the Silk Road Economic Belt in Astana and Maritime Silk Route (MSR) before the Indonesian parliament emphasised that the BRI would not entail “outdated geopolitical manoeuvring”, political intervention or the operation of a sphere of influence.

The US of late is tending towards isolationism, with growing antipathy towards and indeed open attacks upon various institutions of the International system including the WTO, NATO, the ICC etc. compounded by a discernible divergence of interests, between those of the US and those of the Bretton Woods institutions, the EU and the OECD. Additionally, the current administration’s “America First” policies feature significant reductions in US funding for economic development.

In contrast to other development funds and economic corridors, the Belt and Road Initiative (BRI) is distinct in its form as a product of dirigisme.

Whether or not this trend is entirely authored by the current US administration or whether the current administration is itself a manifestation of American disengagement, the US seemed initially for the most part, to not be interested in directly competing with the PRC or contesting its attempts at economic or geopolitical ascendance, particularly through the early phases of the Trump administration, with abandonment of the Trans-Pacific Partnership (TPP) the centrepiece of the Obama administration’s “pivot to Asia” attempts at containment. The US however subsequently took oblique steps such as affirming support for Indian territorial assertions in the context of CPEC, warning prospective BRI participants of the risks of indebtedness and refusing to participate in the Asian Infrastructure Investment Bank (AIIB) alongside its fellow G7 member Japan.

The BRI allows the PRC to diversify from solely employing its forex assets to purchase US Treasuries to foreign infrastructure investment. US Treasuries, in-spite of interest rate cuts may have been acceptable in an environment of stable growth of Chinese exports to the US but changing factors such as growing domestic consumption and unsustainable US debt levels highlight the need for the PRC to develop alternative markets and investment forums for Chinese capital expenditure, particularly where these could be realised in RMB denominated loans. Reciprocal to the emergence of the need for such diversification by the PRC and perhaps indicative of a trend towards mutual disentanglement, by early 2018 the US initiated a regime of ever-exacerbating tariffs on Chinese products, citing concerns relating to Chinese supply chain dominance culminating in a “trade war” with a proposed 10% tariff on $250 billion of Chinese exports though Q4 2018, to rise to 25% in the following year.

Read more: Cost of US-China Rivalry for Pakistan – Andrew Small

A more direct response from the US to the BRI emerged concurrently from June 2018 when the US Senate approved the Better Use of Investment Leading to Development (BUILD) Act, creating the United States International Development Finance Corporation (USIDFC) by combining the USAID Development Credit Authority and the Overseas Private Investment Corporation (OPIC), proposed to operate into 2038. With a view to mobilise US private capital (possibly to counter the presence of PRC POEs in BRI countries), and having available assets of $60 billion, this organisation shall support US private-sector investor/entrepreneurs in making investments in private-sector businesses in low-income or lower-middle-income economies.

The BUILD Act in substance does not detract from traditional US foreign investment and foreign policy ends and rather than represent any radical approach to counter the unprecedented ambition of the BRI, focuses exclusively on private sector development whilst rejecting state-directed investments by “authoritarian governments” and “strategic competitors”, which may render such investments unattractive in some cases, particularly when related to sensitive infrastructure development.

In contrast to the currency flexibility of the BRI, such as the allowance of borrowers to limit exposure and expenditure by denominating proportions of their borrowings in local currency, the availability of local currency for cross-border investment settlements, conducting project activities in local currencies and the availability of RMB swaps, the BUILD Act quite explicitly promotes “dollarization” as a necessary outcome of USIDFC lending, by generally requiring denomination and repayment of loans in USD. RMB currently only constitutes roughly 20% of the preferred funding currencies for BRI projects, which include local currencies and Euros, as the most preferred.

Additionally, the current administration’s “America First” policies feature significant reductions in US funding for economic development.

The BUILD Act does not explicitly detract from ideological or political interference, as might be expected from a response to the BRI, but rather seeks to export American ideas of “economic freedom” and free-market competition specifically limited to the private sector, as well as promote the financial, foreign policy and security interests of the US and its legal norms as pre-inspected into USIDFC lending.  Unlike the BRI, which is tentatively open to all countries, USIDFC lending is limited to low income and lower-middle income countries as defined by the World Bank and would require presidential certification, where availability is sought for upper-middle income countries.

In its enactment and in the context of US domestic politics, the BUILD Act highlighted its self-sustaining basis, with no net costs to the US taxpayer and its ability to generate tax revenues for the US government. Its total allocated assets are a tiny fraction of the $8 trillion projected to be invested in Asia through the next decade by the ADB. In contrast to the multilateral engagement sought by the PRC through the BRI and perhaps conflicting with its own stated ends of mobilising private entrepreneurial capital and expertise, the BUILD Act relies on a Washington-centric “Development Advisory Council” to direct International development.

Read more: China struggles with Belt and Road pushback

Although in its language the BUILD Act seems to posit itself as an alternative to the BRI, it is effectively only the reorganisation of existing US aid and FDI infrastructure, rather than any radical response to the international development initiatives of the PRC. With little-to-no new geo-strategic consequences to USIDFC lending or any specific focus on major or mega infrastructure projects, the BUILD Act seems more a half-hearted reiteration of existent US policy for domestic US political consumption, than any serious attempt to contain or compete with the BRI. Nevertheless, tensions between the US and the PRC are escalating on the forum of the “trade war”; in all likelihood as a US response to the gradual Chinese retreat from the concentration risk posed by accumulating low yielding US debt.

Low Income Countries Eligible for BUILD Investments Lower Middle Income Countries Eligible for BUILD Investments Upper Middle Income Countries Eligible for BUILD Investments upon Presidential Certification Other BRI Countries/Other Involvement
Afghanistan Angola Albania Antigua and Barbuda
Benin Bangladesh Algeria Austria
Burkina Faso Bhutan American Samoa Bahrain
Burundi Bolivia Armenia Brunei
Central African Republic Cabo Verde Azerbaijan Croatia
Chad Cambodia Belarus Czech Rep.
Comoros Cameroon Belize Estonia
Congo, Dem. Rep. Congo, Rep. Bosnia & Herzegovina Greece
Eritrea Cote d’Ivoire Botswana Hungary
Ethiopia Djibouti Brazil Israel
Gambia, The Egypt, Arab Rep. Bulgaria Japan
Guinea El Salvador China KSA
Guinea-Bissau Georgia Colombia Kuwait
Haiti Ghana Costa Rica Latvia
Korea, Dem.People’s Rep.* Honduras Cuba * Lithuania
Madagascar India Dominica New Zealand
Malawi Indonesia Dominican Republic Niue
Mali Kenya Ecuador Oman
Mozambique Kiribati Equatorial Guinea Panama
Nepal Kosovo Fiji PRC/Hong Kong
Niger Kyrgyz Republic Gabon Poland
Rwanda Lao PDR Grenada Qatar
Senegal Lesotho Guatemala Singapore
Sierra Leone Mauritania Guyana Slovakia
Somalia Micronesia, Fed. Sts. Iran, Islamic Rep.* Slovenia
South Sudan Moldova Iraq South Korea
Syrian Arab Republic * Mongolia Jamaica Trinidad and Tobago
Tajikistan Morocco Jordan UAE
Tanzania Myanmar Kazakhstan Uruguay
Togo Nicaragua Lebanon
Uganda Nigeria Libya Other AIIB Members
Yemen, Rep. Pakistan Macedonia, FYR Australia
Zimbabwe Palestine Malaysia Cyprus
Madagascar Papua New Guinea Maldives
Malawi Philippines Marshall Islands
Sao Tome and Principe Mauritius
Solomon Islands Mexico
Sri Lanka Montenegro
Sudan * Namibia
Swaziland Nauru
Timor-Leste Paraguay
Tunisia Peru
Ukraine Romania
Uzbekistan Russian Federation
Vanuatu Samoa
Vietnam Serbia
Zambia South Africa
St. Lucia
St. Vincent & the Grenadines
Venezuela, RB *
World Bank List of Economies (June 2018).
* Currently subject to US sanctions.
BRI Countries in Bold & AIIB Countries in Red.
© Lexgate Ltd. 2018.

The geographical and trade proximity of the BRI to the countries and the sphere of influence of the European Union (EU) makes it more likely for the EU to perceive the BRI as a source of friction, although this has not manifested in any immediately tangible fashion, perhaps owing to the EU not positing itself as a geopolitical actor and its commitment to a rules based rather than political or ideological modus-operandi.

In the wake of the 2007/08 Financial Crisis, the EU has become subject to various economic issues threatening its integrity including spiralling member-state debt, currency depreciation and instability, high unemployment and falling rates of aggregate demand, investment and productivity, particularly in Greece, Spain, Italy and the UK. This situation is aggravated by the uncontrolled influx of economic migrants and refugees fleeing conflict from particularly Syria and North Africa. Resultantly the EU is also suffering from political instability and the rise of far-right political groups aligned to US-style nationalistic disengagement and isolationism that are existentially opposed to the EU.

RMB currently only constitutes roughly 20% of the preferred funding currencies for BRI projects, which include local currencies and Euros, as the most preferred.

A feature of EU expansion and integration has been the maintenance of buffers, through various treaties including Association Agreements entered into with States at its furthest borders with Eurasia, under the European Neighbourhood Policy and for the purposes of Russia the European Eastern Partnership (EaP). These agreements generally offer those states most-favoured-nation treatment, tariff-free access to certain markets, financial assistance or other privileges and advantages and allow the EU to maintain an economic sphere of influence with the possibility of further expansion. The EU, however, does not maintain any common defence policy and is fully reliant on the North Atlantic Treaty Organization (NATO), of which the majority of its member states excluding some smaller countries and those politically neutral are all signatories.

Political and economic instability in Europe and the US, however, have resulted in tensions if not shifts in the foreign policy trajectories of some states within the EU’s sphere of influence, towards the Eurasian Economic Union (EAEU). The EAEU, which receives 80% of its internal FDI from Russia, is a recent initiative to economically integrate post-Soviet states, loosely modelled on the EU. This trend towards the EAEU, sharply contrasts with earlier Eastern European integration into the EU following the collapse of the USSR and highlights changes in the perception of the EU, by the countries in its peripheries.

Read more: Remodelling the Belt and Road: Pakistan picks up the torch

Aside from Armenia, Belarus and the Crimea (which by its annexation by the Russian Federation became part of the EAEU), Georgia, parts of Moldova and significantly Turkey are all EU Association countries or regions geographically within the European sphere of influence, expressing an interest in agreements with EAEU, presumably in parallel with those they have with the EU. Given the political differences and friction between Russia and the member states of Europe, this is unlikely to be acceptable to the EU, particularly as tensions over Association Agreements led (in part at least) to the conflict in Ukraine.

The EAEU is meant to be a purely economic initiative with no collective foreign policy objectives, however Russia, for its part alongside impinging upon the scope of the EAP at its western borders, has actively fostered and supported “Euro-sceptic” and populist political movements across the EU, leveraging the economic decline and public spending cuts in EU countries to its favour. Contrastingly, the EAEU and Russia have been less confrontational in their response to the BRI, possibly owing to the BRI being a mainly economic initiative with little to no underlying institutional structure or political consequences for participants at present.

The BRI and EAEU cooperate productively in Central Asia and although Ukraine is a significant beneficiary of BRI investments and a PRC defence trading partner, China has not opposed or supported Russian policies in the Crimea. The EU’s response to the BRI has as of September 2018, taken the form of a high-level Joint Communication to its institutions (JOIN (2018) 31), which focuses on building towards multifaceted “sustainable connectivity” between Europe and Asia, which appeals to the EU’s high standards and safety, security and legal norms.

The EU is also suffering from political instability and the rise of far-right political groups aligned to US-style nationalistic disengagement and isolationism that are existentially opposed to the EU.

This Communication deals with Asia as a whole and does not explicitly focus on the BRI, yet acknowledges global interdependence and the possibility of peaceful political cooperation. It does however indirectly address the BRI, in terms of highlighting criticisms relating to the BRI’s alleged environmental unsustainability through reference to the EU’s ability to provide and commitment to “sustainable connectivity”. Similarly, the Communication refers to the risk of “debt distress”, alluding to the plight of countries unable to service loans made in the course of BRI investments.

The EU Communication explicitly states that it is not an investment plan of the nature of the BRI but rather focuses on supporting inter-EU integration of private investment in delivering “connectivity-related projects”, whilst developing upon dialogue with the public and private finance institutions of Asian third countries, with specific reference to the AIIB as well as the ADB. Such cooperation also extends to organisations and mechanisms beyond the BRI, dealing with connectivity rather than finance including ASEM, ASEAN, SAARC and the Shanghai Cooperation Organisation. Funding of the initiative is modest and originates from some limited redirection of the Neighbourhood, Development and International Cooperation Instrument towards engaging with Asia, Middle East and Pacific partners.

Read more: What is China’s main motive behind Belt and Road Initiative?

The Communication does, however, indicate that the EU will contribute to “connectivity funding gaps” through the leveraging of EU’s financial resources and points towards the extension of its Trans-European Network for Transport (TEN-T) framework into Asia through cooperation with the pre-existent EU-China Connectivity Platform. A key message in the Communication is a focus on European Standardisation. EU cooperation in connectivity investment is contingent upon the other participants’ alignment or conformity with EU rules, standards or practices. Such standards focus of the need for environmental, social and full life-cycle cost-benefit analysis as necessary for EU participation in connectivity related infrastructure projects as well as financial sustainability and an agreed rules-based approach to the movement of goods, services, capital and people.

The Communication also refers to regulatory conformity such as state-aid control and government procurement rules, in reference to the criticism of the BRI’s perceived lack of transparency and preclusion of foreign participants. The EU in this response does not seem to directly confront the BRI or set out an alternative model but rather seeks to consolidate it, subject of course to EU requirements as well as retain the capacity to engage with other Eurasian actors, both bilaterally and multilaterally.

The BRI and EAEU cooperate productively in Central Asia and although Ukraine is a significant beneficiary of BRI investments.

Following the Financial Crisis, the EU itself is lacking external investment particularly with the initial US abandonment of the Transatlantic Trade and Investment Partnership (TTIP) in 2016. In the interim, BRI outreach to Eastern Europe increased under the $11 billion China-Central Eastern European Financial Corporation Fund under the Industrial and Commercial Bank of China (ICBC). Additionally, in the same period, Chinese FDI in Europe nearly doubled including the purchase of ports, airports and contracts for transportation infrastructure across Europe and particularly the Central and Eastern countries including member states. In this respect the BRI seems to have divided the EU into two; accentuating the differences between roughly Western Europe and the Southern, Central and Eastern countries of the Union.

The richer West are more cautious of Chinese FDI and associated tie-in costs and the South, Central and East have a greater appetite for investment and are more resistant to centralised EU regulation and accepting of the perceived laxer standards of governance, associated with the BRI. This threat to internal cohesion is highlighted in the case of Hungary, which finds itself at odds with and subject to serious criticism by the rest the EU in relation to lack of transparency in bidding related to the BRI  Belgrade-Budapest Railway. Hungary is also instrumental in RMB internationalisation in the EU and its leadership seems more closely politically aligned to the EAEU, having alongside Bulgaria (another EU member) sought closer engagement with the Russian initiative.

Similarly, BRI investments are proving attractive to other countries in the periphery of the EU including, Armenia, Belarus, Georgia, Serbia and Ukraine. In this respect, the EU Communication is reactive, setting out an action plan for investment in transport in the Eastern Partnership countries, with a focus on them approximating or harmonising with the EU. The BRI is mutually beneficial to China and the EU, particularly owing to the geographical proximity of both initiatives. The EU Communication is in part at least a blueprint for cooperation, with the prospect of inspecting better governance, transparency and standards into the BRI for the purposes of Western Eurasian infrastructure development.

Read more: Securing Xinjiang: China adds security component to belt and road initiative

Even if subject to European standards requirements, the PRC certainly stands to gain from investment access to the EU as does the EU from the investments themselves.  Being the most institutionally flexible initiative in Eurasia, the BRI can bridge the gap between the EU and EAEU, particularly in the case of Syria, which poses an ongoing security issue for Europe and requires extensive investment to rebuild. The BRI, however, shall certainly have to remain politically neutral and be perceived as such, in rivalries and confrontations across Eurasia as well as in relation to EU integrity and cohesion.

In a more global context, the PRC should avoid committing to greater security demands beyond its frontiers particularly in relation to protecting BRI projects and should assure BRI investments as global public goods available to all, rather than solely to strategic partners and allies. The US may seek to isolate the PRC through seeking bilateral agreements with the EU amongst others. This may well be underlying to the revamped TTIP negotiations initiated in July 2018.

Such agreements are unlikely to benefit the EU, particularly as many BRI investments in Europe, are already in-situ and ongoing and such measures are likely to further threaten internal cohesion, particularly in Eastern Europe. The US is offering very little in the way of alternatives to the BRI and the current US administration is erratic, isolationist and unreliable and exhibits antipathy towards the EU, the Euro and NATO. Being drawn into the US-PRC “trade war” and a potential new cold-war, detracts from the EU’s position of avoiding emerging as a geopolitical actor and further TTIP itself is subject to deep public unpopularity in the EU and suffers from a lack of transparency and a perceived democratic deficit. It is unlikely that US efforts to direct the EU away from the BRI shall bear any fruit.

Haseeb-Ur-Rehman is a London based lawyer with expertise in International Economic Law, Financial Regulation and Corporate Finance.

Dr. Farwa Sial is a senior teaching Fellow in the Department of Economics at the School of Oriental and African Studies. (@farwasial)

The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.