While the U.S. has historically leveraged formalized rules to exert influence, China is undermining this system by leveraging infrastructure as the basis of foreign policy.
What President TrumpDonald TrumpHillicon Valley — State Dept. employees targets of spyware Ohio Republican Party meeting ends abruptly over anti-DeWine protesters Jan. 6 panel faces new test as first witness pleads the Fifth MORE fails to realize is that China’s infrastructure-first strategy is beginning to undermine the global institutions — the IMF and the World Bank — that have historically cemented U.S. influence in the global economy.
China is beginning to erode this financial system by erecting a new institutional system based in economic dependency to Chinese informal economic practices, rather than to the West and its formalized rule of law. Western financial institutions require significant macroeconomic reforms, austerity measures, and other accountability measures to secure investment. However, the Chinese provide credit without such preconditions and even offer their own workforce to deploy such investments through large-scale infrastructure projects. Such an approach increases China’s informal power over a country’s internal economic and political affairs.
China first brought this approach to Africa where they took advantage of perceptions on the continent that the existing Western financial system was exploiting them. According to the United Nations Conference on Trade and Development (UNCTAD), the Paris Club, a group of largely Western creditors, loaned African nations $540 billion from 1970-2002. Despite paying close to $550 billion, these countries still owe $295 billion. As such, African nations increasingly see these loan agreements as punishing them, rather than providing a pathway towards restored economic health.
Leveraging African skepticism of the West, China solidified its influence through investments in Africa’s infrastructure as part of their “One Belt, One Road” initiative, built and funded as a $200 million gift a new headquarters for the African Union, and is writing off or reducing $1.2 billion in African debt — a stark contrast to a Westernized system that Africans perceive is continually indebting them.
China’s infrastructure investments in Africa has already yielded social and political capital returns. Africa increasingly views the Chinese system as an attractive one that advances not just its own economic interests but theirs as well.
While there is increased angst over China’s influence in the region, the most recent Afrobarometer notes that about two-thirds of Africans see China’s influence as “somewhat” or “very” positive. African leaders also seem to see China’s influence in the region as generally positive. In a letter sent by Nigerian President Muhammadu Buhari to Xi Jinping on the occasion of the 19th National Congress in China, he wrote, China is “becoming an indispensable force in the comity of nations.” The overall result has been that China has quietly displaced U.S. investment, and in turn U.S. power, in Africa.
China is successfully taking this infrastructure-based model beyond Africa as proven by the formation of the Asian Infrastructure Investment Bank (AIIB). With China rather than the West at its center, the AIIB is set to rival the investment power of the World Bank. While the World Bank, as well as the IMF, mandate a series of macroeconomic reforms to secure infrastructure funding, the AIIB does not even require the institution of free-market enterprise.
China also does not hold formal veto power in the AIIB as it recognizes that the basis of its power is ensuring its trading partners become more informally economically dependent on them, rather than formal control over AIIB affairs. Even to the surprise of Beijing, 57 countries joined AIIB as founding members, including many European countries such as Germany, France and the United Kingdom. The AIIB has already begun solidifying these relationships with founding members through investments in infrastructure projects across Europe.
The Trump administration’s approach is still in the world of Bretton Woods past and is underestimating the changing tides out of Beijing. By pressuring Asian trading partners under the assumption that they will continue to go along with the same international financial rules that up till now the West have controlled, the president has made the choice clear for Asian leaders: remain in this restrictive, increasingly marginalized orbit, or turn toward China’s largesse.
The way to counter China’s institution-building is for the U.S. to beat China at its own game: exert the economic dependency that helped the U.S. and the West underpin the Bretton Woods financial system. The Trump administration needs to ensure Asia economically relies just as much on the U.S. as they do China. The Trump administration needs to reassert Asian, and global, dependence on value-added American technology and services to counterbalance China’s focus on infrastructure and manufacturing, which provides reliable yet low rates of return.
Taiwan is a stark example of the potential dangers if the region’s economic dependency on the U.S. is not quickly reasserted. China is now the leading exporter of Taiwan, and even more alarmingly, eight of the top 10 Taiwanese companies are tech companies and all of them have significant business interests in China.
If the U.S. continues to stall and wait for preferable trade terms, the rest of Asia will just continue to depend upon China. China will leverage Taiwanese dependency to improve its indigenous technological capabilities, which will undermine longstanding technological advantages as a source for the region’s economic dependency on the U.S.
As Trump advocates walls and withdrawal, both physical and economic, Xi is advocating bridges and beltways. Into the vacuum left by a TPP now pressing on without the U.S. and offers of unrealistic bilateral trade deals, Asian nations that might have remained tethered to U.S. economic policy now have increased incentive to accept investment from China, even with the Chinese influence that comes with it. If both countries continue with their intended policy paths, the U.S. continues to risk global economic isolation, and China will increasingly orchestrate global economic integration through infrastructure investments that reflect a novel institutional order made in the Chinese image.
Daniel Armanios is an assistant professor in the department of engineering and public policy at Carnegie Mellon University.