Introduction - China’s Belt and Road: Implications for the United States

China’s Belt and Road: Implications for the United States
Updated March 2021

Introduction
 

In the fall of 2013, shortly after assuming power, Chinese President Xi Jinping proposed building a land-based “Silk Road Economic Belt,” extending from China to Central and South Asia, the Middle East, and Europe, and a sea-based “21st Century Maritime Silk Road,” connecting China to Southeast Asia, the Middle East, Africa, and Europe via major sea lanes (see figure 1). Together, these would form the Belt and Road Initiative (BRI), still known officially in Chinese as “One Belt, One Road,” which Xi labeled “a project of the century” and which quickly became his signature foreign policy undertaking.3

Chinese leaders have long sought to close the gap between the country’s booming coastal cities and its impoverished interior and to absorb excess capacity in some sectors by promoting connectivity between southwestern and western regions of China and Southeast, Central, and South Asia. BRI is, in many ways, the latest in a succession of plans to do this.4 In the seven-plus years since Xi introduced BRI, China has funded and built a vast array of roads, railways, power plants, ports, smart cities, telecommunications, and information technology and e-commerce platforms around the world. It has promoted people-to-people ties, financial integration, and closer trade relationships with a range of other countries under the banner of BRI. In so doing, China is both meeting the needs of many in the developing world and filling a void left by the United States, its allies, and the multilateral development banks.

The initiative has since outgrown the original corridors outlined by Xi and become a globe-spanning enterprise encompassing 139 countries (although not every country that has formally signed on to BRI hosts BRI projects), with Latin America added as a “natural extension of the 21st Century Maritime Silk Road.”5 BRI’s scope has also grown, becoming a more amorphous undertaking, with China adding a Digital Silk Road (DSR), Health Silk Road (HSR), and Green Belt and Road, which are unbounded geographically.

Chinese officials insist BRI’s main objective is to spur development in participating countries, while acknowledging its additional contribution to China’s economic growth. They disavow any strategic rationale behind BRI, with Xi stating China “will not resort to outdated geopolitical maneuvering” while pursuing the initiative.6 Xi further has said that BRI is “an initiative for economic cooperation, instead of a geopolitical alliance or military league” and that China does not “play the zero-sum game.”7 The Chinese government objects to any comparison between BRI and the Marshall Plan because the latter had a geostrategic angle.8

BRI, if implemented sustainably, has the potential to bolster economic growth in the developing world, but it was never a straightforward altruistic endeavor. Instead, BRI is designed to advance an array of Chinese economic, political, and geopolitical interests while filling a vital need in many countries for reliable sources of power and better infrastructure.9 China spent hundreds of billions of dollars on economic stimulus following the 2008 global financial crisis but witnessed diminishing returns on its investments. Not wanting to shrink the size of its state-owned enterprises (SOEs), China is seeking to export its excess manufacturing capacity while putting its accumulated savings to work in BRI countries. China also has the ability, through BRI, to secure cheap inputs for its manufacturing sector and set technical standards in foreign countries that could give its companies a leg up in those markets.

China’s leaders hope the new trade routes and more efficient transportation networks created by BRI will reorient global commerce away from the United States and Western Europe toward China. They believe BRI has the potential to increase economic growth in China’s underdeveloped and often restive southwestern and western provinces, thus boosting domestic political stability. By becoming a major creditor to the developing world, China is accruing leverage that potentially enables it to exert pressure on BRI countries to not challenge its position on strategic issues, human rights, or Chinese domestic politics. And BRI allows China to acquire global intelligence capabilities and access to overseas ports and other facilities that it likely hopes to use in the future to project military power.

The COVID-19 pandemic has upended BRI and complicated implementation, slowing the flow of Chinese labor and supplies to foreign countries, eviscerating host countries’ abilities to pay for projects, and forcing countries to stall or cancel expensive projects.10 In addition, in the years since BRI was introduced, China’s current account surplus and its foreign exchange reserves have shrunk, in part because of Beijing’s macroeconomic adjustments. China no longer has the same financial cushion it once enjoyed, and with many projects postponed or canceled, Chinese banks have begun to increase their scrutiny of BRI projects, with lending slowing substantially from its 2017 peak.11 Indeed, Chinese banks and firms are becoming more methodical and risk-averse in their approach to BRI projects.12

BRI is likely to become a more slimmed-down, cost-effective, and technology-focused undertaking. But the initiative is not going away. With BRI now enshrined in the Chinese Communist Party’s (CCP) constitution and Xi Jinping set to rule China indefinitely, Xi’s trademark initiative will certainly continue, repurposed for the pandemic and post-pandemic world.

BRI: Belt and Road Initiative
  • Xi Jinping, “<a href="http://xinhuanet.com/english/2017-05/14/c_136282982.htm">Work Together to Build the Silk Road Economic Belt and The 21st Century Maritime Silk Road</a>,” Xinhua, May 14, 2017; “One Belt, One Road” is the literal translation of the Chinese name for the initiative (一带一路). Although China initially translated the initiative into English as “One Belt, One Road,” it shifted and began referring to it as the “Belt and Road Initiative” in English (while not changing the Chinese characters used). In making this change, China could have been attempting to recast Belt and Road as more of an open-ended undertaking rather than one with a singular geostrategic thrust. This report uses Belt and Road Initiative, or BRI, in keeping with the new official translation.
  • For example, in 1999 China introduced a “Go West” campaign, which sought to build oil and gas pipelines between Western China and Central Asia. Some of these projects, which predate BRI, have now been subsumed under the BRI brand.
  • For the purposes of this report, the following 139 countries are counted as participants in BRI: Afghanistan, Albania, Algeria, Angola, Antigua and Barbuda, Armenia, Austria, Azerbaijan, Bahrain, Bangladesh, Barbados, Belarus, Benin, Bolivia, Bosnia and Herzegovina, Brunei, Bulgaria, Burundi, Cambodia, Cameroon, Cape Verde, Chad, Chile, Comoros, Cook Islands, Costa Rica, Cote d’Ivoire, Croatia, Cuba, Cyprus, Czech Republic, Democratic Republic of Congo, Djibouti, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Estonia, Ethiopia, Fiji, Gabon, Georgia, Ghana, Greece, Grenada, Guinea, Guyana, Hungary, Indonesia, Iran, Iraq, Italy, Jamaica, Kazakhstan, Kenya, Kiribati, Kuwait, Kyrgyzstan, Laos, Latvia, Lebanon, Lesotho, Liberia, Libya, Lithuania, Luxembourg, Madagascar, Malaysia, Maldives, Mali, Malta, Mauritania, Micronesia, Moldova, Mongolia, Montenegro, Morocco, Mozambique, Myanmar, Namibia, Nepal, New Zealand, Niger, Nigeria, Niue, North Macedonia, Oman, Pakistan, Panama, Papua New Guinea, Peru, Philippines, Poland, Portugal, Qatar, South Korea, Republic of the Congo, Romania, Russia, Rwanda, Samoa, Saudi Arabia, Senegal, Serbia, Seychelles, Sierra Leone, Singapore, Slovakia, Slovenia, Solomon Islands, Somalia, South Africa, South Sudan, Sri Lanka, Sudan, Suriname, Tajikistan, Tanzania, Thailand, The Gambia, Timor-Leste, Togo, Tonga, Trinidad and Tobago, Tunisia, Turkey, Uganda, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Vanuatu, Venezuela, Vietnam, Yemen, Zambia, Zimbabwe. This list was compiled by China’s Leading Small Group for the Construction of One Belt, One Road (国家推进“一带一路”建设工作领导小组办公室),&nbsp;<a href="https://www.yidaiyilu.gov.cn/xwzx/roll/77298.htm">https://yidaiyilu.gov.cn/xwzx/roll/77298.htm</a>.&nbsp;See also Wang Yi, “<a href="http://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1494844.shtml">The Belt and Road Initiative Becomes New Opportunity for China-Latin America Cooperation</a>,” Ministry of Foreign Affairs of the People’s Republic of China,” September 18, 2017.
  • Xi Jinping, “<a href="http://xinhuanet.com/english/2017-05/14/c_136282982.htm">Work Together to Build the Silk Road Economic Belt</a>.”
  • “<a href="http://xinhuanet.com/english/2018-08/28/c_137423397.htm">Xi Pledges to Bring Benefits to People Through Belt and Road Initiative</a>,” Xinhua, August 28, 2018.
  • Tom Mitchell, “<a href="http://ft.com/content/48f21df8-9c9b-11e8-88de-49c908b1f264">Beijing Insists BRI Is No Marshall Plan</a>,” <em>Financial Times</em>, September 25, 2018.
  • Xi Jinping, “<a href="http://xinhuanet.com/english/2017-05/14/c_136282982.htm">Work Together to Build the Silk Road Economic Belt</a>"; Reuters, “<a href="http://reuters.com/article/china-silkroad-xi/china-president-xi-says-goal-of-beltand-road-is-advance-win-win-cooperation-idINB9N21901J">China President Xi Says Goal of Belt and Road Is Advance ‘Win-Win Cooperation</a>,’” April 25, 2019.
  • Benn Steil and Benjamin Della Rocca, “<a href="http://foreignaffairs.com/articles/east-asia/2020-04-27/chinese-debt-could-cause-emerging-markets-implode">Chinese Debt Could Cause Emerging Markets to Implode</a>,” <em>Foreign Affairs</em>, April 27, 2020.
  • Although there is some disagreement over exactly how much Chinese policy bank lending has slowed, there is no dispute that the cutbacks have been significant and only partially offset by a smaller increase in Chinese commercial bank lending. Matthew Mingey and Agatha Kratz, “<a href="http://rhg.com/research/bri-down-out">China’s Belt and Road: Down but Not Out</a>,” Rhodium Group, January 4, 2021.
  • Agatha Kratz, Daniel Rosen, and Matthew Mingey, “<a href="https://rhg.com/research/booster-or-brake-covid-and-the-belt-and-road-initiative/">Booster or Brake? COVID and the Belt and Road Initiative</a>,” Rhodium Group, April 15, 2020; Agatha Kratz, Allen Feng, and Logan Wright, “<a href="http://rhg.com/research/new-data-on-the-debt-trap-question">New Data on the ‘Debt Trap’ Question</a>,” Rhodium Group, April 29, 2019; and Cissy Zhou, “<a href="https://www.scmp.com/economy/global-economy/article/3032375/china-slimming-down-belt-and-road-initiative-new-project">China Slimming Down Belt and Road Initiative as New Project Value Plunges in Last 18 Months, Report Shows</a>,” <em>South China Morning Post</em>, October 10, 2019.

Background

Xi has cast BRI as an effort to reconstitute the ancient Silk Road, a series of trade networks that connected China to modern-day South and Central Asia and later extended to parts of Europe and Africa.13 He proposed updating these trade routes for the twenty-first century by investing as much as $1 trillion in building infrastructure in dozens of countries. Just as the ancient Silk Road centered on China, so, too, would its modern equivalent, with projects facilitating trade and investment with China and connecting the country with emerging economies around the world. With a successful BRI, China would cement its position as the region’s economic and political center of gravity.

Many developing countries were initially eager to embrace the concept and receive BRI funding, revealing that China had identified a significant gap between global demand for infrastructure and the record of existing institutions in meeting that demand. In countries alongside BRI corridors, both trade and foreign direct investment (FDI) are estimated to be lower than potential, by 30 percent and 70 percent, respectively, because of poor integration and connectivity.14 The World Bank estimates that $97 trillion needs to be spent on infrastructure globally by 2040 in order to maintain economic growth and to meet the UN Sustainable Development Goals, but an $18 trillion gap exists.15 Asia alone is expected to require $26 trillion in infrastructure investments by 2030 to maintain growth and respond to climate change.16 Latin America and the Caribbean need an additional $120 to 150 billion per year in investment to close their infrastructure gap.17

Despite these significant needs, multilateral development banks (MDBs) and traditional donors were devoting a growing share of their funding to social services, opening the door to China to fund hard infrastructure projects. Moreover, multilateral lenders insist that their projects meet environmental and other sustainability standards not demanded by Beijing, making it easier for China to initiate infrastructure projects. As a result, Chinese lending to infrastructure projects in developing countries now far exceeds that of comparable lending by all major MDBs combined.18

Xi set the broad contours of BRI, but it was never institutionalized into a coherent or coordinated enterprise; no obvious BRI master plan is in place. BRI has no central governing institution, and instead numerous actors shape the initiative, including policy banks, SOEs, China’s National Development and Reform Commission (NDRC), its Ministry of Commerce (MOFCOM), and its Ministry of Foreign Affairs (MFA), all of which have their own priorities and interests and often do not coordinate with one another.19 Most projects take shape through a bottom-up approach and are approved on a case-by-case basis, with the recipient government creating a wish list, often in consultation with Chinese SOEs, and presenting it to MOFCOM and the NDRC for funding.20 BRI is adaptive and responsive to demand pulls: it expanded into Latin America not primarily at the behest of Chinese officials but rather because of lobbying by Latin American political elites.21

The central government in Beijing does not have the capacity to keep track of the implementation of hundreds of projects scattered across the world.22 The lack of centralized governance and oversight has allowed corruption and rent-seeking behavior to flourish in projects in a number of BRI countries, providing an opening for local political elites to distort legitimate infrastructure needs for their own gain and for the gain of Chinese producers of goods and services. BRI is, in many ways, more of a Chinese branding exercise than an institution.

China has not publicly disclosed the exact number of projects underway or the full scope of the initiative, leading to greatly varying estimates of BRI’s size. The initiative’s scope could also be purposefully vague, allowing the CCP to claim only its successes and disassociate BRI from failures while redefining its objectives over time, as it has begun to do during the COVID-19 crisis. SOEs and private firms in China have been adept at getting non-BRI projects rebranded as BRI ones to garner additional political backing for them.23

BRI seeks to back an array of projects, but to date, the vast majority of funds have been allocated toward traditional infrastructure—energy, roads, railways, and ports.24 Though principally aimed at developing countries, with Pakistan, Malaysia, Bangladesh, Myanmar, and Sri Lanka among the largest recipients of BRI funds, BRI also includes developed countries, with numerous U.S. allies participating (see figure 2).25 If these U.S. allies were to turn to BRI to build critical infrastructure, such as power grids, ports, or telecommunications networks, it could complicate U.S. contingency planning and make coming to the defense of its allies more difficult.

Although BRI projects are diverse, they tend to share a number of common features:

  • Chinese companies involved in BRI projects usually enjoy state backing and access to significant amounts of cheap credit, which allows them to take on projects that other companies could deem too risky or too costly.
  • The Chinese state-owned commercial banks and policy banks that provide financing have far more resources to devote to infrastructure projects than most other lenders and a prior directive from Beijing to embrace BRI projects.
  • Loan terms are rarely publicly disclosed, and because China has refused to join the Paris Club of major official creditors, Chinese banks are under no pressure to cap lending rates or share information.
  • Once a BRI project is identified, the loans extended to host countries are generally made on close-to-commercial, rather than concessionary, terms and are not tied to economic or political reform, making them more accessible to states with existing debt or governance issues.
  • Few governance metrics have been established for projects, and many are pursued without conducting financial viability or environmental- or social-impact assessments. Chinese companies generally push to begin projects quickly in an effort to reduce transaction costs.
  • Chinese lenders often are willing to continue projects even when they encounter significant political and financial obstacles.

To be sure, Chinese banks and companies were active in foreign markets prior to BRI, so not all of the concerns over China’s approach to foreign investment can be laid at the feet of BRI. What BRI did, however, was turbocharge these patterns. Chinese companies and banks looked to capitalize on Beijing’s new policy pronouncement and garner political favor by quickly finding projects that could be placed under the BRI umbrella. Inevitably, this race led to Chinese banks backing projects that were not economically sustainable and to Chinese companies prioritizing speed over quality. BRI ushered in a frenzy of lending and construction that often led to a further erosion of standards. In addition, bad BRI projects are more enduring than Chinese investment that is not linked to the initiative: Chinese actors are motivated to continue BRI projects, even in the face of evidence that they are not sustainable, because this is Xi’s signature initiative. Beijing has also ensconced the initiative into numerous multilateral organizations and pacts, giving BRI staying power and deeper reach than traditional Chinese foreign investments.

Many BRI countries appreciate the speed at which China can move from planning to construction, its willingness to build what host countries want rather than telling them what they should do, and the ease of dealing with a single group of builders, financiers, and government officials. Although the United States can contend that Chinese methods are unsustainable and come with many pitfalls, it would be a mistake to assume China is imposing its development model on BRI countries that do not want it.

Beijing’s implementation of BRI has been uneven. BRI has brought infrastructure to countries sorely in need of such investment, relieving power shortages, easing economic bottlenecks, and allowing local products to get to the market quicker, thus improving people’s livelihood. On the other hand, some large projects have stalled, others never got off the ground, and still others are being renegotiated because they are economically unviable. Many BRI projects are beset by corruption. Critics within numerous developing countries charge that Chinese firms do not hire enough local workers and therefore do not transfer enough knowledge or expertise, nor provide much economic benefit to the host country. In a case that has become most synonymous with the perils of BRI, Sri Lanka ceded control of a port for ninety-nine years to a Chinese company because it could not repay its debt on a BRI project.26

Unsurprisingly, many leaders of developing countries have grown more skeptical of BRI. Some U.S. analysts fear that BRI will saddle countries with debts they will never be able to repay, lead countries to become economically dependent on China, provide significant opportunities for the Chinese military to project power, and lay the foundation for a Sinocentric world order.27

Responding to mounting criticism of BRI, Xi has pledged to reorient the initiative to focus more on poverty alleviation and health care and to emphasize green development. He has highlighted the need for economic and fiscal sustainability of projects and pledged that BRI will follow international standards for project development.28 As China has tried to adjust BRI and head off further criticism, the COVID-19 pandemic has greatly complicated its efforts, forcing many projects to a standstill and making recipient states, now in economic distress, more aware of their debt problems.

CCP: Chinese Communist Party NDRC : China’s National Development and Reform Commission MOFCOM : China’s Ministry of Commerce SOE: state-owned enterprise MDB: Multilateral development bank BRI : Belt and Road Initiative

Implications for the United States

No matter how China adjusts BRI for a post-pandemic world, the initiative will continue to have important implications for the United States. In facilitating market entry in many countries for Chinese companies and lowering the costs of working with those Chinese companies, BRI often tilts the playing field toward Chinese firms. With support from state-owned banks, Chinese companies—many of which are also state owned—could displace U.S. exports and challenge U.S. companies in BRI countries. If countries are unable to pay back BRI loans and end up in a debt crisis, global macroeconomic stability could be undermined as well.

China’s push to export its technologies to dozens of BRI countries also poses challenges. Most developing countries have significant needs for telecommunications infrastructure, data centers, and cloud services, which have grown even more urgent because of the COVID-19 pandemic and the shift to remote work. BRI allows China to meet these needs more cheaply and in a more coordinated way than the United States or its allies. By building next-generation digital networks across the world, China could gain access to vast amounts of data, which could help it build artificial intelligence (AI) technologies and which it could exploit to gain sensitive data from other countries and exfiltrate it back to China.29 China’s efforts to dominate next-generation digital networks could also lock other states into Chinese technological ecosystems incompatible with products made by non-Chinese firms. Such a development, though far down the road, could close off many markets in developing countries to non-Chinese firms.

BRI further increases the chances that China will successfully set technical standards governing industrial processes and telecommunications in many countries. Although China’s attempt to craft technical standards predates BRI, the initiative has allowed Chinese companies to increase their market power, better enabling them to set standards that could be incompatible with those of non-Chinese firms. Depending on how they are used, Chinese surveillance technologies exported along BRI could make authoritarian regimes’ repression more efficient. China’s growing strength in producing and selling digital goods could permit it to export views on internet governance that are at odds with U.S. positions. Chinese companies’ growing role in providing technology-driven financial services (fintech) risks locking millions of consumers in BRI countries into using apps developed by these Chinese companies for their banking needs, with an increasing number of transactions settled in yuan and a digital Chinese currency on the horizon.

China also has shown a willingness to use economic leverage for political advantage, and although this strategy predates BRI and is not limited to BRI countries, the initiative gives China greater leverage in more places. China could translate BRI’s economic influence to economically punish countries that take positions on issues at odds with Chinese interests and employ economic inducements to convince countries to promote China’s preferred positions. With such leverage over BRI countries, China could be better able to shape discourse on contentious issues related to China’s domestic and foreign policies, including its persecution of the Uighur minority, its crackdown on freedoms in Hong Kong, and its militarization of the South China Sea (SCS).

This leverage could be important in the security realm. China could use its increased investment in and influence over ports in BRI countries to project power into new regions and possibly to collect intelligence on the U.S. military, if the United States also uses these same ports and other facilities. In addition, in places where Chinese firms have built critical infrastructure, such as telecommunications networks and power plants, and in which Chinese firms retain operational control of this infrastructure, China could turn off a country’s power grid or telecommunications network to force the recipient country to take actions preferred by China. Beijing could use this leverage to pressure a country to deny access to U.S. forces.

BRI projects will also make it harder to address global climate change. By exporting coal-fired power plants and building carbon-intensive infrastructure in other countries, China is not only generating huge carbon emissions but also locking countries into decades of carbon-intensive growth.

In prioritizing the distribution of medical supplies, personal protective equipment (PPE), and health technology to its BRI partners, China is using the COVID-19 pandemic to build its brand of charitable support, while using its position as the world’s largest producer of medical goods, PPE, medicines, and active pharmaceutical ingredients (API) to deepen its commercial ties to BRI countries.

In many of these areas, China has used the size of its significantly protected domestic market, the financial power of its state-owned banks, and the political backing of the CCP to develop highly capable companies ready to build hard and digital infrastructure around the world under the auspices of BRI. China has also taken advantage of a vacuum the United States has created through a confluence of its own actions, including

  • reductions in federal funding for research and development (R&D);
  • an inability to field competitive alternatives in critical technologies, such as fifth-generation (5G) cellular networks and high-speed rail;
  • a failure to craft modern trade rules and join multilateral trading blocs;
  • the withdrawal from or decreased participation in multilateral organizations;
  • a disengagement from standards-setting bodies; and
  • a retreat from providing global public goods.

Unless the United States strengthens its nascent response to BRI, it should expect China to leverage its accomplishments and continue to employ opaque lending and contracting practices to enhance its presence and power in BRI countries.

CCP : Chinese Communist Party PPE: personal protective equipment BRI : Belt and Road Initiative
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