Is China’s ‘Belt and Road Initiative’ a geopolitical ball and chain?

First proposed in 2013 by current Chinese President Xi Jinping, the ‘Belt and Road Initiative’ (BRI) is an ambitious plan modelled on the Han Dynasty Silk Road, attempting to develop maritime and ground routes linking Asia, African and Europe. Superficially, it seems exceedingly altruistic - China will cooperate with and invest over USD$1 trillion into developing nations in order to improve infrastructure spanning three continents and 65% of the world’s population. However, many have criticised this scheme as the Chinese Marshall Plan, after the US’s foreign aid to Europe after World War allowed it to extend dollar dependency in those regions. Thus, is the BRI truly without geopolitical motives - or does it even matter?


(Source: World Bank)



Impact

Fundamentally, China is injecting much-needed money into developing economies like Ethiopia, whose GDP per capita stands at just 770 USD (2017). As more Chinese FDI flows into Ethiopia, they are more able to fund the building of infrastructure, which will improve their ability to transport goods and trade with other countries. Furthermore, spending on capital (such as hospitals or schools) will undoubtedly raise the quality of life for many Ethiopians, further boosting long-run productivity. Moreover, the presence of Chinese FDI is likely to attract FDI from other countries as they seek to benefit from the possible returns of the BRI, further benefitting BRI nations.


Current infrastructure projects are wide-ranging, but one of the biggest is the China-Pakistan Economic Corridor, which will pump $62 billion into constructing transportation networks, building up renewable energy sources, and creating special economic zones, mirroring Deng Xiaoping’s 1970s reformation of the Chinese economy. This project is a game changer for the Pakistani economy- it’s estimated that poor infrastructure causes losses of 3.55% to GDP per year, and the improvement of electricity accessibility will enable the growth of SMEs, driving employment, innovation and therefore, the economy.



What does China get?

The BRI is fraught with risk - there’s a reason why investors aren’t always keen to fund infrastructure projects in developing countries, and it’s because such countries are more prone to delays, budget overruns, and governmental corruption. Therefore, it may be no surprise that 89% of BRI project funding was contracted out to Chinese companies and workers, limiting the notion that the BRI will support domestic employment, at least in the short-term. But it’s not all gloom - while Chinese workers are gaining employment and revenue over domestic ones, they inevitably have to spend on the surrounding local services, generating some worthwhile economic activity.


By nature, China is an export-led nation and improved infrastructure will enable it to trade more widely with other countries in Eurasia and Africa. As road and maritime routes improve, foreign businesses will demand more goods - considering their limited financial capabilities, these goods would most likely come from China, where labour is still cheap enough to make products internationally competitive. Furthermore, Chinese investment into infrastructure (according to the Financial Times, Chinese companies now own almost 2/3 of the world’s top 50 container ports) allows them to export more widely compared to international competitors like Vietnam, allowing them to maintain competitiveness through fast distribution instead of purely low prices.



A Darker Side?

However, BRI countries should be keenly aware of the potential problems associated with such close ties to China. For one, the aforementioned currency dependency or ‘Renminbi Internationalisation’- the BRI could be a way to export Chinese currency abroad in order to create more markets for it to flow. By doing so, they can continue to increase their export-led growth, which has been slowing lately (in January 2019, China reported growth of just 6.4%, down from 6.7% a year previous). Moreover, as China attempts to grow its presence in financial services and shift to consumption-led growth, a stronger and more widely spread Renminbi will facilitate domestic spending and a more liquid currency, which can be more easily traded. Hence, the BRI may be motivated by a desire for China to become a stronger monopsony (buying) power, so it can cut costs in the long run.


Moreover, loans to developing nations with dubious credit ratings could be a strategic ploy to gain financial footholds in other countries- for example, the Sri Lankan Hambantota port cost $1.3 billion of Chinese financing, however failed to stop haemorrhaging money, leading the Sri Lankan government to give the port to China instead of repaying their debt. This could be seen as an attempt by China to use its growing financial power to plunge countries into debt, allowing them to take over strategically important areas (Hambantota straddles commercial sea trading routes), a practice called “debt-trap diplomacy”.


Moreover, increased trade through the BRI may increase the incidence of trade shocks affecting BRI economies - for example, Chinese goods flooding into BRI countries may undermine the domestic production of these goods, leading to long-term negative consequences as BRI countries find themselves increasingly dependent on China. On the other hand, free market proponents would argue this extra competition could only be good, as it encourages firms to innovate in order to lower production costs, benefitting consumers.


The BRI also carries geopolitical consequences - not only is the BRI critiqued as a form of economic imperialism and an extension of Chinese soft power, but it may also be a long-term strategy to increase their military presence in Asia. For example, China established its first overseas military base in Djibouti [Guardian] in 2017. However, these fears may be overstated - it’s not unusual for countries to have overseas military bases; the USA, for one, has nearly 800 bases, including one in Burkina Faso.



Conclusion

To conclude, while the BRI scheme has clear economic benefits for both BRI countries and China, developing countries should be wary of any unintended consequences that may arise from this investment, most notably debt-trap diplomacy- such countries already face fragile budgetary positions, and Chinese debt could exacerbate and exploit less developed nations. However fundamentally, the BRI represents a substantial capital injection into developing countries, encouraging more free trade in a time of increased protectionism.


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