Image: The Belt and Road Initiative includes one-third of world trade and GDP and over 60% of the world's population, says the World Bank. - Photo: 2018

Silk Road: A Debt ‘Trap’ or an Opportunity for the West Joining China to Assist Developing Countries?

By Dr. Palitha Kohona

The author is former Foreign Secretary and former Permanent Representative of Sri Lanka to the United Nations.

COLOMBO (IDN) – “Any conflict between the U.S. and China, including a trade war, would do irreparable damage to both, not to mention the rest of the world. However, the two giants have a unique opportunity in history to get away from traditional power based competition to cooperate for the common good of humanity, especially the developing countries whose primary interest is in progressing economically. Such cooperation may not happen any time soon but a golden opportunity exists.”

Addressing the Asia Pacific Economic Cooperation (APEC) summit in Port Moresby, Papua New Guinea, and referring to China’s Belt and Road Initiative (BRI) related massive infrastructure and development projects spanning Southeast and South Asia, Central Asia, Africa, the Middle East and North Africa, Mike Pence, the U.S. Vice President, kicked off his address by slamming the BRI, suggesting that Chinese funding of infrastructure projects is burdening developing countries with debt.

Pence also claimed that the U.S. commitment to the Indo-Pacific had never been stronger. “The United States offers a better option. We don’t drown our partners in a sea of debt,” he declared. “We don’t offer a constricting belt or a one-way road,” he added.

In a dismissive reference to the BRI, Pence further added that the terms of China’s loans were “opaque at best” and “too often, they come with strings attached and lead to staggering debt.” He exhorted countries supporting the Chinese initiative: “Do not accept foreign debt that could compromise your sovereignty,” adding: “We don’t drown our partners in a sea of debt”. 

“We don’t coerce, corrupt, or compromise your independence. The United States deals openly and fairly,” he said. A statement loaded with irony given the blatant threat by the U.S. authorities to withdraw promised aid to Sri Lanka following the removal of the West favoured Prime Minister of Sri Lanka by its President.

This is only the most recent example of the West using development assistance to influence domestic political processes. During the latter stages of Sri Lanka’s terrorist inspired conflict, the Western aid tap was turned off substantially because Sri Lanka did not comply with Western prescriptions on ending the bloody war, effectively forcing the country to turn to other sources of assistance, including China.

China’s President Xi Jinping rejected U.S. criticism of Beijing’s Belt and Road Initiative, firmly asserting that it is not “a trap” as some have labelled it and that it is not designed to serve any hidden geopolitical agenda. “It is not targeted against anyone, and it does not exclude anyone,” Xi said, and went on to castigate the Trump administration’s “America First” trade protectionism.

He underlined that global trade rules should not be applied “with double standards or selfish agendas”. Xi countered Pence’s remarks, warning that no one would gain from escalating tensions between Washington and Beijing. “History has shown that confrontation – whether in the form of a cold war, hot war or trade war – will produce no winners,” he said. Xi also urged the world to “say no to protectionism and unilateralism,” describing it as a “short-sighted approach” that was “doomed to failure.”

It is also supremely ironic that the U.S., which had championed globalisation for decades, was slinking back in to protectionist isolationism while a state controlled socialist economy was loudly espousing trade liberalisation.

Escalating U.S.-China tension

Pence’s comments must be viewed against the escalating tension between, the U.S. and China in the field of trade and in the competition for global influence, one might even suggest, for global hegemony.

Critics have often suggested that U.S. policy makers have historically formulated national policies on the basis of real or imagined external threats. In the recent past the perceived threat has been the Soviet Union, then Saddam Hussein, followed by international terrorism. Now it appears to be emerging China’s turn to be targeted as a threat generator to the U.S., with China’s high profile BRI providing a convenient focus of attention. The tame Western media has fallen into line with the U.S. with undisguised gusto.

If the U.S. propaganda machine has its way, the U.S. has been running a colossal deficit in trade with China – $370 billion in 2017!. While this deficit may appear to be huge in simplistic terms and is good political sloganeering fodder, many key items exported to the U.S. by China contain parts produced in the U.S. or elsewhere – thus diluting the ostensible surplus in actual fact. 

Unusually, the U.S. which dominated the world in economic and military power for almost a century, while massively subsidising and protecting its agriculture, fossil fuel production, domestic transport, aviation and other sectors, is demonstrating nervous signs of coming under threat from China, which is still a developing country by any measure.

A similar hysteria gripped the country in the late 80s when Japan was emerging as a major trade competitor. Japan was quickly contained through the manipulation of the Dollar and quickly slipped into stagflation.

In response to the trade imbalance with China, Washington has taken direct action and imposed tariffs on $250 billion of Chinese imports and has threatened more, while Beijing has slapped tariffs on $110 billion worth of imports from the U.S., mainly agricultural products, in retaliation, effectively halting purchases of key U.S. agricultural exports.

The U.S. actions may be designed to hurt China economically, thus affecting its modernisation process, including its military, and curtail its BRI ambitions due to future shortages of funds. A short duration ceasefire has now been agreed.

Undoubtedly, the tit for tat tariffs will hurt both economies and other countries as well. As the Sinhala saying goes, when elephants fight, ants are bound to get trampled.

Whether Pence was being simplistic, disingenuous or betraying a latent streak of racism, now that a yellow Asian race was apparently seeking to challenge the dominant position of the West, is difficult to tell. However, there is no record that China has forced any country to borrow from it. China has in fact readily written off almost $2 billion worth of debts of the poorest African countries. The beneficiaries include Sudan, Botswana and Seychelles.

In contrast, poor country pleas over the years for debt relief from Western countries, including through the UN, had fallen on deaf ears. China is making a colossal investment available for infrastructure development purposes and, as a result, many African economies, for the first time in years, are on an upward trajectory.

While roads, bridges and ports may have only indirect impacts on an economy, the flow through effect on economic performance is significant. Some countries, e.g. Malaysia, have cancelled BRI related projects in view of their existing debt overhang with no acrimony on either side. Unlike Western funding assistance, which invariably comes with unwarranted conditionality, Chinese financial assistance does not come with such intrusive conditionality, infringing on the sovereignty of the recipient countries. 

China has categorically eschewed getting involved in the domestic politics of the countries seeking development funding. Importantly, no country has been pushed over the debt cliff by China for failing to repay its loans. This, unfortunately, has not been the experience of a number of countries, especially in Latin America, which had been burdened with loans from Western lending agencies. China has just agreed to a $9 billion currency swap with Argentina to help with its payments problems.

In fact, it has been suggested that it is patently unfair and condescending for anyone to suggest that the developing countries seeking to benefit from the BRI are incapable of determining what is beneficial to them on their own.

Marshall Plan pales into insignificance

China has also repeatedly emphasised that the BRI would be focused on cooperative infrastructure and connectivity enhancement for the mutual benefit. Independent observers believe, that the BRI has the potential to make a greater impact than the post-World War U.S. Marshall Plan. The Marshall Plan provided financial assistance to the war devastated economic giants of Europe and was a major factor in their speedy recovery.

But the funds available under the BRI make the Marshall Plan pale into insignificance. The Marshall Plan provided over $140 billion at 2017 Dollar values, to assist Western European economies. The BRI expects to make available a stunning $4-8 trillion. While the Marshall Plan achieved much, the BRI funds are expected to achieve substantially much more by creating a vast region of shared prosperity stretching from Africa to East Asia, the clear beneficiaries being a large number of developing countries.

Adding strength to the BRI, the Chinese Yuan has now been recognised as a reserve currency by the IMF, and China appears to be increasingly moving towards international payments in Yuan. The IMF elevated the Yuan, also known as the renminbi, or “people’s money”, on the same day that the Communist Party celebrated the founding of the People’s Republic of China in 1949. The Yuan joins the U.S. Dollar, the Euro, the Yen and British Pound in the IMF’s special drawing rights (SDR) basket, which determines currencies that countries can receive as part of IMF loans.

Gradually a force to reckon with – in all fields

It is not only the vast accumulation of foreign reserves in China that makes the Chinese BRI outreach tempting. China is also gradually becoming a force to recon with in IT and AI, spending vast amounts on research, which, coupled with its massive financial clout, makes it a formidable proposition. 

Live steaming, which has caught on rapidly in China, now has an audience that is about the entire U.S. population. China has 700 million Internet users and web development has become a cottage industry. Chinese satellites are a cheaper option for electronic communication providers. It has become the biggest e-commerce market in the world.

Over half of the most valuable companies in the world are now Chinese. China started the electronic bike exchange and has rapidly progressed in electronic payments with most other countries playing catch up. Baidu is the largest search engine and China’s Alibaba is bigger than Amazon and Ebay combined.

Much has been written about the leaps and bounds taken by China in the transport construction industry with over 18,000 miles of high speed trains already in use delivering over 1,7 million passengers in 2017. China’s construction industry has also climbed amazing peaks with some city skylines looking as if they were plucked out of science fiction movies.

The Belt and Road initiative, with the accompanying AI and IT, will have a massively transformative impact on the economies of the vast Asian and African regions encompassing 68 countries with over 65% of the world’s population. It will be a closely related factor as Sri Lanka seeks to realise its own Vision 2025. Vision 2025 (or its successor) provides the development blueprint for the country for the next seven years and infrastructure development and IT will play a central role in it.

The BRI, including through the Asian Infrastructure Investment Bank (AIIB), which claims 61 state members at present, possesses the potential to create significant economic opportunities for the entire region. 

The BRI has posed an unprecedented challenge to the West. The West’s renewed interest in providing development assistance to less advanced countries has been the immediate result. 

The BRI also presents an exceptional opportunity for the West to cooperate with China in assisting the developing world to advance further along the road to development, instead of treating China’s outreach, which may just be a reflection of genuine munificence, as a threat to Western global hegemony and which has to be thwarted.

The West could make its own contribution in areas that it possesses superior skills. After neglecting many parts of the world, especially the Indo-Pacific region, now the U.S., Australia and Japan have combined to deploy more funding to regional development. (Unfortunately and even condescendingly named, ‘The Arc of Instability’). If nothing else, the BRI appears to have galvanised positive attention from the West to a region that for too long had suffered benign neglect..

Already, large BRI related investments have been made region wide. Pakistan, for example, described as an all weather friend by President Xi Jinping, has been promised $62 billion in investments for infrastructure projects. China-Pakistan Economic Corridor is the flagship project under this initiative. The Bangladesh-India-China-Myanmar corridor links China with the Bay of Bengal.

Despite the orchestrated criticisms, already the countries of Africa, are reaping the benefits of China’s investments. Economists agree that the recent rapid upward movement of the economies of a number of African countries has been the result of significant Chinese investments.

Many African economies are prospering for the first time in years and analysts ascribe this development to Chinese investments in infrastructure in Africa. By 2014, that had risen more than 20-fold to $220 billion according to the China Africa Research Initiative at Johns Hopkins School of Advanced International Studies in Washington. It is likely that this trend will accelerate as China also learns from experience, irons out irritations and responds more to the aspirations of the people of the region. 

Since 2000, Ethiopia has been the second-biggest recipient of Chinese loans to Africa, with financing for dams, roads, rail and manufacturing plants worth more than $12.3 billion, more than twice the amount loaned to oil-rich Sudan and mineral-rich Congo. 

The BRI, despite the criticisms of, especially the former colonial powers, who ruthlessly ravaged Africa, can be used by countries of the Indian Ocean region and beyond to enhance their mutual prosperity without being constrained by fears and suspicions inculcated by the colonial past. More importantly, without territorial occupation, racial discrimination and forced alteration of cultures. 

For its part, Australia, a nervous critic of the BRI, received AUD 15.4 billion in Chinese investments involving 103 deals. Australia is the second biggest country recipient of Chinese investments after the U.S. and investors have grabbed mining interests, hotel assets, real estate, agri business, healthcare, infrastructure, etc. The port of Melbourne is now controlled by a Hong Kong-Chinese concern. So is Darwin. 

Instead of disparaging the BRI, it would be better for the West, including Japan, to assist the Indo-Pacific region countries in tangible ways without seeking to interfere in their domestic affairs. Assistance with infrastructure development would result in much longer-term benefits than threatening port visits by navel assets that do not improve infrastructure, create new jobs or enhance exports.

The case of Hambanthota in Sri Lanka has been cited, in my view absurdly, as an example of the fate of countries which fall in to the Chinese debt trap. While it was Sri Lanka itself, which sought Chinese funding for the port after being rebuffed by other possible funders, there is considerable debate whether the Sri Lankan authorities handled the debt repayment issue judiciously given that the amount owed to China is less than 8% of Sri Lanka’s debt.

A significant part of Sri Lanka’s external debt is owed to Japan and the Asian Development Bank. Many in Sri Lanka have argued that the repayments could have been resolved much more favourably to Sri Lanka without the need to lease the Hambanthota Harbour to two Chinese companies for 99 years. The very same critics of the Hambanthota deal see no difficulties with the control of the ports of Melbourne and Darwin in Australia and Piraeus in Greece by Chinese companies.

Nervous reactions in the West

The expansion of China’s economic and political reach is evidently causing more than a few nervous reactions in the West, especially among powers which had been used to dominating the world stage politically and economically. France, Germany and Italy are leading an initiative to require the EU to scrutinise Chinese investments in Europe more carefully.

Recently, it has been said that America’s focus on terrorism as the main threat has now shifted to Russia and China. According to a new Pentagon strategy released recently by Defense Secretary Jim Mattis, the United States must build up its military to prepare for the possibility of a conflict with Russia and China. 

Ironically China is the main lender to the U.S. and also holds over $1.2 trillion in U.S. securities. China is the biggest market for a range of U.S. agricultural products, and millions of Chinese tourists visit the U.S. annually, not to mention the thousands of Chinese students who study there spending billions of Dollars. Any conflict between the two countries, including a trade war, would do irreparable damage to both, and to the rest of the world. 

The two countries have a unique opportunity in history to get away from traditional power based competition to cooperate for the common good of humanity. Cooperation may not be managed in a hurry but the opportunity is there. 

Many aspects of East Asian culture, including food, eating habits, traditional health care, yoga, Zen meditation and mindfulness, martial arts, dress, philosophy have been seeping in to Western and American life over the years. The U.S. has been an inspiration in liberal ideas, democracy, transparency, legal propriety, management style, sports, music, film, etc.

These elements will not be adopted by the East overnight although the interest is palpable. Nor will the Eastern style of living, religion or doing business be adopted lock stock and barrel by the West any time soon. It will take time to adapt and adjust. There are clear opportunities for teaching the two to each other.

Instead of breast thumping and posturing, it will serve humanity’s interests better in the long run if the giants of the world, both Eastern and Western, could cooperate for mutual betterment. [IDN-InDepthNews – 07 December 2018]

Image: The Belt and Road Initiative includes one-third of world trade and GDP and over 60% of the world’s population, says the World Bank.

IDN is the flagship of International Press Syndicate. –

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