How the US and Europe can beat China’s Belt and Road

One of the pithier remarks about America’s geopolitical rivalry with China came recently from Larry Summers, who served in Barack Obama and Bill Clinton’s administrations in a different, more optimistic era of globalisation. He quoted a developing country figure thus: “When we’re engaged with the Chinese, we get an airport. And when we’re engaged with you guys, we get a lecture.”

With developing countries’ borrowing costs rising but massive green infrastructure spending needed, the US and the EU are trying hard to match Beijing’s offer of investment. Washington merged federal agencies to create the International Development Finance Corporation (DFC) in 2018, and at the G7 rich nations meeting in 2021 President Joe Biden launched a Build Back Better World initiative, repackaged the next year as the Partnership for Global Infrastructure and Investment (PGII).

The EU in 2021 launched its Global Gateway, which aims to leverage up a relatively modest amount of public money to fund €300bn of investment in connectivity projects over six years.

As rivals to China, the rich countries’ problem is not just financial firepower but Beijing’s increasing tendency to politicise its investment and link it to security alliances. But that challenge is also an opportunity. The flaws in China’s decades-long campaign of recycling its surpluses into state-directed investments abroad on secretive and arbitrary terms are becoming evident, as is Beijing’s record of picking allies and clients — such as Russia and Pakistan.

Many developing countries are, commendably, declining to be bullied or bribed into taking sides. Europe and the US would do better to offer assistance and trade on fair and open terms.

The problems with China’s overseas lending and investment drive, formalised into the Belt and Road Initiative in 2013, have become more salient. Loans have gone sour, embroiling China in messy debt restructurings in Zambia and Sri Lanka. Many countries are increasingly disillusioned with the BRI. Some, particularly in Europe, have disengaged from China’s investment initiatives, disappointed in the meagre returns.

Some of China’s geopolitical entanglements also look like bad bets. By allying with Russia, Beijing may be able to secure cheap oil. But closer political alignment with Moscow taints it with the weakness of Vladimir Putin’s regime. Pakistan has long been a Chinese ally, but with an IMF lending programme stalled, continued support from Beijing without backing from elsewhere risks shackling China to an endlessly dependent money sink.

Some Asia-Pacific countries are sufficiently concerned about Chinese aggression to push them towards security alliances such as the Quad, which brings India together with the US, Australia and Japan. The EU, of course, lacks a centralised military capacity and developed security dimension. What it and the US do have to offer regarding aid and investment should be based on rules and openness.

The PGII and the Global Gateway are works in progress — fine in principle but with a degree of scepticism required. The US and EU both have a habit of failing to force their disparate official agencies to operate effectively together (as does China, to be fair) and of making wildly unrealistic estimates of the amounts of private capital that can be catalysed by modest public investment.

Alongside their bilateral efforts, Europe and the US need to make a determined effort to expand and depoliticise their traditional channels of assistance, the IMF and the World Bank, where they hold around half the voting power on the institutions’ executive boards.

William Ruto, Kenya’s president, criticised the fund and bank at a development finance conference last week in Paris and said low-income countries’ environmental transitions should be financed by a new, more neutral, “green bank”. A lot more money for the existing institutions and an openness to reform — assuming emerging market countries actually want to take more responsibility — will be needed to overcome this suspicion.

The other area in which the US and EU ought to be able to outbid China is access to their markets. The US economy remains a powerful magnet, notwithstanding its mulish refusal to sign new preferential trade agreements. Exports from non-China East Asian economies to the US have shot up in recent years despite the US pulling out of the Trans-Pacific Partnership, and America overtook China as South Korea’s main export destination in 2022 for the first time in nearly two decades.

As for the EU, finalising the signed but as yet unratified deal with South America’s Mercosur trade bloc would be an important signal to a region that is only projected to receive a few billion in Global Gateway financing.

China envy is a natural sentiment for US and European policymakers. Having lots of levers to pull and arbitrary cash to disperse is always more fun than setting rules and running multilateral systems. But democracies without persistent surpluses to recycle will tend to be at a loss at that game compared with autocracies that do. When it comes to investment and trade, the rich world’s comparative advantages are openness and consistency. They should pursue them.