Cooperation Amid Asia’s Infrastructure Competition

The economies of Asia are collectively the world’s largest, fastest growing, and most populous. According to the IMF’s latest assessment, Asian economies represent more than 46 percent of global GDP on a purchasing power parity basis. By comparison, Europe’s share stands at just 20 percent and North America’s at slightly more than 18 percent. GDP growth rates for Asia are also nearly double those of the world as a whole, projected to reach 6.6 percent in 2020, compared with global growth rates of just 3.6 percent. Asia’s growth rates are also more than three times greater than those for Europe and North America, which are projected at less than 2 percent each in 2020. The world’s largest concentration of people is in Asia, with India and China at well over 1 billion each. The region as a whole is projected to reach 4.6 billion people in 2020 or 60 percent of the estimated global population according to the UN’s World Population Prospects 2019.

Big, dynamic, and growing, Asia is already at the center of the global economy, even if it is not yet at the pinnacle.

Underpinning that growth is a remarkable story of infrastructure investment, trade, foreign direct investment, and conducive economic policies. For the United States alone, according to the State Department, two-way trade with the countries of Asia amounts to $1.4 trillion a year, and U.S. foreign direct investment amounts to some $860 billion.

But Asia’s ability to continue at this rate of growth and poverty alleviation will require considerably more investment, particularly in infrastructure. The Asian Development Bank (ADB) estimates that through 2030, some $1.7 trillion a year in infrastructure investment is needed in the region. The same report estimates that current investment rates will fall short by hundreds of billions of dollars.

Infrastructure’s role in enabling economic growth has been well documented. And recently, infrastructure’s potential for dual military and civilian use has gained increased public attention. Perhaps less understood has been the relationship between infrastructure development and the efficiency and effectiveness of global supply chains.

In today’s interconnected world, competition increasingly takes place between global supply chains, which link and combine production from multiple nations into competitive products for domestic and international markets. A nation’s infrastructure assets can be definitional not simply for that nation’s ability to participate in these supply chains but for shaping which supply chains the nation and its industries participate in most effectively. Some argue that we are entering a world of increasing economic rivalry between emerging Chinese and existing Western supply chains where the question of who sponsors infrastructure investment will shape which supply chains prevail.

Thus, questions of economic development, military power projection, political influence, and global economic suzerainty form the backdrop for what is emerging as a global competition centered on the most economically dynamic region of the world—Asia. And infrastructure development is at the center of that contest.

In many ways, China’s Belt and Road Initiative (BRI) set the context or parameters of the contest. Originally a means to export excess capacity from a slowing and maturing Chinese economy, the BRI has become a central pillar of Chinese foreign policy (written into the constitution at the 19th CPC National Congress in October 2017) and represents certainly the most ambitious and potentially most generous response to infrastructure needs in the region (estimates range from $1 trillion to $8 trillion). The BRI has in many ways shaped the debate over infrastructure investment selection, financing, national sovereignty and economic development, regional security, and economic value chains.

The West—the United States, Japan, Australia, and increasingly Europe—has responded to the BRI with a mixture of selective participation, vocal criticism, recommendations, and competing initiatives (though none at the potential scope and scale of the BRI). The BRI risks Western countries cite most often include issues of unsustainable host country debt burdens, poor project selection, limited transparency in procurement and financing, and social and environmental concerns. Behind these objections are deeper concerns regarding national and regional security, global economic competition, and the undermining of what is often referred to as the “rules-based” international order.

China has been quick to respond to these criticisms with several programmatic changes while not slackening the pace of BRI investment. In May 2017, the IMF and the People’s Bank of China (PBOC) launched a program to jointly train BRI recipient country officials on financial management and procurement processes and in May 2018 convened a conference with key stakeholders to discuss core principles of BRI projects. A year later, in April 2019, China announced a debt sustainability framework to guide investment decision making by China and recipient nations. And in his opening remarks at the 2019 Belt and Road Forum, President Xi emphasized the importance of mutually beneficial, environmentally friendly, and financially viable BRI projects.

During this same period, the United States announced its Indo-Pacific strategy, which includes an economic pillar with infrastructure as one of its key components. The United States made a small initial commitment of $113 million for the region but followed this shortly with legislation creating the U.S. Development Finance Corporation (USDFC) with a $60 billion lending and investment capacity. In 2016, in part as a response to the BRI, Japan increased its commitment to its quality infrastructure initiative, pledging some $200 billion for infrastructure development globally. And in September 2018, following a report by 27 out of 28 EU ambassadors to China criticizing the BRI, the European Union announced an Asia infrastructure plan that could mobilize as much as €300 billion for investments in the region.

Clearly the contest is on. But given these competing initiatives and the growing outcry in the West, is there room for cooperation between China and the West on infrastructure development in the region? Unequivocally, yes, and there are good reasons to cooperate. Even collectively, Chinese and Western initiatives do not fill the infrastructure funding gap the ADB identified. Moreover, outright competition between initiatives could be both inefficient in delivery and unmanageable for host countries forced to balance many competing project concepts and stakeholders. Further, cooperation offers the opportunity to build greater trust between China and the West, potentially reducing rising tensions regarding China’s infrastructure and industrial policies.

Three immediate areas of cooperation would serve both China and the West while delivering significant benefits to the countries of the region. The first and most obvious is to expand the scope of projects undertaken jointly by Chinese and Western nations. There is already some progress here with Japan and China recently committing to jointly develop 50 projects in the region. The United States, Australia, and members of the European Union could follow this example. A key condition for joint development, however, should be the adoption and use of global standards of transparency, procurement integrity, financing, and quality design and execution for each project.

Second, China should embrace for all BRI projects a set of standards by which projects would be transparently defined, prepared, procured, contracted, financed, delivered, and operated, as well as a mechanism for adjudicating disputes. Such standards in fact already exist and are in use throughout the world. They have been promulgated by the World Bank, UN, IMF, and other global institutions, and in fact, many are being adopted by the Asian Infrastructure Investment Bank (AIIB). Open, transparent, and competitive scoping, contracting, and delivery of infrastructure projects would allow competitive market forces to determine the best bidder and the best value for those projects. And government officials would have a common framework from which to judge and compare project proposals and address disputes.

Finally, real work remains to be done to attract global pools of capital to infrastructure projects around the world. By some estimates, there is $100 trillion in available financial assets between pension funds, insurers, and sovereign wealth funds. Many of these funds seek financial returns, which are well suited to infrastructure investment. Yet the risks and complexity of infrastructure projects, particularly in emerging economies, have proven a barrier to greater investment from these sources of capital. China has already demonstrated its capacity to use financing to underwrite infrastructure investment in challenging environments. The financial markets in the West are the world’s deepest and most innovative. Structuring Chinese and Western risk capital into financial instruments that insure against key project risks has the potential to unlock billions of dollars in additional money for infrastructure projects globally.

These three areas of cooperation are all reasonably achievable. They would require compromises from both sides—China to agree to global standards and opening projects to competitive forces and the West to agree to joining with Chinese companies and financial institutions to design and deliver projects. Not all efforts will succeed, but that is the nature of infrastructure project development under normal circumstances.

What is also true is that these areas of cooperation will not eliminate the competition for economic value chains or necessarily diminish strategic military concerns, but they will make the contest fairer, not just for China and the West, but for the host nations and the people these projects are ultimately meant to benefit. And that truly would be a “win-win” for all.

Peter Raymond is a non-resident senior associate for the Reconnecting Asia Project and Simon Chair in Political Economy at the Center for Strategic and International Studies.

This article is part of Perspectives on the Global Economic Order in 2019, a U.S.-China Essay Collection produced by the CSIS Simon Chair in Political Economy in collaboration with the Shanghai Institutes for International Studies (SIIS).