China eyes global economic leadership as U.S. turns inward
This year, a 300-mile railway will begin slicing through Kenya, cutting travel time between the capital, Nairobi, and one of East Africa’s largest ports, Mombasa, from 12 to four hours and breeding hopes of an economic and tourism revival in the region.
The country’s most significant transportation project since its independence in 1963 is being built courtesy of China. China Road and Bridge, a state-owned enterprise, leads construction of the $13.8 billion project, which is financed nearly 100% by the Export-Import Bank of China.
The railroad is one of a host of infrastructure projects China spearheads around the world in an ambitious quest to reinforce its emergence as the world's next economic superpower while President Trump turns his back on globalization.
Trump’s pivot to economic nationalism and hostility toward multilateral trade deals create an opportunity for China — second only to the USA in economic output — to shine even brighter on the world stage, said Louis Kuijs, head of Asia Economics at Oxford Economics.
“As the U.S. becomes more insular in economic philosophy, I think it gives China one more reason to ... say, ‘We are still interested, and we want to continue globalization,’ ” Kuijs said.
One of the clearest examples of the two countries' divergent paths is Trump’s withdrawal from the Trans-Pacific Partnership, a 12-nation trade deal that excludes China, and the Asian powerhouse's role as a dominant foreign investor in Africa, Central Asia, Latin America and the Middle East.
China’s outward foreign direct investment totaled $187.8 billion in 2015, a record and a 52.5% increase from a year earlier, according to the World Bank. Ten years ago, its outward FDI stood at about $17.2 billion. The U.S. FDI — though still significantly larger than China at $348.6 billion — grew only 1.5% year-over-year.
China’s economic ascendance from poverty is a model for struggling nations eager to modernize rapidly, too. In helping to create wealth abroad, China gets an early say in the formation of markets for its exporters to sell.
“I think the Chinese have realized they’re the major beneficiary of globalization,” says Pieter P. Bottelier, former chief of the Resident Mission in Beijing for the World Bank. “If the U.S. ducks out, China will take over the leadership role in globalization. And whatever happens to China, it’ll have a major impact on Americans.”
The range of projects China has launched is eyepopping:
•New Silk Road: China's modern version of the ancient East-West trade route — known as One Belt One Road — winds its way through Asia, the Middle East and Europe. Launched in 2014 with $40 billion of initial investment, it entails new or reinvigorated railways, ports and roads that will link key cities. The anticipated total investment could top $4 trillion, according to The Economist, citing Chinese government officials.
“People don’t’ seem to realize how important it is,” Bottelier says. “A (freight) train is already running between London and China.”
•Pakistani infrastructure: Chinese President Xi Jinping arrived in Pakistan in the spring of 2015 and announced $45 billion worth of investment projects in energy and infrastructure development, some of it tied to the new trade route.
•Nicaraguan canal: In 2015, Wang Jing, a Chinese billionaire who made his fortune in telecom, began digging in the city of Brito, Nicaragua, in hopes of building a canal that will cut 170 miles across the country and ultimately compete with the Panama Canal. The project stalled as his fortunes sank along with the Chinese stock market, but it has not been abandoned.
•South American rail: China plans to build and expand rail networks in Brazil, Peru and Colombia, though it has run into opposition from environmentalists.
“A lot of gigantic Chinese companies are good at building dams, bridges, railroads, and we can use their expertise and capacity abroad,” Kuijs says.
Besides courting favor with other countries, global investments help Chinese leaders deal with a persistent domestic economic issue: massive excess capacity for producing steel, glass, cement, paper, solar panels and other products.
“China’s economy is so large, even if it supports infrastructure in neighboring countries, that amount is trivial compared to the problems (of excess capacity) it has at home,” said Yukon Huang, senior fellow in the Carnegie Asia Program.
Some recipients of Chinese investments are skeptical of their larger neighbor's intentions. The Philippines and Vietnam, for example, are engaged in a territorial dispute with China in the resource-rich South China Sea.
“But in general, poor countries are glad to have the investment,” Kuijs said. “The way China’s leadership communicates to foreign leaders is that China is not an expansionist country, that it’s not interested in invading other countries.”
Wheeling and dealing
In addition to massive infrastructure projects, China exerted its financial muscle by taking the lead in creating the Asian Infrastructure Investment Bank in 2015, a 35-nation organization that will compete with older world lending institutions where China has less clout, such as the Asian Development Bank and World Bank. The investment bank's initial total capital was $100 billion, significantly smaller than the Asian Development Bank and the World Bank's capital.
China’s sway in the bank is part of its broader geopolitical strategy “to undermine the U.S. alliance system in Asia,” says Jennifer Harris, a senior fellow at Council on Foreign Relations.
The Export-Import Bank of China and China Development Bank are even larger and also spend billions a year abroad. But they aren't transparent in their operations like the new bank, which helps shed China’s reputation as a world player more comfortable with shadow lending and backroom deals. "It is also multilateral, not bilateral, so other countries can have (a say)," Kuijs said.
China has been open to allowing companies in any country, including the USA, to sell services and equipment to the projects financed by AIIB. “China knows they’re not the most loved country. They’re trying to buy alliance through financial and security arrangements,” Bottelier said.
Trump's withdrawal from the Trans-Pacific Partnership, ready to be ratified after years of wheeling and dealing, opens the door for China to step in. Australia has called for the TPP to proceed with China taking the U.S. spot.
The TPP is unique in that it ushers in new labor, environmental and intellectual property protection standards — benchmarks many are eager to see China adopt. “The only way to influence and contain China is to force China to abide by the rules of TPP,” Huang said.
Regardless of the TPP’s outcome, China is proceeding with another trade agreement to forge closer alliances in the region. The Regional Comprehensive Economic Partnership (RCEP), proposed in 2012, would merge the 10 members of the Association of Southeast Asian Nations (ASEAN) with six states that have free-trade agreements with ASEAN.
Chinese President Xi summed up his country's goal at the World Economic Forum in Davos, Switzerland, in January with words that could not have been more different than Trump's isolationist "America First" mantra:
“We must remain committed to developing global free trade and investment, promote trade and investment liberalization and facilitation through opening up," he said. "And say no to protectionism.”
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