Washington’s $60 billion challenge to China’s ‘debt diplomacy’

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By Andrew Hammond
The US Senate passed a landmark $60 billion bill last week that will create a new agency aimed at strategic investment in developing countries. The International Development Finance Corporation (IDFC) is the latest step in Washington’s response to China’s growing influence and marks a return to US aid policy with commercial diplomacy and geopolitics center stage.

This, of course, recalls the earlier era of the Marshall Plan, whereby US commercial and development interests converged in the early Cold War era of the 1940s and 1950s. The IDFC will become the pre-eminent US government development finance institution moving US interests forward in several ways.

This includes supporting US companies operating in key developing markets and enhancing US geopolitical influence relative to that of other countries, including China and Russia, who are embedding their own engagement in emerging markets that have driven about 80 percent of global growth since the 2008 economic crash.

In the words of Democratic Sen. Chris Coons, IDFC “will allow us to reduce poverty in areas that are critical to our national security, compete with Chinese influence in the developing world, and help US businesses grow and succeed.” His remarks underline the bipartisan political support for the bill, recalling an earlier era when US party bickering stopped “at the water’s edge.”

It is China’s trillion-dollar Belt and Road initiative, and institutions such as the China-Africa Development Fund, that are in the sights of US policymakers. Belt and Road, for instance, is an immensely ambitious development through which Beijing is boosting trade and stimulating economic growth across Asia, Africa and beyond by building massive amounts of infrastructure and connecting it to countries around the globe.

According to some forecasts, the Chinese initiative has the potential to massively overshadow even the Marshall Plan; it potentially encompasses about 65 percent of the world’s population and a third of its GDP, and helps to move about a quarter of all its goods and services. Indeed, some describe Beijing’s scheme as the biggest development push in history.

Take the example of Pakistan, where China has already made commitments of around $60 billion under Belt and Road. While this is to be spent largely on infrastructure, it has cemented warming geopolitical ties with Islamabad, a previous longstanding US ally during the Cold War.

It is in this context that the US bill should be viewed, and its passage comes only weeks after US Secretary of State Mike Pompeo articulated his revamped plans for a “new era in US economic commitment to peace and prosperity” in the Indo-Pacific region and beyond — the Trump team’s preferred term for the massive strategically important geography from the US West Coast to the Indian subcontinent.

While Pompeo announced about $113 million in regional investments focused on technology, energy and infrastructure, he acknowledged these were “just a down payment” on future US commitments to the region. The legislation — which will allow the IDFC to “make loans or loan guarantees, acquire equity or financial interests as a minority investor, provide insurance or reinsurance to private sector entities, provide technical assistance, administer special projects, establish enterprise funds, and issue obligations” — is the next stage in this commitment.

The development is all the more remarkable as, until a year ago the US Overseas Private Investment Corporation (OPIC), which will now be subsumed into IDFC, was on the verge of being canned by the Trump team. What changed this political context, however, is China’s continued rise and the argument that US interests required a beefed-up commercial diplomacy strategy, with the new agency having double OPIC’s funding.

Part of the US pitch to developing countries will be helping them to avoid what Washington calls China’s “debt diplomacy.” An example is Kenya, a strong US ally in Africa whose external debt is now about 70 percent owed to Beijing, and where many large infrastructure projects are being built by Chinese companies.

By contrast, Washington says its own model will be more sustainable, adhering to international standards of transparency and the rule of law, helping countries become more self-reliant. While this US message will resonate with some allies, others will nonetheless be torn by the massive scale of potential financing offered by Beijing.

The timing of the bill, which has the support of the Trump team, coincides with a frosty period in US-China relations. Not only are the two countries involved in a significant trade spat, US Vice President Mike Pence last week sharply criticized Beijing for alleged interference in the upcoming US congressional elections.

The new legislation is only likely to fuel that bilateral tension. Indeed, there is now a greater prospect of growing competition not just between the two governments, but also between key US and Chinese enterprises, in emerging markets across the globe.

The author Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics. Article courtesy Arab News)