The Geoeconomics of the One Belt One Road Initiative
July 23, 2018
The Economics of OBOR
OBOR consists of two main components: the Silk Road Economic Belt stretching from China to Europe, and a 21st Century Maritime Silk Road consisting of a new network of ports throughout the Pacific and Indian Oceans. If successful, the Chinese project will strengthen the Chinese domestic economy, and generate more favorable economic relations throughout Eurasia.
Now in its fifth year, the OBOR has dedicated over $100 billion for infrastructure projects, such as $46 billion for power plants in Pakistan and funding for train lines connecting a Chinese owned port in Greece to Belgrade. This economic plan is meant to create new markets and increase exports of excess Chinese labor and goods, such as steel and cement, in order to boost the Chinese economy in a time characterized by slower growth (about 7% annually, after years of 10-12%).
Chinese exports to countries along the OBOR have since exceeded those going to the United States and the European Union, with trade and foreign direct investment increasing at an annual average of 19% and 46%, respectively, for participant OBOR countries. According to reports from the Chinese government, trade between China and OBOR countries will pass $2.5 trillion within a decade.
Beijing understands that if, on the whole, its neighbors prosper China does as well - and such a project is particularly alluring for neighboring developing countries that generally have unskilled labor forces, fragile economies, and poor infrastructure. However successful OBOR might be in facilitating trade, there have been significant costs to China. Off the record, Chinese officials have admitted that they expect to lose around 80% of all investments going to Pakistan, and about 30% in Central Asia. Although such risky commercial investments may seem unwise, in the context of Chinese domestic politics and foreign policy goals, they are cogent geo-economic decisions.
The Geopolitics of OBOR
OBOR is a part of President Xi’s ambitious plan to drive growth while opening new markets abroad, but it also reflects China’s shift towards a more proactive foreign policy. We see such behavior materialized in China’s effort to secure strategic resources, assets and partnerships, through the increase in selective M&A (merger and acquisition) deals and loaning practices with OBOR partner countries.
Just as China is buying nuclear energy firms in Europe and the United States to secure a future position as a leading nuclear tech giant, it is using OBOR to buy oil and gas firms throughout South and Central Asia to build strategic pipelines.; Besides economic incentives, China could view this as critical to securing energy independence as the United States experiences a “shale revolution” and is exporting billions of cubic meters of natural gas to China per year. Take the example of Chinese investment in Iran: it is an OPEC member, a large producer of oil, and the most direct link between Central Asia and the Persian Gulf, making it geopolitically valuable. Furthermore, now one-third of Iran’s trade is with China and they recently held joint naval exercises.
China’s lending practices to fund OBOR is also indicative of geopolitical intent. The principle lenders of the OBOR program, the China Development Bank (CDB) and Export-Import Bank of China (EXIM) have extended loans of up to $200 billion across OBOR; however, many participant countries have found themselves unable to pay the large loans forcing them to concede strategic assets. This practice has been dubbed “creditor imperialism.” For example, unable to pay back its loans, Sri Lanka agreed to give control of the strategically located Hambantota Port to the Chinese government. Djibouti allowed the Chinese to establish its first overseas military base in the east African country after it defaulted on a railway loan. Thus, while the economic rationale of OBOR may falter as far as loan paybacks are concerned, the acquisition of ports like Hambantota and the construction of new bases provides China with significant logistical support for Chinese warships patrolling the Indian Ocean.
Conclusion: American Responses
American officials ought to examine the strategic gains China is making through OBOR and formulate a response should they determine the project will ultimately yield significant results. One such response could be to cooperate with the Chinese government to ensure an OBOR that succeeds, at least in part, on American terms. Many US based companies, such as General Electric, have expressed interest in joint ventures with Chinese firms. If such ventures are to be tenable, the United States would have to engage with China to provide transparency on the specifics of the project’s progress and lobby the Chinese government to establish a more fair and open playing field. This should be followed by maintaining, if not increasing, American influence in the World Bank and Asian Development Bank by calling for increased infrastructure standards and compensating for investment gaps that OBOR is unable to fill in Eurasia. The primary downside with this cooperative approach is that it ignores the strategic gains to be made from Chinese OBOR M&As and investments. The policy assists China’s infrastructure project while asserting the US would benefit from questionable gains. There would still be concerns of IP theft, corruption, and other political and fiscal risks that threaten long term viability of US investments in a China-led OBOR.
Alternatively, the United States could assume an active stance against OBOR-led investments in the framework of great power competition. Instead of compromising with China to help construct Xi’s OBOR, the US could advance its own vision for Eurasian infrastructure. This option may be in America’s commercial interests in the long run: since OBOR relies on handing out substantial loans to developing states, a failed OBOR could be an economic setback not only for particularly regions, but also for the global economy. The Trump Administration has frequently called for a foreign policy that advances a “free and open Indo-Pacific,” and could pursue such a policy by increasing federal investments in infrastructure projects in East and Southern Asia without a renewal in the Trans-Pacific Partnership.
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