Is China Winning the Scramble for Eurasia?

_ Matthew P. Goodman, senior adviser for Asian economics, William E. Simon Chair in Political Economy, Center for Strategic and International Studies (CSIS). Jonathan E. Hillman, director of the Reconnecting Asia Project, CSIS. Washinghton D.C. 21 August 2017. Published for debate.

It began in London’s early morning darkness, on June 24, when the British public’s vote to exit the European Union was confirmed. Exhausted but jubilant, Vote Leave advocates could feel their fingers on history. At their headquarters, one leader leapt onto a table and recited a passage from Shakespeare’s Henry V: “This story shall the good man teach his son.”

At the other end of the Eurasian supercontinent, another Shakespeare aficionado was rehearsing his own remarks. Jin Liqun, founding president of the Asian Infrastructure Investment Bank (AIIB) and a lifelong student of Western literature, had a few hours before kicking off the organization’s first annual meeting at the China World Hotel in Beijing. They had embarked on a “historical journey,” Jin told the audience, “towards building a new type [of] multilateral financial institution.” Officials from the United States, who declined to join the AIIB, were not in attendance.

The Bard himself could hardly have set up greater dramatic tension. Yet the contrasting scenes confirm the widespread view that today’s Western-led order is stumbling as its lead actors—notably, the United States and United Kingdom—look inward. China’s increasing importance in global affairs has also become conventional wisdom.

Less attention—certainly in Washington—has been paid to how Asian powers are reaching beyond their borders to spread their influence. Infrastructure investment is a central plot line of this story. Roads, railways and other new connections are reshaping the Eurasian supercontinent and creating new forms of competition as well as cooperation.

For example, the $62 billion China-Pakistan Economic Corridor, or CPEC, will give China access to Pakistan’s Gwadar Port and the Indian Ocean. Just over one hundred kilometers away, India and Japan are developing a competing port in southeastern Iran. Russia is playing both sides, expressing support for CPEC while backing a corridor with India that runs through Iran. Examined closely, these and other projects are windows into national ambitions.

Infrastructure projects not only reflect emerging economic and political realities but can also reshape them. Consider the Trans-Siberian Railway. Its construction helped spark the Russo-Japanese War in 1904. During World War II, it moved Russia’s heavy industries away from enemy lines. More than a century after opening, it still binds the Far East with Moscow and carries over half of the foreign cargo that passes through Russia. Similarly, many of today’s fledgling projects could shape events beyond the twenty-first century.

Since the rise of Europe’s colonial powers in the sixteenth century, Asia’s economic activity has been concentrated on its coastlines. But that could change as China, Japan, Russia and other regional powers connect Asia internally and with Europe by reaching across the Eurasian landmass. Ancient overland routes, harking back to the Silk Road, could be reawakening even as new maritime passages emerge.

At the turn of the last century, the British geographer Halford Mackinder, sometimes called the father of modern geopolitics, wrote, “Is not the pivot region of the world’s politics that vast area of Euro-Asia which is inaccessible to ships, but in antiquity lay open to the horse-riding nomads and is to-day about to be covered with a network of railways?” The same question might be asked today.

The answer could have wide-ranging implications for U.S. foreign policy. Since World War II, successive U.S. administrations have sought to prevent the rise of a hegemonic power in Eurasia. If a great power tries to assume that mantle, it will not do so invisibly, but by physically binding itself with its neighbors, through new railways, ports and other hard infrastructure. Behind many of today’s projects lurk grand ambitions.

THE SHEER scale of Asia’s infrastructure competition is staggering. The region’s infrastructure spending led the world last year, with 552 deals worth a record $131 billion. But Asia’s economies are only investing roughly half as much as they need, according to the Asian Development Bank. To maintain current levels of economic growth, eradicate poverty and respond to climate change, developing Asia alone must spend $26 trillion on infrastructure by 2030. As states ramp up their infrastructure spending to meet these goals, they are advancing rival visions for the region.

Chinese president Xi Jinping’s signature foreign-policy effort, the “Belt and Road” initiative (also known as “One Belt, One Road,” or OBOR) is at the center of this activity. Announced in 2013, OBOR includes an overland Silk Road Economic Belt and an ocean-based 21st Century Maritime Silk Road. It is a hugely ambitious endeavor. Geographically, OBOR could span sixty-five countries responsible for roughly 70 percent of the world’s population. Functionally, it aims to strengthen hard infrastructure, soft infrastructure and even cultural ties. Economically, it could ultimately entail Chinese investments approaching $4 trillion. By comparison, the Marshall Plan would cost roughly $130 billion in today’s terms.

Xi’s vision is already having an impact on business and politics in the region. In 2011, when Hewlett Packard wanted a direct rail connection between China and Europe, it had to start from scratch, work with customs officials and book an entire train. Today, companies can choose from upwards of forty transcontinental routes. In the past two years, direct railway freight shipments have been made for the first time between China and cities in Afghanistan, Iran and the United Kingdom. The changes are perhaps starkest within China, which now has over twenty-two thousand kilometers of high-speed railway track, more than the rest of the world combined.

As Asia’s economic flows shift, so do its political winds. Membership in the AIIB has climbed to eighty countries from all six continents, including numerous allies of the United States. Chinese infrastructure loans have helped persuade the Philippines and Cambodia to reevaluate military or diplomatic ties with the United States. In May, twenty-nine heads of government gathered in Beijing to discuss OBOR. “It is our hope through the Belt and Road development,” Xi said at the summit, “mankind will move closer to a community of common destiny.” But if OBOR is fully realized, the reality will be less egalitarian than Sino-centric: a Eurasian supercontinent where all roads lead to Beijing.

Tokyo sees things differently. Japan is moving to defend its incumbent advantage in Southeast Asia. For example, Prime Minister Shinzo Abe has launched a $200 billion Partnership for High Quality Infrastructure. For countries seeking foreign investment, that phrase is intended to make an implicit appeal: Japanese infrastructure is safer, more dependable and more cost effective than Chinese infrastructure. Competition has been fierce, particularly after China bested Japan for the contract to build Indonesia’s first high-speed railway. According to our “Reconnecting Asia” database, of over two thousand projects, Japan is outspending China on road and railway projects in six of nine Southeast Asian countries. But the margins are slim, and in Cambodia, Laos and Malaysia, China has pulled ahead.

While concentrated on Southeast Asia, Japan’s ambitions extend throughout the broader region. Further west, Tokyo is backing new land and maritime corridors that would increase connectivity between the Bay of Bengal and the South China Sea. In 2015, Abe became the first sitting Japanese leader to visit all five Central Asian states. Japan’s influence on infrastructure matters is magnified by its leadership in multilateral institutions, notably the Asian Development Bank (ADB), whose presidency it traditionally holds. Through the ADB and bilateral mechanisms, Tokyo is advancing higher standards for infrastructure investment, including environmental and social protections.

Sitting atop the Eurasian supercontinent, Russia casts a large shadow over the region. Due to sanctions and low oil prices, Moscow lacks the financial strength to match Beijing and Tokyo’s infrastructure spending. Instead, it has focused on a handful of strategically important projects. In the north, Russia is pursuing port and energy projects as the Arctic becomes more accessible. To its east, Russia’s primary interest is expanding energy pipelines with China. To its south, Russia aims to increase connectivity with Azerbaijan, Iran and India through the North-South Transport Corridor. To its west, Russia is building a railway bypass around Ukraine and a $4 billion bridge into Crimea.

Moscow has also focused on shaping soft infrastructure, especially economic rules and regulations. Founded in 2015, the Eurasian Economic Union creates a single market between Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan. While the economic power of this group is modest, it puts Moscow at the head of the table for deciding on tariffs and customs rules for a large zone through which overland East-West trade routes must pass. Putin and Xi have even spoken publicly about “linking” the Eurasian Economic Union and OBOR, but to date, their rhetoric has not been matched by meaningful changes on the ground.

Nearly every country is jockeying to become a central node within emerging networks of transportation, trade and communication. Iran has budgeted 1 percent of its oil revenue toward expanding its railway system, which it plans to double over the next decade. To celebrate its centennial in 2023, Turkey is building thousands of kilometers of new roads and railways. India is aiming to build forty kilometers of roads a day. South Korea’s ambitions extend into the Arctic, where climate change is making shipping lanes more accessible. Some of the most rapid changes are occurring in Southeast Asia, where the Master Plan on ASEAN Connectivity envisages greater physical, institutional and people-to-people linkages among its ten member countries.

Where is this flurry of activity heading? Collectively, these ambitions could foreshadow a more integrated and dynamic supercontinent, in which commerce, people and ideas move faster than ever before. But there are darker potential paths as well. New connections can also create dependencies between states, exacerbate inequalities within them and produce unintended consequences. After all, Eurasia’s ancient routes carried not only silk and horses, but also Mongol invaders and the bubonic plague.

EURASIA’S INFRASTRUCTURE rivalries consist of a mix of economic, political and strategic forces. The exact balance of these drivers varies greatly, from state to state and even from project to project. Occasionally, they are aligned. But more often, there is friction between competing goals: economic viability, political expediency and strategic clarity.

The strongest driver is Asia’s economic growth. Over the next two years, developing Asia is expected to deliver three-fifths of global growth. Emerging economies like China and India have more capacity to spend and, as the towering estimates of Asia’s infrastructure needs underscore, more reasons to spend. In theory, much of that spending is welcome and well intentioned, but the picture can become more complicated in practice.

Narrower commercial interests are also driving the infrastructure push. Behind China’s OBOR, for example, is an industrial sector whose size far exceeds China’s domestic needs. Having used more cement between 2011 and 2013 than the United States used during the entire twentieth century, China is using OBOR to move its excess capacity into neighboring countries. But China’s problem is too big for others to absorb, and the risk is that OBOR will prolong China’s chronic capacity issues rather than helping address it.

Domestic politics also play a part. From mayors to prime ministers, leaders love ribbon-cutting ceremonies, especially when projects set world records or use new engineering techniques. In 2012, for example, Russia unveiled the world’s longest cable-stayed bridge in advance of hosting the Asia Pacific Economic Cooperation summit on Russky Island in the Far East. Attendees enjoyed easier access to the island, but after they departed, only roughly five thousand year-round residents remained. Large construction projects also offer political leaders the opportunity to direct resources and reward supporters.

Infrastructure can also advance strategic ends. Roads, railways and ports are all dual use and critical for moving military troops and supplies. Controlling these assets also allows countries to restrict access and exert pressure. When a project’s commercial logic is weak, strategic motives are occasionally more apparent. Some observers suspect that Pakistan’s Gwadar Port, for example, will primarily benefit the Chinese navy. History is filled with examples of empires using infrastructure to claim, control and defend territory. The same road network that Darius the Great used to control the Persian Empire was used by Alexander the Great to conquer it.

A more recent development is the use of infrastructure finance to accomplish diplomatic goals. China has used the promise of infrastructure spending to win friends in its near abroad. Take Southeast Asia, where some countries have been offered generous infrastructure packages to support China’s stance on territorial disputes in the South China Sea. Of course, smaller countries know the rules of the game, too. They often play larger powers off against each other, extracting financial and military support and diversifying their diplomatic options. In their first meetings with counterparts from China and Japan, all four of last year’s new Southeast Asian leaders had infrastructure at the top of their wish lists.

FOR ALL the ambitions behind Eurasia’s infrastructure push, many of today’s plans will fail. Infrastructure investment is a notoriously difficult business all over the world, where projects typically run far over cost and over time—if they ever get started at all. The challenges in Eurasia are especially formidable, ranging from hostile geography to weak rule of law.

Having put a man on the moon over four decades ago, many observe, surely modern engineering can conquer our terrestrial environment. But infrastructure projects often traverse challenging terrain. Asia is home to the world’s highest mountains, the largest swamps and flood plains, and permafrost that extends to latitudes lower than anywhere else in the world. Its infrastructure must withstand extreme temperatures, seismic activity and other natural challenges.

The challenges are also man-made. In Pakistan’s volatile Baluchistan Province, for example, separatist groups have killed more than fifty people working on CPEC projects. Islamabad recently deployed fifteen thousand troops to protect workers along the route. States lacking the capacity to secure projects must consider whether to host foreign forces or pay for private-security services. Navigating each of these challenges comes with a financial cost.

In many areas, Eurasia’s legal and governance landscape is not ready for changes to its physical landscape. Corruption looms large, warping everything from contracting and procurement decisions to the operation of infrastructure projects. By some estimates, construction is the world’s most corrupt sector. In Central Asia, fraudsters have been caught setting up fake tollbooths to prey on unsuspecting drivers. Large projects provide ample opportunities to conceal bribes, and many implementing agencies struggle to effectively monitor all the contracting parties involved. Far from being buzzwords, greater transparency and accountability would help these projects succeed.

From project conception to operation, additional legal challenges abound. In South Asia, for example, 75 percent of countries rely on paper records for land rights, leading to confusion and competing ownership claims. Investment protections are often weak, which is why many infrastructure investors avoid developing Asia entirely. Procedures at the border are onerous, sometimes requiring cargo to be transferred to local trucks, for example. Many countries have signed onto transportation agreements but lack the capacity to implement them. International assistance can help, but some poor decisions also reflect the preferences of strong patronage networks. On the Cambodia-Thailand border, for example, a casino was built in the space initially designated for an inspections building.

Increasingly, sustainability is a necessity rather than a luxury. Multilateral institutions condition infrastructure lending on social and environmental impact assessments. But self-interest is a key motivator as well. Through experience, some states have learned that higher-quality infrastructure, the type that meets higher social and environmental standards, is a wise investment. Lower-quality infrastructure is cheaper and might be less expensive in the short term, but it wears down faster and costs more in the long term.

These challenges add up to the biggest hurdle of all: a shortage of bankable projects that offer returns commensurate with their risks. In theory, there are trillions of dollars of investable funds around the world—notably those held by long-term investors, like sovereign wealth funds and pension funds—ready to go into sound infrastructure projects that generate a reliable, long-term return. But all the risks and uncertainties described above can deter even the most intrepid investor. Multilateral institutions are experimenting with novel ways to share risks and attract private capital, but creating enough bankable projects will require wide-ranging political and economic reforms.

Bankability will be even more difficult for Asia’s overland routes than their maritime counterparts. Sea freight is slower than railway and air cargo, but it is considerably cheaper, which is why 90 percent of international trade travels by sea. With the global shipping industry overcapacity, and Arctic routes becoming more accessible, shipping seems primed to continue its dominance. Trade imbalances make it even more difficult to sustain overland routes between Europe and China. A significant portion of rail containers return to China empty. Despite the hype about new railway routes, the maritime realm is likely to be where most of Asia’s economic action remains.

Contrary to popular belief, not all infrastructure projects are economically beneficial or even benign. Economists have demonstrated that infrastructure can decrease trade costs, boost productivity and increase economic growth. But local conditions, institutions and policies matter greatly. If mishandled or pursued for the wrong reasons, infrastructure projects can destroy more value than they create. Even in the best business environments, projects are usually over time, over cost, under benefit—a troubling reality that Bent Flyvbjerg of Oxford University’s Saïd Business School has dubbed the “Iron Law of Megaprojects.” Our own data suggests there is reason to worry. Of projects in our database that were scheduled for completion last year, more than half failed to meet their deadlines.

Rather than approach megaprojects with caution, some countries are pushing forward and amassing alarming levels of debt. Laos is pursuing a railway project with Chinese loans that amount to nearly half of the country’s GDP. Likewise, the International Monetary Fund, Moody’s and others have expressed concerns about Pakistan’s growing obligations from CPEC. According to Tom Miller of Gavekal Dragonomics, a consultancy, Chinese officials privately expect to lose up to 80 percent of their investment in Pakistan. With China’s own sovereign debt recently downgraded for the first time in nearly thirty years, failed projects could exact a toll on borrower and lender alike. Nor is the broader global economy immune to these risks.

BUT NEW roads, railways and ports are being built, and they could reshape the Eurasian supercontinent. The United States cannot afford to stay aloof from these developments. Sitting an ocean away in either direction, and with plenty of storms swirling at home, it will be tempting for Washington to look the other way. Strategically and economically, that would be a colossal mistake.

History underscores the stakes. The absence of great-power conflict in Eurasia is a recent exception to the historical rule. As the late Zbigniew Brzezinski wrote twenty years ago, “All the historical pretenders to global power originated in Eurasia.” The economic case for engagement is also firmly grounded in history. Over the past seven decades, trade and finance have been the organizing principles for Asian economic integration. While more must be done to compensate globalization’s losers, the United States has clearly benefitted from a more prosperous Asia. With global trade growth slowing, and trade liberalization stalled, infrastructure could be the next natural chapter in the region’s integration. Alongside commercial opportunities for American companies, the United States has a strong interest in ensuring that integration occurs within a framework of high standards and safeguards.

Washington is poorly equipped to respond to these developments. This is a complex competition, involving many of the world’s largest powers. Understanding it requires examining economics and security in tandem, a difficult and largely lost art. Critically, it is a structural shift, unfolding in decades rather than the days or, at best, months that represent Washington’s typical attention span.

Washington does not need a Marshall Plan for Eurasia, but it does need a strategy for shaping emerging infrastructure networks. Rather than throw public money at the region, the United States should better organize and use its current toolkit. It can begin by drawing on U.S. legal, financial and technical expertise to help develop principles for infrastructure investment in the region. These would cover procurement, natural-disaster resilience, environmental and social safeguards, and debt sustainability.

Just as important as crafting these principles is building support for them. Internationally, the United States should forge a consensus around these principles through its influence in multilateral development banks, especially the World Bank, and with like-minded partners, especially Japan and the European Union. It should reinforce these principles in the G-20 and other multilateral bodies. At home, rather than perennially threatening to defund the Export-Import Bank and Overseas Private Investment Corporation, Congress and the White House should double down on these cost-effective tools for supporting U.S. economic and strategic interests abroad.

Done right, these efforts would unleash the formidable U.S. private sector to invest in the Eurasian infrastructure story. With institutional investors managing over $50 trillion globally, there is plenty of capital looking for reasonable and reliable returns. At present, less than 1 percent of that treasure chest goes toward infrastructure investment. By providing greater certainty and expanding the pool of bankable projects, U.S. infrastructure principles would help mobilize private capital looking for higher long-term returns.

Investors and statesmen alike dread uncertainty. Even worse than uncertainty, however, is a rush to judgment. In truth, it is much too early to judge exactly how Eurasia’s infrastructure competition will unfold. But it is not too late for the United States to influence events. When the curtains fall on the twenty-first century, historians may decide whether the post–World War II order more closely followed the arc of Henry V or Hamlet. In Henry V, the protagonist secures a miraculous victory and unites nations. In Hamlet, of course, nearly everyone dies.

Source: http://nationalinterest.org/

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