Executive Summary
Despite its rapid expansion since 2013, China’s Belt and Road Initiative (BRI) has been slowed by both the COVID-19 pandemic and Russia’s war on Ukraine.
The EU’s Global Gateway policy, and the American-led Build Back Better World (B3W) global infrastructure initiative of the G7 have emerged as the key rivals to the BRI.
So far, though, the West’s alternatives to China’s BRI are beset by lack of specific projects and an overreliance on risk-averse private capital necessary for planned public-private partnerships.
Implications for International Business
The current headwinds for the BRI, including dissatisfaction in receiving countries, provide opportunities for Western firms, especially in green energy and health infrastructure.
Companies seeking to capitalize on B3W and Global Gateway programs, however, face high economic and political risk in infrastructure projects in Asia, Africa and Latin America.
State of Play Infrastructure development as a foreign policy tool
In the last decade, the countries financing and building overseas infrastructure have increasingly linked their investments to geopolitical and commercial goals. China’s Belt and Road Initiative (BRI), the signature foreign policy of President Xi Jinping, is the most renowned of such efforts. Divided into an overland “belt” and a maritime “road”, it has enabled Chinese banks and firms to develop transport, energy, and digital infrastructure from Asia to Europe and extending to Africa and Latin America. While expanding rapidly, BRI has resulted in controversy about unsustainable debt and climate impacts in developing countries, even before the COVID-19 pandemic and now the Ukraine war have slowed its momentum. In the meantime, countries like Japan and the United States began to promote “high quality” infrastructure alternatives, culminating in a 2021 G7 commitment to pursue a Build Back Better World (B3W) agenda to counter China’s BRI. The EU’s December 2021 Global Gateway strategy, building on an earlier EU “connectivity strategies”, is only the latest such program and open to complement B3W.
Key Issues The West facing challenges in countering China’s BRI
Western governments’ efforts to – often implicitly – offset China’s influence through own infrastructure programs face a number of challenges. First, despite expressed commitments to cooperate and coordinate, these strategies, including Japan’s “Partnership for Quality Infrastructure” and the UK’s “Clean and Green Initiative,” so far are long on lists of priority areas and short on details about actual implementation. Next, China has relied on state-owned “policy banks” to finance, and on state-owned firms to construct, BRI projects. Yet, Western programs rely on private capital in often high-risk settings. Concerns about the sustainability of political support for Western BRI alternatives constitute another challenge, especially given the volatility of American politics and the slow member state take-up of the EU’s Global Gateway. Without clear and concrete achievements as proof-of-concept, emergent Western alternatives to the BRI may soon lose focus and momentum.
Moreover, the appeal of China’s “development”-focused, “South-South” framing of its relations with partner countries is hard to beat. Despite the debt impact and environmental concerns about the BRI, developing countries are attracted to China’s basic proposition that building infrastructure drives economic growth and that China’s hands-on support gets infrastructure projects built. The West’s efforts to offer a geopolitical alternative, in contrast, has been hampered by the perception that it does not adequately understand the needs of developing countries. Governments in Southeast Asia, Africa or Latin America will assess B3W based on what it can actually provide and will welcome viable competition to Chinese offers – but, less so if they are asked to explicitly reject or criticize China as part of the deal.
Global infrastructure competition bears new geoeconomic risks and opportunities
In the past decade, China has used trade, investment, and financial interdependence to boost its political and geostrategic leverage over its immediate neighbors and BRI partners worldwide. The rationale behind the alternative initiatives now promoted by the U.S., the EU and others is not to cede opportunities and influence in specific regions and sectors to China. The “Indo-Pacific” will be a focal point for competing Western and Chinese spheres of influence over different types of connectivity, especially as the EU and the U.S. included elements of their infrastructure-promotion plans into their newly articulated strategies for this region. Besides Southeast Asia, the EU’s Global Gateway will focus more on Africa while the U.S., through B3W, will seek to provide infrastructure alternatives in Latin America and the Caribbean. Also, as Russia’s war on Ukraine has highlighted the importance of energy security, including the role of both traditional fossil fuels and alternative energies, the nascent Western initiatives will likely focus on promoting the energy transition in the Indo-Pacific and beyond.
The global economic volatility and the uncertain outlook on the COVID-19 pandemic add to the difficulty of assessing and managing financial and political risks associated with infrastructure development in developing countries through “building back better” initiatives. China itself has not always understood or managed such risks well. Examples include massive unpaid loans to Venezuela or Myanmar’s backlash over disputed dam and mining projects. Already before 2020, China began drastically scaling back the size and scope of its policy bank lending to partner countries. Although Western governments focus on mobilizing private capital as part of B3W and Global Gateway public-private partnerships, they will have to confront the headwinds of tightened monetary policy and the end of the era of cheap capital. Western firms are thus likely to be even more sensitive to financial and political risk for large infrastructure projects. However, as countries seek alternatives to Chinese-backed coal-fired power plants or from dependence on Chinese digital infrastructure, Western governments and companies should have both economic and political openings. But, to be successful, they have to provide clear and viable financial and technological packages that respond to host countries’ needs and realities. A clear starting point would be to build on the new EU-U.S. Trade and Technology council to establish effective demonstration projects in the field of digital trade in Southeast Asia.