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China is Upping Its Aid and Development Game. How Should the U.S. Respond?

A ChinaFile Conversation

During his September 2018 U.N. address, President Donald Trump threatened that the United States may decide to only give foreign aid to “those who respect us and, frankly, are our friends.” In August, the White House attempted to cut foreign aid spending by U.S.$3.5 billion.

Meanwhile, China has intensified its aid and development spending globally. Pledges of Chinese aid and investment accompany numerous overseas visits by Chinese Chairman Xi Jinping. In September, for example, Beijing earmarked U.S.$60 billion in financing for African nations—on top of the U.S.$60 billion it pledged three years prior—while in July, Xi pledged U.S.$20 billion in loans and U.S.$106 million in financial aid to Middle East nations. The total estimated Chinese development spending of $354.3 billion from 2000 to 2014 was almost as much as the U.S.$394.6 billion spent by the United States over that same period, according to AidData. (There are no good current estimates for China’s annual aid spending.) In addition, China has deepened its international engagement as it advances its Belt and Road Initiative, linking China with over 120 countries and asserting global influence through investments in foreign infrastructure projects abroad.

What does China’s growing aid and development investment mean for U.S. interests? Should the U.S. change its own aid strategy to take China’s greater presence into consideration, and if so, how? —Mark Akpaninyie

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China’s rapid rise presents a set of interlinked challenges to the United States. Yet, rather than study why China has been so effective in using state funds to boost its business in places like Africa, this administration has resorted to circulating rumors that the Chinese are “predatory lenders,” employing debt as a strategic weapon to hold states “captive to Beijing’s wishes and demands.”

Chinese banks may be overextended in some countries. Yet, there is little evidence that the Chinese are deliberately creating debt traps for strategic advantage. Only one example has ever been provided of China’s so-called debt-book diplomacy: Sri Lanka’s controversial, Chinese-financed Hambantota Port, which was concessioned to China Merchants Port Holdings in 2017 in exchange for a cash infusion of U.S.$1.12 billion.

There is far more concrete evidence for U.S. concerns that Chinese companies gain unfair advantages through corruption. American companies are regularly investigated and fined for corruption practices abroad. But although China in 2011 passed legislation similar to America’s 1977 Foreign Corrupt Practices Act, so far, Chinese firms have not faced any sanctions in China for overseas bribery. This creates an uneven playing field when firms are competing for business in countries where corruption is endemic. We should push China to enforce its own laws.

However, the key challenge for the U.S. is that China is an East Asian developmental state. This means that like Japan, Korea, and Taiwan, China’s instruments for fostering trade and investment overseas are far more developed and far better funded than Washington’s.

These instruments go way beyond foreign aid. In fact, China’s aid program is relatively small. According to scholars in Japan, China disbursed approximately U.S.$6.6 billion in official development aid in 2016. However, China has other development finance resources. For example, China Eximbank offered about U.S.$9.3 billion in preferential export buyer’s credits in 2016, while Congress was threatening to shut down the U.S. Eximbank. And Chinese policy banks regularly offer lines of export credit and infrastructure loans at commercial rates with risk insurance from Sinosure. Furthermore, China has equity funds like the Silk Road Fund and the China-Africa Development Fund.

The Obama administration responded to China’s business diplomacy by setting up Power Africa, a program housed at USAID that fosters public-private partnerships to build Africa’s electricity sector. Yet the resources actually contributed by the U.S. government have been paltry. With around U.S.$30 billion in electricity-related projects in Africa since 2000, China has already invested more than four times the U.S.$7 billion spent by the United States over five years.

The Trump administration and Congress have now teamed up to fund the U.S. International Development Finance Corporation (IDFC). This institution offers considerable potential for “win-win” cooperation like China’s, lowering risks for U.S. investors and banks in countries where China has been easing entry for its own firms. China’s head start is large, but a well-funded IDFC could learn from China, offering countries in Africa and elsewhere more choice for the funds they badly need to build roads, ports, and power plants.

As China continues its global infrastructure financing push across the developing world, U.S. officials have accused China of using debt diplomacy: exerting bilateral influence by bankrupting recipient countries with unsustainable debt, and then demanding steep concessions as part of debt relief.

However, research conducted by AidData at the College of William and Mary shows that Chinese aid and other financing often boosts economic growth in recipient countries. Yes, Beijing sometimes wields its aid and investment as strategic tools, but Chinese investment is not purposefully designed to overwhelm vulnerable countries with debt.

The United States is not doing enough to compete with a rising China. By 2040, global infrastructure investment will face a projected U.S.$18 trillion less than the estimated spending needed to keep pace with global economic and demographic trends: 2 billion additional people will need access to transport, telecommunications, energy, and water-related infrastructure. As no single country can supply this sizable deficit alone, the United States should encourage any investment dedicated to absorbing this need.

U.S. officials should tolerate Chinese contributions to much-needed infrastructure that spurs economic growth, but must be wary of the consequences. While the United States stands by, China is deepening its engagement in more than 120 countries through the Belt and Road Initiative, promoting standards that strengthen its strategic and commercial interests. Kenya is just one example where Chinese projects outshine U.S. investment: While U.S.-based Bechtel Corporation announced a U.S.$3 billion project to build a superhighway from Nairobi to Mombasa, China is financing a U.S.$3.8 billion railway linking the same cities, the country’s biggest infrastructure project since independence. And while American firms employ local or international partners, most Chinese-funded projects employ Chinese contractors, diminishing the ability of U.S. firms to compete abroad.

Instead of focusing on branding China as an insincere broker, U.S. officials must work to develop a strategy to effectively compete with China. 2018’s BUILD Act created a new development agency, the U.S. International Development Finance Corporation. It more than doubled the official U.S. development finance funding to U.S.$60 billion and empowered development finance to make a greater set of investments, but it is far from sufficient on its own. In 2018, Beijing offered U.S.$60 billion in financing just for Africa. A dollar-to-dollar match may not be a feasible nor effective deployment of resources, but U.S. officials must address how Beijing’s lavish spending may soon outpace U.S. lending and investment.

U.S. officials should work to increase U.S. engagement while facilitating U.S. companies’ ability to compete abroad. This involves President Donald Trump promoting increased U.S. investment, a reversal from his “America First” policies. But the U.S. government cannot act alone. U.S. companies should work with officials in identifying bankable projects. Just as Chinese Chairman Xi Jinping secures business opportunities for Chinese companies during his state visits, U.S. officials should prioritize ways to boost U.S. commercial presence abroad, especially in riskier markets.

We need a radical shift in how we think about development. Development is not about “them,” it’s about us. The challenges we are collectively facing are unprecedented. 17 of the 18 warmest years since modern record-keeping began have occurred since 2001. African countries will face the hardest pressure to adjust to climate change. The African population is expected to double by 2050. Already, 60 percent of Africans are below the age of 25. They know how their peers live in the U.S. and Europe thanks to the instant communication of the information age, facilitated in Africa by Chinese telecommunication companies. Although the global economy is thriving generally, 850 million people still suffer from hunger, and nearly 1 billion people live in poverty. How many people, children in particular, die from easily preventable causes?

There is little of “us” in recent statements made by the U.S. government, which tends to ascribe binary values to China’s engagement in Africa and to separate China’s behavior from that of the U.S. The fact is, much of China’s “hunt” for natural resources, be it forestry or rare earths, is fueled by U.S. consumers’ demands for cheap Chinese products. A major proportion of Chinese-invested manufactured goods goes to U.S. markets, and the reason why impoverished developing countries take Chinese loans is because often these are the only ones they get. It’s not Chinese aid and investment that is a threat to U.S. interests, it’s global inequalities.

Africa faces a huge investment gap in sectors such as infrastructure, food security, and climate change mitigation. African countries need the U.S.$60 billion promised by the newly created U.S. International Development Finance Corp. not insteadof the U.S.$60 billion promised by Xi Jinping during the 2018 FOCAC summit, but in addition to it.

Empirical research has long since debunked the still dominant “rogue donor” narrative: It shows that Chinese aid neither favors authoritarian regimes nor China’s commercial interest. On the contrary, it aims to promote economic and social development and to reduce poverty. The recently established Center for International Knowledge on Development has the task of thinking about how China’s development experience can be applied in other developing countries. This is not to say that there have not been unsuccessful Chinese projects—there have been many, just as there have been in the case of the U.S. and other “traditional” donors.

In this light, “America First!” is probably the worst possible response to China’s proposed “community of common destiny.” Instead, the U.S. should revise its development policy to better reflect the needs of African countries. It should project its values and liberal norms not by cutting off aid to countries it disagrees with, but by increasing cooperation and concerted efforts with other liberal democratic donors. And it should treat China not as a competitor, but as a strategic partner, while at the same time exercising pressure on Chinese aid and investment to become more socially and ecologically sustainable.