One year ago this month, CSIS released The Higher Road: Forging a U.S. Strategy for the Global Infrastructure Challenge, the product of a bipartisan taskforce co-chaired by Charlene Barshefsky and Stephen Hadley. Major developments since then, including the Covid-19 pandemic and China’s acceleration of its digital infrastructure push, have heightened the stakes of the global infrastructure challenge for U.S. interests and the necessity of fashioning not merely a response, but a comprehensive U.S. strategy. The United States has taken several important steps toward fashioning its own positive vision for global infrastructure, as the report recommended. But critical work remains to effectively operationalize promising developments such as the U.S. International Development Finance Corporation (DFC) and the Blue Dot Network (BDN).
The most powerful drivers behind the global infrastructure buildout remain active, as do the U.S. interests at stake. As the task force co-chairs noted at the report’s launch, the sheer magnitude of global infrastructure demand is astronomical. In targeting those needs, China’s Belt and Road Initiative (BRI) is a grand strategy with direct consequences for U.S. interests. The global infrastructure and technology buildout (such as 5G) will disrupt and create new linkages between countries and will also have long-running implications for the United States. That buildout will continue to happen—whether or not the United States participates. This makes it necessary for the United States to participate strategically.
A year later, these observations have become even more pressing. The ongoing Covid-19 pandemic has revealed major gaps in global health and social infrastructure and the risks that accompany greater connectivity. During this crisis, U.S. strategic partners and competitors have responded differently to the developing world’s demands. China—a major producer of the ventilators, masks, testing kits, and hazmat suits that countries need during this crisis—is both selling these supplies and making them available on a foreign assistance and public diplomacy basis. China is attempting to develop a “Health Silk Road,” thereby deepening global ties, including with some U.S. allies. Even though these efforts remain flawed, they underscore Beijing’s ambitions to replace Washington as a provider of global public goods.
In other respects, the Covid-19 outbreak is exacerbating the BRI’s preexisting conditions. Prior to the outbreak, the BRI was already under pressure from within and outside. Chinese policymakers had less cash on hand, growth was already slowing, and there was less appetite for going even deeper into risky markets where the BRI made its initial mark. The pool of readily bankable projects had not kept pace with China’s appetite for doing projects. Chinese officials were still willing to back projects that others will not, but their efforts to court outside partners suggest they have become more hesitant to shoulder these risks alone. At the same time, some of China’s partners had already taken on too much debt and were hesitant to borrow further. As a result of these challenges, BRI project activity peaked around 2016-2017 and subsequently declined. Rather than returning to the BRI’s peak spending days, Chinese officials are likely to spend most of this year renegotiating existing deals.
Adding the coronavirus to the mix suggests the BRI will be further constrained, with one critical exception: digital infrastructure. For several reasons, digital infrastructure projects are better suited to the challenges that China and its partners face in the aftermath of the pandemic. Compared to the large transport and energy projects that characterized the BRI’s first six years, digital infrastructure is often less costly, faster to build, and easier to monetize, making it an attractive option during an economic downturn. Given the source of the outbreak, Chinese workers may face greater discrimination abroad, and digital projects are often less visible, and less disruptive, to local communities. Facing increased scrutiny in some Western markets, Chinese tech companies are being forced to double down in emerging markets. Many are already pitching their surveillance products, including identification and contact-tracing methods, as part of the pandemic response.
As China’s digital silk road accelerates, the United States cannot rely on defensive measures alone in an attempt to stop it. At home, the U.S. government has banned federal purchases from several Chinese tech companies, restricted their ability to purchase U.S. components, effectively blocked a submarine cable with a connection to Hong Kong, and, most recently, recommended revoking China Telecom’s license. But persuading other countries to take similar precautions will require making affordable alternatives available. The United Kingdom’s decision to cap Huawei equipment in its 5G networks, rather than prohibit it, underscores the depth of this challenge. If the United States cannot convince one of its closest allies—and a rich democracy at that—to share its views, it will have an even harder time persuading the countries with weaker relationships and fewer resources.
The United States has been more effective in advancing a positive vision through the G20, where it has worked with partners and allies, especially Japan, which held the presidency for the 2019 Osaka summit. Quality infrastructure, a concept first promoted by Japan, emerged as the top policy priority for the summit. At the Osaka summit, leaders endorsed the G20 Principles for Quality Infrastructure Investment. The following were the key takeaways from these principles:
- Projects considered should have maximum economic impact.
- Projects should be fiscally sustainable from preparation, through procurement and implementation, until the operations and maintenance phase.
- Projects should factor in ecological implications and disaster resilience considerations.
- Projects developed should intend to serve the domestic and local communities.
- Projects should be subject to universally accepted global governance standards.
At the end of December 2019, Congress reauthorized the Export-Import Bank for a seven-year period while also launching the new DFC formally, allowing the United States to be more impactful and effective in driving its strategic competition with China. However, while the new DFC comes with a number of revamped development finance tools hitherto unavailable to the U.S. development community, it will be some time before its functions are fully utilized. For instance, the DFC still needs to properly staff itself as it builds up its portfolio and find resources to have “on-the-ground” staffing in geostrategic places. Moreover, the DFC will also need to resolve the technicalities when using its new equity authority function and find a way to “score” (or account for it in the federal budget) when investing in equity funds in developing countries.
Another positive development over the past year has been the U.S. government’s launch of the Blue Dot Network in partnership with Japan and Australia. Under the initiative, the three governments—and others that may join in future—would give a “seal of good approval” to global infrastructure projects that meet high standards of transparency, sustainability, and developmental impact. The goal is to create a larger pool of bankable projects around the world and to crowd in private investors—notably pension funds and insurance companies with trillions of dollars of funds looking for long-term returns—by mitigating some of the risks inherent to infrastructure investment. As we have written, the BDN is a promising idea, but it will only take off if a number of practical questions are answered, including how the certification system will work, how much government funding will be made available to pay for project assessments, and what the incentives are for developing countries that so desperately need infrastructure to pay a little more and wait a little longer for the BDN seal of approval.
In sum, over the past year, we have seen an increase in global needs, an intensification of Chinese activity in a strategically important area, and the beginnings of a U.S. response. As our April 2019 report noted, the United States cannot and should not replicate China’s heavily and often wasteful public-spending approach to global infrastructure. Part of the U.S. response, of course, should include upgrading infrastructure at home. The next year will be a major test for whether the United States can move more of its new policy tools, such as the DFC and BDN, from concept to execution. In the aftermath of the pandemic, developing countries are going to turn toward any outside help available, making the U.S.-China contest even more pronounced. The higher road will not be cheap, easy, or fast. But it remains the right path for advancing U.S. interests.
Originally published on csis.org on April 27, 2020.