The Pakistani town of Gwadar was until recently filled with the dust-colored cinderblock houses of about 50,000 fishermen. Ringed by cliffs, desert, and the Arabian Sea, it was at the forgotten edge of the earth. Now it’s one centerpiece of China’s “Belt and Road” initiative, and the town has transformed as a result. Gwadar is experiencing a storm of construction: a brand-new container port, new hotels, and 1,800 miles of superhighway and high-speed railway to connect it to China’s landlocked western provinces. China and Pakistan aspire to turn Gwadar into a new Dubai, making it a city that will ultimately house 2 million people.
China is quickly growing into the world’s most extensive commercial empire. By way of comparison, after World War II, the Marshall Plan provided the equivalent of $800 billion in reconstruction funds to Europe (if calculated as a percentage of today’s GDP). In the decades after the war the United States was also the world’s largest trading nation, and its largest bilateral lender to others.
Now it’s China’s turn. The scale and scope of the Belt and Road initiative is staggering. Estimates vary, but over $300 billion have already been spent, and China plans to spend $1 trillion more in the next decade or so. According to the CIA, 92 countries counted China as their largest exports or imports partner in 2015, far more than the United States at 57. What’s most astounding is the speed with which China achieved this. While the country was the world’s largest recipient of World Bank and Asian Development Bank loans in the 1980s and 90s, in recent years, China alone loaned more to developing countries than did the World Bank.
Unlike the United States and Europe, China uses aid, trade, and foreign direct investment strategically to build goodwill, expand its political sway, and secure the natural resources it needs to grow. Belt and Road is the most impressive example of this. It is an umbrella initiative of current and future infrastructure projects. In the next decades, China plans to build a thick web of infrastructure around Asia and, through similar initiatives, around the world.
Most of its funding will come in the form of loans, not grants, and Chinese state-owned enterprises will also be encouraged to invest. This means, for example, that if Pakistan can’t pay back its loans, China could own many of its coal mines, oil pipelines, and power plants, and thus have enormous leverage over the Pakistani government. In the meantime, China has the rights to operate the Gwadar port for 40 years.
Belt and Road is China’s biggest foreign policy initiative to date, but it’s no Marshall Plan. Beijing is not doing this out of altruism, or out of a desire to stabilize the countries it loans to. So why spend such enormous sums on its neighbors? For one thing, China is too dependent on its eastern seaboard and the narrow Malacca Strait near Singapore to get goods in and out of its vast territory; for example, over 80 percent of its oil goes through the Strait. So building trade routes through Pakistan and Central Asia makes sense. Belt and Road also helps China invest its huge currency reserves and put its many idling state-owned enterprises to work.
The initiative also has a positive side effect for Beijing: Some Chinese government officials say specifically that it’s about competing with the United States. At a minimum, it creates leverage to make many smaller countries feel economically beholden to China.
So what does all this mean for the “liberal international order” that the U.S. did so much to create and uphold over the past seven decades? The effect is not all bad.
If the point of that order was to secure peace and prosperity, there are ways in which China’s largesse actually complements it. Countries that trade more generally fight less, not just with their trading partners, but with the world in general. In its own way, China is thus helping to uphold international peace. Yet even if there is less interstate war under a “Pax Sinica,” an era when many small “donee” states are beholden to China means that on a slew of other issues—from counterterrorism to sanctioning countries at odds with the West—the U.S. will find it harder to impose its will.
On the prosperity question, China’s economic impact on the countries it lends to so far seems mixed at best. While the 20 percent or so that China gives in traditional aid does help local economies, most of its largesse comes as loans, which have not been as helpful. Scholars who looked at Chinese investment in Africa from 1991 to 2010 found that Chinese assistance does not appear to help economic growth, and that inexpensive Chinese imports often displace African local firms, and thus hurt employment in small enterprises. China usually requires donee countries to use Chinese firms to build roads and ports, and until recently didn’t train local workers. In Pakistan, for example, 7,000 Chinese nationals worked on the economic corridor, protected by nearly 15,000 security personnel from Pakistan to guard the Chinese. This all changed recently. As Chinese wages rise, it makes more sense to use locals. A few months ago, a Chinese firm began training hundreds of Pakistani engineers to work on a power plan near Karachi, and other Chinese projects are also employing more locals.
Also, while Chinese loans used to have low interest rates around 2.5 percent, they are now creeping up to near 5 percent or more. This will make them harder to repay. While those who receive Chinese funds are happy to fix their power shortages and improve their roads, they may be mortgaging their futures.
Perhaps the biggest challenge China’s efforts pose to the “liberal international order” is that, in contrast to most Western aid and loans, Belt and Road projects often encourage terrible governance, environmental, and human rights standards, although China’s record on this has improved somewhat over the past few years.
China is often the largest investor in countries that others ostracize—because they are run by dictators, don’t respect human rights, and are corrupt—such as Zimbabwe, North Korea, Niger, Angola, and Burma. Ugandan President Yoweri Museveni—no guardian of human rights—explained that he likes Chinese investment because they “don’t ask too many questions,” and “come with … big money, not small money.” Of course, while the U.S. and Europe insist on high standards for their aid projects today, both their companies and governments also had terrible records on human rights and the environment when they ventured to India, Africa, Latin America in the 19th and early 20th centuries.
On worker safety and the environment, when China first ventured abroad, its standards were often abysmal. In some areas, Chinese firms still leave behind a mess of underpaid miners, devastated forests, and ruined rivers. Yet China is learning quickly. In 2017, the Chinese government published new, more stringent guidelines for outbound investors. China’s new infrastructure investment bank, the AIIB, wants to apply world-class standards, and many Chinese companies—including the national oil behemoth CNOOC—are improving rapidly.
If China’s geoeconomic push continues, it will be its largest legacy and have a profound impact on the world—not necessarily all negative. Since the West doesn’t have $1 trillion to lavish on developing country infrastructure in a new great game, its best choice may be to coopt and shape this juggernaut. If the Belt and Road initiative is a success, asphalt will be smoother, logistics will run faster, and countries that were cut off from world markets will be able to trade more. If the research cited above holds true, that will lead to fewer interstate wars, although it will make many small countries beholden to China. President Xi emphasized in both his 2015 and 2017 visits to the United States, and at Davos, that China wants a more equitable international system, but it does not want to unravel the international order. By encouraging China to raise the labor, human rights and environmental standards of their projects, the world should hold him to it.
This article has been adapted from a chapter of a forthcoming Aspen Strategy Group publication.