The US tries to put its money where its mouth is in Asia

The U.S. is once again embracing the notion that money talks in geopolitics. On Monday, U.S. Secretary of State Mike Pompeo announced an infrastructure spending plan that’s being framed as an alternative to China’s One Belt, One Road initiative. According to Pompeo, the U.S. intends to give $113 mln directly to fund digital, energy, and infrastructure connectivity. The plan also gives the Overseas Private Investment Corporation – an agency that helps American businesses invest in risky emerging markets, but which was on the chopping block a year ago – a stay of execution. OPIC will be merged with a branch of the U.S. Agency for International Development, and its spending cap will be doubled to $60 mln.

Until this point, the Trump administration’s oft-touted vision for “a free and open Indo-Pacific” has been bereft of substance. The U.S. has joined India, Australia and Japan in reviving the moribund Quadrilateral Security Dialogue – a loose coalition intended to contain potential Chinese aggression – but the grouping has met only a couple of times and struggled to gain traction. U.S. security assistance to Indo-Pacific states has not increased substantially. Meanwhile, the Trump administration detonated the economic cornerstone of the previous administration’s AsiaPacific strategy by withdrawing from the 12-nation TransPacific Partnership trade pact. (Or at least it tried to – Japan, Australia and others have successfully resuscitated the plan, which is expected to be ratified by all signatories this year and begin courting new members, such as Thailand and Indonesia.)

At first blush, though, Pompeo’s plan is pretty underwhelming, especially compared to what China plans to spend on its One Belt, One Road projects. Between late 2013 and 2017, Chinese construction and investment in OBOR countries totaled around $340 bln, including at least $90 bln in 2017 alone, according to the American Enterprise Institute. But measuring the new U.S. plan against OBOR is misleading, for several reasons.

First, the U.S. and Chinese approaches are apples and oranges and hardly a zero-sum game. Washington may not be channeling all that much public capital into the region, but U.S. businesses certainly are, even without government direction or backing. In 2017, cumulative U.S. foreign direct investment into Indo-Pacific states surpassed $840 bln, for example. This speaks to both the strength and weakness of the U.S. strategy. The U.S. government has a hard time directing money to specific projects, particularly the sort of commercially dubious but strategically important ventures China is pouring money into. Compared to Beijing, the U.S. also has a harder time employing all the tools of the state to open opportunities for U.S. firms abroad, and the U.S. has no equivalent to China’s behemoth state-owned enterprises and policy banks ready to do Washington’s bidding. On the other hand, U.S. investment is likely more sustainable over the long term and is typically more warmly received by partner governments, which are becoming increasingly wary of Chinese economic coercion and conditionality.

Second, the U.S. isn’t going it nearly as alone as China. Contrary to common perception, China ranked only fifth among ASEAN’s largest sources of FDI in 2016, behind the EU, the U.S., Japan and intra-ASEAN flows. Until Chinese FDI surged in 2016 and 2017, its annual investments in the Southeast Asian bloc were roughly on par with those from Australia, South Korea, India and Taiwan. The U.S. also has the most sway in multilateral institutions like the World Bank, and the second-most in the Japan-led Asian Development Bank.

Third, Chinese pledges are by no means the same thing as cold, hard cash. Beijing is fond of announcing eye-popping deals at high-profile summits and leaving the details for later. (It’s hardly the only government that does this.) For example, of $24 bln in projects and loans promised to the Philippines over two years ago, about $150 mln has been distributed – partly because of various implementation snags, but possibly also because Beijing has gotten Manila’s reluctant cooperation on the South China Sea even without forking over bags of yuan. Moreover, the OBOR is littered with projects that face long odds of ever breaking even, and Beijing itself has begun scrutinising potential projects more carefully. For similar reasons, governments are starting to tread more cautiously with Chinese investment, pointing to countries like Pakistan and Sri Lanka as examples of how China’s alleged “debt trap diplomacy” can leave host countries holding the bag, beholden to Beijing’s strategic whims, and mired in political scandal. Over the past two months, projects in Malaysia, Myanmar and Indonesia, among others, have been put on hold. The U.S. would be particularly foolish to try to match Chinese spending dollar for dollar when it has reason to believe OBOR may just collapse under its own weight.

Finally, FDI alternatives aren’t the only thing the region needs from the U.S. in the economic realm. It helps, to be sure, and would help more if the U.S. and its partners could support riskier projects to help cover the region’s vast infrastructure gap over the long term.

For the U.S., the goal isn’t to stamp out Chinese economic influence in the region altogether. This would be impossible to do. Most ASEAN states are reluctant to antagonise China over hot-button issues like the South China Sea not because they are wholly dependent on Chinese largesse and lack alternative trading partners but because even if, say, only 10% of their FDI comes from China, that’s still a lot of money. There’s little point in risking it for the sake of angering China with moves that won’t get Beijing to back down anyway if the U.S. stays largely on the sidelines.

Rather, U.S. goals are twofold: The first is to ensure that local states do not become dependent on Chinese aid, investment and consumer power to the point where China can dictate terms about their relationships with the U.S., particularly in the military realm. The second is to reinforce the so-called rules-based international order – centered on freedom of navigation, intellectual property protections, anticorruption, and so forth – that has helped unlock the region’s growth and allowed U.S. firms to compete on a level playing field.

The Trans-Pacific Partnership would’ve played a major role on both fronts (and its smaller replacement will as well, despite the U.S. absence).

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