While we in the West are busy discussing the benefits of globalisation and ways to break up global supply chains, China is busy increasing its global influence. And the way the country does that is through infrastructure investments. China’s Belt and Road Initiative (BRI) continues unabated. And if anything, the US-China trade war and the endless negotiations around Brexit have shown the world that when it comes to a being reliable trade partner, China is probably higher up the list than many countries in Europe or North America.
Add to that that the current economic crisis makes it necessary for many countries to look for growth wherever they can find it and the incentive to join the BRI becomes enormous. By accepting Chinese loans to build roads, ports, and railways that connect a country to China, the GDP is expected to get a boost of c. 3.4%. But countries in the Caucasus and East and South East Asia can expect to boost their GDP by more than 5% from infrastructure investments alone.
Boost to GDP from participating in the BRI
Source: de Soyres et al. (2020).
Now, add to that potential second-round effects. With new infrastructure come more modern border checks which reduce delays at borders and thus transportation costs. Then add to that the potential to reduce tariffs in trade with China, something China has offered participants of the BRI. If all of these second-round effects are added together the GDP benefit for the average participant in the BRI can grow up to 12.9%.
Primary and secondary effects of BRI
Source: de Soyres et al. (2020).
In order to get a similar boost in GDP than the infrastructure investments alone, a country would need to reduce its trade tariffs by about 29% with all its trading partners. To get the benefits of infrastructure investments plus tariff reductions with China, a country would have to reduce its tariffs with the world by up to 50% and benefit from similar-sized tariff reductions by their export partners.
If you are in charge of a low or middle-income country in Asia, Africa or Europe and you face the choice of negotiating with the EU and the United States a reduction of tariffs in the order of 50% or instead just take Chinese loans and build vital infrastructure in your country creating thousands of jobs on the side, what would you do?
The power of modern infrastructure is enormous. And China has recognised not only its economic but also its political power. An early payoff was the inability of the UK to pass a UN resolution condemning China’s new security law in Hong Kong. The UK’s resolution garnered 26 votes while 53 nations supported China. Meanwhile, in the West we are sitting on our behinds, bickering about the right kind of infrastructure spending policy and how to get back access to trade partners that we had for free a couple of years ago.
The biggest attraction of BRI is the "no questions asked" policy when it comes to the host nation. Also, pay offs to ensure that financially non viable projects are bid and build - example Mombasa-Nairobi Standard Gauge Railway which is nothing more than a White Elephant whose price shall be paid by the host nations and their citizens.
West cannot and should not compete in similar ways - what China seems to be doing is what Britain did when it first came to India. Start as a business and later start taking over assets (We have seen that in Sri Lanka).
There is a great book that demonstrates this perfectly. It is called the Economic Assassin. This is a path the US walked years ago. They used to fake GDP improvement as tactic to get these countries to take out massive loans. The projects would product lots of profits for the companies (US Before and now Chinese) building this infrastructure. Then the whole thing would fail and not produce the economic outcomes that were promised. Then the country would be impossibly indebted and have policy dictated by outside influences. This is not a new bad that leads to a pot of money at the end of the rainbow. All that happens in Chinese companies make a ton of money and lots of developing world politicians take down and bunch of bribes. The the nations people are left holding the bad. Just high level stealing masked in economic policy. The author of this article is a clown