G7’s infrastructure scheme is no ‘BRI killer’
G7 pledges $600 billion to rival China’s Belt and Road but it’s not clear from where all the funds will arise
TOKYO – US President Joe Biden and his G7 pals are learning a painful lesson about Xi Jinping’s global ambitions for China: don’t bring a butter knife to an economic gunfight.
The G7 did just that Sunday when it whipped out US$600 billion for global infrastructure projects to show President Xi who’s boss. That the plan has since receded from media attention tells geopolitical wags why hopes of besting Beijing’s Belt and Road Initiative are fanciful.
There are three reasons why officials in Beijing need not expend much energy parsing what the G7 just said it would do.
First, when was the last time the G7 actually followed through on its grand communiques?
How have decades of happy talk about currency cooperation and financial risk mitigation gone? Surely, Canada, France, Germany, Italy, Japan, the UK and US have solved climate change as they pledged ad nauseam? How about the trade wars the G7 declared unacceptable?
Remember what the G7 did about its “never again” pledge in 2008 to ensure market crises won’t happen again? It did about as much with it as earlier G7 pacts in 2001, 1997, 1994 and the late 1980s.
Let’s face it, G7 “agreements” are taken about as seriously as Russian elections. Speaking of Moscow, should President Vladimir Putin be quaking over the G7’s newest deal to ban Russian energy when China and India are gleefully buying up surpluses?
And these are the G7 confabs that did not end in rancor and finger-pointing. Recall the 2019 summit in France that didn’t even bother with a statement, thanks to then-US president Donald Trump’s tantrums. Or the 2021 UK event that UBS Global economist Paul Donovan derided as a “selfie summit.”
At this point, economist Jeffrey Sachs at Columbia University thinks G7 summits should be scrapped.
“The world’s problems are far too urgent to leave to empty posturing and to measures that are a mere token of what is needed to achieve stated ends,” Sachs complains.
“If politics were a mere spectator sport, to be judged by which politicians mugged best for the cameras, the G7 summit would perhaps have a role to play. Yet we have urgent global needs to meet: ending a pandemic; decarbonizing the energy system; getting kids in school; and achieving the SDGs,” he added, referring to the UN’s sustainable development goals.
Second, how exactly does Biden expect to prod Congress to pony up hundreds of billions of dollars — or even tens of billions — when his own domestic “Build Back Better” infrastructure plan died in Congress?
Democratic senators like Joe Manchin of West Virginia will surely say “no” to funding dams in Laos, roads in Cambodia, bridges in Ethiopia and power grids in Bolivia when they won’t drop a dime on crumbling roads in Texas or rickety airports in Ohio.
What’s debt-plagued Japan going to do? Is Prime Minister Fumio Kishida going to ask the Bank of Japan to print more yen to finance the G7’s Partnership for Global Infrastructure and Investment? That won’t fly as opposition forces pounce on Kishida’s Liberal Democratic Party.
Nor can European Central Bank President Christine Lagarde channel predecessor Mario Draghi’s “whatever it takes” line given political sensitivities across the continent. German Chancellor Olaf Scholz has an inflation scare on his hands and a fiscal austerity disposition.
France’s Emmanuel Macron is grappling with one of the most complicated debt dilemmas anywhere. Draghi, now Italy’s prime minister, is grappling with an actual debt crisis. Nor is Canadian leader Justin Trudeau known for digging deep into Ottawa’s pockets for far-away causes. British Prime Minister Boris Johnson is too busy fighting to keep his job to do his job.
Third, China’s been firing away for a decade now with its BRI extravaganza. President Xi’s government has signed more than 170 cooperation agreements — that we know of — worth $800 billion with about 170 countries and roughly 30 international organizations throughout Asia, the South Pacific, Europe, Africa and Latin America.
Xi’s government pledges to spend trillions of dollars on a network covering six development corridors around the globe. So unless the G7 is willing to add a zero to its $600 billion pledge — and demonstrate it can come up with the funds and stay focused on implementation — the scheme seems too little too late.
And then there’s the question of odd timing. For all Xi’s stated ambitions and BRI’s vital role in his foreign policy, there’s chatter that Beijing is reevaluating the scheme. Though the initiative made friends near and far, the headlines concerning “debt-trap diplomacy” and environmental fallout raise concerns about whether China is getting the soft power boost Xi expected.
Economist Brahma Chellaney, author of “Asia’s New Battleground,” points to a comment by 1797-1801 US President John Adams: “There are two ways to conquer and enslave a country: One is by the sword; the other is by debt.” By choosing the second path, Chellaney argues, “China has embraced colonial-era practices and rapidly emerged as the world’s biggest official creditor.”
In doing so, it’s eclipsed traditional lenders, including the International Monetary Fund, World Bank and the creditor nations of the Organization for Economic Cooperation and Development combined.
By “extending huge loans with strings attached to financially vulnerable states, it has not only boosted its leverage over them but also ensnared some in sovereignty-eroding debt traps,” Chellaney says.
Johnathan Hillman, a former US State Department official, warns that by limiting outside scrutiny, BRI’s “lack of transparency gives Chinese companies an edge in risky markets, and it allows Beijing to use large projects to exercise political influence.”
The dark side, says Hillman, who’s now with the Center for Strategic and International Studies, a Washington-based think tank, is that “as Chinese companies push deeper into emerging markets, inadequate enforcement and poor business practices are turning the BRI into a global trail of trouble.”
As a solution, “the international community should provide better alternatives to Chinese loans and publicize the perils of opaque approaches to building infrastructure.”
Enter the G7. As Biden put it, this $600 billion joint scheme is “a chance for us to share our positive vision for the future and let communities around the world see for themselves the concrete benefits of partnering with democracies.”
Biden added that “because when democracies demonstrate what we can do, all that we have to offer, I have no doubt that we’ll win the competition every time.” The US leader stressed that “I want to be clear. This isn’t aid or charity. It’s an investment that will deliver returns for everyone.”
Ursula von der Leyen, president of the European Commission, says the plan represents a “positive powerful investment impulse to the world to show our partners in the developing world that they have a choice.”
By one reading, the G7’s setting up shop in BRI’s backyard will prod Beijing to raise its development game. China pivoting to a more collaborative and sustainable model would be good for the developing world and the Communist Party’s reputation abroad. Asia, after all, requires roughly $26 trillion for infrastructure building by 2030, the greener the better, according to the OECD.
As Choi Shing Kwok, CEO of Singapore-based research institute ISEAS-Yusof Ishak Institute, tells CNBC, the G7’s plan “does promise something the BRI perhaps did not have at the beginning. It promises hard and soft infrastructure, it promises a more holistic approach.”
Again, though, the G7’s intentions here, nice as they are, don’t appear credible. The $600 billion plan would be spaced out over five years. In the interim, Biden faces an extraordinarily bruising re-election challenge amid dismal approval ratings. Is it reasonable to think Biden’s Democratic Party — or the Republicans still supporting a Trump coup attempt in 2020 — will give Biden this kind of latitude?
In London, Johnson seems one Covid-era-party disclosure away from full-blown lame-duck status. Macron’s political position in Paris is dimming as his parliamentary majority evaporates. In Berlin, Scholz is plenty busy sorting out how to procure gas and oil now that Germany won’t be buying from Russia and support Ukraine.
Here in Tokyo, prime ministers don’t tend to last very long — 12 months on average these last 15 years. Can Kishida stick around long enough to be the G7’s infrastructure plan’s point man in Asia?
On a more basic level, “it’s questionable whether at this stage the scale [of the G7 initiative] can match that of the BRI but that is something to be seen later,” Choi says. Along with China’s 10-year head start, there are valid questions about the G7’s seriousness.
The G7 is also missing a more obvious point: true economic strength begins at home. That goes especially for Biden, who started out strong in January 2021 with plans to rebuild economic muscle in the world’s biggest economy, which grew 5.7% last year, the fastest pace since 1984.
Early in his presidency, Biden unveiled plans to spend hundreds of billions of dollars, $300 billion to start, on new research and development to ensure the US tech industry regains momentum.
It was a huge pivot away from the Trump era, when the US threw grenades at the global trade system but neglected domestic capacity building. It was Biden’s response to Beijing investing aggressively in making China the dominant power in 5G, electric vehicles, semiconductors, artificial intelligence and renewable energy.
Yet Congress has largely blocked Biden’s spending plans in ways that are exacerbating inflation risks. Because the US isn’t investing big in semiconductors, innovation and productivity-enhancing technologies, the Covid-reopening dynamic pushed inflation to 40-year highs.
As one longtime Asia-based investor puts it: “The G7 is welcome to help Asia finance a better future, and governments wary of owing China an alternative. But if you’re thinking this is a BRI killer, think again.”
Follow William Pesek on Twitter @WilliamPesek