China’s new Silk Road or debt-trap diplomacy?

China’s new Silk Road or debt-trap diplomacy?

Italy’s decision to join China’s new Silk Road project last month has heightened Western nations’ concerns over Chinese expansionism. Though the initiative is likely to disrupt the global power balance and undermine democratic governance, it presents a significant opportunity for investors to access untapped resources across the continent.

China’s controversial Belt and Road Initiative is the cornerstone of its ambitious foreign policy strategy. The initiative seeks to replicate the historic Silk Road trading routes through financing a series of projects across Asia, Eastern Europe and Africa. Over sixty countries, accounting for two-thirds of the world’s population, have indicated their interest or already signed up to projects.

A Perceived Threat to the West

As countries with unsustainable debt accept Chinese BRI investment loans, there is a significant risk of increasing tensions with Western powers. The EU commission’s emphasis on ‘China’s growing economic power and political influence’, reflects the threat perception.

Italy’s decision to join the project has elevated the issue to a new level. As the first developed economy and G7 member to join, the move has lent the project symbolic legitimacy. A total of 29 deals amounting to $2.8bn were signed in Rome last month, covering energy, finance and agricultural sectors. For China, this endorsement serves as a significant political boost, particularly at a time when the EU is seeking to pursue a more unified strategy to address the challenges of China’s growing influence.

China’s investment model in developing countries is likely to tolerate corruption and a lack of transparency, which has a range of destabilising impacts. Moreover, the risk of the institutionalisation of BRI investments in developing countries has increased fears that it could increase the likelihood of the authoritarian model being adapted, whilst undermining the political and economic independence of developing countries in the long term. Therefore, the increased presence of China throughout the developing world poses an implicit threat to political liberalism. This is a challenge to investors and governments alike.

Meanwhile, US-China trade tensions continue to simmer. The US has attempted to dissuade allies from allowing Chinese firm Huawei to contribute to 5G networks, out of the fears the equipment will be used for espionage. These pleas have had mixed success.

US counter-measures

The US has established a new development agency, the International Development Finance Corporation (IDFC), to curb China’s growing influence. The agency seeks to mobilise private capital for development and provides resources to emerging markets. The $60 million dollar agency is designed to ‘provide countries with a robust alternative to state-directed investments by authoritarian governments’. This comes amidst fears China will challenge American hegemony and rising US-China trade tensions, as increasing fragile relations continue to strain under pressure.

The move to counter China’s growing geopolitical dominance is a significant reversal in Trump’s protectionist foreign policy, which has often criticised foreign aid. Increasing fears of the potential security risks Chinese technology firm Huawei poses has been marked by attempts to restrict foreign investment in the US. Significant Chinese investors are reportedly investing in American start-ups working on cutting-edge technologies with potential military applications, further fuelling fears of the risk of cyber-attacks, espionage and exposure of the intellectual property.

Washington responded to these risks with the implementation of tariffs on $250 billion Chinese exports.

The tariffs aim to make it difficult for China to ‘gain access to American technology and trade secrets’. Furthermore, China’s surging investment in Pakistan, known as the China-Pakistan Economic Corridor (CPEC) has further added to concerns over China’s growing military ambitions in Asia. Chinese military expansion is a key political and security risk for the US, a challenge which threatens the US’s international military position.

Debt-trap diplomacy: the globalisation trap?

Skeptics have also raised concerns that China is consolidating geopolitical power through predatory practices. Throughout exploitation of its debts, China has convinced the Sri Lankan government to agree to a 99 year lease to operate its strategic Hambantota port. In Greece, Chinese firms bought 51% of the port authority in Piraeus port near Athens in 2016, following the economic crisis.

The likelihood of a Chinese monopoly on untapped resources is a concern. Countries like Azerbaijan are known for their oil and natural gas reserves. China’s singular presence would be problematic for both foreign investors and global powers alike.

Meanwhile, for local economies, foreign loans and accumulating debt increases the risk of an economic ‘drain’, without guarantee of sustainable reinvestment into the local economy.

The BRI initiative will be felt on a global stage over the next decade. The use of loans to finance projects and the accumulation of unsustainable debt in developing countries remains a significant long term risk, as debts could be used to leverage economic, political and military power. At a micro level, emerging economies face the potential risk of a loss of sovereignty over key assets in the long term, as high-interest debt increases the risk of dependency on China. Indonesia, Thailand and the Philippines have raised concerns about their growing dependency on Chinese investments in infrastructure.

For investors, the BRI initiative presents a significant opportunity to access untapped resources in developing regions. Chinese investment is focussed on infrastructure projects, which should aid in enabling foreign investment opportunities. However, the opportunity is bittersweet. The fruits of untapped resources in emerging markets are likely to be barred and undermined by a lack of transparency and total Chinese monopoly.

Categories: China, Politics

About Author

Hadeeka Taj

Hadeeka Taj is a recent History graduate from the University of Southampton specialising in the British Empire in Africa. In addition to her specialism, she has covered conflict and transformation in Asia focusing on South Asia and China. Her research specialities include political risk and security in sub-Saharan Africa, British foreign policy, international and European politics. She also has an interest in geopolitical risk in MENA. Hadeeka is passionate about making a change, having been a Student Trustee and Company Director, Youth Parliament MYP, political campaigner and has chaired a range of topical debates in her role as President of the Debating Union whilst at university.