How the US and EU can compete with China’s Belt and Road

Hello from Brussels. We have nothing to say about last night’s football in the Euro championships except YESSSSSSS! and will eschew any painful analogies to trade or Brexit. Sometimes football is just football. Now three agonising days to wait till Sunday’s final. Today’s main piece is on the EU’s latest idea for countering China’s Belt and Road Initiative, while Charted waters looks at how balanced, or otherwise, interdependence between the EU and the UK actually is.

Rich countries need to shift their focus outwards

Another year, in fact another month, and another developed-country campaign to challenge China’s infrastructure-and-lending-and-trade-and-technology Belt and Road Initiative (BRI). At stake: hearts and minds — and more pertinently value chains and technological standards — in emerging markets. The latest wheeze, about which our Financial Times colleagues have written this week, comes from the EU. The draft statement has a lot of abstract nouns but not many numbers. It involves an unspecified amount of money lent to support an as yet undetermined set of projects to dispense the soft power that many EU officials appear to believe can be turned on like a tap. There seems to be some disagreement about whether the project should have its own brand or not.

Cynicism in this area comes easily but with some justification. We’ve heard things like this before. The initiative follows on from a similarly vague plan to counter China at the G7 in June, an inchoate EU connectivity agreement with India in May and various ideas before that, including an EU-Japan accord in 2019.

Perhaps a more fundamental question is why the rich countries are trying to challenge the BRI loans model in the first place. Their longstanding problem is that, particularly when it comes to building infrastructure, they are always more likely to be constrained by tedious things such as transparency and lending standards than Beijing. The more recent issue is that with China sharply drawing back from overseas lending itself, what exactly are the likes of the EU and US trying to compete with?

China’s informality and lack of transparency in BRI projects have been among its strengths: it gets a lot of money out of the door quickly. As a couple of interesting recent academic papers have argued (our characterisation, not the authors’), rather than creating a new hard-law rule-based commercial order with transparent contracting, Chinese operations abroad have been based instead on flexible soft-law frameworks designed to facilitate investments. But the informality and politicisation of lending also mean interactions can swiftly go sour with little redress. 

However, China has sharply curtailed its crude policy of spraying around loans at the developing world. Even if you’re not quite sure about the numbers in the much-discussed research by Boston University academics showing a huge fall in Chinese outbound lending since 2016, there’s not much doubt that it’s been pulling back rapidly over the past few years. The pandemic will almost certainly have worsened that further, not least since the deteriorating debt sustainability of existing borrowers shows the risks involved. China could shift more into actual foreign direct investment, of course, but that involves fronting up cash.

China’s “dual circulation” strategy of focusing more on its domestic market doesn’t mean isolationism, but it does mean that it is focusing more narrowly on building global value chains to benefit the Chinese economy based on technological standards such as 5G and artificial intelligence rather than just building ports and railways.

It’s in this context that a major project by the US Council on Foreign Relations on the implications of BRI for the US comes to some interesting conclusions. Rather than try to respond to China “dollar for dollar or project for project”, it says, the US should focus on areas where it has a technological edge and where its companies, working to transparent legal standards backed by vast pools of private capital, would have an advantage.

Sounds wise in principle. But in some areas (5G) it’s way too late: the US doesn’t have a strong market position. In others, we’d argue that an inward focus and rent-seeking behaviour among US companies and government often militate against this.

The report specifically mentions medical devices and pharmaceuticals as a US area of advantage. The Covid-19 pandemic would have been an excellent chance for the US to build alliances in the emerging world, first through providing protective gear and then vaccines. In practice, it has focused much more on the domestic front first. Its exports and the international dimension more generally were long in coming, except what in our view has become a largely cosmetic exercise in supporting in principle the waiving of vaccine patents at the World Trade Organization. The US hasn’t managed to use its technological superiority to its global advantage. The level of protection against Covid infection delivered by Chinese vaccines may be lower than the products coming out of the US, but they have been delivered to many millions more.

It’s surely right that the rich countries should seek to export ideas and institutions to the emerging world rather than cheap (or at least strings-free) loans. But their economic and political systems aren’t currently properly set up to do so. We’ll come back to this issue in more detail in future newsletters: at this point we’re just noting that the initiatives we’ve seen so far haven’t seemed to us to address this point.

Charted waters

The FT’s chief economics commentator Martin Wolf earlier this week explained why independence from the EU does not a sovereign nation make. The realities of relative power mean the UK and EU are — and will remain — far from equals. If you have a far larger economy and population, it turns out you can set more rules than a smaller neighbour. Who’d have thought it?

Anyway, one aspect of the EU’s power to force the UK to follow its own rules lies in the trade imbalance. As illustrated below, almost half of UK exports go to the EU. For the EU, it’s about 15 per cent — and they form a far smaller chunk of the bloc’s gross domestic product. Claire Jones

Trade links

At the heart of Germany’s export machine is the car industry, but, as the FT’s Frankfurt team reports, supply chain logjams are weighing on industrial production. The FT has a great piece on the rise of Comac, China’s state-backed rival to Boeing and Airbus.

Nikkei reports ($, subscription required) on the compensation deal between the Suez Canal and the Ever Given’s Japanese owners, which has meant that after three months, Egypt has allowed the container ship to resume its voyage. Low-priced electric vehicles from Chinese carmakers are edging out Japan’s Mitsubishi Motors in the critical south-east Asia market. 

Marsh McLennan’s Brink platform has an interesting podcast with Erik Jones, director of European and Eurasian studies at the Johns Hopkins University, looking at how shifts, actual and potential, in the leadership of the eurozone’s three largest economies will affect policy. Claire Jones