“China’s belt/road, Silk Road, analysis by former ambassador Chas Freeman, the most sophisticated and enlightened analyst in the world today, is a must read to understand the future economics of the world. It also underscores the silliness of the U.S. continuing to bog itself down in the swamp of the Middle East. The hubris of the president and the Congress will deny us a role in this great future.”

Remarks to a Conference of the University of San Francisco’s
China Business Studies Initiative

Ambassador Chas W. Freeman, Jr. (USFS, Ret.)
Senior Fellow, the Watson Institute for International and Public Affairs, Brown University
February 8, 2017, San Francisco, California

At Davos, just before the U.S. presidential inauguration this January, Chinese President Xi Jinping made a bid for global leadership by China of trade and investment liberalization.  He quoted the opening of Charles Dickens’ Tale of Two Cities.”   He recited the first two sentences and left out the rest.  It’s worth citing a bit more.  Dickens wrote:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was . . .. like the present period. . . .”

Like the United States, China is now domestically evermore ill at ease.  But, unlike America, it’s on a roll internationally.  The contrast is striking.

The fading confidence of much of China’s elite in their future stems from many causes.  Among these are three thousand, five hundred years of history that strongly suggest that nothing is forever.  Progress is invariably succeeded by regression.

As if to validate this historical cycle, more than three decades of remarkable reform, opening, and economic advance in China seem to be giving way to increasingly illiberal, police-state politics, a constipated business climate, and doubts about the prospects for the country’s transition to a new model for continued growth in national wealth and power.  Chinese citizens’ attempts to hedge by moving money to safe havens abroad have stimulated Beijing to impose ever-stricter controls on outflows of private capital.  Meanwhile, however, declining foreign affection for China is offset by China’s rising prestige and influence.

China’s greater international clout has as much to do with the self-initiated retreat of American leadership as it has to do with China’s return to wealth and power.  The indifference of America’s political elite to foreign interests and perspectives as they bear on U.S. policies has grown as the 21st century has advanced.  This indifference has just been formalized in the policy guideline, “America  first.”

In terms of its approach to global governance and international interactions, the United States now officially relegates the interests of America’s allies, and partners, as well as transnational institutions, to second, third, or fourth place behind its own parochial concerns.  American disregard for the impact on others of U.S. policies gives them no incentive to follow Washington’s lead.  The U.S. now wants to cut deals, not make rules.

America has just withdrawn from the international consensus that underpins global efforts to liberalize the rules for international trade and investment and to mitigate manmade climate change.  The leadership vacuum that the contraction of the Pax Americana was already creating has taken a quantum leap.  Ready and willing or not, China is being drawn into an ever-greater role in global governance.

This is the context within which China has been inventing new international financial institutions like the Asian Infrastructure Investment Bank, the New Development Bank, the South-South Cooperation Fund, the China Silk Road Fund, the Maritime Silk Road Management Fund, and the Maritime Silk Road Bank.  In the aggregate, these banks and funds are capitalized at almost $300 billion and promise to add $60-$75  billion to annual lending for infrastructure projects in Asia and its periphery.  This is considerably more than what Bretton Woods legacy institutions like the IMF, World Bank (IBRD), and Asian Development Bank (ADB) have been able to do.  China’s initiatives are game changers.

Most governments other than the United States have been increasing export financing for goods and services companies produced within their borders.  U.S. companies that have subsidiaries abroad benefit from this. But, in the absence of some sort of arrangement for U.S. lending agencies to co-finance projects with the new Chinese-led international financial institutions, American companies will find it hard to source goods and services for projects financed by Chinese sponsored institutions from their home market.

The AIIB is off to a fast start, with almost $2 billion in projects already approved.   It is not revolutionary in nature.  Most of its projects to date have been co-financed with the World Bank and ADB.

Still, the ADB estimates that requirements for investment in infrastructure in Asia are $700 – $800 billion annually, much more than either the legacy or new lenders – or both together – can hope to finance.  A lot of money will have to come directly from China, from its partners in infrastructure projects, and from other Asian and international investors and lenders.  Some of the money will come from binational joint investment funds with matching bilateral commitments, like the $10 billion fund China has established with the United Arab Emirates.  But there will be no shortage of opportunities for independent, non-Chinese lenders to co-finance projects.

The United States has refused to join any of the new banks or funds – apparently to avoid having to appear to defer to Chinese leadership.  This has been a foolish forfeiture of U.S. influence.  We must hope that the Trump administration – with its emphasis on manufacturing jobs — will find a way to work with China to the advantage of American business.  This will be hard if the United States has started a trade war with China.  It is a good argument against doing so.

Our mistake in not engaging with the new Chinese-sponsored institutions has been somewhat mitigated to date by the fact that they have not followed the example of their American-sponsored predecessors by barring companies from non-member countries that want to bid on their projects.  Many American companies are already subcontractors for “belt and road” projects.  These projects represent an unprecedented set of business opportunities on a wider scale than most yet seem to have grasped.

China has set a goal of $2.5 trillion in trade with “belt and road” partner countries by 2025.  In support of this, Beijing is doing more than setting up new institutions.  It is encouraging mergers, acquisitions, and green-field investments to create what might be called “multinational companies with Chinese characteristics,” some with headquarters in Europe or elsewhere outside China.   And it is promoting uniform standards for trade, transport, and communications.

The belt and road initiative is not just the greatest and potentially most transformative set of engineering projects in history, it is the world’s largest emerging platform for international business collaboration.  It is often described as a program directed at China’s neighbors in Central and Southeast Asia.  But, as the recently opened rail line between Yiwu and London illustrates, its objective it to connect China to Europe, not just to the countries that lie between Europe and China.  Its aim is to integrate the entire Eurasian landmass with a network of roads, railroads, pipelines, telecommunications links, ports, airports, and industrial development zones.

The massive infrastructure projects envisaged by the belt and road initiative promise to deliver major increases in the speed of transport and telecommunications, to lower costs, and to create a great many new jobs.  They will integrate Russia and Central Asia with both China and Europe, while connecting South Asia by land as well as by sea to the markets and natural resources of the countries to its north as well as to Africa. There is a very good running account of the state of play of projects in Asia (though, sadly,  not in Europe or Africa) to be found at the “Reconnecting  Asia” website operated by the Center for Strategic and International Studies (CSOS).

Most projects will be overland:  Kunming to Singapore and, separately, to Kolkata; Kashi

[Kashgar] to Gwadar and, separately, to both Tashkent and Tehran; Xi’an to Istanbul and to Moscow, Rotterdam, and Lisbon; from Hunchun ( in China’s Jilin Province) to the Russian port of Zarubino,  on the Sea of Japan.  By making land transport vastly more efficient and linking it to new ports and airports, “belt and road” programs will alter the balance between land and sea power.  Relatively few projects will be maritime, but, given the scale of the initiative, these too will be transformative. including in the Arctic regions now becoming accessible as a result of climate change.

If this concept of Eurasian integration is realized, it will open a vast area to economic and cultural exchange, reducing barriers to international cooperation in a sixty-five-country zone with seventy percent of the world’s population, fifty-five percent of its GDP, and well over half  its current economic growth.   At $1.4 trillion, China’s declared financial commitment to these projects is eleven times the size of the Marshall Plan, restated in current dollars.  Leveraging will likely at least triple the value of this proposed investment between now and 2049.

Not surprisingly, m