Friction and Cooperation Between U.S. and China: Executive Summary1 Matt Geraci, Asiana Cooper & Mengze Li    1 Summarised from ICAS Report: Blue Dots and Red Roads: Frictions and the Potential for Limited Cooperation Between Chinese and U.S. International Models, July 2020.

By 2030, studies indicate that Asia will need an additional USD 26 trillion in infrastructure investment, and China has pledged USD 1 trillion. China’s vision to connect large portions of the developing world through infrastructure development and investment, commonly known as the Belt and Road Initiative (BRI), has been presented to the world as the solution to this shortfall. In support of this, China is thought to have invested USD 333 billion in loans to the developing world, more than half of the World Bank’s USD 624 billion. As the developing world’s single largest sovereign investor, China’s investment practices have placed itself in direct competition with western development models. International development has thus found itself at a crossroads: will the development efforts of China and America morph into yet another arena of strategic competition, or will the two models find ways to coexist pluralistically, allowing for healthy competition and even limited cooperation in non-contentious areas?

At its core, there is surprisingly very little difference on paper between the principles that guide BRI with the principles of western models of development. Both models advocate for quality investments that uphold the norms of United Nations sustainable development principles and seek to improve the living standards and the economies of recipient nations. Even some of the harshest critics of BRI have admitted that its stated principles are admirable at least. Frictions between the two begin on the ground at the implementation level, where the impacts of development, both good and bad, are realized.

The areas that the U.S. holds the majority of its criticism of the BRI are: lending transparency, debt sustainability, geopolitical concerns, and ecological and societal degradation. The U.S. presents its own initiative, the Blue Dot Network, as the counterweight that will compete with China’s spreading global influence through the BRI and prevent countries from falling prey to predatory lending and unsustainable levels of debt. China, fully aware of these criticisms, has attempted to address these issues directly, but the U.S. largely views these efforts as empty promises. If China were truly serious about implementing these changes, the U.S. argues that China must abide by global investment standards set by OECD countries and the Paris Club. An undertaking the size of the Belt and Road Initiative must be open to criticism and recommendations from the international community, as its impacts, both positive and negative, will highly influence the global economy. China must not shy away from this form of engagement if the BRI is to meet its stated purpose.

The COVID-19 crisis and its emerging catastrophic economic impacts knows no borders. The realm of international development is no exception. According to the United Nations, the effects of COVID-19 will continue to be felt in the years to come. The global economy is expected to contract by 3.2% this year and wipe out over USD 8.5 trillion in global output over the next two years. Vulnerable populations and developing countries will be hit especially hard. An estimated 34.3 million people are expected to fall below the extreme poverty line in 2020, with over half of this amount occurring in Africa alone. This global shock may even thrust an additional 130 million people below the extreme poverty line by 2030 as a direct result of the pandemic.

The world’s two wealthiest nations, the United States and China, have both the responsibility and capacity to strategically cooperate in the global recovery process. Yet, the two countries continue to bicker and point the finger about who is to blame during this critical moment. Fortunately, there are areas where cooperation can and ought to occur despite this intensifying vitriol. For instance, a Communication and Coordination Mechanism between the development finance institutions (DFIs) of the U.S. and China would facilitate recovery efforts in the developing world by:

• maintaining capital markets;
• financing local firms offering innovations, business models, or products that address the crisis;
• channeling financing in the hardest-hit regions;
• developing a readiness plan for post-pandemic financial assistance.

The U.S. and Chinese governments can also cooperatively leverage the strengths of their DFIs within a multilateral framework as well. The G20 would be a natural place to start. During the Extraordinary G20 Leaders’ Summit convened on March 26, all members agreed to safeguard the global economy, committing to cooperate to enhance global financial safety nets. Former global heads of state and leaders of financial institutions have called upon the G20 to implement concrete measures in full, as the world is nowhere close to the IMF’s estimated USD 2.5 trillion needed by emerging markets and developing countries.

For instance, the World Bank’s International Development Association (IDA) could be scaled up radically by bilateral, multilateral, and private creditors. The IDA, which is a multilateral financial institution that provides direct development assistance to emerging economies through interest-free loans, already receives billions each year from the U.S. and China to its replenishment fund. As the IDA’s loan programs are essential to rebuilding economies of the developing world, the two countries can coordinate to help ramp up its funding. Furthermore, American and Chinese development banks can find ways to communicate and collaborate with the IDA on the ground as their lending portfolios overlap.

The world cannot afford the two countries most capable of meeting the socioeconomic fallout from COVID-19 to be finger wagging at each other. Although there are many areas where the current political environment is simply not conducive to full and complete cooperation, past experiences indicate that the U.S. and China can work together to solve some of the world’s most pressing issues. The international development finance institutions of the world cannot face these challenges alone, but if a limited channel of communication and cooperation can be utilized, their impacts to the global pandemic recovery will be immense and the road to recovery for the U.S.-China relationship could begin to get back on track.

Matthew Geraci is a Research Associate and Program Officer at the Institute for China-America Studies and a Pacific Forum Young Leader. He specializes in utilizing geographic information systems to manipulate and analyze data to enhance his research on U.S.-China relations, China’s Belt and Road Initiative, maritime claims, energy security, and environmental issues.

Asiana Cooper is a Research Assistant at the Institute for China-America Studies. Her research specializes in identifying overarching themes in U.S. economic and strategic relations with East Asia as they evolve under changing leadership and historical contexts.

Mengze Li is a Research Assistant at the Institute for China-America Studies. Her research centers on China’s economy, especially the Chinese investment environment and the role of the U.S. in China’s economic transition.

This article was published in ICAS Report July 2020. Republished with permission from the Institute for China-America Studies (ICAS).