China to invest in US infrastructure?
April 28, 2018 | Expert Insights
Chinese officials have stated that Beijing would be open to participating in Trump’s ambitious plan to rehaul US infrastructure. China has made infrastructure development a key focus of both national and international policy. Reports have noted that American infrastructure may be below standards, particularly in comparison to other high-income countries. A renovation of US transport and infrastructure would require over $1 trillion.
Infrastructure has been an important focus for the Chinese government since the 1990s. A 4 trillion-Yuan package for infrastructure and social welfare announced in 2008 played an important role in advancing infrastructure development within the country. The focus on infrastructure was a key factor in promoting connectivity and urbanization within the country and helped boost economic growth and standards of living. China has adopted numerous projects including metro, roads, bridges, rail, and utilities. China has also built the world’s largest high-speed rail network.
Infrastructure investment and development has also become a part of China’s foreign policy, with the ambitious One Belt One Road Initiative (OBOR), announced in 2013. Hailed as a “21st Century Silk Road”, the initiative seeks to revive trade routes across Eurasia. OBOR has been publicised as a development strategy that involves huge amounts of physical infrastructure, including railroads, highways, ports, and pipelines. Harvard law professor Noah Feldman describes it as “the 19th-century creation of railroads across continents – or an effort to build an Eisenhower Interstate System for an entire region of the planet.”
China has invested in infrastructure projects across the globe- including Europe, Asia and the African continent. Latin America has been added to OBOR with the “Trans-Pacific Maritime Silk Road”. In January this year, Beijing even included the Arctic in its trade ambitions, proposing a “Polar Silk Road.” Only the US, Canada, and Japan are yet to be included in the plan.
The United States and China are the two largest economies in the world. Both countries consider the other as a partner in trade and an adversary in geopolitics. In 2017, China’s trade surplus with the United States was $347 billion. In March 2018, US debt was over $20 trillion. China is US’s second largest foreign creditor.
In recent months, experts have sounded the alarm about an impending trade war between the US and China. These fears solidified in March, when US President Donald Trump announced global import tariffs of 25% on steel, and China promised retaliation. Since then, tensions have escalated. The US has imposed tariffs worth over $150 billion; Beijing responded with $50 billion worth of tariffs.
Yang Chuantang from China’s Transport Ministry has said that China would be willing to participate in Washington’s $1.5 trillion plan to upgrade American infrastructure, as a parallel to OBOR. “We are willing to work with the US side, under the framework of China’s Belt and Road Initiative and the US plan for rebuilding infrastructure,” said Yang.
The remarks were made at the ninth China-US Transportation Forum in Beijing. US Transportation Secretary Elaine Chao did not directly respond to this offer. However, she noted that American infrastructure needs “have been neglected.” “The goal is to partner with other groups such as state and local governments, as well as allowing the private sector to address these needs,” Chao said.
President Trump has made the development of transport and infrastructure part of his promise to “make America great again.” In February, he unveiled a plan to spend $1.5 trillion on repairing and upgrading America’s infrastructure. Of this, only $200 billion will come from direct federal spending. Previous governments, including the Obama administration, have emphasised the need to improve infrastructure as well.
Public-Private Partnerships in the infrastructure and transport sector are incredibly low, according to reports by the Congressional Budget Office. On toll roads, PPPs accounted for only 1% of spending between 1989 and 2011. In 2016, the United States ranked 10th for overall infrastructure quality, according to the WEF. Economists have said that maintenance costs and delays caused by poor infrastructure are holding economic performance back. Airports alone may be costing the company up to $35 billion a year. Additionally, according to some estimates, the infrastructure industry employs approximately 11% of the US workforce.
Compared to its Western European counterparts, American transport systems were judged “mediocre.” The US also lacks a range of high-speed rail networks. A majority of US infrastructure systems were built in the 1960s. Since this time, the population has more than doubled. In its 2017 report, the American Society of Civil Engineers stated that conditions of infrastructure in the US were “mostly below standard,” exhibiting “significant deterioration,” with a “strong risk of failure.”
Commentators in favour of greater US involvement in the Belt and Road Initiative have argued that Chinese investment would provide Washington with the capital it currently does not have, to reform American infrastructure.
Last year, the China Investment Corporation announced its intention to broaden investment in the US to include infrastructure and rebuilding projects. China Investment Corporation’s (CIC), Chairman Ding Xuedong said that Trump’s estimate and American investment would be insufficient, and that they would “have to rely on foreign investors.” However, later the same year, the company noted that the US government was a key obstacle. Trump has repeatedly emphasised the need to “buy American, hire American”. Governmental organisations are required to prioritise American made material and workers in state funded projects.
Furthermore, China’s infrastructure investment model has also been criticised. According to research conducted at Oxford University in 2016, Chinese infrastructure investments have “destroyed, not generated” economic value. “Poorly managed infrastructure investments are a main explanation of surfacing economic and financial problems in China. We predict that, unless China shifts to a lower level of higher-quality infrastructure investments, the country is headed for an infrastructure-led national financial and economic crisis,” the paper said. OBOR has also been criticised for over-emphasis on physical capital and failure to support this with structural and human capabilities.
Read a critique of OBOR here.
Our assessment is that investment in foreign infrastructure has become a feature of Chinese diplomacy. The United States is China’s biggest market and the Chinese may be trying to propose a deal that Trump will find appealing. Infrastructure in the US is under tremendous stress, and President Trump will need trillions of dollars to jump-start infrastructure reform, as he had promised on the campaign trail. In the same vein, Xi Jinping could be keen to promote his Belt and Road Initiative and extend it to the US. We believe that the United States is very high on debt, and Washington may be incapable of financing this project on its own. Will President Trump find Beijing’s offer appealing?