China Didn’t Invent Asian Connectivity

One of my early mentors, Harvard’s Joseph Nye, has been writing of late about what he evocatively calls Xi Jinping’s “Marco Polo strategy.” And Joe is on to something—with a raft of initiatives, not least the “Belt and Road” infrastructure program, which Xi laid out in 2013, China is among the driving forces of connectivity, construction, capital flows, and economic cooperation in Asia and potentially beyond.

But much of the discussion of the Belt and Road has become entirely too breathless for my taste.

Partly, that’s because it’s utterly ahistorical, reflecting a lack of context on the origins, evolution, and obstacles that have faced a generation of prior connectivity initiatives in both continental and maritime Asia.

The good news about the Belt and Road is that it has now woken up many, especially in the United States, to these issues. Often, the whole subject had been either ignored or dismissed outright. Yet since at least the 1990s, Asians have, in various ways, been remaking their region. The manifestations of this include the redirection of trade and capital flows, as well as connectivity-related investments. And in so doing, Asians have been passing America by, making the US government (and American companies) less relevant in each of Asia’s constituent sub-regions.

But there’s bad news too. While Americans and others have now woken up, much of the resulting commentary has been little more than a reaction to the Belt and Road. As such, it presumes that China somehow “invented” Asian connectivity, did so only in 2013, or that initiatives such as the Belt and Road emerged from Xi Jinping much like the goddess Athena from Zeus’ head.

And that’s where we need to broaden our lens.

China did not, in fact, invent Asian connectivity, which has been developing for some two decades as a product of the actions and choices of many Asian states and firms, both on the demand side and the supply side. In India, for example—Asia’s third largest economy—much of the recent infrastructure and capital construction has been financed by Japan, not China, including the Delhi Metro, the Mumbai-Delhi Industrial Corridor, and high-speed rail for Indian Railways.

Nor did connectivity as a dynamic process within Asia emerge only in 2013.

In fact, it is no accident that China’s most successful infrastructure initiatives in continental Asia actually predate the Belt and Road. These include its oil and gas pipes from Kazakhstan and Turkmenistan, as well as associated production-sharing agreements (PSA) in the Turkmenistani onshore. All of these were in train before Xi had even taken office.

America, too, has some history here. Xi proposed his version of a new Silk Road in 2013. But before Xi did so, Secretary of State Hillary Clinton was touting her “new Silk Road” initiative. And before Clinton began to talk about this, her predecessor (and my former boss), Secretary of State Condoleezza Rice was doing so too.

Rice backed up some of this talk—first, by reorganizing the State Department so that relations with Central Asia would be managed from an Asia-facing bureau instead of a Russia and European-facing one; and second, by intensifying US engagement with the longstanding connectivity initiatives of the Asian Development Bank (ADB), World Bank, and six-bank, ten-country Central Asia Regional Economic Cooperation Program (CAREC), which had its own set of connectivity corridors.

The CAREC program, in particular—when set alongside ADB efforts on roads and World Bank initiatives around power lines—reflects longstanding efforts by the international financial institutions (IFIs) to promote Asian connectivity. In 2007, Washington proposed an expanded scheme that would have brought the United States, European Union, and Japan more directly into the connectivity mix through a “CAREC+3” ministerial and programmatic effort. Its aim was to garner support for the integration process from the world’s three major market economies. (Ultimately, the scheme did not cohere because of opposition in Brussels.)

But all this points to an important problem with the Belt and Road and other “Silk Road” and “Marco Polo”-like connectivity schemes. Simply put, they tend to exotify what the Silk Road actually was, and wasn’t.

The historical Silk Road was not based on international pacts or treaties. It was an informal cluster of networks and arrangements. And suffered often because of wars and conflicts.

Still, the Belt and Road represents one thing: a significant ratcheting up of Beijing’s commitment, resources, ambition, and presumptions about its own centrality in Asia. That is because, quite apart from the eye-popping dollar pledges, the Belt and Road reflects three characteristics that China appears to believe it possesses uniquely among the various financiers and donors that have pursued connectivity initiatives before.

The first of these, as I recently told the audience at CNBC, is China’s sizeable pool of foreign exchange reserves. These can be transferred by the country’s foreign exchange administrator (SAFE) to directly capitalize investment vehicles like the Chinese Silk Road Fund or other banking and even private equity-like operations.

In 2016, China was blowing through its reserves at the mind-boggling pace of about $100 billion per month. Yet Beijing still sits on some $3 trillion in reserves. And it is increasingly deploying some parts of this capital pool for direct investments and in a search for yield.

Second, China has dominant companies in certain areas of infrastructure and construction.

We are accustomed to thinking of Chinese firms as the dominant brands domestically because of Beijing’s protectionism. More often than not, however, we dismiss these firms as merely peripheral players globally.

But this is not the case in some critical sectors. Take hydropower, which Sinohydro—a large central state-owned enterprise—dominates internationally, despite its checkered environmental history and mixed record of managing political and investment risk in countries like Myanmar. Sinohydro is the world’s single largest builder of dams, with a whopping 50% share of the world hydro market.

Or consider high-speed rail. Japanese and European technologies remain market leaders but Chinese trains are accompanied in Beijing’s state-backed construction offerings by considerable engineering know-how. This is a by-product of the need to traverse China’s difficult topography: Chinese state construction firms were compelled, for example, to navigate deep valleys, high mountains, and rocky ridges in the construction of a high-speed rail line to Tibet.

Third, because China is the world’s leading consumer of so many technologies and industrial products, it is beginning to leverage its sheer market power to export, not simply to consume.

A recent Paulson Institute study of ultra-high voltage power lines, for example, noted that China is the only country now deploying UHV technology on a large scale—and that no international UHV standard has yet prevailed. That means Beijing is well positioned to internationalize its own UHV standards through construction contracts and projects overseas. And this, in turn, could yield greater global market share for Chinese UHV technologies and firms, while providing an interesting example of how China may yet leverage infrastructure projects under the Belt and Road to export indigenous engineering standards in an effort to become the default global standard-setter for numerous technologies and industrial products.

In the UHV case, the Paulson Institute study notes that Beijing has already made modest progress toward this goal by growing its global market share. One example, the study says, is the joint development of a Sino-Brazilian UHV project. Another is the successful effort to promote three indigenous Chinese UHV AC standards as international standards of the global Institute of Electrical and Electronics Engineers (IEEE).

Much of the debate about the implications of the Belt and Road revolves around the question of whether China will export its industrial overcapacity, thus dumping steel and other commodities onto global markets and fueling trade tensions. But the export of engineering standards is, to my mind, the more powerful long-term implication. There are simply not enough projects in Kazakhstan, Indonesia, and farther afield to soak up all of China’s industrial overcapacity. The eventual solution to that problem lies at home in China, not abroad. But technical standard setting could be the most far-reaching legacy of the Belt and Road for Chinese firms—one that Marco Polo could scarcely have imagined.

To put all this bluntly, the United States (and Europe, for that matter) had best wake up to these facts, and soon. China did not invent connectivity in Asia. But, increasingly, Americans are bystanders to these developments.

Economically, US firms are mostly absent from Central Asia, are missing in action from nearly all of South Asia with the exception of India, and are at considerable risk of irrelevance in mainland Southeast Asia with the exception of Vietnam, including even in Thailand where US firms once played such a central role.

As Asia becomes more integrated, therefore, the United States may become progressively less relevant. As I argued in a 2011 essay (note: written two years before there was a Belt and Road):

Gradually, but inexorably, the region is becoming more Asian than “Asia-Pacific,” especially in its economic and financial arrangements; more continental than subcontinental, as East and South Asia become more closely intertwined; and, in its continental west, more Central Asian than Eurasian, as China develops its western regions and five former Soviet countries rediscover their Asian roots.

Except as a security balancer in East Asia, the United States is becoming less relevant across Asia writ large in relative terms, especially with respect to trade and capital flows. And on connectivity and transit issues, at least, Washington has been asleep at the switch for over a decade.