By Raj Bhala
Lost amidst the comedic moments in President Donald Trump’s September 25 address to the United Nations General Assembly was a concept, “principled realism,” and a context, American foreign assistance in a world presented with China’s Belt and Road Initiative.
This concept, and how it is manifest in this context, is no laughing matter. It will determine whether America offers the world a better path of economic growth and development than China.
As the President stated, “principled realism” is how America engages with the world, and thus how it is rethinking foreign aid strategy.
The concept has the potential to transform the economies of the Indo-Pacific region, and counter China’s BRI, if it is expressed and executed wisely.
Debunking The Conventional Wisdom
This can be done through legislation the President did not mention in his General Assembly speech – the Better Utilization of Investments Leading to Development Act. The House of Representatives easily passed the BUILD Act on a bipartisan voice vote on July 17, 2018. The Act passed the Senate Foreign Relations Committee with bipartisan support on June 26, 2018, and now awaits passage by the full Senate. The Trump Administration professes its support.
Though President Trump has uttered the words “principled realism” at least five times since becoming President, he never defined it and did not do so at the United Nations either. But one inference to be drawn from circumstantial evidence, in the rest of his General Assembly speech, is that the concept debunks the conventional wisdom that America is withdrawing from the Indo-Pacific region and retreating into protectionism and isolationism.
True, on Jan. 23, 2017, the U.S. infamously pulled its signature off the Trans-Pacific Partnership, but on Sept. 24, 2018, it affixed its signature to a modest revision of its bilateral free trade agreement with Korea, on Sept. 26 announced bilateral negotiations with Japan for an agreement on trade in goods, on Sept. 30 concluded negotiations for NAFTA 2.0 (the new U.S.-Mexico-Canada-Agreement, or USMCA), and now engages China by challenging it to revise the dubious aspects of its industrial policy and intellectual property practices.
“Principled realism” is not a cover over a “Thucydides trap” into which a tired empire in decline, the U.S., is falling as it tries to stave off the inevitable ascendancy of an energetic new power, China.
The answer depends on whether the U.S. is willing to renovate the “principle” and the “realism” of the BUILD Act. However, to identify the needed renovations, it’s necessary to understand China’s Belt and Road Initiative that the Act is constructed to offset.
The BRI Trap
Launched in 2013 by the Chinese Communist Party, the BRI boasts 2,220 deals worth $1.1 trillion in 87 countries. The deals are construction contracts, typically for large-scale infrastructure projects, such as air and sea ports, road networks, energy and petrochemical development, power plants, agriculture, mining, manufacturing, and real estate, and even a digital silk road with fiber optic cables and telecommunication facilities, and satellite links.
Chinese State-Owned Commercial Banks provide financing to countries, loan funds to the debtors, charging interest on terms negotiated bilaterally. Disputes are handled by courts in Xi’an or Shenzhen.
Overall, the BRI project map is Sinocentric: there are land and maritime corridors emanating from China to Europe and Asia.
As the deals are negotiated bilaterally, lacking both whatever protection a multilateral development agency like the World Bank might offer a debtor country, and transparency, it is not hard for the Chinese Communist Party to arrange terms – sometimes with pliable elites in the debtor countries – favorable to Chinese interests.
Pakistan signed $62 billion worth of BRI deals, but now faces a balance of payments crisis because it cannot cover its principal and interest payments.
It is not the only debt-distressed BRI country.
Djibouti, Kyrgyzstan, Laos, Maldives, Mongolia, Montenegro, Sri Lanka, and Tajikistan are on the list, too. They all have unhealthy high debt-to-GDP, thanks to unsustainable sovereign indebtedness to China.
They share another feature: Chinese interests effectively own the assets that China finances. It is as if the infrastructure is pledged as collateral for the loans. If the debtor country cannot make timely payment of principal and interest, guess who takes over? And, even while the debtor struggles to make those payments, Chinese companies, typically employing Chinese rather than local managers and workers, operate the facilities. China provides the goods and services for the projects.
Small wonder why Malaysia cancelled $3 billion worth of BRI pipeline projects, and suspended a further $20 billion, as the new government of Prime Minister Mahathir investigates the financing terms.
Myanmar, a friend of China, likewise scaled back a BRI port project.
And, the Maldives just voted out of office their pro-Chinese President.
Wisely, India thus far eschews BRI projects.
Along with a growing number of Indo-Pacific countries, India is suspicious of the BRI as a tool to tilt the regional balance of power in China’s favor. The projects could be devices for China to find new markets to dump its cement and steel and to keep Chinese state-owned commercial banks and state-owned enterprises afloat. Debt bondage risks compromising the financial sovereignty of the debtor countries, with a further risk to their national security.
Consider Djibouti. Its financial mess may mean China controls its container port, which would be convenient for China, given that China in 2017 established its first overseas military basis in Djibouti. Debt bondage could give BRI ‘beneficiaries’ like Djibouti little choice but to respect the Nine Dash Line, shun Taiwan, and give no quarter to Tibetan Buddhists – all Chinese Communist Party foreign policy goals advanced through an ironic 21st-century twist on the 19th century ‘gunboat diplomacy’ inflicted by western imperialists on China.
Building A Better BUILD Act
The BUILD Act is supposed to counter China’s aggressive, debt-based unilateralist diplomacy. So, the Act:
- Recasts the Overseas Private Investment Corporation as the International Development and Finance Corporation, by combining OPIC with elements of the U.S. Agency for International Development.
- Boosts total investment funding from OPIC’s $29 to $60 billion for the IDFC (with inflation-adjusted upward revisions every five years).
- Allows the IDFC to make equity investments up to 35 percent of its funding.
The “principle” underlying this legislation is to promote self-sustaining, market-oriented, inclusive growth and poverty alleviation.
The “realism” is that projects should be funded transparently through equity rather than debt, thus holding the IDFC accountable as sharing risks with private sector companies in which it invests, rather than casting this U.S. government agency in adversarial debtor-creditor relationships.
But, the “principle” of the BUILD Act suffers from two problems: it is poorly targeted, and insufficiently generous.
In between the statutory language of the BUILD Act is fear the CCP might succeed in refashioning the world economy in its image. O.K., but the other worry is what it always has been since 9/11: Islamist extremism, and more generally, radical ideologies to which poor, marginalised peoples are vulnerable.
Roughly 62 percent of the world’s Muslims live in Asia, which makes the Indo-Pacific region the largest recruiting ground for violent extremist organisations. China is dealing with its Uyghur Muslim population through force: interning large numbers of them as suspected terrorists in political re-education camps. The wiser way to counter extremists is to drain their pools of potential recruits through grass-roots economic growth and development. Indeed, that’s the vision that underlay America’s Marshall Plan – rebuild the war-ravaged economies and support stable, non-Communist democracies across Europe.
The Marshall Plan vision was generous, too. Indeed, unconditionally so. America gave – not invested, not loaned, but gave money. It divided funds on a per capita basis, with the U.K., France, and West Germany being the largest recipients.
Two problems beset the “realism” of the BUILD Act: the funding is too modest, and the funding structures are too conventional.
For four years, 1948-1951, America donated about $17 billion under the Marshall Plan. Today (in 2017 dollars), that’s $194 billion – over three times the maximum $60 billion in contingent liabilities the IDFC can take on under the BUILD Act. And, that $60 billion equals just 6 percent of the value of BRI projects. The Act cannot realise even the misplaced fear-based vision of countering China’s BRI with such a paltry sum.
Fortunately, there is a creative (albeit partial) source of funding for a substantial increase in the IDFC’s capacity to realise a grand vision: the tariff revenue the U.S. is collecting in the Section 301 trade war with China.
As for the funding structures, the BUILD Act ought to allow the IDFC to open an Islamic finance window. China’s BRI financing violates the two basic precepts of Islamic Banking Law: it relies on ribā (interest), and it creates excessive gharar (risk). Paralysed by fake news that Islamic finance and terrorist financing are one and the same, American decision-makers fail to appreciate the tremendous opportunity in their grasp to win hearts and minds across Muslim communities by helping Muslim businesses fund their growth free of ribā and gharar, and thereby distinguish American foreign assistance from Chinese extraterritorial infrastructure.
The BUILD Act can avoid ribā and gharar, and respect the sovereignty of recipient countries, by offering them the option of funding through Sharī‘a-compliant structures.
The most obvious one is qard al hassan, that is, a charitable, interest-free loan with no or low expectation of repayment of principal – in effect, a Marshall Plan-like grant. The other obvious vehicle is sharikah al-muḍārabah, i.e., sleeping partnership. The IDFC would be the rabb al-māl(sleeping partner), behaving passively with respect to the muḍārib (working partner). The two are a mini-ummah (community), sharing in gains or losses – meaning that the IDFC enjoys a small percentage of profits, but suffers from if the venture fails to earn, or simply outright.
The Last Laugh
The President has every incentive to renovate the BUILD Act by reimagining what “principled realism” should mean. It ought not to be dismissed as an oxymoronic concept in which Kissinger-esque instruments of power opportunistically trump the highest American ideals. Imbued with two of America’s greatest virtues, generosity, and creativity, the Act can be a practical centerpiece in a systematic campaign to defeat radical Islamist ideologies by strengthening the sovereign economic interests of beneficiary countries. Moreover, free from domination by China, and liberated from the top-down global governance he reviles, they can fashion their own version of ‘America First’.
Surely that would give Trump a good laugh.
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