APEC Summit Reflects Escalating US-China Tensions
By Dafydd Williams, Senior Director, Advisory Services
Effect on Multinationals
Belt and Road Initiative
China’s most ambitious project, the Belt and Road Initiative, begun in 2013, is breathtaking in scope and has become the subject of increasing controversy. It is an attempt to build a massive amount of infrastructure and establish trade between China and at least 68 other countries. Collectively, countries included in the plan account for over 30 percent of global GDP, 62 percent of population and 75 percent of known energy reserves, according to the World Bank.
China has called Belt and Road the "project of the century," saying it will bring a “golden age” of globalization. It is financing infrastructure projects with loans to developing countries from its large state-owned enterprises, raising concerns about the countries’ ability to repay.
Many of the countries are rated by the OECD as having high economic risk. An analysis by the Center for Global Development, a US think tank, found that eight countries are at particular risk of debt distress.
Some have already experienced trouble. Montenegro’s credit rating was cut after it borrowed one-fifth of its GDP to fund the first phase of a new highway. Pakistan is considering asking the IMF for a bailout to help with debt repayment. Sri Lanka was forced to transfer ownership of a strategic port to China after it was unable to continue repaying debts.
Complicating matters further, some of the Chinese state-owned companies themselves are highly leveraged.
In the escalating battle for hearts and minds, as well as for economic influence, the US has played up problems with the Belt and Road project, labeling it a debt trap. At the APEC summit, the US announced a new initiative of its own, including $60 billion in US investments in the Pacific region, to counter it.
Pacific Island Buildup
Another point of contention has been China’s ownership claim of some of the islands dotting the South China Sea and building of artificial reefs there. The region contains important international shipping lanes and fisheries that could broaden China’s trade access and provide grounds for military bases. It was a strategic location in World War II. An international tribunal rejected China’s claims to the islands in 2016, but China may be considering a new military base on the island of Vanuatu.
In what has been called a “bid to lock China out from developing its own base in PNG,” Vice President Pence announced at the APEC summit that the US will partner with Papua New Guinea and Australia to upgrade a naval base in PNG. "We will work with these two nations to protect sovereignty and maritime rights in the Pacific Islands," Pence said.
The US has long accused China of disregarding patent laws and stealing technology secrets. Relationships are becoming an issue as China expands surveillance of its citizens with facial recognition and other artificial intelligence technology acquired from US partner companies.
Despite the real difficulties and harsh rhetoric separating the US and China, it would be pessimistic to conclude the trade war will become an endless pinball game of sanctions and counter-sanctions forcing poorer nations to take sides and businesses to run for cover. That course risks losing economic gains that could benefit both sides, as well as alienating many of the corporations and citizens who are supposed to be its beneficiaries.
Tough talk by leaders may hide more flexible negotiations beneath the surface. Despite the invective from President Trump, he has also raised the possibility of a trade deal with China. Officials are holding talks and some analysts say protectionist advocates are being sidelined.
The trade war is likely to go on for some time, but like a real war, it won’t last forever. The upcoming G20 summit may reveal a better picture of the hurdles ahead and options for clearing them.