Trump Reaches for Checkbook Diplomacy to Counter China

In a stark reversal, the “America First” administration of U.S. President Donald Trump has ramped up Washington’s ability to compete with China in financing development around the world, pushing back against what administration officials have called Beijing’s “debt trap diplomacy.”

Trump over the weekend signed legislation that will modernize and expand U.S. development finance, essentially doubling its financial firepower and creating a new agency with a host of authorities. The new entity, which will merge the existing Overseas Private Investment Corporation (OPIC) and the Development Credit Authority, will make it easier for the U.S. government to encourage private sector investment in countries where Chinese largesse has for years been used to win influence.

“In the Obama administration … we had developed a very clear wish list to optimize its impact, and pretty much everything on that list is being accomplished in this act,” said Elizabeth Littlefield, who headed OPIC from 2010 to 2017.

Trump came into office planning to shut down OPIC, which uses government funds to encourage private sector investment in developing countries, especially in Africa. Less than two years later, the administration is driving a massive expansion of the program, doubling its financing authority to $60 billion and freeing it to make more kinds of investments in more types of projects.

The reason for the turnaround? China and its aggressive use of finance in the developing world.

Chinese President Xi Jinping’s signature foreign-policy initiative is the trillion-dollar Belt and Road Initiative that envisions building infrastructure across South and Central Asia, Africa, and Europe. China has also launched a pair of new development banks to compete with Western-dominated development banks, such as the World Bank. And Beijing’s state-owned China Development Bank also wields more than $1 trillion in assets to underwrite development around the world.

“This really is viewed as the primary response to Chinese finance around the world,” said Scott Morris, a senior fellow at the Center for Global Development. Rather than just criticize China’s use of development finance, the Trump administration decided to support the legislation that gives countries an alternative to seeking funding from China, he said.

China’s development push is helping to meet a huge shortfall in infrastructure investment across Eurasia, bringing new ports, railroads, pipelines, and power plants to countries from Cambodia to Serbia. But there is increasing concern that China’s development push is saddling countries with unsustainable debt, as in Sri Lanka. (Countries such as Malaysia and Myanmar have also recently started to bristle at debt imposed by Chinese-led development.)

U.S. Vice President Mike Pence last week called the new development finance push a way to give “foreign nations a just and transparent alternative to China’s debt-trap diplomacy.”

U.S. officials also worry that Beijing, by dominating development finance, is buying its way to undue influence while the United States sits on the sidelines. To curb China’s reach, the administration reportedly plans to push for greater transparency in development finance at next month’s meeting of G-20 countries.

The U.S. overhaul, said Ray Washburne, the current head of OPIC, “offers a financially-sound alternative to the state-directed initiatives pursued by China that have left many developing countries deep in debt.”

Some of the changes to U.S. development finance will likely take years to fully implement, including the ability to make sovereign loans, conduct financing in local currencies, and purchase equity stakes in new projects.

For now, the most important change is simply the greater firepower, a doubling of its financing authority to $60 billion, Morris said. But that’s still smaller than the sum of European development finance agencies and much smaller than Japan’s development arm, let alone the huge sums that China’s state-owned banks have mobilized.

“No way does it put it on par with the China Development Bank, but it’s still significantly larger than before and will enable U.S. participation in a wider range of settings and a wider scope of projects,” Morris said.

One very important change—and an odd one to come from the Trump administration—is opening U.S. government financial assistance to private sector projects that don’t include a U.S. company. Under current law, OPIC can only assist U.S. firms operating in the developing world; the new model will throw that open to a wider range of companies.

“If you’re trying to do as much as you can in foreign-policy hot spots, that’s not where U.S. investors want to go,” Littlefield said. “If you want to support stability in Jordan or Iraq or Afghanistan, and you’re limited to finding a U.S. investor, that’s a significant hindrance.”

That’s not to say that the new development finance agency will enable Washington to go toe-to-toe with Beijing, beyond even the size of their respective war chests. While the Trump administration touts its new agency as a private sector response to China’s state-driven model, it’s not clear that a private sector, for-profit model of development will fit the big-ticket needs of the developing world, Morris said.

“If you’re going to respond to China, you have to go where China is. If you’re going to do large-scale infrastructure projects, you have to deal with governments,” he said.

At the same time, Morris said he worries that the push to use U.S. development finance to compete with China could end up undermining the high standards that govern U.S. assistance.

“What I worry about is this positioning of responding to China and seeing the developing world as ‘friends’ and ‘enemies.’ If that is the dynamic, this new entity is going to be under tremendous pressure at the deal level to make ‘friends’ happy,” even at the risk of eroding current standards and safeguards.

There’s certainly more room for private investment in areas that were unthinkable 20 years ago, said Littlefield, from power plants to ports to schools and hospitals, creating an opening for the U.S.-style approach.

But China’s state-driven development model offers countries more than just money, potentially making it hard for even a bulked-up U.S. development agency to compete. State-owned Chinese firms can offer end-to-end engineering, construction, and other benefits beyond just financing.

“The real issue is not so much the volume [of financing] but that China can deliver the whole package with ‘China Inc.,’” Littlefield said. “The U.S. commerce secretary cannot deliver, say, General Electric if the project isn’t good for General Electric. But China can deliver its equivalent.”

Correction, Oct. 8, 2018: Elizabeth Littlefield headed OPIC starting in 2010. A previous version of this article mistakenly said she started in 2011.