April 18, 2018

A route to economic growth – The Belt and Road Initiative 2018 survey

https://www.centralbanking.com/central-banks/economics/3456321/a-route-to-economic-growth-the-belt-and-road-initiative-2018-survey

A route to economic growth – The Belt and Road Initiative 2018 survey

To mark the fifth anniversary of the Belt and Road Initiative (BRI), the IFF – in collaboration with Central Banking – conducted its inaugural Belt and Road Survey of central banks from more than 25 countries and regions. The survey examines BRI achievements, issues and experiences from the perspective of BRI countries. Most respondents expect the BRI to bolster their growth, but more effective co-ordination is required to fully unleash its potential. By Zhang Jizhong and Christopher Jeffery, with research by Emma Glass

Silk Route between China and India, Sikkim

Zhang Jizhong and Christopher Jeffery18 Apr 2018

China’s Belt and Road Initiative (BRI) has the potential to be the largest development project in modern history. In terms of its scope and scale, there can be little doubt. 

China’s signature BRI has already signed up 71 jurisdictions, representing a combined population of around 3.5 billion, and trillions of dollars of investment have already been made in projects such as the Port of Piraeus in Greece, the Suez Canal in Egypt, a new high-speed railway in Thailand, the China–Belarus Industrial Park, the Yamal LNG project in Russia, upgrading the Serbian railway system in Belgrade and the development of Gwadar – a brand-new container port – in Pakistan and 1,800 miles of superhighway and high-speed railway to connect China’s landlocked western provinces.

The BRI is not targeted as official development aid. It is a development strategy proposed by China focusing on connectivity and co-operation. Funding is expected to yield monetary returns and there will be economic consequences if projects fail to deliver on their expected returns. The sheer scale of the initiative also raises some challenges. Some are operational challenges – how capable are countries in terms of engaging into the BRI? What are the available sources of funding? What risks do they raise? Other issues are related to geopolitics. Could the China-led effort aimed at boosting economic development – in part by learning from China’s own lessons from its economic development, as well as benefiting from its capital – spark tensions with the European Union, the US, Russia, Japan and India? 

RELATED ARTICLES

The IFF China Report 2018The IFF China Report 2018Asian Infrastructure Investment Bank – Raising expectationsBRI and the participation of private capital

The International Finance Forum asked Central Banking Publications to survey central banks of countries participating in the BRI to gain their insight into the current state of the initiative and the challenges and opportunities it faces in the years ahead. Central banks were polled as they are key advisers to most governments on economic and financial matters, have technical competency – even in developing countries – and are often charged with financial stability in addition to being stewards of monetary policy. About one-quarter of BRI central banks have also arranged currency swap agreements with the People’s Bank of China. 

This article reports the findings of the survey, which was carried out in January and February 2018. The work has only been possible with the support and co-operation of the central bankers who agreed to take part. They did so on the condition that neither their names nor those of their central banks would be mentioned in this report. 

Key findings

Just under half of central banks described the BRI as a ‘once-in-a-generation’ initiative. Half of respondents said the BRI ranks above national development bank programmes in terms of importance; 21% ranked it above International Monetary Fund (IMF)/World Bank efforts; and 14% above regional development bank projects. Nearly three-quarters of those surveyed said the BRI has not yet resulted in greater investment from China than already expected.However, 92% of respondents expect the BRI to bolster domestic growth during the next five years, with 67% saying it will be greater than 0 and up to 1.5 percentage points, and 25% saying greater than 1.5 and up to 5.5 percentage points.Most funding is expected for major and mega infrastructure projects rather than smaller projects.Funding is expected to come from Chinese development banks, China-led and other multilateral institutions – financial centres scored poorly, with London (33%) ranking highest.Domestic currency (32%) and the euro (29%) are the most favourable funding currencies; respondents ranked renminbi and US dollar funding at the same preferred level (19%).Sixty-three per cent of respondents said they “actively support” or “support” expanding the capital of the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) with reserve currencies; 60% favoured domestic currency expansion – central banks unanimously rejected the use of reserves and sovereign wealth fund (SWF) capital for BRI projects.There was overwhelming support for sound ethical standards and transparency in BRIprojects.Thirty-five per cent of respondents said the BRI is evolving from an initiative to a regional/international co-operation mechanism; 35% called for the BRI to be more specific with standards; 29% called for it to be more transparent and relevant institutional mechanisms to be improved – European central banks believe the BRI will contribute to green finance, while most other central banks view it as “not relevant”.Legal framework, financing and the government sector were stated as being the largest obstacles to development.Policy and political risks are viewed as the two greatest barriers to the BRI.The BRI is expected to create the greatest friction with the EU (42%) and the US(33%). There was little concern about increased strain in relations with Russia, Japan or India.The BRI poses the biggest risks for domestic funding capabilities (36%), followed by monetary policy (27%) and financial stability (18%).Most central banks are not actively advising on the BRI to their governments or official development bodies – but the majority that are advising their governments on this initiative also have direct dealings with China.Engagement in the BRI is still patchy – most central banks said their countries have yet to draw up BRI plans.

Profile of respondents

Central Banking received responses from 26 central banks in countries participating in the Belt and Road Initiative. Over half of respondents were European, while Asian respondents made up just under one-quarter of the replies. Central banks from the Middle East and Oceania also featured. Transition economies played a significant role in this survey, contributing 46% of responses. Emerging markets and developing economies made up 19% of the total, while 15% of central banks were from industrial economies.

Percentages in some tables and graphs may not total 100 due to rounding.

Survey responses

1. Does your central bank actively advise your government and/or state development bodies on the BRI?

Nine respondents did not reply.

The majority of central banks’ respondents in BRI-participating countries surveyed said they are not playing an active role in advising the government or state development bodies about China’s signature development initiative. Given that much of the work of central banks is related to monetary policy, financial stability, currency and payments, and market infrastructure developments, it is perhaps not surprising that central banks are not yet playing a major role. Nonetheless, as many are financial and economic advisers to governments, it is noteworthy that so few view themselves as “active” in the area, five years after the unveiling of the BRI. This is by no means the case for all. One European central bank noted that it “acts in close co-operation with its government in connection with the BRI” while a major Asian central bank added: “We regularly provide outlooks to our government on this issue.” 

Others are engaged because of their involvement with multilateral bodies – particularly the World Bank, the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank (ADB) and the China-led AIIB. At this stage, central bank governors are far less likely to be substituted for finance ministers on the AIIB board than on the boards of the Bretton Woods multilateral institutions and established regional development banks.

Some central banks are actively involved in tackling financial issues associated with the BRI. One respondent from a central and eastern European (CEE) central bank said: “The bank has been internally consulted on the main strategic guidelines of the BRI, especially the ones dealing with financial issues and financial system development.”

1a. If yes, does your central bank also engage with China on the BRI? 

It is noteworthy that more than 70% of central banks that viewed themselves as actively advising their governments and/or state development bodies were also engaging directly with China on the BRI.

One major central Asian central bank said that it “takes part in discussions concerning interbanking co-operation”. A Southeast Asian central bank explained that it “always supports [its] government’s co-operation with China under the framework of the BRI”, and other efforts. A European central bank added that “several initiatives have already been launched in the framework of the BRI” and it is expected “to further develop its relations with countries participating in the BRI”, while another pointed to the importance of its currency swap agreement with the People’s Bank of China to facilitate “commercial trade between the two countries”, although this is not “formally part of the BRI”.

2. How important is the BRI to your country? 

10 respondents did not reply.

Just under half of central banks viewed the BRIas a once-in-a-
generation opportunity, with another 20% ranking it as one of the most important in the past decade. This supports assertions that the BRIrepresents a major opportunity to advance transport, logistics and other infrastructure in developing countries, as well as to increase the velocity of trade and services for all countries involved.

“We support the BRI as it is expected to facilitate the flow of trade between our country and Asian countries, particularly China,” said one Middle East-based central bank. “In addition, the initiative enables us to access new financing sources and boost investment in infrastructure projects.”

“The BRI can significantly improve connectivity within Southeast Asia and beyond. The infrastructure networks connecting Asia with Europe and Africa, along with the project’s routes, will induce closer and larger economic, social and cultural ties between China and its trading partners,” added a central bank from a middle-income Asian nation. 

One major central bank asserted that the BRIrepresents an “opportunity to increase bilateral investments”, while others felt the BRI could promote development within their nation in terms of technological and social advancement. “The results of the initiative should be mostly obvious in building technological capacities, development of skills and the creation of new jobs – especially for the youth and female population. It should result in a long-term growth model, based on trading, exchange and, primarily, the activities of small and medium-sized enterprises,” said the central bank of a former Soviet Bloc nation.

One CEE central bank believes the BRI “could potentially be very important, if implemented and utilised actively”. 

3. How does your central bank categorise the importance of the BRI at a national level?

15 respondents did not reply.

Half of central bank respondents ranked the BRIas “more significant than national development bank programmes for new initiatives”, although just 14% said they viewed the BRI as “more significant than domestic government programmes for new initiatives”.

Perhaps surprisingly, 35% of respondents ranked the BRI as more significant at a national level than IMF/World Bank (21%) and regional development body (14%) programmes. “The BRIis able to promote win-win co-operation among the participating countries. The technological and financial involvement of the East can be decisive for the further development of Europe,” responded one CEE central bank.

Many central banks said they found it hard to rank the BRI against existing multilateral and domestic development efforts, in some cases because these efforts are viewed as complementary. “The BRI and the programmes offered by the organisations mentioned… are different both in objectives and practices and cannot be compared directly,” said one mid-sized Asian central bank.

A European central bank added: “It is very difficult to point out to what extent the BRI is more or less important … but it is certainly very much connected to all other international and domestic relations. We have a very specific position, and our economy is very much dependent on foreign direct investments. In that context it has to be highlighted that relations with the IMF… are very important, as well as the World Bank programmes. On the other hand, the involvement of the EBRD and other such institutions in the financial market is of the utmost importance for the further development of the economic conditions in our country. In our view, the BRI is accompanying these other factors.” 

Some central banks believed the scope of the question needed to refer, in a broader sense, to more than just public money. 

4. Has the BRI resulted in greater investment in your country compared with what was already expected from China?

11 respondents did not reply.

Nearly three-quarters of respondents stated that the BRI has not resulted in more Chinese investment in their country than was already expected. Most central banks asserted that Chinese investment that has taken place would have occurred irrespective of the BRI. There were some exceptions, however. 

One mid-sized central bank discussed the development of ports by public sector Chinese companies. Another central bank from central and eastern Europe foresaw investment in the future: “We expect far more projects in railways and road-building, housing, energy, mining and other sectors in the coming years, which would be a direct result of this initiative.”

“We already have a close trade and investment tie with China,” said one Asian central bank. “The BRI may further help secure the financial support needed from the China-led development banks to upgrade our infrastructure facilities and improve connectivity with other Asian countries.” 

One mid-sized central bank pointed to a major project that will target logistics and help develop high-value manufacturing, modern services and a knowledge-based society. “We aim to focus on linking innovative economies and supply chains across the region, which would be complemented by the BRI,” it said.

5. What is the expected boost to GDP from BRI-related projects over the next five years? 

Figures are rounded to the nearest percentage. 14 respondents did not reply.

China says it is keen to export its growth model to developing countries, and believes that enhanced connections of all forms will help to uplift economic growth for all parties engaged in the BRI. 

A total of 92% of central bank respondents expect the BRI to bolster their domestic growth during the next five years, with the majority saying this would be greater than 0 and up to 1.5 percentage points although 25% were more bullish, predicting a fillip to growth of more than 1.5 and up to 5.5 percentage points. Such growth levels would reflect favourably on the growth China itself has enjoyed during the past four decades. 

“Countries like ours have a chance to use the funds and agreements with the Chinese government and Chinese companies… to influence infrastructure development to be better connected to the region and world trading routes,” explained a CEE central bank. “In this way, better conditions would be formed for foreign direct investment and economic development. With this in mind, the government [agreed to give] full support to this new ‘Chinese economic philosophy’ and its guiding principles in financing the development of the countries along the ancient Silk Route. The BRI will certainly have a positive effect on our GDP in the next five years, but it is hard to calculate the extent of it.”

“The expected boost depends not only on engagement but also on the external opportunities,” added another CEE central bank. “The projects are in the initial phase and involve a number of institutions and decision-making bodies. For the time being, the impact on GDPcan be estimated in a wide range. However, the initiative is expected to further boost economic growth.” 

Other central banks found it hard to estimate the overall impact. A Southeast Asian central bank, for example, explained how its own new economic strategy would be the main contributor to future growth. “Our assumption is that the BRIwould induce investment as a supplement to [our own economic strategy], thus, its contribution to our GDP is expected to be quite slim,” it explained. “That said, direct contribution may be small but [the] indirect crowding-in effect could be large.”

A number of central banks chose not to make a prediction. “It is virtually impossible to answer, as there are no necessary and stable inputs,” said one European central bank. “It might not affect our economy,” added another, located in the Middle East. “Based on currently available information, publicly disclosed projects will affect the country only indirectly, thus they will have only a marginal impact in terms of GDP,” said another. 

6. In your country, which types of projects will receive the greatest funding support from the BRI? 

Votes were cast using a scale of 1–5, where 1 denotes the source of most funding and 5 the least. 15 respondents did not reply.

The Chinese authorities are keen to stress that BRI projects are not necessarily focused on major infrastructure developments, but rather the entire ecosystem, including small and
medium-sized enterprises and the financially excluded. This focus has yet to materialise in the thinking of  central banks in BRI countries. 

Major infrastructure (railways, roads, highways, factories and agricultural water conservancy works) and mega infrastructure (power stations, the power grid, high-speed rail networks, urban underground networks and rail transit) were the two types of investments viewed as most likely to secure the greatest funding from BRI, according to central banks surveyed. A total of 55% of central banks ranked major infrastructure projects as the most likely to secure BRI funding, with 36% ranking mega infrastructure as most likely. The percentages for second-ranked votes were 44% for major infrastructure, and 22% for mega infrastructure. 

“We anticipate we will be a connecting logistic hub for the whole Association of Southeast Asian Nations region,” said one Southeast Asian central bank. “Having said that, infrastructure and construction projects are at the forefront of receiving funding support from the BRI.”

These sentiments were echoed by a small European central bank. “Road and general infrastructure projects would probably constitute the main contributions. Some intra-regional and other types of supporting infrastructures could develop as well,” they added. 

Another European central bank said its response was based on “observed interest of Chinese investors in transport infrastructure and power plants projects”.

“Up to now there was no interest in the projects that fall into the remaining three categories of medium-sized development projects, small and medium-sized enterprises and financial excluded sectors, and could be qualified as part of the BRI. However, there are also other Chinese investments that we do not consider part of BRI,” the central bank said.

7. Where does your central bank expect most BRI funding for these projects to come from? 

Votes were cast using a scale of 1–6, where 1 denotes the source of most funding and 6 the least. 15 respondents did not reply.

The most significant source of funding
for BRI projects was expected to come from Chinese development and state-owned banks, said 40% of central banks in their first choices and 22% in their second. Chinese-backed multilateral institutions (20% of first choices and 22% of second choices) and, to a lesser extent, other multilateral institutions (10% of first choices and 20% of second choices) also scored highly. Meanwhile, private sector Chinese corporations (10% of first choices and 22% of second choices) are expected to play another important but smaller role. International commercial banks and financial markets are expected to play a minor role, despite Chinese efforts to utilise private capital. 

“It is expected that funding for BRI projects would come primarily from Chinese development and state-owned banks and, in some part, from private Chinese corporations and Chinese-backed multilateral institutions,” said one ‘16+1’ group central bank, summing up the views of many institutions. 

Some central banks said it is still too early to determine the source of funding for BRI projects. “Talks with Chinese investors on possible investments in major infrastructure projects are still at an early stage and that is why we cannot precisely rank the possible sources of funding,” said a CEE central bank. 

A small number of central banks alluded to involvement from European institutions. “Eurozone, EU-based markets and banks in general”, will be the primary source of funding, according to one central bank, while another suggested “adding the European Investment Bank to the list of multilateral institutions” – a list that includes the World Bank, the EBRD and the ADB. 

One major central bank explained how initial public offerings in Chinese financial markets are “regularly discussed” with the People’s Bank of China, but “the projects have not been implemented yet”. 

7a. If funding for BRI projects comes from financial markets, which financial markets?

Financial markets are not expected to play a major role in funding BRI projects for the time being, despite vast sums of pension and insurance money seeking higher returns than are currently available from many current market instruments. London was ranked as the top centre for market-based funding, followed by Hong Kong and mainland China. One European central bank explained: “Given prevailing current trends, the funding might probably be expected to come from Hong Kong-based markets.”

8. What currency should be used for financing BRI-related projects?  

Eight respondents did not reply. Respondents were invited to select more than one answer.

Unsurprisingly, many central banks would prefer BRI financing to take place in domestic currencies (32%), where there is no foreign exchange risk. But a large number of central banks also favour the use of the euro (29%). 

“Domestic currency would be preferable in order to minimise potential negative impacts on economic and financial stability,” said one central and eastern Europe-based central bank. “However, local financial markets remain rather shallow, and excessive reliance on them might crowd out domestic investment projects. A combination of both euro – given our increasing EU integration trends – and [domestic] currency might offer the best combination.”

A eurozone central bank added: “The euro serves as the one and only official currency, so from a financial stability point of view, it is preferable to eliminate forex risk, unless an effective/efficient hedge is made, and/or it can strongly be concluded that benefits of non-euro funding outweigh its costs.”

Encouraging for those that see a greater international role for the renminbi is that the same proportion (one-fifth) of respondents favoured use of renminbi for BRI projects as those that preferred the US dollar. 

“Our country is committed to strengthening financial and economic relations with China through renminbi-related agreements and initiatives,” said one mid-sized central bank. 

“The central bank is promoting regional currency usage,” added a mid-size Asian central bank. “Regarding the promotion of renminbi usage, we have designated one of the Chinese banks as a clearing bank to deal with renminbi transactions… In addition, we have swap arrangements between the central bank and the People’s Bank of China, which serves as backstop liquidity as it allows both central banks to access the local currency of the other party. This has bolstered confidence of the private sector as well as financial institutions on the availability of local currency for cross-border investment settlements.”

Another central bank that has a bilateral swap with the People’s Bank of China said the “best solution” would be for Chinese investments to be conducted by a “direct conversion from renminbi to our [domestic] currency” and “for all project activities” to be conducted in “domestic currency”. “However, BRI projects are very important for stimulating economic growth, even if they are conducted through funding in hard currencies such as the US dollar or euro.”

Another Asian central bank was impartial, stating the choice of currency should be determined “by the relevant decision-makers”. 

9. What is your central bank’s position on expanding the capital in the NDB and AIIBwith reserve currencies and/or your nation’s own currency?

17 respondents did not reply.

Many central banks that participated in the survey did not express a view about funding for the new China-led multilateral development institutions, the NDB – or the Brics (Brazil, Russia, India, China and South Africa) bank – and the AIIB. The NDB is currently seeking to expand membership beyond its five founders. 

“As we are not a member of any of the stated banks, we do not have a specific position on this issue,” said one mid-sized institution. One bigger central bank added: “The central bank’s involvement in the AIIB is somewhat limited as such matters fall within the responsibilities of the ministry of finance and involve the use of fiscal resources.” 

Nonetheless, a total of 63% central banks responded by saying they “actively support” or “support” expanding the NDB and AIIB’s capital with reserve currencies, while 38% objected. Further, 60% of respondents favoured expanding capital in national currencies, while 40% objected. 

“The central bank supports the capital increase in the NDB and AIIB to strengthen the role of institutions in financing the projects of the BRI,” said an Asian central bank.

But not all institutions favoured additional capital raising. “Our answers concern only the AIIB as we are not a member of the NDB. The AIIBseems to be well capitalised at the moment,” said one European central bank. Another stated: “The current economic conditions and fiscal position constrain us from expanding our share in the NDB.” 

9a. Should central bank forex reserves and sovereign wealth be used to invest in BRIinfrastructure strategies?

15 respondents did not reply.

Although the challenging yield environment in traditional reserve currency assets is making it difficult for central banks to earn a profit on their foreign exchange reserves, central banks that responded unanimously rejected the idea of using reserves and sovereign wealth assets in BRI infrastructure projects – despite the Hong Kong Monetary Authority unveiling plans to invest US$1 billion in International Finance Corporation infrastructure projects last year. 

“The role and function of central banks’ forex reserves and SWF should not be changed,” said one mid-size central bank. 

“The purpose of international reserves is primarily to ensure a country’s international liquidity. Therefore, we believe that – in line with the principles of liquidity and safety – the decision on the investment of the international reserve funds should not be bound to any specific project, but determined by the securities’ credit rating,” added another, echoing the thoughts of many central banks. 

Indeed, this was the view even in countries that have SWFs or whose central bank reserves are viewed as being sufficiently large that they can invest in less liquid financial instruments. 

10. How important are ethical standards and transparency in the development of the BRI?

Eight respondents did not reply.

Central banks overwhelmingly support the practice of sound ethical standards and transparency for BRI projects, with 89% of participants describing it as “very important”. Just 11% said ethical standards and transparency are “important, but not essential”, and no central bank viewed them as “not very important” or “irrelevant”.

A Eurasian central bank said: “Ethical standards and transparency are essential and very important principles for us”; while an Asia-Pacific central bank added: “Ethical standards and transparency are equally important for developments outside the BRI.” 

A small European central bank also highlighted the benefits of transparency: “It should always be the case with major infrastructure projects so that benefits and cost associated with it are clear to all market agents.”

11. Which best describes your central bank’s view of the development of the BRI? 

Nine respondents did not reply.

A total of 35% of respondents say they view the BRI as “developing from an initiative to regional or international co-operation mechanism”, with one Asian central bank stating: “Regional financial connectivity has long been a key driver behind the flourishing economic ties between ourselves and countries in the region”.

However, 35% felt the initiative needs to be more specific and that standards need to be created to ensure the successful implementation of projects; while 30% say the BRI needs to be more transparent and the institutional mechanisms need to be improved. 

11a. Do you believe the BRI will contribute to green finance?

12 respondents did not reply.

There was a split between European central banks – particularly those with close ties to the EU – and other central banks when it came to views on the BRI contributing to green finance. Half of those that voted said they thought the BRI would boost green finance – many of them European. “We believe that the projects under the BRI will be implemented in accordance with key international agreements regarding climate change and emerging tendencies in financing infrastructure,” said a respondent from a medium-to-large-sized EU central bank. 

“It is very important that all future projects within the BRI have a focus on green financing as environmental preservation and the appropriate usage of natural resources become more and more important,” added a central bank based in the Balkans region.

“Our country is committed to environmental protection and believes that green funding can play an increasingly important role in securing sustainable economic growth and long-term investments,” said another European central bank. 

China has received criticism from some of the backers of Bretton Woods institutions for its financing of higher-polluting, coal-fired power stations in countries such as Pakistan. Bankers in the south Asian nation – which produces its own coal and has to import gas – believes it would have struggled to fund new coal-fired stations from sources other than China. This may explain why 43% of respondents – particularly those in Asia – viewed green financing as “not relevant” to the BRI. 

However, attitudes may be changing. One small central bank reported: “Investments in the power plants based on renewable energy sources could contribute to green finance.” Another added: “China is putting green finance at the centre of its development plans. The BRI could be used as a platform for the delivery of green finance, [enabling a] greater amount of finance for construction of non-hydrocarbon energy-generating facilities.” 

12. What is causing the biggest roadblock to the development of BRI projects in your country?

Votes were cast using a scale of 1–5, where 1 denotes the most significant roadblock and 5 the least significant. 14 respondents did not reply.

The biggest blockage to the development of BRIprojects are the legal framework, financing, the government sector and credit ratings. A total of 45% of survey respondents ranked the legal framework as the most significant roadblock when facing the development of BRI projects, with 36% citing financing. Furthermore, 44% of second-placed votes went to the government sector, and 9% of first-ranked and 33% of second-ranked concerns were related to credit rating.

Many legal challenges are related to compliance commitments to rules that are part of being a member of an existing trading bloc. “Most impediments arise from legal rules – which originate in the EU legal framework,” explained one European central bank. 

An Asian central bank said that despite attempts to “streamline regulations”, “foreign contractors participating in the projects may still be subject to regulatory burdens”.

One central bank referred to the high costs related to Chinese funding. “The biggest roadblock to developing BRI projects is expensive financing from China, including the insurance of funding costs,” said a CEE central bank. “Adjustment in this area would provide far more BRI projects.”

13. What is the greatest policy barrier related to the BRI? 

Votes were cast using a scale of 1–5, where 1 denotes the greatest barrier and 5 the least. 13 respondents did not reply.

Respondents voted policy risks (18% of first-ranked votes and 45% of second-ranked) and political risks (36% of first-ranked votes and 9% of second-ranked) as the greatest barriers to the BRI. “We are in a very specific position,” said one mid-sized BRI country central bank. “We are based in a country that has had many political tensions in the past and many different foreign influences, so the biggest risk to development is a political risk coming from different international forums.” 

Some parties also highlighted a lack of clarity around the BRI. “Stakeholders are uncertain about the policy implementation plan,” said one Asian central bank.

Many more central banks were worried about exchange rate fluctuations (27% of first-placed votes) and others expressed concerns over investment risks (9% of first-placed votes and 45% of second-placed). 

A small European central bank worried that forex inflows “might engender exchange rate volatility and induce economic and financial stability shocks”. Forex volatility was also cited by a Group of 20 central bank: “Some participants of investment projects under the BRI pointed out the importance of hedging risk of exchange rate fluctuation.”

14. Is your central bank concerned the BRI may create friction with any of its strategic partners? 

14 respondents did not reply. Respondents were invited to select more than one answer.

China has presented a philosophy of embracing nations engaging in the BRI. But with so many nations and vested interests involved there are bound to be tensions. 

Central banks that voted in the survey believe the BRI may create greatest friction with the EU(42%) and the US (33%). This is perhaps not surprising, given the decision by EU members not to endorse part of the multi-billion dollar plan in 2017 because it did not include commitments to social and environmental sustainability and transparency. The US, meanwhile, has recently named China a “strategic competitor” and moved to impose trade sanctions on it, including restrictions on investment and tariffs on US$60 billion worth of products. 

“If the [BRI] initiative does not develop in compliance with EU/US projects and policies, or does not duly take into account their economic or political concerns, the risk of friction is certainly there,” said one CEE central bank. “Considering the size and scope of current investments here, we do not see that they could create frictions [at the moment].” 

“There is a possibility that the BRI could in some way conflict with EU goals, but we are strongly committed to the European integration process, while trying to have very friendly and prosperous relations with China through the BRI,” said another European central bank. “In our view, these two processes should accompany one another.”

A respondent from a Middle Eastern central bank also expects the BRI to offer a net benefit. “The BRI is expected to strengthen the economic and trade relations with our existing trading partners and create new opportunities and new economic partners,” the bank said. 

“The BRI can be regarded as win-win co-operation. The initiative should be considered as an opportunity that is not intended to divide the countries,” added another European central bank.

“As far as we are concerned, we do not foresee any friction arising from the BRI with our strategic partners,” added an Asian respondent.

Despite many BRI countries in central Asia and central and eastern Europe falling within Russia’s traditional sphere of influence, there did not appear to be much concern about frictions with Russia and the Eurasian Economic Union. This may be in part due to Russia – itself already benefiting from BRI projects – appearing to embrace China’s strategic initiative. 

“We are not concerned the BRI may create friction with any of the strategic partners,” explained a Eurasian central bank located within Russia’s traditional sphere of influence. 

Perhaps surprisingly, no central bank predicted the BRI would cause frictions with India. One of the original Brics nations, India notably stayed away from Belt and Road Forum for International Cooperation in May 2017 in Beijing. It has also expressed its opposition to the economic corridor China is building in Pakistan, as it passes through the disputed Kashmir region controlled by Pakistan but claimed by India. 

14a. Are there concerns that the BRI may pose risks to any of these areas at a national level?

15 respondents did not reply. Respondents were invited to select more than one answer.

The main risks the BRI could pose for their nations, as the central banks highlighted,  were related to its impact on domestic funding capabilities (36%), followed by monetary policy (27%) and then financial stability (18%) – although a large number did not answer or did not see risks in the indicated areas. “We consider the BRI an opportunity that will not pose risk to the mentioned areas,” said one CEEcentral bank. “We do not foresee that the BRIcould pose risks to the mentioned areas at a national level,” added a Southeast Asian central bank.

Central banks did not elaborate on the reasons for their concerns about domestic funding capabilities being damaged by the BRI, but they did add some details about other concerns. “Projects need to be well chosen, designed and implemented. Otherwise they can create a dangerous fiscal burden, which would then spill over to the rest of the economy – the financial sector in particular,” said one Balkans-based central bank. 

Another small central bank reiterated earlier concerns about foreign-exchange funding risks. “If financing occurs in forex it jeopardises monetary policy operations,” a respondent from the central bank said. “If the projects engage in large domestic borrowing, as some of the construction contracts could be outsourced to domestic implementers, financial stability could be affected.”

15. Has your country drawn up corresponding plans to participate in the BRI? 

12 respondents did not reply.

While China has moved quickly to turn the BRI into a major initiative involving some 71 territories, engagement still appears to be patchy – and the majority of central banks said their countries have yet to draw up plans to participate in the BRI. 

A response from a mid-size Asian central bank sums up the view of many: “We have not drawn up corresponding plans to participate in the BRI. However, our nation has signed a memorandum of understanding with the People’s Republic of China on co-operation within the framework of the Silk Road Economic Belt and the 21st Century Maritime Silk Road Initiative.”

Another central European central bank added: “Our government adopted a directive in May 2017 in which it gave full support to the BRI and its guiding principles, but a detailed plan to participate in this initiative is still to be developed.” 

One larger Middle-Eastern economy central bank said it has initiated plans for “investments of Chinese infrastructure corporations” in its country – but this has yet to be extended to the BRI more broadly. 

Another central bank whose nation looks set to benefit from a major infrastructure project funded largely by the Export–Import Bank of China since 2014 said it has also signed a memorandum of understanding on the BRI in May 2017. Other nations have advanced beyond signing general memoranda of understanding on co-operation within the framework of the BRI to move towards more specific co-operation, for example, on ports and port industrial parks. This was particularly the case for some 16+1 central banks.

 

This article is part of The IFF China Report 2018, which draws mainly on content provided by China-headquartered think tank, the International Finance Forum, and is published in association with Central Banking

PD & THE DECLINE OF LIBERAL DEMOCRACY: THE CASE OF HUNGARY

http://uscpublicdiplomacy.org/blog/pd-decline-liberal-democracy-case-hungary

PD & THE DECLINE OF LIBERAL DEMOCRACY: THE CASE OF HUNGARY

Apr 17, 2018

by
Vivian S. Walker

In the good old days, we worried about carrying out effective public diplomacy in patently authoritarian, newly independent or conflict-ridden states. We had a well-established set of public diplomacy practices to lay the groundwork for democratic institution building, featuring principles of tolerance, transparency and freedom of expression. 

But what do you do when these principles are at risk in established democracies? When democratically elected leaders and their governments disparage liberal values in defense of national security and prosperity, political sovereignty and the preservation of national identity? How does public diplomacy promote devalued principles of tolerance, transparency and free expression?

As we struggle to manage the widening gap between values and actions in our own country, we must also keep track of public diplomacy challenges elsewhere. Take Hungary, for example, a country that endured centuries of occupation and incursion, bloody wars and ill-fated revolutions, to emerge as a strong Central European democracy, a trusted NATO ally and EU member state. Today, it is on the verge of becoming a cautionary tale about the decline of liberalism—and the fragility of democratic values.

In 1989, as a young firebrand politician, Victor Orban emerged as a champion of liberal democracy, calling for an end to communist rule and Hungary’s triumphant return to the West. Today, Prime Minister Orban, just elected to his third straight term of office, has morphed into a hardline authoritarian. As the self-proclaimed prophet of “illiberal liberalism,” he and his fellow Fidesz party members have steadily eroded Hungary’s hard-won democratic freedoms.

Citing Russia, China and Turkey as political models, Orban has been busy squeezing out independent media, launching repressive measures against ethnic minorities and refugees, and amending the constitution to limit judicial authority. Much like Putin and the restoration of a so called “Greater Russia,” Orban appears to be fixated on a vision of Hungary as a bastion of traditional values and a model of homogenous ethnic cohesion.

In the effort to achieve this vision, no one has been more vilified by the Orban government than Hungarian-American financier and philanthropist George Soros. Indeed, the demonization of Soros served as a core theme of Orban’s recent reelection campaign. Describing Soros-funded democratization initiatives as corrupt, destabilizing and even “evil” influencers, Orban and his supporters have launched a series of public attacks against a number of Soros-sponsored institutions.

Can public diplomacy help to mitigate the decline of democratic liberalism? No. And yes.

Chief among Orban’s targets is the Central European University (CEU), founded in Budapest by Soros in 1991 to offer a broad liberal education to students from newly independent states and developing countries. CEU’s subsequent prominence as a haven of liberal idealism didn’t sit well with Orban. In April 2017, the Hungarian Parliament pushed through stringent amendments to the higher education law that would force CEU to close down by Fall 2018, unless it could negotiate a bilateral treaty with the United States and establish an accredited campus on U.S. soil in a mere 12 months. (Today, little progress has been made on either front, and recent reports suggest that CEU is considering a move out of Hungary.)

In the wake of these punitive amendments to the education law, protestors took to the streets in solidarity with the university, and the government appeared to tone down its anti-CEU rhetoric. However, just a few days ago, immediately after Orban’s sweeping reelection victory on April 9, a prominent Orban supporter dangerously upped the ante, publishing the names and institutional affiliations of those associated with Soros initiatives. 

Titled “The Speculator’s People,” this unprecedented “name and shame” article identifies a number of individuals, many of them foreign citizens, who are allegedly working to “enforce George Soros’ will.” The list of so-called “mercenaries” focuses on CEU faculty but also includes the names of people working at human rights monitoring and advocacy organizations as well as independent media outlets. Now the attacks on democratic values in Hungary have become personal—and threatening.  

The short-term public diplomacy implications are significant as well. A strong judiciary, robust media and widely representative civil society institutions provide the conditions necessary for vigorous public debate about government policies and actions. And public diplomacy initiatives provide a platform to manage these exchanges, which are vital to the health of a democracy.

But when the courts, the press, human rights organizations and educational institutions are either co-opted, targeted or marginalized, then it is very hard indeed to make the case for a state’s viability as a democracy—or even to make the case for democracy itself.

Can public diplomacy help to mitigate the decline of democratic liberalism? No. And yes. No, because public diplomacy is, after all, merely an instrument of policy—not the policy itself. Yes, because as an instrument of policy, public diplomacy has the unique power to inform and influence, to shape the way in which publics perceive and respond to their rights and responsibilities as citizens. Time to step up international support for advocates of liberal democracy in Hungary.

VIVIAN S. WALKER

CPD Faculty Fellow

Research Fellow, Central European University Center for Media, Data and Society

Superpower Constrained

http://www.css.ethz.ch/en/services/digital-library/articles/article.html/6ec57131-fed0-4037-88d3-8d5548f642be

Superpower Constrained

18 Apr 2018

By Jack Thompson for Center for Security Studies (CSS)

Jack Thompson contends that the US’ longstanding role of international leadership is under threat. Washington is struggling to manage external challenges —including great power competition and globalization— and domestic constraints, such as underfunding and mismanagement of the military and diplomatic corps. Unfortunately, prospects for reform are uncertain given the dysfunctionality of the US political system. So what does all this mean for the future of US foreign policy? Further, what implications could this have for European policymakers? Here’s Thompson’s answer.

This article was originally published in Strategic Trends 2018 by the Center for Security Studies on 13 April 2018.

 

The US’ longstanding role of international leadership is under threat. It is struggling to manage external challenges, including great power competition and globalization, and domestic constraints, such as underfunding and mismanagement of the military and diplomatic corps. Unfortunately, prospects for reform are uncertain given the dysfunctionality of the US political system. This should worry European policymakers and will hopefully hasten their efforts to develop a more robust and independent Common Security and Defense Policy.

 

Introduction

The United States enjoys an unrivaled ability to shape world affairs. Thanks in large part to its leadership of and participation in the liberal world order (LWO), US military might is unequalled, its economy is the largest in the world, and the US dollar’s status as the most important reserve currency provides enormous benefits. Soft power is another area of advantage, with US culture in particular commanding global influence.

 

US President Donald Trump returns to the White House after addressing the Republican Congressional Retreat, 1 February 2018. Yuri Gripas / Reuters

However, this favorable state of affairs is under threat. Partly, this is due to structural changes in the international system. With the rise of persistent global and regional challengers, the post-Cold War “unipolar moment” has ended, and US military and economic predominance are no longer assured. Globalization and technological change have accelerated the process, fragmenting power, diffusing information, and weakening support for international trade and democratic values. Even its soft power could be at risk, as political and economic dysfunction undermine the US’ image abroad.

If the US is to reverse these trends, to retain a position of unquestioned leadership in world affairs, and to preserve the LWO, it will need to get its house in order. There is little policymakers can do to reverse the structural changes to the international system, but they have the power to deploy US troops more carefully, to manage the military and diplomatic corps more intelligently, and to address the underlying causes of opposition to international trade and declining attachment to democratic norms.

Unfortunately, a vigorous reassertion of US leadership appears to be unlikely. Demanding deployments and – in light of its many commitments – inadequate budgets have left the military in a state of crisis. The diplomatic corps is also struggling under the weight of poor leadership, a sharp reduction in numbers, sinking morale, and the prospect of reduced funding. Some of these problems are specific to Donald Trump’s presidency, but the problems go much deeper than the current administration.

In other words, reform is unlikely. There is little indication that the political will exists, or that the system is equipped to accommodate the sweeping changes that would be necessary to turn things around. Washington remains hamstrung by gridlock, which reflects the polarization that has divided society in recent decades. It seems likely that the US will continue to face significant constraints for the foreseeable future. In the meantime, its rivals are gaining ground, and the world is becoming less conducive to liberal internationalist values such as democracy, free trade, and the rule of law. This state of affairs should worry Europeans, as their foreign and security policy relies upon vigorous international engagement by the US.

 

Sources: Kathryn Watson, “Where does the U.S. have troops in Africa, and why?”, in: CBS News (21.10.2017); International Institute for Strategic Studies (IISS), The Military Balance 2018 (Routledge, 2018), 59.

The Return of Geopolitics and the Forever War

The apparent post-Cold War triumph of the LWO has proven illusory. Instead, the US and its allies face a fractured, multipolar system that is rife with threats, especially from revisionist powers. What Walter Russell Mead dubbed the “return of geopolitics” represents – as the Department of Defense’s 2018 National Defense Strategy acknowledges – “the primary concern in U.S. national security”.

Two nations, China and Russia, have not reconciled themselves to the current international order and constitute the foremost threat to US leadership and the future of the LWO. China resents US predominance and is positioning itself as a rival superpower. Though Beijing is challenging US interests across the globe, its priority is to upend the status quo in East Asia, where the US has long served as the fulcrum for the region’s power structure. Much as the US asserted itself in the Western Hemisphere in the early 20th century by forcing European nations to acknowledge its preeminent role, China seeks to replace the US as the leading power in its neighborhood.

Though the US position remains strong, recent political and economic developments have drawn attention to Beijing’s growing influence. President Trump’s decision to withdraw the US from the Trans-Pacific Partnership trade agreement – which excluded China, and which the administration of Barack Obama viewed as a way to reinforce its standing in East Asia – represented a setback. China quickly moved to fill the vacuum by redoubling efforts to promote an alternative arrangement, the Regional Comprehensive Economic Partnership. This dovetails with a desire to link Eurasia under Chinese economic leadership, embodied in the Belt and Road Initiative, and a long-term goal of establishing footholds in Europe, Latin America, and Africa.

Beijing is also challenging the US and its allies on military, strategic, and technological fronts. It is executing a steady campaign of pressing a long list of territorial claims in the region, including a dispute with Japan over the Senkaku Islands. Even more noteworthy is China’s project of creating artificial islands in the South China Sea, several of which it is equipping for military purposes. Their development also serves the broader goal of buttressing Beijing’s claim to sovereignty over most of the South China Sea, the world’s most important shipping zone. The US contests this claim by regularly conducting freedom of navigation exercises, but has been unable to do anything to slow the reclamation and fortification project. China’s development of anti-ship ballistic missiles, which are designed to destroy aircraft carriers, also threatens the ability of the US to intervene in the region. China’s nuclear arsenal, though still small when compared to those of the US or Russia, is slowly increasing in size and in terms of its capabilities.1

China has moved aggressively to close the gap with the US in the realm of advanced technology, with considerable success. When it comes to artificial intelligence, for instance, China has announced a goal of becoming the global leader by 2030, and is already closing in on the US. China is also a powerful player in the cyber domain and is using its influence to shape the global development of the internet in ways that are conducive to its own interests, but not necessarily to those of the West.2

Like China, Russia seeks to undermine US leadership, which it views as the foremost hurdle to its return to superpower status. Vladimir Putin’s campaign to revivify Russian power has enjoyed considerable success, even if the economic resources at his disposal are more modest than China’s, and much of his progress has come at the expense of the US and its allies. Military interventions in Georgia and Ukraine – nations that harbored ambitions of drawing closer to the European Union (EU) and/or the North Atlantic Treaty Organization (NATO) – elicited condemnation and economic sanctions from the West. However, these have done nothing to impair Moscow’s aggressiveness, which includes frequent violations of NATO airspace. Even Moscow’s interference in the 2016 US elections, the full extent of which remains unclear, has yet to elicit an effective US response.

Russia’s intervention in the Syrian civil war appears to have been a decisive factor in the resurgence of Bashir al- Assad’s regime and should give Moscow a foothold in the Middle East for the foreseeable future. Meanwhile, in spite of the virtual defeat of the Islamic State, the return on Washington’s investment of money and troops in Syria has been more modest. Nevertheless, former Secretary of State Rex Tillerson recently announced that US forces will remain in Syria for the foreseeable future, thereby adding further strain to an overstretched military.

The US is also confronted by regional powers that resent the status quo. The speed with which North Korea has developed intercontinental ballistic missiles that might already be able to reach the US mainland, and Pyongyang’s unwillingness to trade its nuclear weapons program for relief from economic sanctions, has left policymakers with a series of unappealing choices. They could accept North Korea as a nuclear power and rely on deterrence. However, Kim Jong-un’s regime is particularly brutal and regularly transgresses international laws and norms. It views a nuclear arsenal as more than merely a defensive investment. Rather, it has a history of engaging in brinkmanship to extract concessions from the US and the rest of the international community.

One alternative to deterrence would be an attack designed to destroy most or all of the North Korean nuclear arsenal. The Trump administration is currently considering such a “bloody nose” strike. However, even if a military raid achieved its objectives – and the chances of success would be low – Pyongyang also has extensive conventional armaments at its disposal. These includes a large array of artillery that potentially could inflict catastrophic damage upon Seoul.3 A third option, relying on North Korea’s only close ally, China, to force Pyongyang to denuclearize has also failed. There are limits to Beijing’s ability to dictate to North Korea and it is unwilling to impose conditions that would lead the Kim regime to collapse, as the most likely outcome would be a united Korea closely allied to the US.

Policymakers are also uncertain how to handle the emergence of Iran as a regional power. The 2015 Joint Comprehensive Plan of Action (JCPOA) appears to have halted Iran’s nuclear weapons program. However, the president and some of his key advisors have taken initial steps to undermine the JCPOA, and there are indications that they will withdraw from it altogether.4 Meanwhile, Iranian influence in the Middle East continues to increase. Tehran’s expansion has been enabled, in large part, by ineffective US policy over the last 15 years, including the invasion of Iraq in 2003 and the indecisive response to the Syrian civil war.

There are no appealing options when it comes to restraining Iran. The Trump administration complains that the JCPOA, by ignoring the non-nuclear aspects of Iranian expansionism, is worse than no deal. However, withdrawing from the JCPOA would alienate the other signatories – especially the Europeans, who consider the deal to be effective – and allow Iran to restart its nuclear weapons program. The preferred alternative of some hawks – airstrikes on Iran’s nuclear facilities – would further destabilize the region. It would also be difficult to hit all of the targets, and even a successful operation would only retard Tehran’s nuclear program for a few years.5

The Trump administration’s attempt to balance Tehran by reinvigorating the long-standing alliance with Saudi Arabia and moving even closer to Israel also brings risks. By siding so decisively with Riyadh and Tel Aviv, the US further undermines its previous status as an honest broker and makes a broader peace agreement in the region between Israel and its neighbors more unlikely. This strategy also ties the US more closely to Saudi Arabia’s disastrous intervention in Yemen, which will do nothing to improve the US’ image in the region.

US troops have been involved in combat in the Middle East and South/ Central Asia for more than 15 years, and the recent announcement of the Trump administration that it is planning for an open-ended commitment of forces in Syria confirms that there is no end in sight to the “Forever War” against terrorism and hostile regimes. The length of this conflict, which constitutes the longest in US history, does not indicate resolve. Instead, it underlines the inability of the US to obtain its political and military objectives, or even to formulate a coherent strategy for doing so. The prosecution of the Forever War has led to an unsustainable dynamic: The US is fighting on too many fronts and lacks the resources and political will to maintain the present situation. It is a textbook example of imperial overstretch.

If anything, the situation is worsening. Military involvement in Africa is a case in point. It has notably escalated over the last 15 years and now affects almost every nation on the continent. Many soldiers – at least 6,000, according to the Department of Defense – are participating in ill-defined activities such as training or advising, which often entangle them in combat.

Obama was anxious to avoid worsening the problem of overstretch, and Trump, albeit inconsistently, has also criticized the Bush administration’s overuse of the military. Yet neither has explained how to prevent it. This suggests that the US is caught in a vicious cycle. Policymakers recognize that they need to use force more intelligently in order to husband finite resources and revitalize an exhausted military, but struggle to extricate the US from its existing obligations. Furthermore, the temptation to intervene in new hotspots is ever-present.

The Downsides of Economic Interdependence and Globalization

In the decades following World War Two, the US did more than any other nation to create the foundations of the modern era. It encouraged free trade and the lowering of barriers to the flow of capital; US corporations penetrated new markets, taking knowledge and technology with them; and millions embraced US popular culture. The results appeared to be unequivocally positive. Many Americans attained unprecedented standards of living as a result of greater interdependence, and the US economy remains the world’s largest and arguably most dynamic.

Nevertheless, in the years since the financial crisis of 2007 – 2008 the downsides of globalization have become apparent. Indeed, even as the US appears to be thriving, it is also increasingly constrained by many of the forces it was instrumental in unleashing. In spite of strong headline numbers – including an unemployment rate of approximately 4 per cent and an economic expansion of 2.3 per cent in 2017 – there is ample reason for concern. Partly, this can be ascribed to ineffective policymaking at home. Inequality has reached historic levels, and legislators appear to be more concerned with placating wealthy donors than with the need to rebuild crumbling infrastructure or make university education more affordable.6

Changes in the structure of the global economy also present long-term obstacles. The rise of China – facilitated in part by the interdependence pursued by the US – is particularly problematic. In and of itself, the emergence of a strong economic counterweight is not necessarily cause for concern. The economic clout of allies such as Germany, Japan, or the EU – in spite of occasional alarmist headlines – does not generate widespread alarm. However, the threat posed by China is more profound: it is expected to surpass the US as the world’s largest economy in the near future, and its ability to influence the global system dwarfs that of other trade competitors.

The scale of China’s influence can be seen in the consequences of its rapid growth. The “China Shock”7 – the inability of labor markets to adjust to competition from China – and other manifestations of interdependence, such as the North American Free Trade Agreement (NAFTA), have led to the loss of millions of jobs, the long-term decline of regions most vulnerable to increased competition, and an increase in political populism, including calls for protectionism.

The nature of the Chinese regime and its geopolitical ambitions also make its status as an economic superpower problematic. In spite of occasional friction between the US and Germany or Japan over trade practices, the fact that they are close allies that hold free elections and embrace the rule of law means that they pose no threat to core US interests – a point that is lost on President Trump. China, by contrast, has failed to democratize. This has confounded many analysts, who argued that accession to the World Trade Organization in 2001 and a long-term program of economic liberalization would force Beijing to reform its political system. If anything, the opposite has occurred, and President Xi Jinping has redoubled the grip of the Communist Party, as well as his own, on the Chinese political system.

This combination of economic power and resilient authoritarianism gives Beijing considerable global sway.8 China is now Africa’s largest trading partner and, in spite of Beijing’s official policy of “non-interference” in the internal affairs of other countries, it has gradually expanded its influence throughout the continent. In doing so, it has pursued strategic aims – such as garnering support for its “One China” policy and its model of non-democratic governance – as well as economic growth.9 Similar efforts in Latin America pair economic and strategic objectives, such as counterbalancing the strong position of the US in East Asia.10

Most worrying is China’s growing influence in Europe. It has used promises of investment in the “16+1” group of Central and Eastern/Southeastern European countries to engender closer ties and more sympathy on issues such as human rights.11While China’s influence is still modest in comparison to that of the US – and is generating opposition in some corners of Europe – its efforts underscore the sweeping scale of Beijing’s vision. Furthermore, China’s emergence as an alternative to the US when it comes to leading the international community on pressing global challenges, such as trade liberalization or combating global warming, underscores the fact that the US can no longer take predominance for granted.

Regional powers have also harnessed aspects of globalization to increase their ability to frustrate the US. North Korea and Iran have used technology first developed in the West in their quest to attempt to develop nuclear arsenals. North Korea has developed sophisticated cyber capabilities and used them to carry out cybercrime, to infiltrate the political and military infrastructure of adversaries such as South Korea, and to undermine the dissemination of what it views as hostile cultural products. The US has yet to develop an effective response.12 Because its economy is relatively primitive, retaliatory attacks are of limited value, and until recently, the US has been reluctant to respond with conventional military force for fear of sparking a broader conflict.

Hostile powers and non-state actors alike have discovered that some of the longstanding strengths of the US, such as its democratic form of government and the ability to develop and integrate advanced technology into its economy, render it vulnerable to cyber attacks. Russia’s interference in the 2016 election relied on a combination of cyber espionage and collaboration with US citizens. WikiLeaks has caused considerable damage by releasing a large number of sensitive government documents. These data dumps, which have relied on leaks from inside the US national security community and intelligence acquired by state actors such as Russia, have angered allies and damaged US soft power.

As the example of WikiLeaks indicates, globalization has enabled some non-state actors to accrue disproportionate influence. The ability of terrorist groups such as al-Qaida or the Islamic State to confront the US would not have been possible in the era before modern international travel, mass immigration, and wider access to information about weapons and military tactics. The tendency of the US to overreact, and to pay correspondingly less attention to more acute problems such as global warming, only compounds the problem.

Domestic Constraints

Trade liberalization and advances in technology have had a profound impact on US political culture. Political polarization, for instance, has increased in areas that are exposed to increased international trade. Over the last 15 years, congressional districts represented by moderates have tended to replace them with more liberal Democrats or more conservative Republicans. In presidential races, these areas have become more likely to vote for Republican candidates.13 The results at the national level are striking, as polarization has reached historically high levels and the Republican Party (GOP) is more conservative than at any point in its history.14

Related to this increase in partisanship is the tendency of voters who have suffered economically as a result of free trade and/or technological change to embrace radical political views. Many working-class white voters feel that they have lost economic and political status and power.15 This perception has been amplified by the growing diversity in the US – at some point in the mid-21st century, whites will no longer constitute of a majority of the population – and has fueled support for extremist political ideas and figures, with several notable consequences.

One is decreased enthusiasm for democratic politics and norms – which correlate closely with support for internationalism. This phenomenon is particularly notable among younger Americans, but can be seen throughout the US body politic.16The rise in authoritarian values – a preference for order and conformity, especially in times of crisis – and the growing tendency of authoritarians to vote for the GOP, is a manifestation of this tendency.17 Another is the radicalization of border politics, as a majority of white Americans have come to view immigration as a burden and/or threat.18 Opposition to free trade has become an important feature of US politics, especially among culturally conservative whites.19 Support for international alliances is shaky and notably weak among Republicans (though support for NATO remains strong). Even when it comes to broad attitudes toward international engagement, which a large majority of Republicans advocate, many in the party – and a majority of Trump supporters – prefer a dominant position rather than a shared leadership role.20

 

Sources: Dina Smeltz et al., “What Americans Think about America First”, in: 2017 Chicago Council Survey, The Chicago Council on Global Affairs (2017), p. 3, 5, 9; Dina Smeltz et al., “America Divided: Political Partisanship and US Foreign Policy”, in: 2015 Chicago Council Survey, The Chicago Council on Global Affairs (2015), p. 12; Bradley Jones, “Support for free trade agreements rebounds modestly, but wide partisan differences remain”, Pew Research Center (2017).

When viewed in this light, the election of Donald Trump is not surprising. His withdrawal from the Trans- Pacific Partnership trade agreement; his promise to renegotiate or withdraw from NAFTA and to get tough on Chinese trade practices; his attempts to reduce the number of immigrants, legal and undocumented alike; his ambivalence about NATO; his enthusiasm for illiberal leaders; and his reluctance to condemn white supremacists – all of these policies are acceptable to millions of Americans, and in some instances enjoy the support of a majority of Republican voters. Many in the GOP political establishment have quickly embraced the Trumpification of Republican foreign policy. (It is also worth noting that in regard to some aspects of international engagement, such as free trade, a large minority of Democratic voters also express skepticism.)

Overstretch, polarization, political dysfunction, and skepticism about internationalist policies have contributed to a crisis in funding and readiness for the military. The problem began with the conflicts in Afghanistan and Iraq, which led to frequent and lengthy deployments for many soldiers and a corresponding drop in morale. This problem has been compounded by certain provisions in the Budget Control Act of 2011 – commonly referred to as sequestration – which was opposed by most members of Congress, but was nevertheless implemented because no agreement could be reached to fund the government. Sequestration has required substantial spending cuts and led to uncertainty about long-term funding streams.21

President Trump has called for a sustained increase in military spending, including an upgrade and expansion of the nuclear arsenal that will cost at least 1.2 trillion USD. Although Congress recently agreed to a spending deal that would increase funding for the military over the next two years by 160 billion USD, this is unlikely to include nuclear weapons. Furthermore, though the additional funding is a necessary first step, it will still take time to undo the damage wrought by sequestration. For instance, in the event of a conflict, the Army would only be able to field an estimated three brigade combat teams out of more than 50.22

The diplomatic corps is also in a state of crisis. At one per cent of the federal budget, funding for the Department of State and the Agency for International Development is already modest. To make matters worse, the Trump administration has proposed sweeping cuts to these departments – though Congress is unlikely to approve these reductions in full. This indifference to the importance of diplomacy and development, along with mismanagement by former Secretary of State Tillerson, has resulted in a steep decline in morale and a mass exodus of senior diplomats. Meanwhile, a hiring freeze by Tillerson has dramatically lowered the number of incoming Foreign Service Officers.23

With the exception of the ongoing disaster at the State Department, it would be a mistake to blame Trump for these developments. Rather, the president embodies an evolving political culture in which actual or perceived threats assume disproportionate importance for many. This imposes additional constraints on foreign as well as domestic policy making and makes it more difficult to sustain internationalist policies such as admitting immigrants, promoting trade deals, maintaining alliances, and upholding democratic values.

 

* International Affairs Budget consists of International Development and Humanitarian Assistance, International Security
Assistance, Conduct of Foreign Affairs, Foreign Information and Exchange Activities, International Financial Programs
** Estimate

Sources: U.S. Government Publishing Office; Paul Singer, “What’s in the senate budget deal? Billions for defense, infrastructure, disasters and more”, in: USA Today (7.2.2018).

The rest of the world has noticed. Although there is still widespread admiration for some aspects of the US, such as popular culture, there is widespread unease about its political system and opposition to the spread of its ideas and customs. Partly, these attitudes can be linked to the election of Trump, who is unpopular in all but a few countries.24 It is also evidence of a wider sense of disquiet about the future of US global engagement. Approval of US leadership worldwide rose between 2008 and 2016, but has since returned to the low levels that prevailed during the Bush administration. It now ranks on par with China, a troubling omen for those who consider US soft power to be an advantage in its rivalry with Beijing. Also worrying is that only one-quarter of Europeans approve of US leadership.25

 

Sources: Andrew Kohut et al., “Global Opinion of Obama Slips, International Policies Faulted”, Pew Research Center (2012), p. 3, 5, 22 – 23; Richard Wike et al., “U.S. Image suffers as Public Around World Question Trumps Leadership”, Pew Research Center (2017), p. 22, 28, 34, 93 – 94; Gallup (2018), Rating World Leaders: 2018, p.2.

Conclusion: the Consequences of Constraint

Policymakers face a different geopolitical landscape than their post-World War Two predecessors. The US remains the world’s most powerful nation, but its influence is undermined by foreign and domestic constraints that are unlikely to dissipate. Great power competitors such as China and Russia will remain antagonistic – though China, given its economic strength, has a much better chance of sustaining its challenge over the long term.

The downsides of globalization will also endure. Economic interdependence, a source of considerable strength for the US economy, will also continue to fuel inequality and – in combination with cultural conservatism – political radicalization. There is little reason to expect that the political will exists to address this paradox, or that the system is even capable of accommodating the type of changes that would be necessary. On the contrary, the situation appears set to worsen, as key arms of the US foreign policy and national security apparatus – its military and diplomatic corps – are in the midst of crises that could leave them hobbled for years.

Aspects of soft power, such as popular culture and the reputation of its leading universities, will continue to be a strength, but the longer the US is plagued by political dysfunction and radicalization the more difficult it will be to attract talented foreigners and influence other nations. One worrying sign is that after years of steady growth, enrollments by international students at US universities declined in 2016 and 2017.26

Meanwhile, the diffusion of information and technology will continue to empower regional competitors and non-state actors. Here, too, policymakers remain at a loss as to how to respond. The nature of the US economic and political system, with its reliance on the rule of law, advanced technology, and the free flow of information and people, leaves it uniquely vulnerable to asymmetric attacks from weaker and authoritarian foes. Partisanship further complicates matters by making it difficult to assess the impact of previous attacks and to implement effective countermeasures.

What does all of this mean for the future of US foreign policy? Sweeping predictions are unwise in the era of Trump, but the evidence suggests several trends. Fears that the US will embrace a form of neo-isolationism are unjustified. However, we can expect more extreme swings in behavior, based partly on which party holds power. The GOP has fused comfortably with Trumpism, leaving it more nationalist and unilateralist than was previously the case – a fact which is highlighted by the administration’s decision to continue using the unsavory phrase “America First”, which appears numerous times in the recently released National Security Strategy. This means it will be prone to bouts of protectionism, nativism, xenophobia, and illiberalism. This will hamper efforts to sustain an internationalist grand strategy in the coming years. The Democratic Party, meanwhile, continues to be more committed to engagement, multilateralism, and democratic values. However, a vocal minority of the party firmly opposes trade liberalization and favors further cuts in military spending – tendencies which bode poorly for revitalizing US leadership.

In the worst-case scenario, extremist nationalism combined with an inability to satisfactorily counter asymmetric threats could lead to a more dangerous, unpredictable foreign policy. One hint of this troubling possibility can be found in the 2018 Nuclear Posture Review (NPR). It expands the category of threats that could elicit a nuclear response and calls for placing more emphasis on low-yield devices. Obama’s 2010 NPR called for modernizing the nation’s nuclear arsenal, but also sought to lead the way on arms control. In keeping with his skepticism regarding the value of international cooperation, Trump shows no such interest.27

European policymakers are understandably concerned about the direction of US foreign policy. It is more aggressive but less effective, and more demanding of its allies but unwilling to provide leadership. This state of affairs presents potential opportunities and pitfalls. The return of geopolitics will focus US attention on Africa, the Middle East, and East Asia, leaving limited time and resources for assisting allies across the Atlantic. This could encourage Europe to accelerate the development of a robust Common Security and Defense Policy (CSDP) and, in the best-case scenario, lead to a more equal and fruitful US-European relationship.

However, if the US continues to struggle to adapt to the evolution of global politics and to address its most pressing domestic challenges, the transatlantic alliance will suffer accordingly. This would be dangerous for both sides – and for the entire international system.

Notes

1 Hans M. Kristensen/Robert S. Norris, “Chinese Nuclear Forces, 2016”, in: Bulletin of the Atomic Scientists 72 (2016), 205 – 211.

2 Nigel Inkster, China’s Cyber Power (London: Routledge, 2017); Sophie-Charlotte Fischer, “Artificial Intelligence: China’s High-Tech Ambitions”, in: CSS Analyses in Security Policy, no. 220 (2018).

3 Uri Friedman, “What Are America’s Options on North Korea?”, in: The Atlantic, 07.04.2017.

4 Jack Thompson/Oliver Thränert, “Trump Preparing to End Iran Nuke Deal”, in: CSS Policy Perspectives 5, no. 4 (2017).

5 The Iran Project, Weighing Benefits and Costs of Military Action Against Iran, 2012.

6 Maggie Severns, “Big Donors Ready to Reward Republicans for Tax Cuts”, in: Politico, 29.01.2018; Jack Thompson, “Looking Beyond Trump”, in: Strategic Trends (2017), 35 – 54.

7 David H. Autor et al., “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade”, in: NBER Working Paper, no. 21906 (2016).

8 Nadège Rolland, China’s Eurasian Century? Political and Strategic Implications of the Belt and Road Initiative (Seattle: The National Bureau of Asian Research, 2017).

9 Yun Sun, “Africa in China’s Foreign Policy”, Brookings Institution Report, 04.2014.

10 Thorsten Benner et al., “Authoritarian Advance: Responding to China’s Growing Political Influence in Europe”, Global Public Policy Institute Report, 02.2018.

11 Keith Johnson, “China’s New Silk Road into Europe is about more than Money”, in: Foreign Policy, 01.06.2016; Lucrezia Poggetti, “China’s Charm Offensive in Eastern Europe Challenges EU Cohesion”, in: The Diplomat, 24.11.2017.

12 Jenny Jun et al., “North Korea’s Cyber Operations: Strategy and Responses”, Center for Strategic and International Studies Report, 11.2015.

13 David Autor et al., “Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure”, in: NBER Working Paper no. 22637 (2017).

14 Noland McCarty, “What we know and don’t know about our polarized politics”, in: The Washington Post, 08.01.2014.

15 Justin Gest, The New Minority: White Working Class Politics in an Age of Immigration and Inequality (New York: Oxford University Press, 2016).

16 Yascha Mounk and Roberto Stefan Foa, “Yes, people really are turning away from democracy”, in: The Washington Post, 08.12.2016.

17 Christopher Weber et al., “How authoritarianism is shaping American politics (and it’s not just about Trump)”, in: The Washington Post, 10.05.2017.

18 Marisa Abrajano and Zoltan Hajnal, White Backlash: Immigration, Race, and American Politics (Princeton: Princeton University Press, 2017).

19 Bradley Jones, “Support for free trade agreements rebounds modestly, but wide partisan differences remain”, Pew Research Center, 25.04.2017.

20 Dina Smeltz et al.,“What Americans Think About America First”, Chicago Council on Global Affairs Report, 10.2017.

21 Grant A. Driessen/Marc Labonte, “The Budget Control Act of 2011 as Amended: Budgetary Effects”, Congressional Research Service Report, 12.2015.

22 United States Government Accountability Office, Department of Defense: Actions Needed to Address Five Key Mission Challenges, 06.2017; Katherine Blakely, “More Money on the Horizon? Analysis of the FY 2018 Defense Budget Request”, Center for Strategic and Budgetary Assessments Report, 12.2017; Dan Goure, “The U.S. Military Is Suffering A Crisis Of Strategy, Not Just One Of Readiness”, in: The National Interest, 30.05.2017; Statement by General Daniel Allyn, Vice Chief of Staff of the United States Army, Senate Armed Services Committee Subcommittee on Readiness and Management Support, 08.02.2017.

23 Barbara Stephenson, “Time to Ask Why”, in: The Foreign Service Journal, 12.2017, 7; Robbie Gramer et al., “How the Trump Administration Broke the State Department”, in: Foreign Policy, 31.07.2017.

24 Pew Research Center, U.S. Image Suffers as Publics Around World Question Trump’s Leadership, 06.2017.

25 Gallup, Rating World Leaders: 2018.

26 Elizabeth Redden, “International Student Numbers Decline”, in: Inside Higher Ed, 18.01.2018.

27 Oliver Thränert, “President Trump’s Nuclear Posture Review”, in: CSS Analyses in Security Policy no. 223 (2018).

About the Author

Dr Jack Thompson is a Senior Researcher in the Global Security Team at the Center for Security Studies (CSS).

Strate­gic Trends 2018

http://www.css.ethz.ch/en/center/CSS-news/2018/04/strategic-trends-2018.html

Strate­gic Trends 2018

12.04.2018

Strate­gic Trends 2018: The CSS has pub­lished its an­nual analy­sis of ma­jor de­vel­op­ments in world af­fairs. The four top­ics cov­ered in­clude whether or not emerg­ing trends sug­gest the US could be­come a less re­li­able part­ner for Eu­rope; why Rus­sia and China are likely to con­tinue build­ing closer re­la­tions; the po­ten­tial im­pact of en­ergy tech­nolo­gies on in­ter­na­tional pol­i­tics; and how re­silience can act as an in­stru­ment of de­ter­rence.

US Pres­i­dent Don­ald Trump re­turns to the White House af­ter ad­dress­ing the Re­pub­li­can Con­gres­sional Re­treat, 1 Feb­ru­ary 2018. Yuri Gri­pas / Reuters

Strate­gic Trends 2018 of­fers a con­cise analy­sis of ma­jor de­vel­op­ments in world af­fairs, with a pri­mary fo­cus on in­ter­na­tional se­cu­rity. It pro­vide suc­cinct in­ter­pre­ta­tions of key trends and con­tain nu­mer­ous graph­ics.

Su­per­power Con­strained

In the first chap­ter, Jack Thomp­son looks at the new for­eign pol­icy of the US un­der Pres­i­dent Trump. In his view, the US will re­main the most im­por­tant player in global af­fairs, but is strug­gling to adapt to the evo­lu­tion of the in­ter­na­tional sys­tem and will be more vul­ner­a­ble than ever to changes in the geopo­lit­i­cal land­scape. At the same time, the new ad­min­is­tra­tion has ex­pressed am­biva­lence when it comes to play­ing its tra­di­tional role in lead­ing the Lib­eral World Or­der and shows lit­tle will­ing­ness to en­gage in ques­tions of in­ter­na­tional gov­er­nance, which poses new se­cu­rity ques­tions for the Eu­ro­peans.

Room for Ma­neu­ver: China and Rus­sia Strengthen Their Re­la­tions

Man­ag­ing re­la­tions with Rus­sia and China will be among the main chal­lenges that the West will face in the com­ing years. Brian Carl­son ex­am­ines the China- Rus­sia re­la­tion­ship and its ef­fects on world pol­i­tics. The two coun­tries have built an in­creas­ingly close re­la­tion­ship, which is ap­par­ent in arms sales, en­ergy, and co­op­er­a­tion in ad­dress­ing the North Ko­rean nu­clear is­sue. This trend is likely to con­tinue, though the re­la­tion­ship will be in­creas­ingly tilted in China’s fa­vor.

Tech­no­log­i­cal In­no­va­tion and the Geopol­i­tics of En­ergy

China is also an im­por­tant fac­tor in Sev­erin Fis­cher’s chap­ter on the im­pacts of tech­no­log­i­cal change in the en­ergy sec­tor. In his view, China will be the domi­nant player in the world of new and clean tech­nolo­gies, no­tably so­lar and bat­teries. This could be good for de­vel­op­ment goals and lim­it­ing global warm­ing, but not nec­es­sar­ily for the in­flu­ence of the West­ern world in other re­gions. At the same time, the US is re-en­ter­ing the hy­dro­car­bon mar­kets as a sup­plier due to in­creased hy­draulic frac­tur­ing and mix­ing up ex­ist­ing power re­la­tions. In this con­text, the role of in­fra­struc­ture will mas­sively change in the com­ing decades.

Re­silience: The ‘Fifth Wave’ in the Evo­lu­tion of De­ter­rence

▶▶▶▶▶▶▶▶▶▶▶▶▶▶▶▶▶

Within this chang­ing, and in­creas­ingly com­plex, in­ter­na­tional sys­tem, calls for im­prov­ing na­tional re­silience across dif­fer­ent sec­tors in states and economies are be­com­ing louder. Tim Prior’s chap­ter ex­am­ines the grow­ing fo­cus on resil­ience in West­ern se­cu­rity pol­icy, par­tic­u­larly with re­spect to de­ter­ring asym­metric threats. He ex­plores how sys­temic changes in gov­er­nance arrange­ments, em­body­ing net­worked ap­proaches that match the na­ture of the 21st-cen­tury threat land­scape, could pre­sent ad­van­tages in ad­dress­ing se­cu­rity is­sues in the in­ter­na­tional sys­tem

As has been the trend in recent years, 2017 was characterized by significant changes in international politics, highlighting the growing complexity of the world we live in. Reflections on major developments can be found in the contributions to this year’s “Strategic Trends 2018”. In the first chapter, Jack Thompson looks at the new foreign policy of the US under President Trump. In his view, the US will remain the most important player in global affairs, but is struggling to adapt to the evolution of the international system and will be more vulnerable than ever to changes in the geopolitical landscape. Managing relations with Russia and China will be among the main challenges that the West will face in the coming years. Brian Carlson therefore examines the China-Russia relationship and its effects on world politics. China is also an important factor in Severin Fischer’s chapter on the impacts of technological change in the energy sector. In his view, China will be the dominant player in the world of new and clean technologies, notably solar and batteries. This could be good for development goals and limiting global warming, but not necessarily for the influence of the Western world in other regions. Within this changing international system, calls for improving national resilience across different sectors in states and economies are becoming louder. Tim Prior’s chapter examines the growing focus on resilience in Western security policy, particularly with respect to deterring asymmetric threats.