Addressing the Global Infrastructure Deficit: Channels for U.S.-China Cooperation

Part of Chapter 9 | Infrastructure

Ziad Haider1
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Introduction

Hard infrastructure, from airports and railways to power stations and fiber-optic networks, is vital to enabling trade, economic growth, and development. Yet, the world is facing a severe infrastructure deficit. Estimates of annual spending shortfalls are in the hundreds of billions of dollars. In the developed world, countries are struggling to maintain existing infrastructure; take advantage of modern technologies; and adapt to changing patterns of economic activity. In the developing world, countries face these same difficulties, as well as the challenge of rapidly expanding the overall infrastructure stock to meet the needs of growing economies and populations. Leaders around the world have recognized that inadequate investment in infrastructure undercuts not just growth but also, in many parts of the world, stability. As such, addressing the global infrastructure deficit has become a priority in international economic forums and institutions.

As the world’s largest economies, the United States and China have a unique responsibility and potential to address this deficit. Both countries have security, economic, and commercial interests in ensuring an adequate global supply of infrastructure. Yet the United States and China also have divergent interests in some areas and differ in their approach to infrastructure investment. Scope for cooperation may exist that could mitigate this competition and produce positive outcomes for both countries and the global economy. However, opportunities for cooperation must be pursued within an understanding of trends in the relationship and each country’s strategic priorities, recognizing that win-win outcomes may not always be possible.

The Cost of Failure

The McKinsey Global Institute estimates that $3.3 trillion in infrastructure investment is needed every year through 2030 to meet current forecasts for GDP growth.2 When compared to current levels of infrastructure investment, this translates into an estimated gap of $350 billion per year. Achieving more ambitious growth and development targets, such as those outlined in the UN Sustainable Development Goals (SDGs), will require an even greater increase in spending: an estimated $1.1 trillion annually above current levels.3 This gap is pervasive and growing, even in areas where infrastructure investment has been relatively robust, such as Asia.4

The cost of failing to address these gaps is significant. In addition to producing weaker growth, a failure to invest in infrastructure could contribute to increased instability in the developing world. Lack of access to appropriate sanitation and other public health infrastructure can increase the likelihood, frequency, and severity of infectious disease outbreaks. Underinvestment in green energy and transport infrastructure or in climate change mitigation, particularly in the coastal areas where many of the world’s largest cities are located, has the potential to accelerate climate change and amplify its negative effects.5 Any of these crises-in-waiting would likely spill rapidly across borders with economic and security consequences.

The global response

These high stakes have made infrastructure a top issue in international development and generated a range of institutions and initiatives with cooperative and competitive dynamics.

At the global level, these include the G20’s Global Infrastructure Connectivity Alliance (GICA) and the World Bank’s Global Infrastructure Facility (GIF). Regional development banks, such as the Asian Development Bank (ADB) and the European Bank for Reconstruction and Development (EBRD), have expanded their already significant investment in infrastructure. Newer institutions, such as the New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB), have emerged. Countries have also launched individual initiatives. Some of these, like China’s Belt and Road Initiative (BRI)6 and Japan’s Expanded Partnership for Quality Infrastructure,7 are externally focused; others, such as Georgia’s Spatial Arrangement Plan8 and Iran’s Sixth Five-Year Development Plan,9 are efforts to invest or attract investment in their infrastructure sector.10

The motivations behind these efforts and their specific areas of emphasis are diverse. However, present as a backdrop in all this activity are the strategic implications of infrastructure development. From the roads of the Roman Empire to the Trans-Siberian Railway to the rail network of British India, connectivity infrastructure has played a vital role in facilitating trade and the extraction of resources, enabled the timely relay of information, and supported the projection of military power as well as political influence. Understanding this strategic dimension remains critical to evaluating the scope for U.S.-China cooperation in the infrastructure arena.

The U.S.-China context

The United States and China appear to have a shared interest in addressing the global infrastructure deficit. First, both have committed to supporting ambitious development targets, including those outlined in the SDGs, which outline the global development agenda through 2030, as well as the G20 Hangzhou Declaration.11 In the case of the SDGs, infrastructure is mentioned as both a standalone goal (SDG 9) and plays a key role in achieving a number of other goals, such as expanding access to clean water and sanitation (SDG 6) and improving the sustainability of cities (SDG 11). Second, appropriately addressing the infrastructure deficit could help support development and integration in many parts of the world, generating global economic growth as well as new markets for U.S. and Chinese firms. Third, addressing infrastructure gaps is critical to reducing the risk of instability and transnational threats, whether stemming from vulnerability to extreme weather events or inadequate opportunity for youth populations. This could be from direct effects, such as flood-proofing of cities, or indirect effects, such as the creation of additional urban and rural jobs through enhanced growth and connectivity.

However, the United States and China also differ in their approaches to infrastructure investment. Recent decades have seen the United States shift away from prioritizing direct participation in large-scale infrastructure projects toward creating an enabling environment for high-standard infrastructure investment, such as by enhancing host government technical capacity and connectivity-related soft infrastructure. In its engagements at the multilateral development banks, the United States is a strong advocate for greater transparency and for strengthening safeguards in areas such as environmental protection and debt sustainability. Even as U.S. companies are involved in infrastructure projects globally, they do not have the level of government support that their competitors do.12 For example, the Export-Import Bank, the official export credit agency of the United States, cannot finance projects greater than $10 million until it achieves a quorum on its Board.13

By contrast, China is playing a larger and more direct role in physical infrastructure development.14 China’s signature geoeconomic initiative, Belt and Road Initiative (BRI), reflects its ambitions to generate strategic influence in part through promoting Sino-centric patterns of trade and investment by investing in infrastructure.15 Even prior to BRI’s debut, China had emerged as the world’s single-largest source of development finance through policy banks, state-owned enterprises, and other public and government-linked actors, including the China Development Bank and China Export-Import Bank.16 Much of this money has been directed into large-scale infrastructure projects that are frequently designed and implemented by Chinese companies and executed by Chinese labor.17 Relative to other major development actors, China is also less transparent in its practices, which creates barriers to effective cooperation and challenges to clearly understanding the impact of Chinese activities.18

Cooperative channels

Despite the divergences, opportunities may exist for enhancing cooperation on infrastructure development through bilateral and multilateral channels.

Bilaterally, the United States and China, as part of the U.S.-China Comprehensive Economic Dialogue, should formally discuss infrastructure-related topics, including BRI. Specifically, the Treasury and Commerce Departments, with support from the interagency, should establish a regular dialogue with Chinese counterparts responsible for oversight of the BRI to seek clarity on the projects involved and associated financing and standards. This might be organized with the National Development and Reform Commission or relevant leadership from the Belt and Road Leading Group, with the intention of also exploring potential alignment with U.S. infrastructure-related initiatives in Eurasia.19 Recognizing that BRI may provide commercial and development dividends for U.S. interests, Commerce and State should also work through this dialogue and in other venues to actively support U.S. firms seeking to join BRI projects.20

Multilaterally, there are numerous potential opportunities for cooperation, beginning with the G20, where Washington and Beijing should continue to emphasize the importance of quality infrastructure as defined in the Hangzhou Action Plan. The Global Infrastructure Connectivity Alliance (GICA), launched by the G20 in 2016, represents a promising effort to harmonize and improve coordination across these various initiatives.21 The United States and China should seek to enhance support and resourcing for GICA, especially in order to ensure it is able to fulfill its mandate to support greater infrastructure investment transparency.22 The Global Infrastructure Hub, launched by the G20 in 2014, represents another promising initiative that the United States and China should seek to support, particularly with regards to its work on public-private partnerships and development of its Concession Management and InfraCompass tools.23

Regarding the role of MDBs in infrastructure investment, the United States and China should encourage the MDBs to implement and further build upon the Joint Declaration of Aspirations on Actions to Support Infrastructure Investment that was issued by 11 MDBs in 2016 as a statement on their collective efforts and strategic plans to help strengthen cooperation and address global infrastructure deficits.24 In the Asia-Pacific region, the United States and China should also work together and with the other members of APEC to build on the Cebu Action Plan,25 specifically the pillar on “accelerating infrastructure development and financing,” as well as the work of the Asia-Pacific Economic Cooperation (APEC) Investment Experts’ Group26 as part of developing and implementing a new Multi-Year Plan on Infrastructure Development and Investment.27

At the intersection of bilateral and multilateral engagement lies the issue of U.S. policy toward the China-led Asian Infrastructure Investment Bank (AIIB). While full AIIB membership will likely remain both inadvisable and politically impossible for the foreseeable future, the United States should continue to endorse cofinancing and cooperation between the AIIB and other MDBs and consider strengthening U.S. direct engagement. At an appropriate time and in close coordination with allies, especially Japan (as the other G7 member that has thus far withheld from joining the AIIB), this might include designating a senior-level U.S. observer to the AIIB, potentially the assistant secretary for international finance from the Department of Treasury. If such a step were to be taken, it should be done to demonstrate U.S. willingness for positive engagement, but also with an explicit official commitment for U.S. firms to be able to bid on AIIB projects and adherence to high standards in the AIIB’s operations.

Finally, for the United States, all of this must be accompanied by enhanced coordination with allies and partners on infrastructure-related issues. This should be done not only to avoid unwarranted perceptions of an emerging “G2” approach to global economic governance, but also to help create greater transparency and more global support for high standards and other U.S. priorities.

Conclusion

Reflecting the broader dynamic in the U.S.-China relationship, competition between the United States and China in the realm of infrastructure is to be expected. Both countries are major global powers whose strategic interests are, in some cases, at odds.28 Even ignoring this strategic backdrop, divergent approaches and priorities in infrastructure investment are likely to remain enduring sources of tension. However, both counties have shared interests in mitigating the socioeconomic and security risks associated with the current global infrastructure deficit. Constructive engagement through bilateral and multilateral channels has the potential to not just manage these risks, but also net economic and commercial benefits for both sides and provide important ballast to the relationship given trends in China’s economic and security policies.

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[1] The author expresses his sincere thanks to David Parker for his research and inputs.

[2] Jonathan Woetzel, Nicklas Garemo, Jan Mischke, Martin Hjerpe, and Robert Palter, Bridging global infrastructure gaps, McKinsey Global Institute, June 2016, http://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/bridging-global-infrastructure-gaps.

[3] United Nations, World Investment Report 2014: Investing in the SDGs: An Action Plan , 2014, http://unctad.org/en/PublicationsLibrary/wir2014_en.pdf.

[4] Asian Development Bank, Meeting Asia’s Infrastructure Needs, 2017, https://www.adb.org/sites/default/files/publication/227496/special-report-infrastructure.pdf; Asian Development Bank and Asian Development Bank Institute, Infrastructure for a Seamless Asia, 2009, https://www.adb.org/sites/default/files/publication/159348/adbi-infrastructure-seamless-asia.pdf.

[5] UNDP’s Asia-Pacific Regional Centre and UN-Habitat, Asia-Pacific Issue Brief Series on Urbanization and Climate Change No. 1: Urbanization and Climate Change, 2012, http://www.undp.org/content/dam/rbap/docs/Research%20&%20Publications/poverty/RBAP-PR-2013-Urbanization-Climate-Change-Issue-Brief-01.pdf.

[6] National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce of the People's Republic of China, Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road, March 28, 2015, http://en.ndrc.gov.cn/newsrelease/201503/t20150330_669367.html.

[7] Ministry of Economy, Trade and Industry, The ‘Expanded Partnership for Quality Infrastructure’ initiative directed toward the G7 Ise-Shima Summit Meeting announced, May 23, 2016, http://www.meti.go.jp/english/press/2016/0523_01.html.

[8] “What will Georgia look like in 2020? Government announces major development plan,” Agenda.ge News, September 16, 2016, http://agenda.ge/news/65365/eng.

[9] “Iranian Government Earmarks $462 million for Rail Expansion,” Financial Tribune, January 18, 2017, https://financialtribune.com/articles/domestic-economy/57677/iranian-govt-earmarks-462m-for-rail-expansion.

[10] For the most complete list of active infrastructure-related initiatives available, see “Initiatives,” Center for Strategic and International Studies Reconnecting Asia, https://reconasia.csis.org/database/initiatives/.

[11] The Hangzhou Declaration was released by the leaders of the G20 economies following the Hangzhou Summit in September 2016, the first time that China had hosted a G20 leaders’ summit. In addition to promotion of strong, sustainable, balanced, and inclusive growth, the Declaration places a specific emphasis on “lifting and enhancing infrastructure investment,” emphasizing its potential role in both boosting aggregate demand and catalyzing structural reforms. G20 Research Group, G20 2016 China: Hangzhou Action Plan, September 5, 2016, http://www.g20.utoronto.ca/2016/160905-action.html.

[12] Charles J. Hall, Export Financing in an Increasingly Competitive World: Challenges from China and Beyond, Center for Strategic and International Studies, July 6, 2017, https://www.csis.org/events/export-financing-increasingly-competitive-world-challenges-china-and-beyond.

[13] Ziad Haider and Arun Kumar, Trump’s Global Infrastructure Opportunity, Center for Strategic and International Studies, February 3, 2017, https://www.csis.org/analysis/trumps-global-infrastructure-opportunity.

[14] Nadège Rolland, China's Eurasian Century? Political and Strategic Implications of the Belt and Road Initiative, National Bureau of Asian Research, June 6, 2017, http://nbr.org/publications/issue.aspx?id=346.

[15] Scott Kennedy and David A. Parker, Building China’s ‘One Belt, One Road’, Center for Strategic and International Studies, April 3, 2015, https://www.csis.org/analysis/building-china%E2%80%99s-%E2%80%9Cone-belt-one-road%E2%80%9D.

[16] Henry Sanderson and Michael Forsythe, China's Superbank: Debt, Oil and Influence—How China Development Bank Is Rewriting the Rules of Finance (New York: Bloomberg Press, January 22, 2013), https://www.amazon.com/Chinas-Superbank-Influence-Development-Rewriting/dp/1118176367; Boston University Global Economic Governance Initiative, China's Global Energy Finance: Chinese Development Bank (CDB) and Export-Import Bank of China (Ex-Im), http://www.bu.edu/cgef/#/intro.

[17] Howard W. French, China's Second Continent: How a Million Migrants Are Building a New Empire in Africa (New York: Knopf, May 20, 2014), https://www.amazon.com/Chinas-Second-Continent-Migrants-Building/dp/0307956989; Ana Cristina Alves, China’s Economic Statecraft and African Mineral Resources: Changing Modes of Engagement, South African Institute of International Affairs, January 2013, https://www.saiia.org.za/occasional-papers/17-china-s-economic-statecraft-and-african-mineral-resources-changing-modes-of-engagement/file.

[18] AidData, “Tracking Chinese Development Finance—BETA,” http://china.aiddata.org/content/about_the_project.

[19] Xinyi Yang and David A. Parker, Buckling Down: How Beijing Is Implementing Its ‘One Belt, One Road’ Vision, cogitASIA, May 7, 2015, https://www.cogitasia.com/buckling-down-how-beijing-is-implementing-its-one-belt-one-road-vision/.

[20] Ziad Haider, “Can the U.S. Pivot Back to Asia?: How Trump Should Respond to China's Belt and Road Initiative,” Foreign Affairs, May 23, 2017, https://www.foreignaffairs.com/articles/china/2017-05-23/can-us-pivot-back-asia.

[21] G20 Research Group, Global Infrastructure Connectivity Alliance Initiative, July 2016, http://www.g20.utoronto.ca/2016/global-infrastructure-connectivity-alliance.pdf.

[22] G20 Research Group, G20 2016 China: Hangzhou Action Plan.

[23] Global Infrastructure Hub, Global Infrastructure Hub: A G20 Initiative, 2015, https://www.gihub.org/.

[24] G20 Research Group, MDBs joint declaration of aspirations on actions to support infrastructure investment , 2016, http://g20chn.org/English/Documents/Current/201608/P020160815360318908738.pdf.

[25] Asia-Pacific Economic Cooperation, APEC Finance Ministers Launch Cebu Action Plan, September 11, 2015, http://www.apec.org/Press/News-Releases/2015/0911_FM.

[26] Asia-Pacific Economic Cooperation, APEC Moves to Bridge Asia-Pacific Infrastructure Funding Gap, July 30, 2015, http://www.apec.org/Press/News-Releases/2015/0730_PPP.aspx.

[27] Asia-Pacific Economic Cooperation, “Annex B—APEC Multi Year Plan on Infrastructure Development and Investment,” October 8, 2013, http://www.apec.org/Meeting-Papers/Leaders-Declarations/2013/2013_aelm/2013_aelm_annexB.aspx.

[28] United States Office of the Director of National Intelligence, Global Trends: Paradox of Progress, January 2017, https://www.dni.gov/index.php/global-trends/letter-nic-chairman.