The basics of China’s BRI, announced in 2013, are well known (for a recent overview: Fang and Nolan 2019). It will suffice to mention a few key characteristics. The core idea is developing a so-called “belt” across Eurasia with three routes and a maritime “road” with two routes. Originally, 58 countries were identified for primarily bilateral cooperation with China. Memoranda of Understanding (MoU), phrased by China in a standard format, were the instrument of choice to initiate concrete cooperation, then led to concrete contracts. While there was an initial focus on infrastructure, the initiative referred to five links, apart from infrastructure also policies, trade, finance, and people. Cooperation was to be based on five principles, in line with the UN Charta: “mutual respect for each other’s sovereignty and territorial integrity”, non-aggression, non-interference, equality, mutual benefit and peaceful coexistence, according to the principal 2015 document outlining BRI (National Development and Reform Commission 2015). Several finance mechanisms were put in place, both domestic and multilateral schemes. They include the Silk Road Fund, with 40 billion USD from foreign exchange resources, the Chinese sovereign wealth funds and the newly founded multilateral Asian Infrastructure and Investment Bank (AIIB), a Chinese initiative with a capital stock of 100 billion USD for the region.
The early experiences with BRI, now with a track record of half a decade, are somewhat mixed. Compared with the expected size of about 1 to 2 trillion USD, while some estimates were as high as 8 trillion USD, actual disbursement is still much lower. At the same time, problems have surfaced for partner countries, among them fears of a debt overburden for borrowing countries. The most famous case is the forced handover of Hambantota Port in Sri Lanka to China as a 99-year-leaselease, as the Sri Lankan government could not honor its debt obligations. This has led India and Japan in the meantime to find favor with the Sri Lankan government again (Herskovitz and Marlow 2019).
To some extent, the emerging problems seem related to an underpricing of the infrastructure initiative by the early mover China. Underpricing, combined with relatively low product and contract quality keeps potential competitors at bay, particularly in cases of a natural monopoly, where a second mover would find it difficult to enter at all. Moreover, underpricing is in line with relatively ample financial reserves, which lowers the need for efficiency, and it is in line with the relatively early phase of China in its learning curve as an international supplier of infrastructure.
It is plausible that China already in this early phase was aware of a need to further adjust its strategy, either because of new market entrants, which would lead to action-reaction cycles in an oligopolistic environment, or due to learning effects. As a consequence it developed the initiative in a flexible way (Öztürk 2019). For instance, there is no clear and uniform organizational structure behind the execution of BRI, so changes can be implemented rather easily. Finance is a case in point. China has various financial instruments at her disposal to make use of in actual projects. AIIB was announced in 2013 and started in December 2015. At first, many observers feared that AIIB would undercut the standards of the established multilateral development banks. However, so far AIIB acted much more prudently than expected, and this was clearly in China’s interest of not endangering its reputation as a trustworthy multilateral partner. On the flipside, AIIB lending has progressed much slower than expected: while it had a goal of disbursing around 10 to 15 Billion USD per year, since 2016 until September 2018 only some 6.4 billion USD was realized in total.
Flexibility served a second interest, namely that it helped to negotiate contracts favorable to China as the stronger partner with weaker borrowers. With respect to the MoUs, for instance, their non-committal wording can serve the purpose of underlining demands from China if it serves its purpose, while downplaying the status of the bilateral relationship in cases that are potentially disadvantageous for China (Okano-Heijmans and Kamo 2019).
One major problem for China proved to be the variety of objectives that BRI was meant to tackle, as discussed above: domestic regional motives, financial motives (related to forex reserves), business motives (related to capacity utilization), geo-strategic motives, and international reputation effects. It turned out that not all motives were easily compatible with one another.
In 2015, two years after the launch of BRI, Japan started the so-called “Partnership for Quality Infrastructure” (PQI). Its original pillars were an expansion and acceleration of infrastructure-related assistance through the established Japan International Cooperation Agency (JICA), collaboration with ADB as the established multilateral development bank for the wider region, measures to increase the supply of funding, and promoting relevant international standards (MOFA 2015). The target of providing 110 billion USD was raised to 200 billion USD in 2016, for a period of five years. Apart, the regional scope was extended from Asia “to the whole world” (MOFA 2016), explicitly mentioning Russia and Africa. Moreover, in the context of this expansion, the range of projects was enlarged beyond infrastructure in a narrow sense to cover natural resources, hospitals, etc. This also meant that more institutional mechanisms were being involved.
Notwithstanding the fact that there had already been earlier Japanese initiatives in this field, it is obvious that PQI is a reaction to BRI. Even though the official narrative might deny this, not only the conspicuous timing of the 2015/16 PQI is revealing. After the first move of China (BRI), its regional rival, Japan, modelled core features of its own competing initiative as a finely honed response to central characteristics of BRI. Against China’s bilateral approach involving MoUs, which gave China a lot of problematic bargaining power, Japan stressed its intention to base her propositions on each country’s development plan, thus making it attractive for potential partners including heavyweights like India. In terms of financial magnitude, due to its dire fiscal situation Japan could not make a convincing counter-proposal to the trillion dollar China promise. So Japan could not follow a low-price or even underpricing strategy like China, but had to choose a high-price/high-quality approach. Claiming “high quality” of infrastructure projects is, however, difficult, because of infrastructure being an experience good. Quality assurance therefore had to be ascertained in several ways. First, Japan could point to its successful economic development trajectory and its reputation as delivering “quality” industrial solutions, including economic efficiency in export-oriented manufacturing, experiences with technology transfer and effective mechanisms of human resource development. Arguably, while somewhat less convincingly, this reputation could also be extended, at least in comparison with China, to “prudence” and good governance in a wider sense, involving transparency, careful economic viability considerations and thorough appraisal of risks. Second, Japan could point out the strong role of its successful private sector companies in delivering such qualities, a big difference with China’s approach, which basically focused on government funds delivered through state-owned enterprises or other mechanisms and firms closely related with the state, all of them with a doubtful reputation as providers of quality and prudence. Third, quality assurance could also be supported by involving established mechanisms with a well-developed track record, both on the domestic level (like JICA) and internationally (ADB). The Japanese government also started some new mechanisms, like the Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development in 2014, meant to support and facilitate Japanese corporations in the global infrastructure market (Hatano n.d.). Nevertheless, the focus was on established organizations, thus setting oneself apart from nontransparent mechanisms like the various financing agencies in China or untested new agencies like AIIB.
Finally, Japan promoted the establishment of quality standards through the multilateral level, thus pushing for rules that it could arguably fulfil much easier than China. Japan used the 2016 G7 Ise-Shima Summit in her own country to pass the so-called “Principles for Promoting Quality Infrastructure Investment”. Five principles addressed, still rather vaguely, effective governance in the interest of reliability and efficiency, labor-related aspects like job creation and capacity building, social and environmental impacts, alignment with national and regional development strategies, and finally resource, particularly finance mobilization. Later in 2016, a statement on quality infrastructure was also included in the Declaration of the 2016 G20 Summit in Hangzhou, chaired by China. Japan also took an active interest in engaging other organizations like the World Bank and OECD. As a culmination of these efforts, the 2019 G20 Summit in Osaka adopted a more elaborated list of “G20 Principles for Quality Infrastructure Investment” that is significantly more concrete than its predecessors (Table 1). The various principles are explained on six pages of text.
These principles are not obligatory. According to the preamble of the document they are meant to help close the financing gap of infrastructure investment and thus to support the private sector and multilateral development banks. From that perspective, reference to them will be hard to avoid in cases of co-finance on the international level. If market players expect the proclaimed principles, like the explicit references to environmental and social sustainability, to become even more pervasive in the future, they will tend to consider them even now for costly infrastructure schemes with their long use periods.
This is a serious challenge to China’s earlier low-price strategy. At the same time, it has to be noted that in the oligopolistic environment of infrastructure, moves and counter-moves are only to be expected. With respect to Japan, for some time during 2017/18 there were hints that Japan might be shifting towards a more positive attitude towards BRI, for instance considering to eventually join AIIB (Iida 2018). Possibly, although this is difficult to verify, this was driven by the early successes of BRI, in the meantime encompassing agreements with more than one hundred countries. However, such a rapprochement has not been fully realized so far, although China and Japan in 2018 have agreed in principle to cooperate on 52 infrastructure projects, in moves that have been called a “conditional engagement” (Ito 2019). In oligopolistic markets, such developments are not surprising, as the limited number of actors often decide to cooperate or even collude, as this may be superior for them (but not necessarily for the demand side) when facing the risks of ruinous competition or additional actors who could spoil their rents.
With respect to China, the flexibility of BRI made it easy to adjust to new circumstances. It is noteworthy that BRI had a rather positive image during its early years, but that this image worsened after first experiences with actual projects were made (Garcia-Herrero and Xu 2019), including debt-trap issues, quality concerns and cases of corruption. A notable development is the Second Belt and Road Forum of April 2019, in which China took up the challenge to redefine her approach. In his keynote speech, President Xi Jinping stressed three major points to develop BRI further (Xi 2019):
He formulated a “principle of extensive consultation, joint contribution and shared benefits”, which implies that BRI will become more multilateral, as the earlier bilateralism had been met with doubts due to the asymmetric relationships,
He acknowledged “open, green and clean cooperation”, thus taking up points like transparency and environmental sustainability that had become major concerns of the strive for quality infrastructure,
And he alluded to a “high standard cooperation to improve people's lives and promote sustainable development”, underlining similar points further, stressing poverty alleviation and socio-economic development.
These points also entered the Joint Communique, which speaks of aiming for “high-quality, reliable, resilient and sustainable infrastructure” (Leaders´ Roundtable 2019).
For the time being, the infrastructure market seems to be leaning toward a high-quality strategy. The downside is that this could also turn out to be a high-price strategy that is problematic for the developing world, as has already been observed (e.g. Osaki 2019). As the Principles for Quality Infrastructure Investment are still open to some interpretation and are not mandatory, the market can still develop in one direction or another, driven by the small number of major players.
The reaction of the EU
While focusing on China and Japan, other major players have been neglected so far. An important development concerns the concept of the “Free and Open Indo-Pacific” (FOIP), based on an agreement between Australia, India, Japan and the USA of 2017, initiated by the Trump-led administration in the US, while originally already put forward by Shinzo Abe from Japan as early as 2007. FOIP is meant to ascertain the sovereignty of Indo-Pacific states, safeguard open sea-lanes and lead to fruitful economic cooperation, including infrastructure projects. Security-related cooperation so far seems to be the core interest. Most observers agree that it has to be interpreted as a move against China’s growing geo-strategic ambitions, although the government of Japan, for instance, would deny this (Rossiter 2018). Economic, including infrastructure cooperation so far plays only a minor role. As the four partners are quite different in terms of their structural characteristics and ambitions, economic cooperation so far has rather progressed on a bilateral basis. For instance, India and Japan already cooperate since 2016 and have decided about seven major infrastructure agreements in late 2018. They also cooperate on Africa. Japan and the US have launched a Japan-US Strategic Energy Partnership in late 2017 that reaches beyond the two countries, for instance supporting Indonesia to develop LNG infrastructure (Mehta 2019).
Here, we focus on the role of the EU instead. What strategic position can the EU take in the emerging international infrastructure market and that has been shaped, to a considerable extent, by the competition between China and Japan?
For several reasons, the EU is not in a very favorable position:
Decision–making is difficult: There is no clear mandate for an EU infrastructure initiative, although its various policies on trade, transport, energy and external affairs, among others, would allow to combine them – however, with coordination between the policy spheres of different Directorates General and of the External Action Service to be accomplished first.
(Major) member countries have their own political and economic interests.
The EU is not an insider to major parts of the regions of Eurasia and elsewhere that have attracted most of the interest.
In earlier years, several policies can be mentioned that contributed facets of a European approach, but only on a small scale and inconsistently. The Trans-European Transport Network (TEN-T) can be named, the European Neighborhood Policy and the EU-level ODA. In 2016, the EU passed a Global Strategy, in which a “Connected Asia” is dealt with in a short passage (EU 2016: 37–38).
Only in September 2018 did the EU manage to proclaim a Joint Communication (between the Commission and the External Action Service) on “Connecting Europe and Asia: Building blocks for an EU Strategy” (EU-HR 2018). Due to the difficult background of reaching a strategy, it is rather an amalgamation of existing policies of the various parts of the EU and of drawing out interfaces than a coherent approach. For instance, TEN-T is to be connected with Asia, a sensible idea, which had already been followed though. There is no clear budget line for the new strategy, rather references on the intention to make extended funding available. Relevant allocations from the new budget phase 2021 to 2030 are summed up. The notable increase of resources for the External Action Service is mentioned, but it cannot fully be attributed to the connectivity strategy. China and Japan are noted as partners for bilateral cooperation in the document, but China in a somewhat more cautious way, noting issues of market access and of a level playing field.
As a vision for consolidating the various threads, the text points out a “European way” of “sustainable, comprehensive and rules-based connectivity” (EC-HR 2018: 2–3). In this context, it should also be remembered that the Global Strategy signals a strongly value-driven agenda: “Our interests and values go hand in hand. We have an interest in promoting our values in the world” (EU 2016: 13).
Summing up, the strategy is still quite vague and flexible, in line with what has been noted for other strategies in the infrastructure market as well. During 2019, however, it already became somewhat clearer what course the EU might choose in terms of alliances or stand-alone policies. The March 2019 EU-China Strategic Outlook diplomatically points out that China is both, in different policy fields, a partner, a competitor, and a systemic rival. For instance, there is a valuable role for partnerships with China when coordinating connectivity schemes across the Eurasian landmass. At the same time, problematic issues like the potentially divisive role of China in the 17 + 1 scheme (for a survey, Stanzel 2016) or in the West Balkans have to be noted. In more general terms, the EU intends to “more robustly” “preserve its interest in stability, sustainable development and good governance” (EC-HR 2019: 5).
In September 2019, the EU and Japan concluded a bilateral “Partnership on Sustainable Connectivity and Quality Infrastructure”, which stresses three points, namely sustainability, the concept of “quality infrastructure”, and the idea of the “level playing field”, thus three issues on which the EU policy and the Japanese approach converge convincingly. The text also accentuates topics in the digital connectivity. Common values of the EU and Japan are noted, which lays a foundation for cooperation on the multilateral level to support the established rule of law. In terms of regions, “the Western Balkans, Eastern Europe, Central Asia, Indo-Pacific, as well as Africa” (EU and Japan 2019) are highlighted. Mentioning parts of Europe in this context is quite remarkable, with prime minister Abe explicitly referring to Japan’s Western Balkans Cooperation Initiative (of 2018) in his accompanying speech, because the EU had been quite critical of China’s approach towards several European countries in the 17 + 1 framework before. China is not explicitly touched upon, but when Commission President Juncker expressed the hope to avoid “mountains of debt” (“non pas des montagnes de dettes”, Juncker 2019) and “dependence on a single country” (“non pas plus de dependence à l’égard d’un pays”, ibid.) in his accompanying speech, it is quite obvious which country is being referred to.
The EU is following Japan’s path of stressing the quality-aspect of infrastructure, which is in line with her competitive advantages. From that perspective, Japan is a natural partner, and both on a regional and on a multilateral level, common interests are obvious, and the institutional foundations have been laid to pursue them.
The oligopolistic market evolution has led to a number of alliances. As there are quite a number of natural monopolies in the international infrastructure market – like railway lines, subway systems in metropolitan areas, etc. –, if the number of the players increases, the risk will rise that a player cannot be the winner of an important, contested contract, so it is a less risky strategy to ally oneself with others, while also not excluding cooperation with the single early mover, China. It remains to be seen which of the alliances will prove stable. While Prime Minister Abe mentioned the concept of the Free and Open Pacific in his speech when signing the EU-Japan partnership, Mr. Juncker did not do so, and no reference is contained in the actual agreement. The difficult amalgamation of security and geo-strategic economic concerns underlying FOIP, which could lead to conflicts of interest among the heterogeneous Quad of FOIP countries, is facing some skepticism among EU policymakers.