During the past two decades, China’s high growth rate and the fact that it has the highest trade surplus with the U.S. has made it the primary target of the U.S. trade war. This trade war is harming global economic integration. Tariffs were the first shot in trade war escalation between the U.S and China. This trade war seems to be turning into a technology conflict. These could be worsening even more, and from bilateral tensions that are already affecting the multilateral global economic integration, may turn into decoupling of both of the world’s biggest economies. The U.S-China trade war and its impact on Belt & Road Initiative countries’ trade and Chinese FDI, specifically in terms of its impact on their international business and trade policies, will be more than on others’.
The United States of America and China’s economic sizes and defense budgets make them leading powers in the world. China and the U.S are also a permanent member of the U.N Security Council. If we look into the very recent past, these two countries were trading with each other as the biggest trading partners in the world. Rapidly, China has developed and grown in its economy since 2000. At that time, China’s economy was a tenth of the U.S GDP. Another turning point of the Chinese economic boom was becoming a member of the World Trade Organization in 2001. China and U.S bilateral relationship is considered as the most influential and consequential in the world.
If these two big economies start colliding with each other, then it impacts also on other countries’ economies, trades and even FDI get affected.
In 2013, China’s President Xi Jinping put forward the Belt and Road Initiative, and since then, more than 80 countries, including international organizations, have signed agreements and cooperate with China.
The Belt and Road Initiative is a Chinese ambition for providing opportunities of trade and benefits in the world. Beijing believes that BRI is the broadest platform for international cooperation and further economic globalization in the world. In today’s world, globalization has been led by America, but fast-emerging economies have fueled this globalization also like China. On the other side, Washington kept itself away from China’s The Belt and Road Initiative. It has been argued that “China has depended trade ties, improved cooperation mechanisms and expanded areas of cooperation with BRI countries First, more international actors have acknowledged and participated in building the Belt and Road Initiative. Since its debut in 2013, The BRI has provided a novel and innovative framework for realizing coordinated global governance and building a community of common destiny for all mankind, receiving more endorsement and support from countries and international organizations. More countries have joined the BRI Friends Circle —122 countries have signed cooperation agreements with China as of the end of 2018, over 60 of them joining during the year. Most countries have continued to support the BRI in the midst of global political and economic turbulence”. Because there might be a possibility of the United States of America keeping itself away from BRI in order to contain China’s booming economy, this will affect The Belt and Road Initiative flagship plan through a trade war. The U.S trade war with China may cause China’s economy to rise or divide Asia, as we have already seen some evidence by pressuring China on its trade, technological policies, and investments around the world.
What made the U.S initiate its trade war with China? Liu and Woo in their research study (2018) give convincing arguments that there were three main concerns that drove the U.S to start a trade war with China:
1. China’s huge trade surplus affecting job creation in the U.S.
2. U.S blamed China for illegally acquiring U.S technology.
3. China wants to weaken the United States of America’s National Security and also intends to weaken its international standing.
For the last few years, China has been investing billions of dollars around the world under its BRI projects. Chinese FDI has become an important driver of international investment in the world. Right now, China’s greatest international economic ambition is The Belt & Road Initiative. China aims to develop and stimulate its economic growth all over the world. It is only possible for China if they cover vast regional investments and bring Asia, Africa, Europe and other areas and populations of the world into its marshal plan of BRI. As Huang in his research study in 2016 puts it that way, While infrastructure development plays a central role, the Belt & Road Initiative is a comprehensive one, including also policy dialogue, unimpeded trade, financial support and people-to-people exchange. It is too early to assess the impact of this ambitious Initiative. It certainly has the potential of turning the underdeveloped “Belt & Road” region into a new vibrant economic pillar and contributing to economic policy thinking by incorporating successful experiences of emerging market economies.
However, the initiative also faces very high barriers, including lack of a central coordination mechanism, a potential clash of different political regimes and beliefs, and financial viability of cross-border projects.
A recent study by Chen and Lin has found that the global FDI flows that went to the BRI economies have varied near by 35 percent. Under the BRI economies, the Pacific and East Asia have received the main Chinese FDI, including the drivers of FDI outflows. Central Asia and Europe are on the second stage. However, the BRI corridor attracts high levels of investment not only from Chinese FDI, but also from other world’s FDI. However, low-economy BRI countries still could not attract such FDI.
According to the Belt and Road Economics report:
“Within regions, as well, FDI flows show significant heterogeneity and concentration. Only a handful of corridor economies absorbed more than US$10 billion in FDI in 2017. They include China; Hong Kong SAR, China; Indonesia; Singapore; and Vietnam in East Asia and Pacific; the Russian Federation and Turkey in Europe and Central Asia; and Israel and the United Arab Emirates in the Middle East and North Africa. Together, these economies accounted for almost 80 percent of the total FDIs to corridor economies in 2017. In contrast, for many corridor economies, FDI is less than 1 percent of GDP. This group includes Bangladesh, Bhutan, Brunei Darussalam, Kenya, Nepal, Pakistan, Timor-Leste, and Uzbekistan. The concentration of direct investment outflows is even starker: just eight economies accounted for 87 percent of the total flows out of corridor economies in 2017. Five of these eight are from East Asia and Pacific: China; Hong Kong SAR, China; Singapore; Taiwan, China; and Thailand. The others are India, the Russian Federation, and the United Arab Emirates. At the other extreme, five of 13 corridor economies in East Asia and Pacific and the majority in the other regions invested less than US$1 billion abroad in 2017.”
The mainstream of corridor economies’ FDI inflows comes from non-corridor economies. Yet, as for trade, the share of corridor economies is increasing, in excessive share due to investment from China, which has picked up since the mid-2000s.
The key investments in The Belt and Road are a heavier network of transport infrastructures. It will eventually aim to effect and improve world trades. But the U.S-China trade war could also impact these Foreign Direct Investments over strengthening trade between the China and BRI partnering countries. Under the BRI investments, for easement in trade along the Belt and Road countries, bilateral trade flow has an exceptional importance. It can reshape and strengthen trade relations between the BRI-participating countries. It may also help and already has helped China to increase its imports and exports especially with East Asia and Pacific economies. This intra-BRI trade is being impacted by U.S-China tensions. (Belt and Road Economics 2019) If China could not play its full role in governance and infrastructure-building promises within the given time frame, BRI countries’ trade and Chinese FDI get affected directly due to the U.S China trade war.
We are seeing that the world’s two biggest economies, China and U.S, are engaged in a trade war, digital war, and might be going into full-fledged cold war. All of these have the aptitude to be escalated if situations remain the same, which would impact on BRI counties’ trade and Chinese FDI as well. The recent tariff war and tit-for-tat manner from both sides gave the world an impression that this trade war is not going to end soon.
Fazal Gilani is a senior journalist from Pakistan who studied IMPA-BRI from Tsinghua University Beijing in China and is currently a Doctoral Candidate at Xi’an Jiao Tong University. The article was first published in OneWorld.Press and has been republished with permission.
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