Global Economies

On February 10, Abu Dhabi awarded an Indian consortium a 10 percent stake in one of its offshore oil concession areas. This announcement is significant as it marks India’s maiden entry into the Gulf’s upstream hydrocarbons sector.

The 600 million USD deal was facilitated by a recent upswing in political ties, following a spate of reciprocal visits by the UAE-Indian leadership and the consequent flow of bilateral ties.

In 2015, after becoming the first Indian Prime Minister to visit the UAE in 34 years, Narendra Modi returned on February 10-11 for the World Government Summit in Dubai.

In the meantime, the UAE’s de facto leader, Abu Dhabi Crown Prince and Deputy Supreme Commander of the UAE Armed Forces H.H. Sheikh Mohammed bin Zayed Al Nahyan, visited India in 2016 and 2017. 

This momentum in bilateral ties helped surpass the traditional areas of collaboration — oil, trade and expatriate workers. To tackle contemporary challenges of mutual interest, the two countries signed the “Comprehensive Strategic Partnership Agreement” last year. This newfound government-to-government camaraderie and strengthening of ties allows the two countries to not only focus on new economic opportunities like food security and frontier science, but also helps them tackle their mutual security concerns in the Middle East and South Asia. 

This will be enabled through improved tactical defense cooperation, joint military exercises and training, naval collaboration, partnerships in defense production, and combined action against religious extremism. 

While this agenda will evolve over the next few years, it is worth exploring the possibility of converting the strategic bilateral association into tactical multilateral partnerships in certain economic and security domains.

In the current context, the rationale for multilateralism is that many of the UAE’s and India’s individual interests or joint concerns are unlikely to be optimally addressed by mere bilateral cooperation mechanisms.

While the immediate economic, political and strategic needs could be met by pursuing bilateral track, long-term interests – which often depend on a third country or more — this is best tackled through a multilateral strategy. Pooling of resources, ideas and efforts would not only be cost effective and efficient, but could possibly yield better results as well.

To this end, the UAE and India are engaged in separate multilateral partnerships with various countries. They are also part of several multilateral forums, but many are too global in nature to promote their common interests nearer to home.

Instead they could focus on collaborating in regional organizations to promote multilateral engagement, like the Indian Ocean Rim Association (IORA) and the Indian Ocean Naval Symposium. The IORA is crucial to promoting the economic interests of 21 member countries, including the UAE and India, and to safeguarding mercantile shipping lanes from piracy.

Such an association would gel with India’s vision of SAGAR (Security and Growth for All in the Region). This promotes an ocean-based “blue economy,” wherein sustainable economic development is linked to security.

Another potential area is the defense sector. Both the UAE and India are negotiating with France to purchase Rafale fighter jets. This offers a chance for Paris-supervised regional manufacturing of spare parts and collaboration in aviation software technology that could be cost-effective for both.

Recently, New Delhi’s proactive diplomacy has sought to expand and intensify ties in South, West, East and Central Asia, which offers the UAE scope to enhance its own interests by teaming up with India. Opportunities include the following:

• The UAE considering investment in India’s North-South Transport Corridor (NSTC), a network of ship, rail, and road routes between India and Europe, via the Middle East, Central Asia and Russia. It links the Indian Ocean and Gulf with the Caspian Sea, making the current routes shorter and reducing transport costs. Either Afghanistan or Central Asian countries, where the UAE has stakes, could become potential venues for multilateral cooperation.

• Beyond the potential NSTC opportunity in Afghanistan, the UAE and India are also committed to the war-torn country’s stability and welfare, paving the way for cooperation on combatting terrorism and coordinating their development assistance and infrastructure projects, thus strengthening the Afghan government.

• The UAE and India could also team up in Africa by combining their strengths of wealth and technological expertise to augment, for example, telemedicine and food production and storage facilities, which have great potential to improve the quality of living in remote parts of the continent.

• India is also part of the Japan-promoted “Asia-Africa Growth Corridor” or “Freedom Corridor,” connecting the Bay of Bengal and the South China Sea, a potential point of interest to the UAE given its recent focus on expanding business and strategic opportunities in Africa.

• India-Japan joint ventures also open the door for the UAE to promote and partake in engagements arising from the recent quadrilateral cooperation among the mainstream Indo-Pacific countries, including Australia and the United States.

Together, the quest to advance UAE-India bilateral ties through some of these partnerships also adds value to South-South cooperation and contributes to partially fulfilling the United Nations Sustainable Development Goals.

Finally, there is also the opportunity for both countries to work with other like-minded countries to draw the contours of a more effective security architecture for the region.

UAE-India relations have a newfound level of strategic depth, and there remains enormous potential for collaboration on multilateral initiatives. While it is every country’s sovereign right to pursue the strategy that suits it best, there is little to argue against pooling of opportunities and resources, particularly when shared interests pave the way for discernible results.

There is an increasing mutual recognition between Abu Dhabi and New Delhi, who along with other strategic partners, are poised to leverage multilateralism to improve economic efficiency, enhance international cooperation and contribute to peace and security in the region. The effects are not instantaneous, but the two countries are demonstrating the value and benefit of an approach that focuses on commercial, military and diplomatic partnership supporting mutual interests and regional stability.

Dr. N. Janardhan is Senior Research Fellow, Gulf-Asia Programme, Emirates Diplomatic Academy, and Honorary Fellow, University of Exeter.  

The views expressed in this post reflect those of the author and not that of the EastWest Institute.

Photo: https://commons.wikimedia.org/wiki/File:Abu_Dhabi_Skyline_from_Breakwaters_Marina.jpg

The Asian giants must devise ways to make their respective initiatives less competitive geopolitically and more cooperative geo-economically.

As 2017 drew to a close, Beijing made two surprising proposals to further the Belt and Road Initiative (BRI)—one, extending the China-Pakistan Economic Cooperation (CPEC) to Afghanistan; and two, linking Pakistan’s Gwadar and Iran’s Chabahar Ports.

These propositions assume significance because as BRI continues to hog the global limelight, India has been quietly promoting its own North-South Transport Corridor (NSTC). These infrastructure plans not only intensify Sino-Indo competition—even potentially working at cross-purposes—but also risk duplicating partnership opportunities for several countries, including those in the Gulf interested in contributing to the projects.

Beijing’s announcement of the BRI (originally known as the One Belt and One Road initiative) in 2013 seeks to reinvent the age-old “Silk Road.” The plan is to link China with the economies of Southeast and Central Asia by land and those of the Middle East and Europe by sea.

After being in cold storage since its announcement in 2000, the NSTC made progress with two dry runs in 2014. The project envisions a network of ship, rail and road routes between India and Europe, via the Middle East, Central Asia and Russia. Linking the Indian Ocean and Gulf with the Caspian Sea, the project would make the current routes shorter by almost half and reduce costs by about 30 percent.

Both initiatives are, no doubt, designed to energize Chinese and Indian domestic markets and improve both powers’ international standing. In time, they may also promote infrastructure, business ventures and economies of all the countries falling in and around the projects’ paths.

While the end destination—Europe—is also common to both projects, from a Gulf perspective, the involvement of Oman and Iran in the initiatives is another shared denominator.

With multiple funding deals spanning water, energy and transport sectors, China is keen to use the BRI to multiply the current 31 billion USD bilateral trade with Iran by 20in the next 10 years.

On the other hand, the commissioning of the first phase of the Chabahar Port in Iran—which is funded partly by India—in late 2017 is a sign of recent progress associated with the NSTC. In fact, India sent its first consignment of wheat to Afghanistan through Chabahar in October last year.

New Delhi is also investing heavily in rail-road developments linking various parts of Afghanistan with Chabahar. The port will then formally be linked to the NSTC, which currently connects Bandar Abbas to Russia, Eurasia and Europe.

At present, BRI dwarfs NSTC in scope and scale. While the BRI has attracted the interest of about 60 countries, the NSTC currently involves only about 15 countries.

More importantly, while the BRI encourages bilateral trade agreements between China and individual countries, the NSTC strengthens multilateral partnerships. Many countries that lack the financial capability to bankroll the development process are nonetheless able to engage with the initiative, encouraging more widespread participation.

Geopolitical Grey Areas

Amid these similarities, differences and opportunities, lie a few grey areas, particularly concerning geopolitical issues and scope for cooperation.

As Afghanistan is already a member of NSTC, China’s bid to include Afghanistan in the BRI, via CPEC, could fuel competition with India, especially since it also involves Pakistan. Adding to the complexity is Pak-Afghan friction. Despite the emphasis on economic development, the Chinese bid to get Afghanistan on board the CPEC may buffer the BRI against possible Taliban sabotage efforts.

India has, thus far, spurned the BRI and has protested the CPEC project because it runs through Pakistan-administered Kashmir, which New Delhi claims is integral to India. China, however, rejects this view, stressing that the project has nothing to do with territorial disputes.

Further, India aided Chabahar Port faces competition from the not-too-distant China-aided Gwadar Port in Pakistan. While Beijing’s call to link the two ports is economically wise, it is politically loaded.

A unique development, however, is the limited scope for the United States in both projects. While Washington might decline to be part of the BRI because of China—an imminent challenger to U.S. global predominance—it would be just as disinclined to be part of the NSTC because of Russia’s stake.

Yet, Iran’s stake in both ventures is likely to get the U.S. interested. While sanctions on the Islamic Republic have stalled progress in the past, the possibility of new sanctions by the Trump administration could pose fresh challenges to both initiatives, thus pitting the U.S. against China and potentially throwing a spanner in Gulf countries’ interests in the projects.

As a result, here are two points for consideration.

One, China and India could devise ways to make their respective ventures less competitive geopolitically and more cooperative geo-economically, both for their own benefit and for the welfare of the other countries involved.

One possible way of achieving this could be to de-emphasize India-China ties from New Delhi’s proximity with Washington and Beijing’s support for Islamabad. This could help the two countries with “oversized egos” to progress from “INCH (India and China) towards MILES (Millennium of Exceptional Synergy).”

Such an understanding could then facilitate India’s participation in the BRI and China’s cooperation in the NSTC.

Two, while the Gulf countries could take the easy option of separately getting on board with both initiatives, wherever possible and beneficial, it may also be worth promoting the idea of connecting the two Asian projects either in the region or beyond.

Since animosity with Iran is likely to be the biggest obstacle for Gulf countries’ participation in either regional initiative, Afghanistan or Central Asia could become potential venues for multilateral cooperation among the concerned countries.

Such a joint pooling of opportunities and resources would make it a win-win proposition for all.

Dr. N. Janardhan is Senior Research Fellow, Gulf-Asia Programme, Emirates Diplomatic Academy and Honorary Fellow, University of Exeter.

The views expressed in this post reflect those of the author and not that of the EastWest Institute.

"PM Modi with Chinese President Xi Jinping" (CC BY-SA 2.0) by narendramodiofficial

The U.N. Framework Convention on Climate Change 21st Conference of the Parties, or COP21, was a tough act to follow. At that event in 2015, delegates from 195 countries came together in Paris and adopted a landmark agreement to address climate change. The accord, known as the Paris Agreement, laid out the signatories' intention to limit global warming to less than 2 degrees Celsius (and, ideally, well under that mark) by curbing greenhouse gas emissions and decarbonizing the global economy by 2060. Two years later, however, it's becoming increasingly clear that fulfilling the accord's objectives won't be enough to halt the effects of global warming. What's more, though COP21 established an ambitious plan for addressing climate change, it left hashing out the details for another year, another conference.

Expectations were high that this year's 23rd Conference of the Parties, or COP23, would offer the perfect venue for fleshing out the Paris Agreement. The summit, which Fiji presided over, drew 22,000 people from all over the world to Bonn, Germany, on Nov. 6-17 to hash out the next steps toward addressing climate change. COP23 lacked the fanfare of COP21, and some critics argued that its participants failed to take any meaningful action over the course of the meeting. On the conference's conclusion, the main takeaway was that climate change is still a top priority for policymakers, economists and voters worldwide. But that message, and the decisions that came out of COP23, nonetheless represented an achievement in the international fight against climate change.

Click to read the full commentary on Stratfor.

Photo: "Harnessing Nature" (CC BY-NC-ND 2.0) by tommyscapes

BY: DR. SASKIA VAN GENUGTEN

The Head of Libya’s Presidency Council, Fayez al-Serraj and his rival, the head of the Libyan National Army, Field Marshall Khalifa Haftar, recently agreed to call a ceasefire and hold elections as a way out of the current political and security crisis. Yet, despite the recent announcement, it remains to be seen whether unity amongst Libyans can be found on political matters. Any renewed dialogue focusing primarily on politically contentious issues and on dividing positions of power is likely to lead to failure in the short-term. 

However, what Libyans most likely can agree on is that a concerted effort needs to be made to stabilize their country’s economy. Indeed, more than a year and a half after the signing of the Libyan Political Agreement, large parts of the country suffer from suboptimal basic services and witness inflation above 15 percent, while dealing with limited liquidity and a steadily weakening currency in parallel markets. Indeed, the precarious situation has negatively impacted citizens’ trust in Libya’s struggling state authorities. Thus, Libyan and international policy-makers alike are looking for a solution to the crisis, should cling to that glimmer of unifying hope that can be found in economic revival. 

In broad terms, building consensus around economic objectives could start with problem-solving workgroups aimed at reversing the detrimental economic developments over the past six years of civil war and political strife, in order to find shared and inclusive solutions to the following issues:  

• How to optimize and secure oil production and exports? State revenues have decreased due to severe disruptions to oil production and lower global oil prices. Lately, oil production has rapidly increased again, but equipment, pipelines and terminals have been damaged and are in need of repair. At the same time, when oil production rises, OPEC members might demand Libya to be included in current production capping agreements.  
• How to spend the limited resources fairly and effectively? A significant share of the central (emergency) budget is being spent on public sector wages. This includes a good number of ‘ghost employees’ and in the aftermath of the 2011 civil war, a large number of revolutionary combatants were added to the state’s wage bill. Due to suboptimal bureaucratic practices, what were believed to be a few thousand beneficiaries, rose to more than 200,000 citizens claiming funds. 
• How to curb inflation, ensure liquidity and stabilize the currency? As a result of the continuous budget deficit, international reserves have dwindled. In 2012, reserves stood at 118 billion USD, in 2017, the amount was 67 billion USD. Banks have suffered liquidity problems. While lately an upward trend is seen due to increased oil production, there remains pressure on the currency peg, with increased inflation making imports difficult to obtain. 
• What can be done to transform the criminal economy?  Illicit trade is growing and there is a risk that illegal and harmful activities are being ‘normalized’ due to the security situation and a lack of governance and regulation. Growth is caused by flaws in border controls, an abundance of weapons, generous subsidies that allow for a thriving black market, and a lack of alternative economic activities. The smuggling industry has offered attractive employment opportunities – with fast money and limited risks. 
• How to bolster the unity and independence of national economic institutions? Since the onset of the 2014 civil war, Libya has witnessed the establishment of several parallel and competing branches of, among others, the National Oil Company (NOC), the Libyan Central Bank (LCB) and the Libyan Investment Authority (LIA). Most of the breakaway entities have little control over oil and state funds and tendencies are currently towards cautious reunification.

All the above are issues that, after years of damaging conflict, require immediate action. At the same time, Libyan policymakers should keep in mind the fundamental medium and long-term challenges that were lingering even before the fall of Qaddafi’s regime. Several of these structural economic issues were partly responsible for putting Libya in such a precarious situation in the first place as they allowed someone like Qaddafi to use and abuse income from oil to buy loyalty and legitimacy. Supporters could receive cash, public sector jobs, subsidies and other benefits, while disobedience could be punished at will. 

Many of the fundamental, systemic economic issues Libya struggles with reflect those generally associated with oil exporting countries. These range from a large public sector wage bill, a lack of incentives for private sector activities, high spending on subsidies to a suboptimal human capital base. Oil still generates 95 percent of total government revenues, but only 2 percent of local employment as the industry relies heavily on expat technical staff. In 2012, explicit state subsidies amounted to 11.5 billion USD, which translated into 13.8 percent of GDP. Already under the Qaddafi regime, it was acknowledged that to remain sustainable, Libya’s economy needed urgent diversification, subsidy and banking reforms and private sector development. 

Tackling real-life economic problems, without getting lost in political zero-sum games, could allow for: 

• A functioning, inclusive economic model which will raise the profile of Libya as a possible investment destination, to start with, a return of investments in the oil and gas industry. 
• The release of significant government tenders in the field of reconstruction, development and advisory projects and the stability to attract companies for such projects.
• The return of expat workers from neighboring countries to the resource-rich country, thereby adding to much needed regional employment opportunities. 
• A better management and scaling back of the illicit economy, which is particularly of interest to European actors greatly concerned with human smuggling and trafficking activities.

Reconciliation and ending the feud should largely be a Libyan endeavor, but given the international stakes in Libya’s economy and the country’s stability, the international community should apply the pressure needed to bring the different Libyan sides to the negotiating table. The agreement between Serraj and Haftar is an excellent start. 

Dr. Saskia van Genugten is a Senior Research Fellow at the Emirates Diplomatic Academy and author of “Libya: Building Political Consensus around Economic Objectives.” Follow her on Twitter at @svgen.

The views expressed in this post reflect those of the author and not that of the EastWest Institute.

The EastWest Institute (EWI), the National Institute of Strategic Communication at Peking University (NISC), the Centre for China & Globalization (CCG), and the Chinese Academy of International Trade and Economic Cooperation (CAITEC) convened on June 15-16 an international symposium entitled “’Afghanistan Reconnected’: Renewed Opportunities Under China’s Belt and Road Initiative (BRI)” in collaboration with the Embassy of Afghanistan to China, Kabul University and the United Nations Industrial Development Organization (UNIDO).

Following the Belt & Road Summit in Beijing in May of this year, the EWI symposium was the first follow-up event dedicated to one particular country along the “New Silk Road.” Given the tragic backdrop of the recent terror attacks in Kabul, the symposium was a timely event in reinvigorating a collective hope for the future as the general consensus was that peace in the region is dependent upon a stable and thriving Afghanistan.

The event focused on how China’s new outgoing economic strategy can provide benefits for Afghanistan's stability, security and prosperity in a regional context. To this end, it aimed to build trust between political and business contacts among countries (India, Pakistan, Iran and Afghanistan) with significant interests in the future stability of the country as well as to develop policy recommendations for regional economic cooperation.

Conceived as a Track 2 dialogue, the symposium brought together parliamentarians, diplomats, academics and professionals from across the private sector and several international organizations. Despite being an unofficial event, significant assurances from speakers associated with the National Reform and Development Commission (NDRC), the Ministry of Commerce (MOFCOM) and the Ministry of Industry and Information Technology (MIIT) represented the authentic expression of Chinese government strategy.

Key Themes

As a consequence of Afghanistan’s weakened governmental institutions and endemic corruption, the need to address the very real concerns that BRI may forgo Afghanistan completely was a main topic of concern. However, amongst Chinese reassurances that Afghanistan is very much a central cog of BRI, other delegates warned that an unstable and economically regressive Afghanistan will also hamper the future success of its neighbors.

Chief among several tangible Chinese pledges was the commitment to further financial investment and professional training.  Improving and increasing the possibilities for people-to-people exchanges between all countries along the New Silk Road was also emphasized as a perquisite to BRI’s possible success.  Several Chinese speakers voiced China’s commitment to provide 10,000 scholarships to train Afghan researchers, managers and engineers to run 50 jointly-organized laboratories.  The mining industry, in particular, was identified as a specific area of win-win cooperation, as Afghanistan boasts rich deposits of several minerals and can benefit from the infrastructure and technical expertise of China to exploit these resources.

Along with discussions concerning trade and transit, investment and infrastructure, and energy cooperation, sustainable or “green” development was a new theme to emerge as a guiding principle of BRI. In order to ensure the New Silk Road is conscious of its environmental impact, there were calls for concerted efforts from the Chinese government and its international partners to share information in order to develop thorough regulation and policy. In addition to its abundant natural resources, Afghanistan also has masses of renewable energy potential waiting to be tapped into, such as 23,000 megawatts of hydropower which, if developed, could be exported to Pakistan. Furthermore, well over 200,000 MW of solar energy and tremendous possibilities for wind energy are yet to be realized. As a concrete outcome, cooperation between Kabul University and Poly Solar Technologies was concluded to help both the university train Afghan students and the company invest in the Afghan market.

During the discussions, participants drew attention to how BRI can both learn and expand from previous initiatives which attempted to revitalize and reestablish the centrality of the Old Silk Road in global economics. Several philosophies underpinned previous attempts, but BRI’s strength lies in its extensive research and identification of significant focus areas, including Afghanistan.  A major task for BRI in this regard is to address the large trade imbalance between China and Afghanistan by creating stronger trading links through the China Pakistan Economic Corridor (CPEC).

When considering the more polarizing foreign policy emanating from Washington, a significant geopolitical observation to come out of the symposium was the prospect for BRI to be a driving force in convincing regional states to put aside their differences in order to foster a richer culture of cross border cooperation. With over 20 terrorist groups said to be operating in Afghanistan, several delegates dispelled the myth that a difference between “good” and “bad” insurgent groups exists. Delegates, therefore, expressed the hope that both the U.S. and China would use their leverage over Pakistan and Afghanistan to work towards a common understanding of combatting violent extremism, and at the same time towards connecting the two countries through the existing and new rail and road systems. EWI’s CEO Cameron Munter, former U.S. Ambassador to Pakistan, pointed out that BRI and the converging interests of the U.S. and China represent not only an immense mobilizer of unprecedented economic opportunities, but also an opportunity to strengthen institutional capacities and state building.

These arguments echoed Afghan President Ghani’s sentiments just a week prior, while he was in Astana, Kazahkstan as part of the latest Shanghai Cooperation Organization (SCO) summit, where he expressed his willingness to step up cooperation in transportation to enhance connectivity. Chinese influence is seen as a potential driver for brokering bilateral agreements regarding border management control along the hotly contested, and often tense, Durand Line. A common complaint, reiterated several times throughout the symposium, was that despite hundreds of agreements and MoU’s in place between Afghanistan and its neighbors, these policies often go unimplemented. In terms of the border between Afghanistan and Pakistan, Chinese/U.S. influence was envisioned as serving the dual purpose of providing an independent check on illegal crossings and assisting with trade management processes for trucks transiting goods in and out of either country.

Contrary to more pessimistic reports amongst geopolitical and international relations analysts, and with respects to other local infrastructure projects in the region, delegates at the event highlighted the potential synergies between the Iranian Chabahar and Pakistani Gwadar ports. Some see the construction of the two ports as physical manifestations of the wider geopolitical tensions in the region, especially considering the former is largely viewed as an avenue by which India and Afghanistan can increase trade by circumventing Pakistan. Yet, it was the compatibility of the two ports which garnered most discussion at the symposium with comments that Gwadar could complement the overall function of Chabahar by handling any spillover cargo. Moreover, the short distance between the two ports was seen as the ideal reason to implement a feeder vessel service, transporting both cargo and people to greatly enhance the economy and build trust between Iran, Pakistan and Afghanistan.

All parties to the symposium were thus unanimous in their insistence that Afghanistan will be an indispensable building block in the realization of BRI as it shall provide the bridge between east and west. More importantly, all delegates agreed BRI offered a unique chance for the countries of the region to focus on their mutual interests, rather than their mutual differences, in pursuit of economic prosperity and peace. As one delegate put it succinctly, this is a chance the region must not pass up.

Japan has a long history of investing in Southeast Asia, a policy strengthened by Prime Minister Shinzo Abe. At the same time, President Xi Jinping has had ample opportunity to increase China’s influence in the region through “checkbook diplomacy.” With a tight relationship between China’s government and state run banks, as well as an intimate marriage between China’s national finance, business and diplomatic strategies, China’s entry into Japan’s traditional forte is daunting for both Japan and outsiders anxious about the implications of a Chinese hegemony.

A major battle ground is Indonesia, the fourth largest economy in the region boasting the second largest population. China has recently doubled its investments in the country, and managed to secure a coveted deal to build Indonesia’s first high speed train. At first, it appeared Japan would soon find itself falling behind China’s expansive influence. Yet, as work on the project unfolds, China’s early victory may belie larger weaknesses in its diplomatic foreign direct investment (FDI).

The “Crown Jewel” of Chinese Infrastructure Exports

Even before assuming office, Indonesian President Joko Widodo reached out to Japan and other global investors for infrastructure funding. In a 2014 interview, he stated the importance of soft diplomacy, and expressed a desire to facilitate investments in infrastructure by being diplomatic with regional disputes. Indonesia was an early supporter of China’s Asian Infrastructure Investment Bank (AIIB), with Widodo’s administration agreeing to join just one month into his presidency.

Japan has been investing in Indonesia since the 1950s, but China is quickly catching up to become Indonesia’s third largest source of FDI. The coup de grace came in 2015, when the Indonesian government signed a deal for a 5.5 billion USD high-speed rail line between Jakarta and Bandung (150 km) to be built by a Chinese-Indonesian joint venture and financed primarily by China Development Bank (CDB). Chinese ambassador to Indonesia, Wie Feng, described it as the perfect showcase of not only international cooperation, but of China’s ability to export high level technology—a realm in which Japan is actively carving a niche for itself.

This deal came as an especially big shock for Japan. After a five year, 6 million USD feasibility study, Japanese officials were convinced they would be building Jakarta’s bullet train. But unlike Japan, Chinese officials made no requests for funding guarantees from Indonesia’s government. China’s state-run financing seemed unstoppable for anyone, let alone Japan, to beat.

At first, hopes were high for speedy and efficient completion. When the deal was first signed, construction was expected to begin early in 2016, with trains operational by the start of 2019. But only a few days after celebrating the official start, construction was delayed due to incomplete paperwork. In August, rumors surfaced that there were problems securing funding from CDB, with funding contingent on Jakarta securing rights to the needed land. Those permits took a long time to acquire, with protracted negotiations undertaken both with local land owners and the nearby air force. To date, it’s not clear that all land rights have been secured, or that the CDB has issued needed funding for the project, and overall progress has been most charitably described as, “halting.”

Potential and Percentages versus Past and Real Totals

Looking closer at the numbers, China’s rise in Indonesia, though very real, is perhaps overblown. China may have become Indonesia’s third largest source of FDI in 2016, but close on its heels at number four is Hong Kong (HK). Even after combining investments from the HK administrative region and mainland China, Indonesia would still fall half a billion short of Japanese investments that year. Since China historically has invested less, its year-on-year increase is dramatic and new—but Japan also nearly doubled their FDI last year alone and quadrupled it over the past five years. Both nations still fall well behind Indonesia’s largest investor, Singapore.

Early stage investors and investees have the advantage of being able to talk up potential, but potential alone cannot sustain an empire. Bidding strong on projects but then backing down due to unforeseen problems is turning into a pattern for China. Plans to build a high-speed rail in Thailand have fallen under similarly considerable delays, and in 2014, plans for China to build a high-speed rail in Mexico were quickly canceled. Though the Jakarta-Bandung rail project has any number of specific issues, the prioritization of announcing projects rather than completing them is a habit China has a hard time shaking.

If China terminates this crown jewel infrastructure rail project, it will be harder for China to compete with Japan’s reliability. At the start of this year, Widodo and Abe met and discussed plans for updating the rail line from Jakarta and Surabaya (768 km), turning it into Indonesia’s first high-speed rail line. The deal’s first phase is expected to cost 2.6 billion USD, and has been under discussion since October 2016, with Indonesia’s transportation ministry saying, “We are giving priority to Japan.” The official agreement to go with Japan for this project was announced in late March.

Widodo’s overtures to China have received significant attention because this kind of Indonesia-China relationship is new. But the emergence of new players does not automatically discount the importance of old partners. Japan may not have an ambitious “One Belt One Road” initiative, but Tokyo also aspires to build a soft power base to counteract China. Though it may not have the same state financing flexibility as China, Japan’s hard-earned experience and reputation for driving results over the years should not be discounted.

The point is not that China cannot or should not be involved in foreign infrastructure projects. With a round of overseas investment projects in energy, China is poised to dominate the green energy economy and disseminate renewable energy infrastructure in the developing world. But when it comes to competing for major infrastructure contracts, China’s rise is far from certain and Japan’s influence is not fading from the foreground anytime soon.

Ann Listerud holds a master’s degree from UC San Diego’s School of Global Policy and Strategy. She currently works in finance and is based in Tokyo. Follow her on twitter @lianlist.

The views expressed in this post reflect those of the author and not that of the EastWest Institute.

President Donald Trump has pledged to create new, good-paying jobs for millions of blue-collar workers across the United States. Central to this pledge is President Trump’s still largely undefined plan to inject 1 trillion USD in both public and private funding into America’s infrastructure. The first U.S. president to refer to the word “infrastructure” in an inaugural address, Trump promised to “build new roads, and highways, and bridges, and airports, and tunnels, and railways all across our wonderful nation.” He went further, stating that the United States would “rebuild… our country with American hands and American labor,” while “follow[ing] two simple rules:  buy American and hire American.”

While this may be a laudable policy objective, there is a problem with it: there is not enough ready American capital to hire the all the American hands and American labor that would be required to realize Trump’s envisaged program of “national rebuilding.” Even with a major infusion of capital from the U.S. private sector—and even assuming the United States’ dysfunctional permitting system is greatly streamlined (and this is perhaps the more formidable impediment to revitalizing U.S. infrastructure)—it is unlikely that the nation would be able to marshal sufficient resources over the next several years to put a perceptible dent in the roughly 4.5 trillion USD investment need that presently exists within the U.S. infrastructure sector. Indeed, even if the president’s plan were enacted immediately and fully, and even if all the permitting issues were resolved magically and instantly, the plan would only address about one-fifth of the identified funding shortfall. What to do about the other four-fifths? The United States should look overseas to those countries where there is a massive surplus of investable capital—and specifically to China.

The notion of China helping the United States undertake its program of national rebuilding may seem to some counterintuitive and problematic at a number of levels. First, could such investment on the part of China in U.S. infrastructure clear the security vetting mandated by U.S. law? Second, is there a sufficiently compelling investment rationale for China to consider investing in U.S. infrastructure projects that generally spin off returns in just the low single digits? And third, what about the political optics involved:  politically and psychically, could U.S. political leaders and the American public accept this kind of overture from China?

With respect to the security considerations, that bar is easily cleared. The Committee on Foreign Investment in the United States (CFIUS), the principal U.S. government interagency body charged with vetting foreign investments in the United States for potential deleterious impact on U.S. national security, governs only those investments in which an ownership stake (and, specifically, a majority ownership stake) is sought by the foreign investor. By structuring Chinese investment in U.S. infrastructure as loans rather than equity ownership, CFIUS concerns are fully mitigated and the need for voluntary CFIUS review is obviated.  In short, the United States can “buy American and hire American” with Chinese capital (as well as other foreign capital) and not trigger federal security vetting.

Apart from the security issue, a more fundamental economic question remains: is there is a sufficiently compelling business case for Chinese to invest in, or lend to, U.S. infrastructure projects? The answer would appear to be: “yes.” While it is true that U.S. infrastructure projects tend to generate returns in the low single digits—often between 2 and 5 percent—there are reasons that such projects and returns might nonetheless seem very attractive to potential private investors from China.

First, the U.S. infrastructure market offers diversification relative to the existing portfolios of these potential investors. Second, the United States is seen as a stable, predictable, high-quality destination for capital.  And third, apart from the economic rationale for such investment, Chinese investors view this kind of investment as having a double bottom line. Recent meetings I have had with senior Chinese economic and financial policymakers make it clear that the Chinese, in the wake of Donald Trump’s inauguration as U.S. president, are keen to create a more (politically) sustainable economic partnership between China and the United States and stabilize the most consequential bilateral relationship in the world by making China an even greater stakeholder in U.S. economic success. After all, infrastructure investment generates about 42 cents in GDP growth for every dollar spent; and a more prosperous and confident America is good for a China that seeks to continue economic growth around the 6.5 per year level and whose trade with America remains an important contributor to growth at that level.

In sum, though there is an economic case for Chinese investment in U.S. infrastructure (just as there is an economic case for U.S. investment in U.S. infrastructure), there are also other good reasons, from the Chinese perspective, for China to align itself with a central policy priority of the sitting U.S. president: chief among them, to change the overall dynamics of U.S-China relations. Transforming China from “job killer” to “job creator” is good for China, even as it is good for blue-collar workers in the United States.

Finally, how would American political elites and the American public view Chinese investment in U.S. infrastructure? The majority of presidential candidate (including candidate Donald Trump’s) framing of China in 2016 was negative—and focused on China’s presumed role as a killer or stealer of U.S. jobs. The obvious political criticism of the type of initiative described here would be that those who advocate it are “selling (out) America to China.” The only problem with that criticism is that, under the vision laid out here, nothing is being sold. All that would happen under this plan would be for Chinese money—along with U.S. money and money from other foreign countries—to come into the United States and put “American hands and American labor” back to work rebuilding America’s roads, bridges, railways, ports and so on.  China would cease being a big (perceived) part of the problem and would instead become (and be perceived to be) part of the solution. Politically speaking, the president himself—and a bunch of governors, mayors, senators, and U.S. and state and local representatives—would have a positive story to tell in the course of campaign 2018: more workers employed at good wages, more roads and bridges built, more ports dredged, and so on. Everyone—including office-holders in the United States on both sides of the partisan aisle—can walk away from this type of arrangement a winner.

Earlier this month, the EastWest Institute (EWI) co-convened (with the China Institutes of Contemporary International Relations, a premier Chinese think tank) the first-ever conference on infrastructure cooperation in U.S.-China relations. The excitement about the possibilities for this arena of cooperation was palpable; there was a strong sense among those who took part in the conference and the officials who met with the U.S. delegation that U.S.-China cooperation in this area could generate needed positive momentum in the U.S.-China relationship—and, perhaps more importantly, help solve both U.S. and Chinese problems (e.g., the U.S. problem of how to finance national rebuilding and the Chinese problem of what to do with massive quantities—e.g., at least hundreds of billions of U.S. dollars’ worth—of surplus capital currently bottled up in China).

A joint statement, or even memorandum of understanding (MOU), between President Trump and President Xi at their upcoming summit would be a good place to start. Such a statement or MOU could flag this issue as a presidential priority in both countries and flesh out specific areas for cooperation and joint action. The two presidents could also bring together business leaders and investors and preside over the signing of major infrastructure financing deals. Perhaps even more ambitiously, the two presidents could endorse the construct of a U.S.-China “bilateral infrastructure investment treaty” (BIIT) that would codify a framework for joint action in this important area—and fast-track the infrastructure element of the much slower-going bilateral investment treat (BIT) negotiations that have been underway for some years.  Whatever the “deliverable(s),” it is clear that infrastructure investment should figure prominently on the summit agenda; both sides have much to gain from enhanced collaboration in this area. Indeed, infrastructure investment may be the best hope for a true “win-win” in U.S.-China relations for both the present moment and the foreseeable future; the two presidents and the two nations would be wise to seize the opportunity to leverage it fully as a means of building positive momentum in this vital bilateral relationship.

Welcoming Chinese investment in U.S. infrastructure would go a long way toward advancing a top U.S. presidential policy priority, putting millions of blue-collar workers back to work in good-paying jobs, “making American infrastructure great again,” and deepening and stabilizing U.S.-China relations in ways that are consistent with U.S. law and policy, in sync with the current Administration’s “America First” governing philosophy, and good for America (as well as China). The infrastructure jobs that this collaboration would create need to be American; the capital that funds those jobs doesn’t.

The commentary was originally written in Chinese and published in Dunjiaodu.com​ on April 5, 2017 prior to President Xi's visit.

The democratic values of the American people will prevail over attempts at reversing the core principles of that country, a senior Pakistani defense and international trade expert said, taking stock of the multilateral issues concerning the current world order from the lens of both the economic as well as the judicial. 

Ikram Sehgal elaborated that Islamic countries could depend on the goodwill of the people of the United States as well its judicial system to ensure that racial discrimination is not institutionalized. 

Read the full interview here.