Leverage the new US International Development Finance Corporation to compete with China

The United States has a unique opportunity to up its game in the global economic competition with China. In early October, even as Democrats and Republicans in the Senate engaged in an unprecedented standoff over the Supreme Court nomination of Brett Kavanaugh, they quietly came together to pass the Better Utilization of Investment Leading to Development (BUILD) Act, setting into motion the creation of a new U.S. International Development Finance Corporation (IDFC). The IDFC holds the potential to significantly boost America’s economic edge against China – if the Trump administration and Congress make the right choices in the coming months.

The stakes could not be higher. In recent years, China has advanced its influence across the developing world under the umbrella of what it calls “One Belt, One Road.” This Belt and Road strategy envisions a world connected by a web of Chinese-funded physical and digital infrastructure. It has involved unprecedented resources: according to independent estimates, around $340 billion from 2014 to 2017.

Marketed as Beijing’s “gift to the world,” the Belt and Road has in fact served to cement China’s status as a global power by creating opportunities for overseas military access and promoting relationships of debt dependency – all while corroding existing international commercial standards and imperiling democracy in some countries.{mosads}

Recognizing that China’s Belt and Road strategy is a power play intended to position Beijing to shape the course of the 21^st century, the United States this year has begun to formulate an economic response. However, a lack of resources has remained America’s Achilles heel. When the Trump administration unveiled a series of new initiatives during its Indo-Pacific Business Forum this summer, the modest price tag – $113 million – failed to answer mounting questions from U.S. allies and partners about America’s commitment to fund its international economic engagement, and elicited mockery from Beijing.

Enter the new IDFC.

Authorized by the bipartisan BUILD Act, the IDFC will more than double the lending capacity of the existing Overseas Private Investment Corporation (OPIC) – adding more than $30 billion to the resources by which the U.S. government can partner with private sector investors to support commercial projects in developing countries. Compared to OPIC, the IDFC will deploy a more expansive and flexible toolkit: it can take equity in overseas projects and work more freely with non-U.S. investors, and will also incorporate components of the U.S. Agency for International Development.

The BUILD Act stipulates that U.S. policy seeks “to provide countries a robust alternative to state-directed investments by authoritarian governments,” but gives the Trump administration and Congress significant latitude over the IDFC’s future organization, staffing, and activities.

An IDFC optimized to support U.S. competition with China should feature the following elements.

First, the IDFC should include a new office for strategic investments. Overseen by a Vice President for National Security who would serve as a member of the IDFC’s leadership team, this office would work with the private sector to catalyze investments in overseas infrastructure projects with significant geopolitical value, as determined by the U.S. Department of Defense and the U.S. Intelligence Community. The new office would also have responsibility for coordinating with ally and partner governments on joint infrastructure financing.

Second, the IDFC should have the ability to take a degree of financial risk. To compete with China for strategic infrastructure projects across the developing world, the IDFC will have to encourage the U.S. private sector to operate in some countries where political instability and weak regulatory environments would normally deter investment. Some projects will succeed; others may fail. Although the IDFC must be judicious in its use of taxpayer resources, Congress should resist the urge to grade it by overall return on investment, as this will hamstring efforts to compete with China.{mossecondads}

Third, the IDFC should pursue a handful of large-scale, commercially viable infrastructure projects. Beijing has skillfully played up the size of its economic investment across the developing world, in part by pointing to mega-projects with symbolic value. America’s economic engagement, by contrast, often takes less visible forms, even if U.S. companies do more to bolster local employment and transfer expertise. A small number of high-profile, U.S.-backed infrastructure projects in the Indo-Pacific, Africa, the Middle East, and Latin America could become the core of a counter-narrative to China’s Belt and Road strategy.

Fourth, the IDFC should prioritize financing for digital infrastructure. China is making a play to dominate the information technology ecosystems of many developing countries. The consequences range from exporting elements of Beijing’s domestic surveillance complex to obtaining data that will fuel China’s artificial intelligence industry. American companies remain highly competitive in the digital domain, and with U.S. government support, could be incentivized to take on projects in countries where risks are immediate and reward more long term.

The U.S. government will never match the level of resources that China has dedicated to its Belt and Road strategy. But with the new IDFC in place, it can compete by unlocking the resources of America’s private sector and offering credible alternatives.

With countries across the developing world increasingly concerned that Chinese investment translates into unsustainable debt, corruption, and an erosion of national sovereignty, the United States has arrived at a moment of strategic opportunity. Now is the time to seize it.

Daniel Kliman is a Senior Fellow with the Asia-Pacific Security Program at the Center for a New American Security (CNAS) and previously served at the U.S. Department of Defense as Senior Advisor for Asia Integration. He is the co-author of a recent CNAS report, “Power Play: Addressing China’s Belt and Road Strategy.”