The Emperor’s New Road: China and the Project of the Century

by Jonathan E. Hillman

On the train to Budapest, I was startled by a voice, the first I had heard in hours. “Passport,” a uniformed woman said, standing in the doorway of my cabin with one hand out. In her other hand was a small box. As my documents were stamped, I looked out the window and realized I had been expecting the physical landscape to change. But identical fields stretched on. Some borders have natural physical divides: a river, a mountain, or the sea. Others, like the one between Serbia and Hungary, feel entirely arbitrary. But they have consequences for the people caught between them. The average salary in Serbia is 40 percent lower than in Hungary.54

  Other than a brief change of staff and the appearance of customs officers, the stop on the Serbian-Hungarian border was remarkably similar to all the other stops. At each stop, a railway official emerged from a building with a small notebook, judiciously noted the presence of the train, and exchanged some quick banter with the conductor. At the border, the entire process took less than fifteen minutes, helped by the fact that there were few passports to stamp. We continued onward, and finally, after twenty-four stops and nine hours, the train rolled into Budapest.

  For China’s state-owned construction firms, the EU remains much more difficult to enter. The biggest obstacles are EU funding and rules. To compete for EU projects, China must drop its preferred approach of offering loans that require using Chinese firms and compete more directly for contracts. Chinese firms are struggling but learning, and with time, they will surely get better at meeting EU environmental safeguards and other rules. But the availability of EU funding for infrastructure, as well as private investment, means that China’s loans are not as attractive. Compared to developing and emerging markets, where China’s BRI is most active, China has a higher bar to clear and less leverage for negotiating in the EU.

  That bar could get even higher. Chinese investments are receiving greater scrutiny, particularly those related to technology and critical infrastructure.55 Along with stricter foreign investment reviews, EU states are considering industrial policies that would support their firms against China’s large and heavily subsidized state-owned enterprises.56 Calls for conditioning China’s access to the EU market on reciprocal access to the Chinese market are growing louder as well.

  The thorn at the center of this debate is whether Europe must become more like China in order to compete with it. If the EU does nothing, it risks defeat on what many European officials believe is an uneven playing field. If it overreacts, the urge to protect European companies could come at the expense of their competitiveness.

  The EU is still struggling to find the right balance. To compete with China’s railway companies, French and German leaders supported merging their state railway companies, Alstom and Siemens. In February 2019, however, the deal was stopped by antitrust authorities in Brussels on the grounds that it would raise costs for consumers and reduce competition. The process for evaluating mergers looks only at the EU market. “There is no prospect of Chinese entry in the European market in the foreseeable future,” explained Margrethe Vestager, the EU commissioner in charge of competition policy.57

  That future is not so difficult to imagine, however, and the global view looks different. China’s state-owned firms benefit from scale as well as generous state subsidies, and they are using the BRI to learn how to deliver projects outside China. It is sobering to note that even if the merger were approved, China’s largest railway company, CRRC Corporation Limited, would still have annual sales totaling more than twice that of a combined Siemens and Alstom.58 European business interests, particularly in France and Germany, are pressing for policies that would make mergers easier.59

  It is ultimately a question about how to compete. Free-market advocates still see more danger in domestic protection than in China’s expanding global footprint. In the Siemens and Alstom case, for example, the worst outcome would be an EU railway champion that atrophies because it is overly protected. In that scenario, a weak EU champion would become a liability and could even become a target for Chinese acquisition. Even for the EU, turning inward is not a viable long-term strategy, since more than three-quarters of the global economy is outside it.

  The EU is not marching in lockstep, of course, and never has. At least ten EU members, primarily in central and eastern Europe, had signed BRI MOUs by mid-2019.60 When Xi Jinping visited Rome in April 2019, the Italian government rolled out the red carpet, literally, and signed onto the BRI. The decision provoked public criticism from the U.S. government, but it was another nonbinding document, more politically symbolic than commercially meaningful. By pulling in a new Italian government that was more favorable to Beijing than its predecessors, the deal demonstrated China’s ability to take advantage of political windows of opportunity. After Rome, however, Xi continued on to France, which did not sign an MOU but did announce $45 billion in deals, sixteen times more than Italy had done.61 Inadvertently, Xi’s trip also signaled how little value the MOU carries.

  Even “neutral” Switzerland has signed onto the BRI. At the second Belt and Road Forum in April 2019, Switzerland, which is not an EU member but participates in the EU’s single market, signed a document to facilitate cooperation in third markets. China’s main interest is attracting more private investment to its projects. Of course, the MOU does nothing to reduce the risks that investors face in foreign markets. For all the headlines that these documents have generated, they remain neither necessary nor sufficient for doing business with China.

  But the EU’s debate is less about ends than means, signaling a major shift in its stance toward China.62 For years, the EU’s engagement with China was based on the hope that China would liberalize its economy and open up. As recently as 2016, for example, the EU’s main China strategy document took a relatively cautious position, noting, “China’s increased weight and a renewed emphasis on ‘going global’ mean that it is seeking a bigger role and exerting greater influence on an evolving system of global governance.”63 Three years later, it called China a “strategic competitor” and “an economic competitor in pursuit of technological leadership and a systemic rival promoting alternative models of governance.”64

  These are modest steps, more rhetorical than transformational; but they reflect a growing consensus among policy makers, and their direction is clear. As the EU ramps up investment screening and considers new industrial policies, it has launched its own connectivity initiative aimed at competing with the BRI in its backyard. It has also refused to grant China market-economy status at the WTO. “Maybe we have overestimated Russia and underestimated China,” Johannes Hahn, the EU commissioner formerly responsible for accession, said in March 2019.65 If more Europeans agree, elevating China as the primary threat, the shift in perceptions could be transformative, not only for the EU’s relations with China but also for the EU itself.

  That shift has not yet occurred in the broader public mind. Roughly the same percentage of people in France and Germany were concerned about China’s and Russia’s power and influence, according to a 2018 poll.66 Other EU members surveyed, including the United Kingdom, Italy, Spain, Hungary, and Poland, had higher percentages concerned about Russia. More people in Germany and France viewed U.S. power and influence as threatening than viewed either China or Russia that way. The more U.S. and European perceptions diverge, the more difficult it will be to fashion a united response to China.67

  Of course, the BRI is just one dimension of Chinese power and influence. In the short term, European views of China are likely to be shaped more by events within China. Beijing’s use of surveillance technology, its persecution of ethnic minorities, and its treatment of Western firms are among the top areas of European concern. But through the BRI, some of these challenges will move closer to the EU. In early 2019, for example, Belgrade announced plans to install one thousand surveillance cameras through a partnership with the Chinese tech giant Huawei. As Chinese construction firms learn to navigate the EU market, the friction created by competition with Western firms will intensify.

&nb
sp; China’s divisive push into the EU’s neighborhood could eventually help unite it. After all, the Soviet Union helped bring the EU into existence. Before that, threats came from the Ottoman Empire during the sixteenth century and the Mongol empire during the thirteenth century. Halford Mackinder, the British geographer, argued that European civilization itself is a reaction to threats from the East. “European civilization is, in a very real sense, the outcome of the secular struggle against Asiatic invasion,” he wrote in 1904.68 Sometimes external enemies divided and ruled; other times Europe unified and resisted.

  The BRI in its current form presents a different threat. The invaders are not massing at the EU’s borders with horses or tanks but strolling into European capitals with briefcases in hand. Yet China’s influence, and its use of economic tools for political aims, has already caught the attention of European leaders. Even as they debate whether to become more like China in their responses, a consensus has emerged that China is not going to become more like the EU. There is a growing sense of urgency, but the threat China presents is not yet viewed as existential. To truly unite Europe, China’s BRI will have to stretch closer and become more menacing in European minds.

  PART III

  To the Sea

  Southeast Asia

  Center for Strategic and International Studies, Reconnecting Asia Project; United Nations Economic and Social Commission for Asia and the Pacific

  CHAPTER SIX

  The Weak Are Powerful

  Southeast Asia

  THE POWERFUL WILL TAKE what they will, the weak will yield what they must,” Malaysia’s Prime Minister Mahathir Mohamad reflected in July 2018, paraphrasing the Greek historian Thucydides to summarize the challenge that China presents. “They are more powerful, and we cannot fight against them. How do we benefit from their wealth and their power?”1 It is a question that many developing countries are grappling with, none more urgently than those in Southeast Asia. Cleverly, it also hides the power that smaller countries wield when they court China and its competitors, playing them off each other.

  As a geographic construct, Southeast Asia was first defined by outsiders. Howard Malcom, a reverend from Boston, Massachusetts, is often recognized as being the first to use the term in his book Travels in South-Eastern Asia, published in 1839. The concept was cemented during World War II, when Franklin Roosevelt and Winston Churchill created the South East Asia Command. British and U.S. government agencies further debated and revised their definitions of the region, its membership and boundaries, but the basic idea stuck.2

  Following the war and decolonization, the region defined itself. A landmark development was the creation of the Association for Southeast Asian Nations (ASEAN) in 1967 by Indonesia, Malaysia, Singapore, Thailand, and the Philippines. Five more countries have since joined, and the remaining country in the region, East Timor, is an observer. Originally aiming to offset communist insurgencies in the region, ASEAN gradually developed an economic focus.

  Squint your eyes, and ASEAN looks like a whale’s tale. Thailand is the spine of mainland Southeast Asia, its second largest economy and the gatekeeper for overland connections between the South China Sea in the east and the Bay of Bengal in the west. It is surrounded by Cambodia, Laos, and Myanmar, three fast-growing economies whose fates are increasingly bound with China. In the maritime space, Indonesia is the region’s powerhouse, responsible for roughly two-fifths of ASEAN’s collective population and a third of its GDP.3

  For countries on the outside looking in, the region’s pull is irresistible. If ASEAN was a single economy, it would have been the fifth largest in the world in 2018.4 It is an exporting juggernaut, home to some of the fastest-growing middle-income populations, which are becoming burgeoning markets of their own. Even those countries not looking to do business with ASEAN can hardly avoid it. Sitting among Asia’s largest economies, it hosts the second-busiest shipping lane in the world, the Malacca Strait, through which nearly one hundred thousand vessels—carrying a quarter of global traded goods—pass every year.5

  The contest to access and influence ASEAN is multifaceted, but the strongest tug-of-war is between China and Japan. China is playing a north-south game, reaching down from Yunnan, the southern province that Owen Lattimore, an American scholar of China, once called the “pivot” of Southeast Asia.6 China’s proximity is a blessing and a curse. Along with ports, it can build overland infrastructure—fiber-optic cables, pipelines, railways, and roads—expanding its supply chains southward. As Chinese wages climb, the prospect of relocating its manufacturing activities to Vietnam, where wages are lower, becomes more attractive.

  But China’s size and increasingly strident behavior have created unease in the region. Chinese officials have taken an expansive view of China’s territorial claims in the South China Sea, resisting attempts to negotiate territorial disputes multilaterally and disregarding rulings by international tribunals. In 2010, during an annual ASEAN security forum, China’s foreign minister, Yang Jiechi, stormed out after Secretary of State Hillary Clinton challenged China’s claims. He returned with an aggressive message for the ASEAN countries: “China is a big country and other countries are small countries, and that’s just a fact.”7

  China’s actions in the South China Sea have been even more alarming than its words. Where the facts on the ground have not suited its position, China has changed the ground. Between 2013 and 2017, Chinese dredgers added thirty-two hundred acres to land features in the Spratly Islands, nearly the equivalent of the Los Angeles International Airport.8 International condemnation has grown louder as China has outfitted artificial islands with runways and deployed antiship and antiaircraft missiles. But these “salami-slicing” tactics have been effective because no single change seems dramatic enough to warrant a sufficient response.

  Japan is playing an east-west game. It is approaching from the sea; but with deep experience in Southeast Asia, Japan is the incumbent, and China is the newcomer. Much of the region’s infrastructure already reflects the interests of Japanese firms, whose supply chains depend on maritime connections. Japan cannot match the global scale of China’s BRI, but it is intensely focused on Southeast Asia, where it is outspending China in several countries and going toe-to-toe with it in others.

  Japan’s east-west preferences can be seen in its support for several “economic corridors,” which connect major cities with transport infrastructure. It is backing a “Southern Economic Corridor” that hops across major cities in four countries: Ho Chi Minh City (Vietnam), Phnom Penn (Cambodia), Bangkok (Thailand), and Dawei (Myanmar). To the north, an “East-West Economic Corridor” runs from the port of Danang in central Vietnam, through Laos and Thailand, to the port of Mawlamyine in Myanmar. It is also developing ports in Malaysia, Indonesia, Brunei, and the Philippines.9 What these efforts have in common is a desire to funnel more commerce to the coastlines.

  Japan also benefits from a reputation for delivering reliable products, and it has made quality a focus of its efforts. In 2015, Prime Minister Shinzo Abe launched the “Partnership for Quality Infrastructure,” a not-so-subtle way of contrasting Japanese infrastructure with Chinese infrastructure. Backed by $200 billion, it aims to persuade countries to pay more up front for projects that cost less over their lifetime. Japan has also pushed hard for the world’s leading economies, including China, to endorse “quality infrastructure” principles. Safety, sustainability, and reliability are among the goals mentioned. These principles stem not only from a desire to compete with China but also from Japan’s own experience in the region. In the 1970s and 1980s, it made many of the same mistakes that China has been making during the BRI’s initial years.

  Japan has another advantage that China does not: allies. No country has been more successful than Japan in shaping recent U.S. government policy for the region. Abe got off to an early start in November 2016, when he strode into Trump Tower with a gold-plated golf club, a gift for the president-elect. The charm offensive has continued with over forty c
onversations. Many more meetings between lower-level officials have hammered out overlapping policies. In 2016, Abe unveiled his “Free and Open Indo-Pacific” strategy, and the following year, the Trump administration announced its “Free and Open Indo-Pacific” strategy.

  But while the Japanese and U.S. bumper stickers are nearly identical, Japan has taken a more diplomatic approach to China’s BRI. Japanese officials have underscored the region’s need for infrastructure and put forward criteria for the type of “quality infrastructure” they support. That engagement, however, should not be confused with endorsement. Naturally, many Chinese projects do not meet those criteria. Japan also supports cooperation among Japanese and Chinese companies working in third countries. These arrangements provide Japan with a window into China’s approach and a seat at the table. Abe has even softened his sales pitch, referring to the “Free and Open Indo-Pacific” as a vision rather than a strategy, after some ASEAN countries claimed it was too divisive.10

  Critically, the countries at the center of this competition are far from pawns. The savviest among them have turned a contest among outside powers into a buffet of options for themselves. They do this directly, through open competitions for megaprojects. When Indonesia called for bids for a high-speed railway in 2015, for example, it was as if Sotheby’s put the Mona Lisa on the auction block. They do it indirectly, by traveling to capitals and announcing deals, courting better offers from larger powers, who fear being cut out of some of the world’s fastest-growing markets. In 2016, all four of the region’s new leaders traveled to China and Japan, and all had infrastructure at the top of their wish lists.11

  The result is not a simple dichotomy between the powerful and the powerless. Although China’s shadow is growing, Japan is fighting to retain an edge in markets where it has invested heavily for decades. The United States, for its part, is invested commercially and has a network of security partners, including the Philippines and Thailand as treaty allies and Indonesia, Malaysia, Singapore, and Vietnam as enhanced security partners. India’s rise will be felt more acutely in the coming years. Deals are constantly being made, relationships adjusted and recalibrated. Thucydides would be intrigued by the flurry of action but also lost. In Southeast Asia, the powerful pay what they must, and the weak take what they can.