The New Arms Race

Connectivity and Competition

Foreign Affairs | 15 February 2016
By Parag Khanna

In the twenty-first century, arms races are not over weaponry but over connectivity—and the United States is losing ground. At the heart of the connectivity competition is infrastructure. Between 2005 and 2012, to keep up with urbanization, rising international travel, growing trade, the dispersal of supply chains, and increased dependence on global digital services, spending on infrastructure for transportation, energy, and communications has doubled from approximately $2 trillion per year around 2005 to $4 trillion by 2012. That figure is projected to rise to $9 trillion by 2020. 

With the world now crossed by a latticework of connections, the age of territorial conquest is largely over. International conflict has fallen; instead, nations compete to gain leverage in the connected world.  

TIES THAT BIND

The China-led Asian Infrastructure and Investment Bank (AIIB) is one of the foremost examples of competitive connectivity. Since the collapse of the Soviet Union in the 1990s, successive waves of Chinese infrastructure investments have washed over the former Soviet States.China quickly settled border disputes (it borders more post-Soviet Central Asia republics than Russia does), put in place customs agreements, and completed multiple oil and gas pipelines from the Caspian Sea throughKazakhstan and Turkmenistan.

China has more neighbors than any country. It has tense and even hostile histories with some, and suspicions about all. But its strategy of choice was not war but roads, railways, pipelines, and other investments. China treats friends and foes alike: as construction projects to build, own, and operate. 

China will not rival the United States in military power anytime soon, but it has a definitive home-court advantage in Eurasia. In fact, all infrastructure built on China’s periphery—irrespective of who builds it—ultimately serves China. For example, when the AIIB announced its initial $100 billion commitment to the region, Japan declared its own intention to fund $110 billion in Asian infrastructure projects. Yet Japanese projects from Kazakhstan toMyanmar will only make these countries more efficient trading partners and passages for China. Japan might applaud itself for writing off $5 billion in Burmese debt and committing an estimated $3 billion in investment in Myanmar’s airport, power sector, and special economic zones over the last several years, and the West can tout its lifting of sanctions on the country in exchange for a democratic transition, but China still dominates Myanmar’s inbound investment and outbound exports. China is moving forward with pipelines and railways to connect the mainland to the Bay of Bengal so that China is less dependent on the Malacca Strait for shipping exports. Likewise, the United States’ “Silk Road Roundabout” program, which is meant to buttress Afghanistan’s ring road network, will no doubt benefit Afghanistan’s farmers, but it will also aid in China’s extraction of copper and lithium from a country where it has long been the largest foreign investor.

Afghanistan is also the only country separating China andIran, which Chinese President Xi Jinping visited one week after Western sanctions were lifted. Sino–Iranian bilateral trade already stands at $55 billion, and Xi has announced a projected tenfold increase in the coming decade. Europe has also raced to secure long-term contracts for aircraft, oil refineries, and construction projects in Iran

From the Middle East to China, the United States has secured its position through alliances and occupation and coercive sanctions. Increasingly, those methods look like something from the past. These days, Europe, Russia and other trade powers are less interested in thanking the United States for trying to provide stability and more interested in the United States getting out of the way so that they can move into potential markets.

FACTS IN THE WATER

China’s infrastructure strategy even works at sea. Sand is a more potent weapon than aircraft carriers and littoral combat ships. By dredging and towing sand to turn reefs and atolls into strategically positioned garrisons, China has created facts in the water that America’s recent freedom of navigation operations have not undone.

At times, it seems like the United States could get sucked into a war with China on behalf of its allies in the region. But Washington will refrain from being dragged into a “wag the dog” scuffle with Beijing on behalf of such a militarily weak ally; the Philippines is not Taiwan or Israel. Beijing will, too. Its strategy in the gas-rich Paracel Island chain is to use mobile infrastructures such as towable CNOOC-981 rigs to explore waters and then quickly withdraw when the diplomatic backlash mounts. Escalation is controlled and incremental, but it is impossible to deny. 

China uses connectivity in ways that the United States cannot deter. Over the past decade in particular, it has become the top trading partner of 124 countries, more than twice as many as the United States (52). The Trans–Pacific Partnership (TPP) trade agreement, which Congress could pass in 2016—would give U.S. companies greater access to Asian markets, but it will be easily outstripped by the China-led Regional Comprehensive Economic Partnership (RCEP), which will build on already flourishing intra-Asian supply chain networks. 

After all, RCEP includes TPP members countries, such as Australia and Japan, but also non-members, such as India. Although U.S.–Indian strategic ties have no doubt improved since 9/11, Indian Prime Minister Narendra Modi is an avowed fan of China’s development model. Bilateral trade between the two grew from $5 billion in 2002 to over $70 billion today. India is the second-largest shareholder (behind China) in the AIIB. In short, China has used connectivity to neutralize the only Asian country that can rival it in ambition. 

SILK ROAD

Perhaps more worrying for the West, if only because of geography, is Turkey. It is a NATO member, but its hot-and-cold relations with the West have much to do with its failed EU membership bids and disagreements over Iraq and Syria. Erdogan now intends for Turkey to join the Chinese-led Shanghai Cooperation Organization (SCO), making it a firm member of both camps. In other words, Turkey is emblematic of the new age of infrastructure alliances; cultural communities and military alliances do not guarantee loyalty as much as the density of connectivity across the infrastructural and commercial domains.

And Turkey might just be the beginning. The rest of Europe is feeling the pull of Chinese-financed Eurasian integration. Whereas the United States sees China through the lens of defense, Europe’s view of China is shaped by its engineering, procurement and construction (EPC) companies. Of the 25 top EPC companies in the world, 23 are European and Asian (Bechtel and Fluor are the only American firms that make the list). 

So whereas the Obama administration opposed the AIIB, more than 60 other countries—including almost every American ally—flocked to join it. In late 2015, British Chancellor of the Exchequer George Osborne made a special trip to Urumqi, capital of China’s Xinjiang province, to shill for British companies seeking projects along the “New Silk Road.” As of 2015, Europe’s total trade with China equals its trade with the United States. When it comes to alignment, cultural ties across the Atlantic may prove weaker than infrastructural ties across Eurasia.

MIXING MARKETS

To be sure, China’s expansionism might proceed smoothly for now, but it could easily derail as political times change. Mines can be expropriated, power plants and pipelines seized or blocked, and passage for freight railways denied. When countries swing against China, cancelling its contracts (as Iran has just done for gas exploration and Indonesia has on a high-speed rail project) and ejecting its workers (as Zambia has), Western powers can fill the gap, much as China did after the United States and Europe pulled back at the end of the Cold War. If they don’t, vulnerable countries could eventually become sitting ducks if China decides to call in their enormous debts or seek retribution over assets.

In fact, many countries from Ecuador to Sri Lanka to Kazakhstan already find themselves in this position today. Chinese loans to Ecuador total nearly $12 billion, but as oil prices plummet and the country enters a likely prolonged recession, China will get nearly all of Ecuador’s oil exports at a bargain price, while also gaining rights to explore Ecuador’s Amazonian region for oil, and effectively take over the country’s mining sector. A year ago, Sri Lanka’s new government pledged to reconsider and even cancel major Chinese projects such as the new Colombo port complex; it swung open the doors to India instead. A year later, with no other foreign investors capable of matching China’s investment volumes, the same government has moved forward with multiple Chinese mega-projects. Western preaching for more transparent procurement is no substitute for actually putting its money where its mouth is, especially when potential allies face depleting reserves and worsening balance of payments.

There is no doubt that China’s infrastructure-driven grand strategy is crafted to last at least two generations, riding out any changes of government in host countries along the way. The United States, too, needs a strategy not just for the next administration but for the rest of this century. Even though the country is geographically detached from Eurasia, three factors ensure that it will remain a deeply essential superpower for connectivity for at least two decades: Energy, money, and technology.

The United States is now the world’s top oil and gas producer, able to export to both Europe and Asia. Congress’ December 2015 vote to lift the ban on U.S. oil exports could prove to be one the most strategically wise maneuvers in the post-Cold War era, giving high-growth Asian markets an alternative supplier to the turbulent Middle East. Asian nations from Singapore to South Korea are busy upgrading their refineries to boost imports of light crudes and condensates.

Even China could become a major market for U.S. energy exports; this March the first tanker of U.S. crude oil from the Gulf coast will sail to China. Meanwhile, the U.S. dollar remains the world’s only universal reserve currency and a safe haven in times of economic volatility. The dollar’s share of total global currency reserves is holding steady at 65 percent while the Euro’s is falling. And, of course, the United States is the chief source of the digital technologies that underpin the communications infrastructure.

Less an offshore balancer, these days, the world looks to a United States that is an offshore provider. To maintain its edge, the United States must guarantee the reliability of the goods it provides: through wise trade and monetary policy, and continued investment in innovations that benefit global consumers. This will be the path to reconciling America’s overwhelming strengths with the priorities of other countries around the world.

Link to article