China’s aggressive finance strategy harms the competitiveness of U.S. exporters

Implementing tools of economic statecraft for the China competition

By Dan Negrea and Stephen Renna – – Monday, May 17, 2021

ANALYSIS/OPINION:

The Trump administration identified China as a strategic competitor and economic security as national security. It then created tools of economic statecraft to respond to the China challenge. The Biden administration should use and improve these tools.

The new Development Finance Corporation was created by Congress in 2018 as a response to China’s Belt and Road Initiative. It finances and de-risks infrastructure and other projects in developing countries.  Congress doubled DFC’s funding to $60 billion. A significant improvement but China BRI budget is $2 trillion.

China’s BRI deals are usually opaque and often corrupt. These secured loans are also risky: Recipient countries frequently overborrow and risk losing to their Chinese lender valuable national assets. Still, absent an alternative, developing countries accept these “debt trap” deals and get pulled in the Chinese sphere of economic influence.

The DFC can become a real alternative to BRI if it partners with sister agencies in Free World countries, like the Interamerican Development Bank, the African Development Bank, the Asian Development Banks, and the International Finance Corporation. These banks should develop processes to synchronize and fast-track their due diligence and pool their resources.

The U.S. Export-Import Bank was re-authorized in 2019 to facilitate U.S. exports by providing financing when private lenders can’t. There are today 115 export credit agencies in 89 countries. In 2019, the U.S. export financings were about $5.3 billion, compared with about $6 billion for France and U.K., and about $11 billion for Germany and Italy.

Most large export credit providers subscribed to the fair play standards of the Organization of Economic Cooperation and Development.  But China did not, and its export financings were a staggering $34 billion in 2019. Its aggressive finance strategy harms the competitiveness of U.S. exporters. It also allows the winning Chinese companies to embed their technology and create a dependency by the recipient country.

EXIM needs to execute and expand its Program on China and Transformational Exports. Under the program, EXIM can use up to 20% of its $135 billion lending capacity to support U.S. companies competing against China. The program focuses on 10 high tech sectors like renewable energy, 5G, biotechnology, and artificial intelligence. And it allows EXIM to offer more flexible financing terms to compete with Chinese state-sponsored loans.

The Clean Network initiative was pioneered by Secretary of State Mike Pompeo and Undersecretary of State Keith Krach in 2020. It started with a simple yet powerful question: Who do you trust with your citizens’ personal data, your companies’ intellectual property, and your country’s most sensitive information? Certainly not Chinese companies:  Chinese law forces them to share their data with the country’s intelligence services.

The State Department asked countries around the world to reject Chinese telecom equipment and select Nokia, Eriksson, or Samsung instead.  Speaker Pelosi called it a choice between authoritarianism and democracy. Sen. Tom Cotton said that choosing China would be like asking the KGB to build your phone system during the Cold War.

The Clean Telecom campaign was a major success: 60 countries signed up and over 200 telecom companies. The “Clean” initiative should be expanded to other areas like subsea cable and infrastructure. And also financing: Institutional investors should disclose their Chinese investments and divest from firms involved with human rights violations.

The Deal Team Initiative was launched in 2020 as a response to China’s state capitalism. The Chinese Communist Party controls the government and through it all Chinese companies. China regularly helps its companies win business abroad through subsidies, preferential financing, government aid and diplomatic support. The United States also helps its companies but its dozens of programs in several agencies are uncoordinated.

Deal Teams is a coordination and rapid response mechanism without adding to the bureaucracy. It brings together in regular consultations 14 agencies, the National Security Council, and the National Economic Council at both the working and the leadership level.

China’s authoritarian government has more resources than the U.S.’ democratic government. But the United States is stronger than China when it engages its private sector and also mobilizes the resources of other Free World governments and their private sectors. The Deal Team Initiative can help in this task and should be expanded.

Winning the economic competition with China requires coordination between the U.S. private sector and government. And continuity between Republican and Democratic administrations. This is not a partisan matter.

Dan Negrea is a senior fellow at the Atlantic Council. He served as the State Department’s special representative for commercial and business affairs and as a member of the secretary’s policy planning staff. He is a former Wall Street executive.

Stephen Renna is a consultant with Ankura Global Consulting. He served as EXIM’s chief banking officer and as head of the Commerce Department’s Advocacy Center.