The Belt & Road Initiative as Power Resource: Lessons from Japan

In 2013, the Chinese government announced its plans to establish the Asian Infrastructure Investment Bank (AIIB) and to pursue a massive regional infrastructure plan initially called either the “New Silk Road” or the “One Belt, One Road” (OBOR), and now officially termed the Belt and Road Initiative (BRI). The simultaneous push to create a new development bank with nearly twice the paid-in capital of the Asian Development Bank (ADB) and an audacious (if non-specific) commitment to expanding and restructuring regional infrastructure and connectivity was an extraordinary move by China.¹ Arguably, it constituted the most ambitious foreign relations venture in the history of the People’s Republic.

The BRI plan has inspired widespread speculation about China’s intentions, the potential economic impact, and the effect on regional politics. Indeed, the attention—both positive and negative—has been impressive even though the effort is in its early stages. Among fans and alarmists alike, there is a widespread sense that BRI is a game-changer for the region—the only question is whether the new game upends the “rigged” Western, neoliberal “Washington Consensus” order, or is rather a move by China to impose its own, “rigged” neostatist “Beijing Consensus” order on its neighbors. This article casts a skeptical eye on claims that the massive infrastructure projects envisioned as part of BRI will remake the regional order in Beijing’s image. It draws on theory and history to make the case that China’s regional influence, though likely to be enhanced by its largesse, will not grow unabated as a result of the plan. I begin by sketching out the basic contours of BRI and lay out the logic by which the scheme could lead to Chinese hegemony across the continental and maritime silk roads. I then address conditions under which the logic of influence might hold. Finally, I draw on the closest comparison available—Japanese aid, trade, and investment in East Asia in the 1980s and early 1990s—to see how those conditions played out in an actual historical situation.

What Is BRI?

While the details are still hazy, BRI has been formulated as two sets of massive, transnational infrastructure projects.² The “belt” is meant to approximate the ancient Silk Road, connecting China to the Middle East and Europe across Central Asia. The “road,” also known as the “Maritime Silk Road,” focuses on the economies that lie along the maritime routes from China to the Middle East, along the South China Sea and the Indian Ocean. The renaming of OBOR to BRI emphasizes the intention to create connectivity throughout the region, rather than just developing narrow routes from China to Europe. To give a sense of its scale, the following summary by a World Bank economist is illustrative:

OBOR can be big, indeed. In its largest definition, OBOR would include 65 countries, 4.4 billion people and about 40 percent of global GDP. China is backing the plan with considerable resources, setting up a New Silk Road Fund of USD 40 billion to promote private investment along OBOR. The New Silk Road Fund is sponsored by China’s foreign exchange reserves, as well as government investment and lending arms.

In addition, the Asia Infrastructure Investment Bank is widely expected to support the initiative with a considerable share of its USD 100 billion in lending, and the China Development Bank reportedly said it would invest almost USD 900 billion into more than 900 projects involving 60 countries to bolster the initiative. The Economist reported that USD 1 trillion in “government money” would be spent on the initiative.³

As large as these sums are, the program has the potential to be much larger in its total impact. Many of the projects will be in cooperation with local authorities, who will provide additional financing or create opportunities for public-private partnerships (PPPs). Moreover, there is ample room for co-financing with other aid funders such as national aid agencies, multilateral development banks, and sovereign wealth funds—already, the ADB has stated that it is open to co-financing with AIIB, and others are likely to follow. Finally, China’s enormous state-owned commercial banks are also being induced to join the action.⁴

For Asia, BRI addresses two interrelated challenges. The first is the “infrastructure gap.” According to an oft-cited ADB estimate, developing Asia needs infrastructure investment of nearly USD 1 trillion each year in order to accommodate its potential growth.⁵ Official actors such as governments and multilateral development banks have found themselves unable to mobilize the funds needed to close this gap, while private investors have been unwilling or unable to take up the slack due to legal, political, and economic barriers. The second is connectivity. Regional economic integration requires physical connectivity, which means infrastructural projects that are developed in a coordinated fashion. For China, the world’s largest manufacturer, physical connections to suppliers and markets promise to expand opportunities; for its neighbors, deeper integration into regional production and consumption networks will accelerate industrial development and raise standards of living.

From the perspective of China, BRI also offers an opportunity to address some of the country’s glaring economic imbalances, including excess savings, overcapacity in many industrial sectors (both manufacturing and construction), and large foreign exchange reserves. These issues have become all the more important as economic growth has begun to slow down, along with the end of its “demographic dividend.” For China, higher return on investment will be essential to sustaining growth; with overcapacity in many domestic industries, the allure of shifting some of its excess savings abroad is evident.

Pathways to Influence

Of course, BRI is not just an economic exercise. The promise of trillions of dollars in new investment and a reordering of production networks on a regional basis will necessarily have significant political effects. But what will they be? While it may appear obvious that such a large venture would create political benefits for China, it is worth examining how it might do so.  There are three main ways in which economics translates into power: transactional power, structural power, and “soft power.”⁶ Here, I consider each, in turn, as it applies to BRI.

Transactional power is, at its core, a quid pro quo.In economic terms, a transaction implies a price at which an exchange takes place. This makes for a fairly simple measure of power—having sufficient resources to pay a counterpart the price it requires to forgo its own preferred course of action in favor of the payer’s preferred course of action. In the political economy literature, such transactions are often referred to as “side payments,” and are described approvingly as a way to induce cooperation. More broadly, a powerful actor can shape the behavior of its counterpart by promising benefits for compliance or threatening consequences for non-compliance. A classic example at the international level is aid—by offering grant aid (or even loan aid, if it is concessional or if the recipient is credit-constrained), the aid provider may be able to affect either specific behaviors (e.g., an infrastructure project that privileges firms based in the providing country) or more indirectly buy “friendship,” in the form of political support or security cooperation.

Many of the political analyses of BRI and AIIB focus on their potential for providing China with substantially expanded transactional power. The logic is simple. On an absolute basis, China will be providing large amounts of funding for infrastructure, which can benefit the recipient, regardless of whether “recipient” is defined as the economy, the government, particular interest groups, or even specific individuals. From the point of view of the United States and Japan, the relative dimension is, perhaps, equally important: assuming that neither the United States nor Japan will be ramping up their own economic contributions to the same extent, China’s relative attractiveness as a political and economic partner would grow. Moreover, this effect would be compounded if Chinese money were to come with fewer strings attached. (In economic terms, this both lowers the cost of accepting funds, and potentially increases the likelihood that the recipient’s utility will be increased because the projects chosen are more likely to reflect its preferences than those of the providers.)

BRI might also contribute to Chinese structural power—particularly regionally, but also, perhaps, globally. A variety of scholars have written about structural power, with occasionally differing emphases or understanding.⁷ While the definition and measurement of structural power remain contested, there are two strands that are relevant to this discussion. The first can be summarized as “dependence” or “entrapment.” Drawing on Albert Hirschman’s analysis of pre-WWII German economic activities in Central and Eastern Europe (particularly infrastructural development and changing shares of trade and investment), this strand argues that economies that are particularly dependent on a much larger economy become vulnerable to its blandishments and threats. In this version of structural power, because of the path dependence of some economic activities such as connectivity, the stronger economy gains enormous potential transactional power. Regardless of whether threats are actually made or carried out, the dependence of the weaker economy tends to change its behavior to meet the preferences of its stronger partner.

The other version of structural power operates at the systemic level. As Gilpin and others have written, this is a story of how the great powers create rules and systemic incentives that shape the behavior of others in the system. The classic example is the postwar global system, whose rules and institutions (e.g., free trade and capitalism, as embodied and supported by institutions like the International Monetary Fund and World Trade Organization) profoundly shape international and transnational interactions. These institutions reward compliance with prosperity and threaten obsolescence (what Garrett and Lange call the “costs of closure”) for states that reject those norms and rules. The apotheosis of structural power is hegemonic power, where a single state has disproportionate influence on the rules and institutions, affecting the behavior of every state and economic actor in the system. A variety of Chinese official pronouncements have suggested dissatisfaction with the existing, US-created system, which suggests that China might seek to erode the monopoly of the Bretton Woods institutions, and, thus, US global hegemony. The BRI and AIIB could also be seen as an attempt to create a regional order, in which China sets rules and norms for neighbors, particularly in Central and Southeast Asia

The final lens through which to analyze the effects of OBOR and AIIB on China’s regional power is the concept of “soft power.” Soft power has become a common and often misused term, with some writers using it to describe nearly everything short of military action and others valorizing the pursuit of likeability over interests. At its core, however, soft power is the ability to attract and persuade others, i.e., to provide a model that is compelling enough to others that they voluntarily choose actions or policies that are preferred by the leading power. As Joseph Nye puts it: “It is the ability to get what you want through attraction rather than coercion or payments. It arises from the attractiveness of a country’s culture, political ideals, and policies.”⁸ In this conception, the power of the United States rests at least to some extent on the attractiveness of its culture, ideals, scientific accomplishments, material prosperity, or other values besides its ability to reward or punish specific behavior or to set the rules that others must follow. As Evelyn Goh has perceptively written, international order cannot be understood only in terms of leadership, but quite crucially as a relationship between the leader(s) and followers.⁹ This is true of all forms of political power, which are inherently relational, but the sentiments of followers are particularly crucial to the operation of soft power.

Analyzing soft power is very challenging. Conceptually, attraction is audience-specific and can draw from a variety of aspects of a given country’s policies, culture, economic and scientific activities, etc. Moreover, the salience of particular elements (e.g., Hollywood movies versus societal openness versus security policies) may vary over time, events, or constituency. And there must be some conduit through which attraction affects policies, even if not consistently.¹⁰ Measurement is even more problematic than definition. It is difficult to decide how to measure (or how to combine data to make a synthetic measure of) attraction, and even harder to demonstrate how attraction might affect a given policy outcome. Even Nye tends to conflate attraction with broad gauges of popularity of countries (although, to be fair, he provides multiple measures, for which he offers some justification) and to focus on public diplomacy and propaganda as the ways in which states “wield” soft power (in other words, external communication rather than attempts to shape domestic society or foreign policy in ways that will make them attractive internationally).

All that said, the idea of soft power remains a powerful one. Katzenstein, for example, argues that US hegemony has in fundamental ways been sustained by willing followership on the part of potential regional rivals such as Germany and Japan, which has, in turn, derived from their acceptance of the legitimacy of the US-led order.¹¹ Meanwhile, a variety of analysts have referred over time to Chinese “charm offensives” in Asia as potentially shifting the relative influence of China, the United States, and Japan.¹² So how would BRI improve China’s soft power? One way would be through greater exposure to the sheer magnitude and dynamism of China’s economy—as one analysis of China’s soft power argues, “China’s growing economy is a major source of its increasing appeal in the developing world. Wealth and the potential to be wealthy are attractive, and money confers normative power.”¹³ Moreover, China’s largesse in contributing to Asia’s yawning infrastructure needs will not only offer material benefits to its neighbors, but will also contribute to a vision of China as a country that is both powerful and generous, and whose developmental model, perhaps, offers an attractive alternativeto the prescriptions of the United States and the Bretton Woods institutions.

Parallels to Japan in the 1980s

While apparently unprecedented in scale, scope, and ambition, BRI has historical parallels. Several writers have compared BRI to the Marshall Plan,¹⁴ which may sell some newspapers, but the comparison is problematic on several fronts. The Marshall Plan was mostly about reconstruction, not development; there was no such thing as a global production network; and the emerging Cold War politics created clear, politically-dictated geographical bounds to the plan.

A better comparison is with Japan in the 1980s and early 1990s. Japan was a country with a high savings rate and corresponding current account surpluses that was also dealing with an appreciating currency and slowing domestic growth. It was experiencing frictions with major trading partners, and there were some concerns that direct investment by Japanese companies was not welcome in the United States and Europe, especially when it involved acquisition of intellectual property or major brand names. Japanese firms did invest in the United States and Europe, but also began to rapidly expand their investments in East Asia. Given the relative sizes of the economies, Japanese investment in Southeast Asia was particularly noteworthy.

Renewed attention to Southeast Asia in the late 1980s had profound implications for the region. Under the banner of the “flying geese” model and with the support of their government, Japanese firms pioneered regional production networks based on vertically-integrated, intra-industry trade.¹⁵ Companies—or in some cases, business groups or keiretsu—moved operations overseas to the increasingly welcoming export platforms across the region. They also brought along service investment (e.g., finance and logistics) to support the new manufacturing networks. In the new Japanese production networks, labor-intensive or low-skilled manufacturing processes were moved out of the home islands to the same firm’s (or keiretsu’s) operations in Taiwan, Thailand, Singapore, or Malaysia. Decisions about where to invest were made strategically, matching the type of manufacturing process being transferred overseas to the comparative advantage, skill levels, and wage levels of the various territories that were welcoming to Japanese investment.

The role of government in this process was inescapable. Although the business decisions of Japanese firms were decidedly not dictated by the state, Japanese government agencies provided financial and infrastructural support as well as active encouragement and an intellectual rationale. Hatch and Yamamura describe Japan’s “New AID” plan, first announced in 1987, as beginning with a strategic “master plan” for each country, followed by detailed infrastructure planning that would then be made concrete with the help of aid and other official financial flows (primarily through the Export-Import Bank or JEXIM and Japan Development Bank).¹⁶ Japanese aid visions from the mid-1980s through the mid-1990s built on the “flying geese” model of development, which anticipated that production of commoditized manufactured goods would shift offshore from Japan to medium-income economies (such as South Korea and Taiwan) and then later to developing economies (such as Thailand and Malaysia). The crucial innovation of the Ministry of International Trade and Industry (MITI) and Japanese firms in the 1980s was to realize that the “flying geese” model could be applied not only to final products, such as TVs and microwave ovens, but to components within a vertical supply chain. With the rapid appreciation of the yen that began with the Plaza Agreement of 1985, many Japanese electronics manufactures realized the need to move many operations and supplier relations overseas; MITI’s conception of the “flying geese” offered a model for taking advantage of regional diversity, by moving operations to specific countries or locations based on their comparative advantage.

The government’s role was much more than just moral support or advice, however. It also provided financing and coordination to ensure that this ambitious effort would work to the benefit of Japanese firms. Through the former JEXIM, Japan Development Bank, and other specialized government financial institutions, it offered subsidized loans for Japanese firms to shift non-competitive production abroad.¹⁷ The Overseas Economic Cooperation Fund (OECF) and JEXIM (and, to a lesser extent, the Japan International Cooperation Agency [JICA], which focused more on poverty alleviation, education, and public health than the OECF) contributed to infrastructural projects across East Asia. Japan’s recycled surpluses funded projects such as power generation, telecommunications, harbors, airports, roads, and export processing zones that were both designed and built primarily by Japanese contractors, and that moreover attracted and benefited Japanese firms looking to relocate production either because of declining cost-competitiveness or to surmount tariff barriers. Of course, they also helped to shape the economic development of the host countries—in retrospect, Japan’s focus on commercially viable infrastructure projects was probably much more effective than US and multilateral aid projects that emphasized poverty alleviation. In short, the massive Japanese support for East Asia (particularly Southeast Asia and China) in the late 1980s and early 1990s provided a win-win for Japan and for the host countries, and it did so by weaving a web of economic interdependence and connectivity that centered on key Japanese players including manufacturing firms, trading companies, and banks, with the government as handmaiden.

If the economic parallels with China’s BRI are evident, the political reactions to Japan’s efforts also resonate today. While many economic and political actors in Southeast Asia were eager for Japan’s largesse, others feared the possibility of political interference and growing dependence on Japan. Concern was certainly common among US observers, who saw Japan carving out a new sphere of influence in East Asia that would thwart the interests of the United States and of US firms.¹⁸ Rudiger Dornbusch went so far as to write in 1989, “The way Japan Inc. operates also facilitates the formation of an Asian co-prosperity zone: government and business work hand-in-glove and business moves jointly.”¹⁹

Of course, there are some important differences between “flying geese” efforts of the 1980s and 1990s and BRI. Japan was at the forefront of technology; most observers would have agreed with Bernard and Ravenhill’s assessment that “Ongoing product innovation by Japanese corporations, facilitated by the application of microelectronics technologies, has ensured … that Japanese companies supply the core technologies for most of the region’s output in industries such as consumer electronics and automobiles.”²⁰ China, in contrast, is a supplier of capital but not of technology, and its firms participate in regional production networks as suppliers and assemblers, but not as leaders or innovators. Yet, China’s economy is very large (on some measures, larger than the US economy), and, unlike Japan, China is signally not dependent on the United States for its security and has the potential to be a global political rival across all forms of power, not just economic. Still, Japan’s example is instructive.

In the Japanese case, all three dimensions of power were considered to be in play at the time. Hatch and Yamamura offer examples of transactional power, including one in which they state that the Thai government “buckled” under a Japanese threat to withhold new aid loans, and reversed a decision to cancel a project.²¹ However, the scope for transactional power was limited by the fact that Japan was a largely one-dimensional actor, offering only economic benefits rather than the full range of security, political, and economic blandishments. Also, despite the considerable extent of cooperation between Japanese firms and government entities, the firms involved in the push into Asia were almost all private-sector (with a few exceptions like NTT) and, thus, had interests that were sometimes at cross-purposes with Japan’s political objectives. But more than countervailing US power or conflicting objectives between Japanese firms and agencies, the capacity of Japan to use transactional power was limited by host country politics. In some cases, Japanese actors had to tread lightly in recognition of the locals’ harsh memories of the Pacific War. But even in Thailand, which alone among East Asian states had suffered no damage from the Japanese Imperial forces, Japanese firms and their MITI patrons could not get their way consistently. Instead, they had to operate through the complex and corrupt thickets of successive Thai governments, compromising at each stage along the way. The importance of local politics has proved inescapable even for the most dominant states dealing with highly dependent client states.

Japan’s structural power was limited as well, particularly in terms of regional and international rulemaking. The better case for structural power would be dependence/entrapment of the sort that Hirschman theorized. This was the argument of writers such as Hatch and Yamamura, who envisioned developing Asian countries as locked into a subordinate role in the developing, Japan-led regional production networks. In this vision, the Asian economies might benefit economically, but they would be dependent on the Japanese entities, both private and public, which led and managed the various networks. In hindsight, this too did not pan out as expected by many observers at the time. One reason was the declining vigor of the Japanese economy after the glory days of the bubble economy. By the mid- to late 1990s, Japan’s economic vibrancy was being clearly surpassed by the United States and others; moreover, the domestic travails of the Japanese banks further limited the ability to project economic power. This may or may not prove relevant to those economies in Asia now considering the embrace of China. But, perhaps, more crucial, and more clearly relevant to China today, was a second factor—the non-exclusivity of the regional production networks, as seen by the activities of US, European, Taiwanese, and Korean firms that created their own production networks or penetrated existing ones. Japan had, whether intentionally or inadvertently, helped to create the “open regionalism” that it had only rhetorically supported in the late 1980s, both because foreign firms saw the benefits of mimicking or joining the Japanese networks and because the host governments saw the benefits of allowing them in. By the late 1990s, Japanese companies were just another (albeit very competitive) set of players in the game. Dependence, in other words, proved to be escapable.

With regard to soft power, it does appear that “Japan”—whether understood as Japanese popular culture, organizational norms, or economic model—became much more attractive in the 1980s and 1990s, although it is hard to measure. Karaoke and Japanese popular music swept Asia, while a variety of countries resorted to the sincerest form of flattery, in seeking to imitate what they understood to be the Japanese model. In the Philippines, Secretary José Concepcion vowed in 1989 to transform the Department of Trade and Industry into a Philippine version of  MITI. In Malaysia, Prime Minister Mahathir’s “Look East” policy explicitly sought to model his country’s industrialization on the examples of Japan and South Korea, and loudly rejected the development approaches championed by the United States and Malaysia’s former colonial master, the United Kingdom.

In retrospect, many analysts had the story backwards. They expected that Japanese aid and infrastructure would provide economic benefits primarily to Japan and Japanese firms, while excluding foreigners and making locals into political puppets. In fact, the political benefits were limited and transitory; meanwhile, economic benefits to locals were often substantial, and foreigners were able to join in profiting from the Asian economies’ development. This happened even though Japanese aid and infrastructural investment were well-articulated, often self-interested, and sought to benefit closed networks.

Lessons for China’s BRI

BRI is not directly analogous to Japan’s efforts to support industrialization in East Asia through infrastructure and regional production networks; yet, the concerns voiced by US and Japanese observers today bear an uncanny resemblance to those of US observers a quarter century ago. What lessons can we draw from that history?

One lesson is that large-scale, coordinated investment in commercial infrastructure and connectivity is likely to have significant benefits for recipient countries. To the extent that infrastructural projects are well-managed and sustainably financed, China’s BRI and AIIB efforts should contribute to the material well-being of those countries, regardless of whether Chinese intentions are altruistic or selfish. (Of course, in some cases projects will likely be shoddily built, leading to lower returns, recriminations, and either unpaid loans or tense negotiations.) Efforts to somehow dissuade emerging economy governments from accepting Chinese largesse out of political concerns will mostly be unsuccessful and counterproductive.

At the same time, the ability of Chinese leaders to use BRI and AIIB to push their regional political agenda—excluding economic rivals or pursuing political or even security goals—will be limited. We see evidence for this not only in Japan’s Asia strategy of the 1980s and 1990s, but also in the experience of global superpowers such as the United States and Soviet Union in trying to control client states. External meddling typically meets some degree of countervailing efforts by the locals. As a result, transactional power is ephemeral, and using it can create a backlash from target governments and societies. It is by no means evident that Chinese leaders will manage that challenge better than the Americans, Soviets, or Japanese before them.

It is also important to look at the micro-foundations of transactional power. Despite the prevalence of state-owned enterprises and the deep interconnectedness of Chinese firms and government, there are multiple internal divisions that will reduce the ability of the central government to implement a cohesive strategy to take advantage of transactional power. Even potential transactional power is mediated by issues such as the appropriateness of a given piece of infrastructure, the domestic politics of target economies, and links between firms and both the home and host governments.

The potential for Chinese structural power is clearly large, much larger than was the potential for Japan, because both of the sheer scale of what is being contemplated and China’s rivalry with the United States and its vision of global order. Still, China’s structural power gains will be tempered by competition from foreign players for the simple reason that infrastructure projects provide public goods—to the extent that they provide actual benefits, non-Chinese firms will compete in creating local and regional production networks. Another constraint, at least for the medium term, is that even though China is very large, its companies and technology will not be at the core of regional production and service networks. China’s extraordinary success in economic and technological development to date is largely attributable to globalization (global trading system and investment practices), which reflects the structural power of the “West.”

Finally, with regard to soft power, China operates at a significant disadvantage to the United States (although not necessarily relative to Japan in the 1980s and 1990s). The Chinese model of state capitalism and authoritarian government is not intrinsically attractive to neighbors and economic partners, particularly if we are looking at societies and not authoritarian leaders. While the success of China in transforming its economy over the past four decades is certainly attractive, over the longer run soft power at the international level probably requires a positive vision of collaboration and fairness rather than just the gravitational pull of market demand. In short, there is no “Beijing Consensus” or “China Dream” that carries appeal across China’s borders.

If this analysis is right, then US, Japanese, and Korean policymakers need not worry about the creation of an exclusive Chinese economic zone. BRI will, most likely, benefit Chinese firms more than foreign firms, and China’s influence will certainly grow. But the best course of action for the United States and its partners at the regional level is to participate in regional economic development so as to benefit from BRI. A side benefit will be limiting the growth of China’s structural power in the region. At the global level, China’s challenge to Western hegemony is a call to make, obey, and enforce better rules to maintain the global system. The answer is not to disengage or to try to force rules on unwilling states, but to pursue the globalist agenda that has served them so well in the postwar period.