In early October, the Trump administration formally rebooted development aid to compete with China’s expansive aid program that seeks to create a new world order for trade.
The maneuver was part of the administration’s response to China’s state-driven Belt and Road Initiative (BRI), a program that will spend an estimated $1 trillion on development projects in Asia and Africa that aims to boost China’s global and regional influence by investing in foreign countries.
True to its capitalist philosophy, the United States’ answer to BRI involves empowering private capital in new ways. The administration argues that such initiatives are a crucial means of competing with China and, therefore, supporting national security. Its most ambitious gambit, signed into law by President Trump on Oct. 5, is the innocuously named International Development Finance Corporation (IDFC). IDFC is an attempt to assert soft power by financing and insuring American business investments in the developing world.
IDFC represents the latest in a line of government programs animated by the belief that development aid, funneled through private corporations, makes the United States stronger and safer and better situated to triumph in an era of great power competition.
Development aid was a mainstay of Cold War competition between the United States and the Soviet Union. President Harry S. Truman cemented it into the United States' national security policy at the start of the Cold War via the Marshall Plan and the Point Four program. The idea behind development aid was that secure, prosperous societies were more likely to have stable, democratic governments, making it a vital, if expensive, tool in U.S. efforts to thwart communism.
The Vietnam War and a balance-of-payments crisis in the late 1960s demanded a rethinking of aid as the American public turned away from using taxpayer money for development assistance. “The U.S. foreign aid program is in major crisis,” Henry Kissinger warned President Richard M. Nixon in March 1969. Nixon and Kissinger resolved to preserve aid and assure the world that the United States was invested in the future of the developing world. They hit upon the Overseas Private Investment Corporation (OPIC) as the ideal solution.
The Nixon administration created OPIC to encourage private investment abroad so that business capital could fill the gap from a decline in public aid. OPIC underwrote political risk insurance and guaranteed loans for American companies at a time when many businesses were apprehensive about the threat of expropriation in the Third World. And it worked: OPIC bailed out Anaconda Copper Mining after President Salvador Allende nationalized Chile’s copper industry, resulting in the expropriation of Anaconda’s mines.
For Nixon and subsequent presidents, OPIC kept aid flowing and spread American-style capitalism. The U.S. Chamber of Commerce and the National Association of Manufacturers cheered OPIC’s political risk insurance, loans and loan guarantees that fueled a surge of overseas investment by American companies.
Despite its Republican roots, conservatives in recent years have been quick to criticize OPIC as corporate welfare. The Heritage Foundationand the Cato Institute blasted OPIC’s financing for a host of dubious investments, including loans to open Papa John’s Pizza franchises in Russia. On Oct. 2, the Wall Street Journal’s editorial board rejected claims that modernizing OPIC would accomplish much more than the continuation of bad policy.
But lawmakers have consistently reauthorized OPIC for two simple reasons: Businesses lobbied for its survival, and OPIC routinely turned a profit with no cost to taxpayers. In 2017, for instance, OPIC paid $262 million to shrink the federal deficit. OPIC’s overall contribution to reducing the deficit will total almost $6 billion when IDFC subsumes it.
OPIC and IDFC are based on a simple proposition: Relationships forged from aid will mature into sustainable trade relations, and taxpayers won’t pay a dime. IDFC’s architects drew on OPIC’s accomplishments, seeing the private sector as the best vehicle to deliver reliable economic growth and development aid by building market economies. IDFC will expand beyond OPIC and respond to evolving national security priorities.
IDFC’s legislative language leaves no doubt that its intentions are to “provide a robust alternative to state-directed investments by authoritarian governments” such as China’s. OPIC suffered from the absence of a similar justification. IDFC indicates how Washington plans to wield soft power to counter the primarily state-based largesse that China offers to countries.
Rep. Ted Yoho (R-Fla.) and a diverse coalition of interests sponsored the creation of IDFC to strengthen the United States’ competitive edge against China. Congress appropriated $60 billion for it, more than double OPIC’s budget in its closing fiscal year. IDFC will share some primary functions with OPIC to incentivize investment: political risk insurance for projects, loans and loan guarantees.
IDFC breaks new ground, however, with the authorization to own equity stakes in investments and use local currencies to mitigate investors’ risk. The addition of these two measures leaves IDFC better suited for a vast expansion beyond OPIC’s constraints. IDFC, in other words, is primed to compete with BRI in more challenging political, economic and social climates. The United States is trying to persuade policymakers in the developing world to stand with the U.S. global order.
IDFC cannot rival BRI’s torrents of cash to fund an array of projects to develop infrastructure, energy and technology. But BRI is not without its flaws. Evidence of debt-trap diplomacy in Sri Lanka that resulted in China’s 99-year lease on the strategically valuable Hambantota Port and Malaysia’s August 2018 cancellation of BRI projects represent an opening wedge for IDFC. The United States can make the case that, unlike China, its aspirations are not to saddle countries with debt that will require surrendering sovereignty.
If that occurs, the United States can achieve its ambition of “taking countries from aid to trade,” as Yoho put it. Government institutions such as the Export-Import Bank must be empowered rather than sidelined by the Trump administration in order for aid to trade to materialize.
Two rival economic systems are colliding over the politics of development and the state’s role in controlling the economy. Development is once again a primary feature of great power competition. IDFC is one of the United States’ best shots at competing with China’s head start in Africa, Asia and Latin America. IDFC may also broadcast that the United States remains concerned about the future of developing countries and global poverty, despite the rallying cry of “America First.”