During the early 2010s, developing countries were keen to get in on the global trade boom that brought prosperity to many countries, most famously China, over the prior quarter century.  At the Asian-African Conference in 2015, Chinese General Secretary Xi Jinping promoted how Beijing could help them replicate its success by “the building of high-speed rail, expressway and regional aviation networks and facilitating the industrialization process.”  Better yet, Xi noted, China’s development assistance would be granted “without political conditions,” in contrast to the West’s which often required recipient countries to reform their governance or laws.

Perhaps best of all, China offered to finance new infrastructure construction on easier terms than developing countries had received from the West in the past.  The lion’s share of that financing would come from Chinese lenders under the umbrella of what would eventually be known as China’s Belt and Road Initiative (BRI).[1]  Beijing would also directly support new infrastructure construction in developing countries by contributing $40 billion to its state-run Silk Road Fund and $50 billion to the China-led Asian Infrastructure Investment Bank.

The Promise of Belts and Roads

With easier access to financing, developing countries hoped to speed the construction of new infrastructure—airports, power plants, railways, roads, seaports, and the like—that would lay the foundation for their economic development.  Such industrial and transportation infrastructure would surely lower barriers to creating new value-added industries and boosting trade both within their borders and across them.

China also stood to benefit from the BRI, creating what Xi referred to as a “win-win” for both China and its developing-country partners.  The financing provided by Chinese lenders would flow back to Chinese companies contracted to build the new infrastructure in those developing countries.  And once that infrastructure was built, Chinese manufacturers would benefit from better access to those countries’ markets and raw materials.

But among the BRI’s biggest benefits for China was the fact that its overseas lending sterilized a sizable portion of the dollar inflows produced by its massive trade surpluses with the United States.  That helped to prevent China’s currency from strengthening against the dollar, enabling Beijing to keep its export-driven economy growing faster and for longer than it otherwise could have.  Indeed, China’s “win-win” arrangement was doubly beneficial for Beijing; it not only extended the longevity of China’s economic growth, but also generated future income streams from its overseas loans.  By 2017, Chinese overseas lending under the BRI banner topped $843 billion.  So much money was lent that 42 countries have come to have Chinese debt exposures exceeding 10 percent of their GDP.

In some cases, BRI credit turned out to be too easy to get.  It led borrowing countries to build more infrastructure than demand would support.  Hence, a number of BRI loans have gone bad.  Possibly the best-known examples were the loans made to Pakistan and Sri Lanka.  When their BRI infrastructure projects failed to produce expected revenues, both countries became ensnared in debt spirals.  Eventually, Sri Lanka would lose control of its BRI-funded seaport to its Chinese creditors in 2017; and Pakistan would be forced to seek a bailout from the International Monetary Fund in 2019.  Needless to say, the two countries’ experiences have taken some of the shine off China’s BRI and prompted other countries, like Kazakhstan, Kenya, and Malaysia, to reassess their BRI infrastructure projects and trim their loan exposures.

The Great Slow Down

While short-term risks to the BRI may lie in the overbuilding of infrastructure, the longer-term danger might come from a different quarter: cooling global trade.  For 21 of the 26 years between 1986 and 2011, global trade grew faster than global GDP.  In fact, for 19 of those 21 years, global trade grew over twice as fast as global GDP, which spurred demand for additional infrastructure.  But since then, global trade has cooled.  For all but two of the nine years after 2011, global trade growth has lagged behind global GDP growth.  The COVID-19 pandemic, which began in China in 2020, made things worse by dislocating worldwide supply chains.  Though global trade had begun to recover a year later, Russia’s invasion of Ukraine in February 2022 disrupted it anew.  As a result, the recovery has remained tenuous, as the trade of less-developed countries has trailed behind that of more-developed ones.

Meanwhile, Chinese economic growth, which began to slow in 2010, slowed more rapidly after 2017.  Its once-reliable seven-percent annual advance now seems difficult to achieve, with the exception of a one-time post-pandemic bounce in 2021.  To keep its economy from slowing even faster, Beijing cut its reserve ratio requirement, its main monetary policy tool, nine times for its major banks and 13 times for its rural community banks between 2018 and 2021.  But despite such intense pump-priming, Chinese economic growth seems headed towards the 5.5 percent mark in 2022 and perhaps lower in 2023.

That matters for international trade volumes because the enormous expansion of China’s export-led economy is what drove much of the rise in global trade since the 1990s.  Lower Chinese economic growth, coupled with China’s long-awaited shift to a more consumption-led economy, is likely to temper global trade.  That, of course, would bode ill for BRI infrastructure projects in developing countries that need higher trade volumes to meet their debt obligations.

Belt and Road Headwinds?

Ultimately, the “win-win” bargain that Xi promoted at the Asian-African Conference works only if the new infrastructure, which China helps to finance and build in developing countries, is productive; that infrastructure must generate enough revenues to pay for its construction and upkeep, not to mention the interest on its loans.  In economic terms, the infrastructure must unlock demand.  After all, a new seaport yields little benefit if no ships use it.  Should that happen, the seaport simply becomes a financial burden to whoever borrowed to build it.

While the absence of sufficient infrastructure certainly makes economic development more difficult, the presence of too much infrastructure does not ensure development success.  History is replete with failed economic development schemes.  No doubt, tepid global trade growth will test the viability of BRI infrastructure projects.  At the very least, it will temper enthusiasm for them.  That will make it harder for Beijing to resume the brisk pace of BRI lending that prevailed before the COVID-19 pandemic.

Still, borrowing countries could take some comfort in the fact that global trade continues to grow, even if at a slower pace, suggesting that demand might someday expand enough to make their BRI infrastructure projects worthwhile.  But that will take time.  Until then, those countries must pay interest and principal payments on their BRI loans.  The longer global trade remains sluggish, the more likely new (and existing) BRI infrastructure projects will end up not only saddling developing countries with debt, but also bringing pressure on Chinese lenders to write down that debt.  And, if that comes to pass, Xi’s bargain will look less like a “win-win” than a “lose-lose.”

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[1] The BRI has been a remarkably flexible concept.  Beijing seems to bestow or withhold BRI status to infrastructure projects based on how well they perform.  The BRI was once known separately as the “Silk Road Economic Belt” and the “21st-Century Maritime Silk Road” and then together as the “One Belt, One Road” initiative before its current appellation.

The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.