Thursday, March 29, 2018

Go Big Or Go Home - Trade Tiffs Underscore Global Economic Chess Match

https://www.forbes.com/sites/joeharpaz/2018/03/28/go-big-or-go-home-trade-tiffs-underscore-global-economic-chess-match/


Joe Harpaz ,  

 CONTRIBUTOR

I help business leaders understand the tax, regulatory and tech scene.  

China's President Xi Jinping and US President Donald Trump (L-R front) shake hands during a meeting outside the Great Hall of the People in Beijing. Artyom Ivanov/TASS (Photo by Artyom IvanovTASS via Getty Images)

In the U.S. business climate, where seemingly every conversation is dominated by new tech and cloud initiatives, no one talks about infrastructure unless they just arrived via LaGuardia Airport. But those pot-holed roadways, orange traffic cones, and crawling dump trucks that have become the unofficial “Welcome to New York” sign for so many travelers are symbolic of a major global trend that will influence businesses of every type in the coming months and years. Today, infrastructure is at the beating heart of several world domination strategies, and the taxes, private company investment, and debt that will be used to fund these initiatives will soon be the headlines.

Going Big: China’s Belt And Road Initiative

The most ambitious of the new crop of mega infrastructure projects is China’s trillion dollar Belt and Road initiative, which aims to connect Asia, Europe, the Middle East, and Africa with an enormous logistics and transportation network. If you don’t know about it, you should. The ambitious plan calls for building and upgrading roads, ports, rail lines, pipelines, airports, electric grids, and fiber optic lines to create a multinational commerce network, with China serving as the hub.

I recently returned from a business trip to China, where I visited customers in the country’s booming tech centers in Hong Kong, Shanghai, and Shenzhen, and the conversations about the project were everywhere. What struck me most was how passionate businesses are about the Belt and Road initiative and how government and business have come together to commit to this strategic national effort.

While it makes sense that the Chinese government has launched this initiative as an opportunity to extend its global influence – going so far as to write the initiative into its constitution – the enthusiasm from businesses was surprising. One executive explained to me that most businesses are expected to address how they support the initiative in their board level corporate plans.

Part of the reason for this, of course, is political. Chinese companies want to be seen as good corporate citizens in the eyes of the Chinese government. But there is also an economic reality to this support.

So far, roughly $350 billion in Belt and Road development projects have been financed, with the bulk of that financing coming from Chinese development banks. But these banks will not be able to fund the entire project.

“That’s when private capital will come in and public-private partnerships (PPP) have an important role to play,” Ben Simpfendorfer, founder and CEO of consultancy Silk Road Associates, explained to the South China Morning Post.

That’s being promoted as a good thing by companies around the world that have begun singing the virtues of the Belt and Road program in their quarterly earnings calls. Among them is Alibaba CEO Yong Zhang.

“The One Belt, One Road initiative is an important tailwind for our cross-border import business, which will help address the massive demand for imported products in ongoing consumption upgrades taking place in China,” Zhang said.

Clearly Chinese businesses see the benefits of the Belt and Road initiative as both a means and an end. It will spur near term economic activity by creating large scale multi-country infrastructure projects. Longer term, it will produce a new economic trade route heavily influenced by Chinese technology, infrastructure, and management.

Going Home: So How Does The U.S. Infrastructure Plan Compare?

The initiative stands out as even more ambitious when compared to that other trillion plus dollar infrastructure plan – the one introduced by the Trump administration this past February.

Now, these are obviously two wildly different infrastructure plans being executed by two wildly different countries. While China’s strategy is focused on globalization and is being implemented at typical Chinese breakneck speed with close orchestration between government and business, the U.S. policy is decidedly domestic-focused and is subject to the endless echo chamber of American politics.

One area where the Belt and Road initiative and the U.S. infrastructure plan are similar is in the significant reliance both have on public-private partnerships. The U.S. plan calls for $1.3 trillion in funding to come from state and local governments and the private sector. But U.S. businesses are not exactly clamoring to get on board – yet.

In fact, a recent forecast from the University of Pennsylvania’s Penn Warton Budget Modelsuggests the U.S. infrastructure plan will have “little to no impact” on economic growth over the next decade, largely due to lack of investment from state and local governments and the private sector. The Penn analysis suggests that total infrastructure funding coming from states and private investors will fall far short of the Trump administration’s $1.3 trillion goal. The study projects that total funds raised from states and private investors will be somewhere between $20 billion and $230 billion.

That’s not to say that investment in U.S. infrastructure initiatives does not make sense for businesses. There will be potentially huge dividends for companies involved in the construction process and every business will become a bit more efficient with better trains, airports, and highways. Clearly, Elon Musk is a believer. He recently shared the first photo of an underground Los Angeles tunnel his Boring Company is building as part of an experimental effort to create underground roadways to speed transit in congested cities.

Still, the decidedly insular focus of the U.S. plan lacks the promise of global trade dominance that has so many Chinese businesses so excited about the Belt and Road initiative.

Beyond the Belt and Road and U.S. infrastructure plans, there is also a nascent movement developing between Australia, the U.S., India, and Japan to establish a joint infrastructure initiative to compete with the Belt and Road project. Billed as the Quadrilateral Security Dialogue, or Quad, the initiative has a geopolitical footprint that is uncannily similar to the maritime element of China’s Belt and Road initiative.

Why Funding These Programs is a Wild Card

With mega infrastructure projects like these gaining momentum, the key variables businesses and investors will want to watch as they unfold will be the tax and debt plans that will keep them funded. For example, one of the newer ideas floated by President Trump to help fund the U.S. infrastructure plan is a 25-cent increase in gasoline and diesel taxes. There has also been a great deal of discussion at the state level that local taxes will need to be raised to support the infrastructure plan.

For the Belt and Road program, a large chunk of which is being funded by debt from participating countries, a new study has found that eight of the 68 countries involved in the project are at a higher risk of default as a result of their involvement. Those countries – Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan, and Kyrgyzstan – would see their level of external debt owed to China rise dramatically as a result of the Belt and Road project.

As the underlying intricacies continue to be sorted out, it’s becoming clear that the foreign policies of the world’s superpowers will increasingly be dictated by each government’s ability to fund its domestic agenda and global ambitions. With those kinds of stakes at play, businesses will have to keep a close eye on how to participate in building bridges to the future

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