As part of its strategy to counter rising Chinese influence abroad, the US recently unveiled the International Development Finance Corporation (IDFC), a development finance agency with a US$60bn war chest. The successor to the Overseas Private Investment Corporation (OPIC), it will continue to offer political risk insurance and is authorised to take up to a 10% equity position in ventures in eligible countries, while new powers include the ability to offer guarantees and invest in local currency.
The “better utilisation of investment leading to development” (BUILD) act, passed in October, merges OPIC with some key private capital functions of USAID to create this new, beefed-up agency, which is anticipated to be operational as of October 1, 2019. This marks a policy reversal for President Donald Trump, whose first budget called for the elimination of OPIC, along with over 60 other government agencies.
The IDFC will, in part, enable the US to respond to the threat posed to its economic and national security interests by China’s Belt and Road Initiative and the China-Africa Development Fund.
In recent years, China has overtaken the US as the largest trading partner for vast swathes of Africa and Latin America, and has cemented its dominance across Asia. This has not gone unnoticed by the US. In comments published today by the Associated Press, Dennis Shea, US ambassador to the WTO, complained that the global trade environment gives China an unfair advantage, pointing to the “fundamental challenge posed by China’s state-led, mercantilist approach to the economy and trade.”
Exact figures are hard to come by, but it is estimated that China Development Bank and the Export-Import Bank of China together provide more international development finance than the World Bank, the Asian Development Bank and the Inter-American Development Bank combined; and the Export-Import Bank of China alone outstrips all other developed economies’ export credit agencies in lending power.
With the US Exim bank still hobbled, many question if the creation of the IDFC will be enough for the US to keep up with China’s inexorable march around the world.
Matthew Oresman is a partner at law firm Pillsbury Winthrop Shaw Pittman’s public policy practice, and is based in London and Washington DC. He has advised over a dozen sovereign governments and political leaders on their relations with the US and their global strategy. GTR speaks to him about what this new development means for US trade and investment around the world, and whether the softening of the Trump administration’s stance towards development finance might lead to a revamp of US Exim.
GTR: President Trump originally said he wanted to eliminate OPIC. Instead, with the creation of the IDFC, the US now has an ‘OPIC on steroids’. What is behind this reversal?
Oresman: It is China. It was likely pointed out that the Belt and Road Initiative is a huge money cannon being shot across the world – in debt, too, not only in equity – and that the US wasn’t competing in any great way. This was sold as a way to compete with the Chinese in Africa and Latin America especially; areas that have been historically American areas of interest.
I’m sure it was also pointed out that this would effectively form the core of the Trump administration’s Africa policy, which to date has been underdeveloped and without which the US would see its position in Africa continue to decline. It also aligns much more to the mercantilist policy approach that Trump has advocated for, in that rather than being seen as giving away money in aid, the money will also benefit American companies.
GTR: How confident are you that the IDFC will help the US match China?
Oresman: US$60bn can go a really long way, and I think that’s the secret of this bank: you actually don’t have to spend much of the money to have the impact. You can have cheques in the tens of millions to unlock billions of US capital in the private sector. There is plenty of private sector money that wants to go into these projects but wants to share the risk, to have allies. A very small amount of equity position will go a long way in unlocking the massive pools of private equity that are sitting there and are looking for returns as the stock market stays erratic. It should be able to accomplish a good amount.
GTR: Given the about-face on OPIC, can we expect to see any developments around US Exim any time soon?
Oresman: Between US Exim and the IDFC, you really have a tale of two cities, in that they are organisations that should be complementary but are headed in different directions.
As far as Exim goes, the truth is that the politics hasn’t changed. The confirmation of the board members is still being held up at the Senate, and as we see the new committee chairmanships break down, we will see if anybody who is an Exim proponent does get a position of real leverage to break these logjams. At the moment, it seems stuck.
Exim may still come back, but I could see specific programmes step in to fill the gap and achieve the same purpose, especially around the creation of tariff relief measures. Export credit could be part of the relief issue. Tariffs are rising around the world and you have to address them in some way that still keeps US exports competitive.