Infrastructure is the newest turf to witness rivalry among major global powers. The turf battle is playing out in Asia, which is expected to remain the major zone of contention in the years to come.

Asia has large infrastructure needs. These are pronounced across all parts of the continent. Despite having been parts of ancient trading routes connecting the region to Europe and Africa, modern connectivity in Asia, particularly cross-border connectivity by road, is limited. The need for such connectivity has become important given the large intra-industry trade in the continent accompanied by growth of several value chains.

Asia’s current economic dynamics points to the importance of its two largest economies—Japan and China—investing overseas for higher returns. The Japanese domestic market has been saturated for a long time and Japanese outward FDI has been traditionally high. The deepening contraction in the Chinese economy spells dim prospects for returns on investment, urging Chinese investors to look overseas. China has now become a net outward investor with its overseas FDI becoming higher than the inward FDI. The quest for higher returns is making both countries take a closer look at their Asian neighbourhood.

Given the high demand for infrastructure in Southeast Asia, South Asia and West Asia, both China and Japan are keen on investing in major infrastructure projects in these regions. A significant part of these investments are being envisaged in land connections.

China has been ahead of Japan in staking claim to developing infrastructure in Asia. It begun by announcing the ambitious Silk Road route, both by land and sea, for laying down cross-continent infrastructure through Asia. The land route, following the ancient silk trade traffic, would connect China to Europe via Central Asia. Both this route as well as the modern maritime trade route would run through Southeast Asia and parts of South Asia. China has announced $40 billion for developing the new Silk Road route. It followed the initiative by announcing plans for an Asian Infrastructure Investment Bank (AIIB), devoted specifically to the infrastructure needs of the Asian region.

The early moves by China put Japan in a spot of bother. As the farthest country in Asia on its east and with no land connection to the continent’s landmass, Japan could not have been part of the new Silk Road. Also, China would have been careful in avoiding a transport architecture that included Japan given the strategic discomfort between the two countries. Furthermore, the lead taken by China in establishing the Silk Road Fund meant Japanese investment in regional connectivity would face serious competition.

The AIIB was the icing on the cake. The $100 billion infrastructure bank for Asia being set up by China with an open call to all countries for becoming founding members made Japan realise the lead picked up by China in establishing itself as the champion of infrastructure building in Asia. The rush of countries that have traditionally been anti-China for AIIB membership also took Japan by surprise. The fact that 57 countries became founding members of the AIIB, including major US allies such as the UK, Germany, France, Israel and Australia, notwithstanding USA’s  advice to stay out, was also a signal to Japan of the strategic leverage accruing to China from the AIIB.

It was inconceivable that Japan would give China a free run in creating infrastructure in Asia. It has, therefore, announced a $110 billion fund for building infrastructure in Asia. The announcement came at a time when the AIIB is finalising its operational details. A significant part of the funds earmarked by Japan would be disbursed in projects to be developed in collaboration with the Asian Development Bank (ADB). This gives the ADB a chance to bounce back in infrastructure building in Asia—a role it has monopolised for several years and which is now threatened by the AIIB.

The China-Japan competition over infrastructure in Asia symbolises a larger strategic conflict among the world’s major powers manifesting through regional financial institutions. The AIIB threatens the dominance of the ADB.

This amounts to the threat posed by the world’s second largest economy, China, to the world’s first and third largest economies, the US and Japan. Japan’s decision to step into infrastructure funding in Asia in a big way stems from the concerns of the US-Japan alliance in loosing its strategic hold over Asia’s financial architecture, particularly development financing.

There is little doubt over the turf battle heating up even more in the months and years to come. The tussle for geo-strategic gains in Asia manifesting through the command of regional institutions over infrastructure financing is compounded by the desire of China and Japan to maximise returns on their investments in Asian infrastructure. The AIIB and the ADB would feel the tensions of the major power rivalry, as would the rest of the Asian region, notwithstanding the funds it receives for creating the much-desired infrastructure.

The author is senior research fellow and research lead (trade and economics) at the Institute of South Asian Studies in the National University of Singapore.

E-mail: isasap@nus.edu.sg. Views are personal

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