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WATCH: The Future of Oil Demand: Peak, Plateau, or Plummet?

Uncertainty exists in future oil shipments of export cargo and import cargo in international trade.

WATCH: The Future of Oil Demand: Peak, Plateau, or Plummet?

Projecting oil demand several decades from now is a formidable challenge. Competitively priced alternatives, emerging technologies, policy prerogatives, and societal choices can all have significant impacts on the trajectory of demand over time. Even moderate changes to underlying assumptions in oil demand projections (such as GDP growth) can lead to vastly different outcomes.

In recent years, this range of uncertainty has led to speculation that global oil demand will experience a peak in the not too distant future. Much of the debate on this issue has focused on the potential timing of this peak and some analyses have projected a deep decline in oil demand once this point is reached. Given the magnitude of global oil demand and the variety of combustible and non-combustible uses throughout the economy, it is likely that any peak will first come in the form of a plateau and experience a more gradual rather than precipitous decline thereafter. Moreover, the excessive attention that has been paid to the timing of this decidedly uncertain date appears to miss the broader strategic significance of the issue. That is, the high level of uncertainty surrounding future levels of demand and the increased likelihood that it will begin to level off at some stage in the coming decades has significant implications for both markets and policy.

This CSIS Energy and National Security Program production unpacks the various factors causing such uncertainty for future oil demand and outlines the consequences of a potential peak.

USTDA facilitates infrastructure shipments of export cargo and import cargo in international trade.

What Is the US Trade and Development Agency?

The US Trade and Development Agency (USTDA) is a small independent federal agency whose mission is to help American “companies create US jobs through the export of US goods and services for priority development projects in emerging economies.” USTDA links American businesses to export opportunities in emerging markets by funding activities such as project preparation and partnership building in sectors including transportation, energy, and telecommunications. Since it was established 25 years ago, the agency has generated a total of $61 billion in US exports and supported over 500,000 American jobs. In connecting American business to such opportunities, USTDA also links American technology’s best practices and ingenuity with US trade and development policy priorities.

USTDA is an instrument to enable American-led infrastructure development in emerging economies and, therefore, frequently sees increasing competition from government-backed Chinese firms and the challenge they can pose to American commercial engagement under the flag of One Belt, One Road (OBOR). OBOR is paving the way for Chinese engineering, procurement, and construction companies to prepare and develop infrastructure projects in OBOR countries in a way that favors Chinese standards, thereby exerting significant pressure to select Chinese suppliers. This creates a potentially vicious cycle—the more China builds, the faster their standards become the international norm, and, ultimately, this cycle could foreclose export opportunities for US businesses and harm American competitiveness in global infrastructure development. US exporters are increasingly requesting USTDA intervention at the pivotal, early stages of a project’s development, to compete in markets, such as the OBOR countries, where they frequently face Chinese competition. Of note, 40 percent of USTDA’s activities in 2016 were in OBOR countries across South and Southeast Asia, Central Asia, the Middle East, and Africa.

Although there are other agencies that may seem to do work similar to USTDA, there are various aspects that make it a unique agency. This paper provides a brief description of USTDA, its origin and evolution, the impact on the US economy and its proactive collaboration across U.S agencies. Finally, it offers a set of recommendations for USTDA on how to improve its operations and strengthen its role in the developing world.

OPEC agreed to further reduce shipments of export cargo and import cargo in international trade.

Post-OPEC Analysis

By most accounts, the Organization of Petroleum Exporting Countries (OPEC) successfully concluded its November 30 meeting by agreeing to extend the production cuts an additional nine months, to run through the end of 2018, and seeking to cap output from Nigeria and Libya, two members specifically excluded from the earlier pact. At the same time, the group announced that it will continue to monitor ongoing changes in global markets and would review the agreement at its next scheduled meeting in June. In the run-up to last week’s meeting, analysts had warned that OPEC’s failure to meet “market expectations” with the extension would likely cause oil prices to plummet. In fact, the meeting’s agreement produced no such upheaval, with Brent crude oil continuing to trade above $63 per barrel, although we would caution that persistently higher prices may eventually reintroduce periodic oversupply problems.

Several elements have combined to make OPEC’s strategy effective this year in working off the enormous global oversupply (in terms of inventory) and accelerate the rebalancing of global oil markets. The most notable of these include Saudi Arabia’s leadership and commitment to production and export caps, general compliance among other OPEC members, rising global demand, hurricanes in the US Gulf of Mexico, and Russia’s continued participation in the agreement (see CSIS Commentary “Russia and Saudi Arabia”). The November 2016 agreement established an aggressive new production target with a buy-in from Iran and Iraq and a promise from Russia to cooperate that has so far been kept (albeit with a lag in the early going). Technical experts in the OPEC Secretariat think that Iran, Iraq, Libya, and Nigeria are not likely to see significant production gains in 2018, and problems in Angola and Venezuela could provide the group some additional headroom. Complicating considerations for continuation of the OPEC/non-OPEC group on limiting production, however, is the internal division of economic interests within the countries between governments and companies.

Because of the way the taxation system works in Russia, the central government receives most of the financial benefit of oil prices above $40 per barrel (which incidentally is the price level on which the national budget is based), whereas Russian oil companies need to maintain or increase their production to justify investments they have made in infill drilling and developing new fields. In varying degrees, this is also true for certain countries within OPEC and the non-OPEC group (such as Kazakhstan and Azerbaijan) where foreign companies operate most of the production.

The contractual terms generally benefit the host government’s fiscal take disproportionally when oil prices rise, while the foreign companies operate on a margin basis that requires volume growth to increase profits and justify new investments. Such internal tensions are easy to overcome when oil prices drop below $30 per barrel, as was the case in January 2016, when both governments and companies were severely affected. However, maintaining production discipline within this temporary coalition of OPEC and non-OPEC countries is likely to be more challenging at a price of $60 or higher.

And although the OPEC meeting took place in Vienna, Austria, the Permian Basin and other US shale regions clearly were on the minds of the delegates. For despite the obvious differences in crude quality and characteristics, the projected rise in US output and exports is increasingly seen as a threat to OPEC members, who have voluntarily ceded market share in the interest of draining global stocks and attempting to rebalance the market. Such was the topic of the much overlooked technical-level workshop on tight oil that OPEC convened a week before the ministerial session, specifically aimed at examining the prospects for US shale production.

Every business school teaches the importance of competitive analysis in designing a good business plan, and the shale workshop was part of OPEC’s strategy to stay informed. OPEC will need to monitor developments carefully in the Permian, Anadarko, and other basins and make sure that prices don’t encourage too much US shale oil production or undermine demand growth going forward. Cost inflation, reinvestment rates, and productivity trends need to be closely watched and OPEC’s own production plans quickly adjusted accordingly.

Brent crude was still trading near $45 per barrel in May 2017 when OPEC’s deal was quickly renewed. Now, the slow reduction in global inventories accompanying the rebalancing of supply and demand has pushed Brent steadily upward to over $60 per barrel in November. And while estimates of US output in the coming years vary widely, reports are that third quarter 2017 price levels have resulted in some 900 thousand barrels per day of production on an annualized basis already being hedged (providing producers with ongoing cash flow) and that drilled but uncompleted wells (DUCs) now exceed 8,000. At the other end of the spectrum, ongoing concerns over a myriad of issues could prevent output projections from being realized. Among these problems are frac hits/well interference, lack of takeaway infrastructure, water availability, personnel issues, overstressing formations, public concerns related to water contamination, use and disposal at scale, seismicity, and other matters.

And then there’s the issue of OPEC’s “exit strategy” and how they reintroduce volumes currently withheld from the market and whether geopolitical disputes or the draw of higher prices could undo the present level of cooperation and compliance. The Russians seem to be worried about prices rising too fast and encouraging too much shale, which could impinge on Russian expectations for their own capacity growth in 2019–2020. The Saudis undoubtedly worry about that too but are more likely focused on the goal of reducing the global inventory overhang across 2018, a period more applicable to the expected initial public offering of Saudi Aramco.

And just as reportedly there was no consensus at the workshop on the level of US shale growth in 2018–2019, research analysts across the industry also remain divided on outcomes and timing. The November 30 OPEC meeting admittedly sustained higher prices and happy days for producers, but longer term, a cautionary note is warranted. Despite the extension of the official agreement to the end of 2018, if US shale proves more robust than current expectations or demand disappoints, a midcourse adjustment could be announced next summer when the ministers convene in Vienna on June 22.

Adam Sieminski holds the James R. Schlesinger Chair for Energy and Geopolitics at the Center for Strategic and International Studies. Frank A. Verrastro is a senior vice president and trustee fellow at CSIS. Sarah Ladislaw is a senior fellow and director of the CSIS Energy and National Security Program. Edward Chow is a senior fellow with the CSIS Energy and National Security Program.

Should US exporters target China for shipments of export cargo and import cargo in international trade?

How Well-Off Is China’s Middle Class?

Over the past several decades,‭ ‬China’s economic development has lifted hundreds of millions of Chinese out of poverty and resulted in a burgeoning middle class.‭ ‬Middle class households typically have enough income to satisfy their primary needs‭ – ‬food,‭ ‬clothing,‭ ‬and shelter‭ – ‬with some disposable income left over for additional desired consumption and savings.‭ ‬In‭ ‬2002,‭ ‬China’s middle class was only four percent of its population.‭ ‬A decade later this number had climbed to‭ ‬31‭ ‬percent,‭ ‬constituting over‭ ‬420‭ ‬million people.‭ ‬China’s growing middle class presents an array of new economic opportunities,‭ ‬but also poses significant political and demographic challenges.

Defining China’s Middle Class
China’s ongoing development has created new economic opportunities in its cities,‭ ‬prompting hundreds of millions of rural Chinese to migrate to urban centers.‭ ‬In just a few decades,‭ ‬China’s urban population skyrocketed from‭ ‬19‭ ‬percent of the total population in‭ ‬1980‭ ‬to‭ ‬56‭ ‬percent in‭ ‬2015.

As Chinese workers have flocked to cities,‭ ‬wages have grown substantially,‭ ‬averaging an‭ ‬11‭ ‬percent increase from‭ ‬2001‭ ‬to‭ ‬2015.‭ ‬Rising wages have led to a steady increase in China’s Gross National Income‭ (‬GNI‭) ‬per capita,‭ ‬which now stands at‭ ‬$13,300.‭ ‬This figure falls between the per capita income of other developing countries like South Africa‭ (‬$12,100‭) ‬and Brazil‭ (‬$14,100‭)‬,‭ ‬but is significantly lower than the‭ ‬$37,900‭ ‬average of OECD economies.

A greater demand for labor in China’s coastal cities has disproportionately driven urbanization in eastern provinces,‭ ‬which has exacerbated significant regional differences.‭ ‬China’s coastal provinces often boast higher per capita income levels than inland provinces even after taking into account the rural-urban income gap.‭ ‬For example,‭ ‬per capita income among urban residents in the coastal province of Jiangsu is‭ ‬40,152‭ ‬yuan‭ (‬$6,043‭) ‬compared to just‭ ‬26,743‭ ‬yuan‭ (‬$4,025‭) ‬for urban dwellers in the landlocked province of Guizhou.‭ ‬China’s major cities‭ – ‬particularly Beijing,‭ ‬Tianjin,‭ ‬and Shanghai‭ – ‬have among the highest levels of Gross Domestic Product‭ (‬GDP‭) ‬per capita in the country‭ (‬each at around‭ ‬$30,000‭)‬,‭ ‬but are still well below those in developed-economy cities such as New York at‭ ‬$69,900‭ ‬or Tokyo at‭ ‬$43,700.

Importantly,‭ ‬there is no standard statistical definition of a middle-class level of income,‭ ‬but some metrics use bands to distinguish between several different income groups.‭ ‬For instance,‭ ‬the Chinese government defines incomes ranging from‭ ‬60,000‭ ‬to‭ ‬500,000‭ ‬yuan per year‭ (‬$7,250‭ ‬to‭ ‬$62,500‭) ‬as middle class.‭ ‬McKinsey uses a range of‭ ‬75,000‭ ‬to‭ ‬280,000‭ ‬yuan‭ (‬$11,500‭ ‬to‭ ‬$43,000‭) ‬per year.‭ ‬To facilitate cross-country comparisons,‭ ‬the World Bank uses a dollar-per-day amount expressed in purchasing-power-parity‭ (‬PPP‭) ‬dollars.‭ ‬In‭ ‬2015,‭ ‬Pew Research Center expanded this metric to include four additional income levels.

Since the early‭ ‬2000s,‭ ‬China’s middle class has been among the fastest growing in the world,‭ ‬swelling from‭ ‬29‭ ‬million in‭ ‬1999‭ ‬to roughly‭ ‬421‭ ‬million in‭ ‬2013.‭ ‬Compared to other large,‭ ‬emerging market countries this growth is particularly noteworthy,‭ ‬as Mexico’s middle class only grew from‭ ‬19‭ ‬to‭ ‬34‭ ‬percent‭ (‬19‭ ‬to‭ ‬42‭ ‬million‭) ‬and Indonesia’s only grew from‭ ‬1‭ ‬to‭ ‬10‭ ‬percent‭ (‬2‭ ‬to‭ ‬24‭ ‬million‭) ‬over the same time period.

Most of China’s middle-class growth has occurred within the lower-middle income band.‭ ‬China’s middle-class share of‭ ‬31‭ ‬percent of its population is similar to that of the Netherlands‭ (‬32‭ ‬percent‭)‬,‭ ‬but differences emerge when breaking down the middle class into its lower and upper echelons.‭ ‬In China,‭ ‬75‭ ‬percent of the middle class falls into the lower income category,‭ ‬while in the Netherlands this figure is only‭ ‬7‭ ‬percent.‭ ‬Nevertheless,‭ ‬the emergence of a strong middle class may offer an opportunity for greater political participation for a large segment of the Chinese population whose primary needs are now satisfied.

Spending Habits Of The Middle Class
The Chinese middle class is beginning to behave similarly to its counterparts across the world by spending income on a range of goods and services.‭ ‬Middle class spending growth has been primarily driven by consumers in the upper-middle income band,‭ ‬which have a significant amount of disposable income.‭ ‬For instance,‭ ‬passenger vehicle sales in China have experienced growth for‭ ‬26‭ ‬straight years,‭ ‬with‭ ‬23.9‭ ‬million cars being sold in‭ ‬2016.‭ ‬For reference,‭ ‬U.S.‭ ‬consumers bought‭ ‬17.5‭ ‬million cars in‭ ‬2016‭ ‬and Brazilians purchased just‭ ‬2.5‭ ‬million automobiles.

Higher incomes have also enabled consumers to be better connected.‭ ‬Since‭ ‬2006,‭ ‬internet users and mobile phone subscriptions have skyrocketed.‭ ‬China’s internet penetration rate has jumped by a factor of five since‭ ‬2006‭ ‬when it was at just‭ ‬10.5‭ ‬percent,‭ ‬meaning that in‭ ‬2016‭ ‬over half of the Chinese population has access to internet.‭ ‬This number significantly trails the OECD internet penetration rate of‭ ‬77‭ ‬percent,‭ ‬but is also considerably higher than India’s rate of‭ ‬26‭ ‬percent.‭ ‬Notably,‭ ‬internet penetration rates are significantly higher in China cities.‭ ‬For instance,‭ ‬both Beijing and Shanghai have internet penetration rates around‭ ‬75‭ ‬percent.‭ ‬Online shopping has also increased with E-commerce accounting for‭ ‬15‭ ‬percent of total private consumption in‭ ‬2015‭ – ‬up from‭ ‬3‭ ‬percent in‭ ‬2010.‭ ‬Enhanced connectivity may also provide members of the middle class with an improved means to advocate for social issues through various digital platforms.

Greater economic means have also created new educational opportunities.‭ ‬Annual enrollments rates in Chinese higher education grew from about‭ ‬5.5‭ ‬million in‭ ‬2006‭ ‬to almost‭ ‬7.5‭ ‬million in‭ ‬2015‭ – ‬an increase of‭ ‬35‭ ‬percent.‭ ‬Students are also flocking overseas for education.‭ ‬Annual outbound students climbed from about‭ ‬285,000‭ ‬in‭ ‬2010‭ ‬to over‭ ‬520,000‭ ‬in‭ ‬2015‭ – ‬with most leaving to study in South Korea,‭ ‬the United Kingdom,‭ ‬Australia,‭ ‬and the United States.‭ ‬As of‭ ‬2015,‭ ‬China had over‭ ‬790,000‭ ‬students studying abroad at the tertiary level,‭ ‬more than the next eight countries combined.‭ ‬By comparison,‭ ‬234,000‭ ‬Indian and‭ ‬116,000‭ ‬German students studied abroad in the same year.

Chinese are also traveling with increased frequency,‭ ‬as evidenced by a rise of over‭ ‬185‭ ‬percent in annual domestic trips over the last decade.‭ ‬Over the same period,‭ ‬annual spending by Chinese travelers outside the mainland grew by over‭ ‬1100‭ ‬percent‭ – ‬soaring from‭ ‬$20‭ ‬billion to over‭ ‬$250‭ ‬billion‭ – ‬with Hong Kong,‭ ‬Macau,‭ ‬and Taiwan the top destinations.‭ ‬Chinese are also traveling further afield to locations like Thailand,‭ ‬South Korea,‭ ‬and the Philippines.‭ ‬Over roughly the same period,‭ ‬tourism spending abroad by U.S.‭ ‬citizens grew by‭ ‬39‭ ‬percent to‭ ‬$148‭ ‬billion and spending by E.U.‭ ‬citizens grew by only‭ ‬8‭ ‬percent to‭ ‬$382‭ ‬billion.

China Outbound Tourism
Although consumer financing instruments such as credit cards,‭ ‬mortgages,‭ ‬and automotive loans,‭ ‬which are more commonplace in upper-income countries,‭ ‬are on the rise in China,‭ ‬the savings habits of Chinese consumers have yet to reflect those of their foreign counterparts.‭ ‬Chinese households save a greater share of their income than households in other major economies.‭ ‬As of‭ ‬2015,‭ ‬the average Chinese household saved about‭ ‬40‭ ‬percent of its income,‭ ‬the highest of any major economy and in stark contrast with savings rates of‭ ‬5.2‭ ‬percent and‭ ‬1.8‭ ‬percent for the U.S.‭ ‬and Japan,‭ ‬respectively.‭ ‬These saving habits are in part a necessity due to lower levels of social insurance and were historically promoted by the Chinese government as it set up state-owned banks and postal savings.‭ ‬Today households cite family,‭ ‬investment,‭ ‬and retirement as top reasons for saving money.

Asset allocation in China is also different than other countries.‭ ‬Chinese households keep a greater proportion of their wealth in their home,‭ ‬averaging‭ ‬74‭ ‬percent compared to‭ ‬51‭ ‬percent in the Euro area.‭ ‬Moreover,‭ ‬China has an above average home ownership rate of‭ ‬87‭ ‬percent compared to‭ ‬67‭ ‬percent in the U.S.‭ ‬Its household debt to GDP ratio is similarly lower at just‭ ‬41‭ ‬percent compared to‭ ‬80‭ ‬percent for the U.S.

Social Challenges Of The Middle Class
China’s middle class is forecast by McKinsey‭ & ‬Company to reach‭ ‬550‭ ‬million by‭ ‬2022‭ ‬and comprise‭ ‬75‭ ‬percent of urban households.‭ ‬This continued expansion of the middle class presents a host of new environmental,‭ ‬demographic,‭ ‬and social challenges.

The increased consumption levels of the middle class have contributed to environmental stresses.‭ ‬Rising vehicle purchases,‭ ‬higher gasoline consumption,‭ ‬and urban sprawl is resulting in higher CO2‭ ‬emissions and elevated levels of air pollution.‭ ‬Dietary preferences have also shifted.‭ ‬A rise in animal protein consumption among the middle class has caused an increase in the intensity of agricultural production and placed a considerable strain on the environment.

This shift in middle-class diets and the sedentary lifestyle often associated with higher income occupations has led to an increase in healthcare costs.‭ ‬Diseases that are of the chronic,‭ ‬non-communicable variety are on the rise in China.‭ ‬These same diseases characterize the populations of developed countries and are often expensive to treat.‭ ‬From‭ ‬2004‭ ‬to‭ ‬2014,‭ ‬healthcare expenditure per capita in China increased by over‭ ‬400‭ ‬percent.

Healthcare concerns are further compounded by the fact that China’s population is aging.‭ ‬China’s age pyramid is in the process of inverting,‭ ‬with its dependency ratio expected to increase from‭ ‬36.6‭ ‬percent in‭ ‬2015‭ ‬to‭ ‬69.7‭ ‬percent in‭ ‬2050.‭ ‬Without vibrant working-age adults to support older generations,‭ ‬the rising social security and healthcare costs of older,‭ ‬retired family members is expected to increasingly burden Chinese households.

Inequality also poses a challenge for China.‭ ‬China’s Gini coefficient,‭ ‬a measure of a country’s income inequality ranked from‭ ‬0‭ (‬perfect equality‭) ‬to‭ ‬1‭ (‬maximal inequality‭)‬,‭ ‬has almost doubled from‭ ‬0.28‭ ‬in the‭ ‬1980s to between‭ ‬0.53‭ – ‬0.55‭ ‬in‭ ‬2015,‭ ‬considerably higher than that of the U.S.‭ ‬0.39‭ ‬or Japan’s‭ ‬0.33.‭ ‬While the rise in inequality partially speaks to China’s previous economic impoverishment,‭ ‬it also reflects the imbalanced growth in the Chinese economy.

The government has taken some actions to strengthen China’s social safety net to better handle a range of social issues.‭ ‬For example,‭ ‬Beijing increased average pensions by‭ ‬275‭ ‬percent from‭ ‬2006‭ ‬to‭ ‬2015‭ ‬and also introduced a more general pension that covers workers not participating in the formal economy.‭ ‬Additionally it has extended healthcare coverage to urban non-workers,‭ ‬raised the minimum wage in fourteen provinces and major cities,‭ ‬and passed measures to expand unemployment insurance to migrant workers where previously their benefits would not follow their move to a new city.

Overall government expenditures on social spending rose to nine percent of GDP in‭ ‬2012‭ ‬from‭ ‬6‭ ‬percent in‭ ‬2007.‭ ‬While significant,‭ ‬this is noticeably lower than the OECD average of‭ ‬22‭ ‬percent.‭ ‬Social welfare reform is also part of the government’s attempt to spur middle class spending and reduce high savings rates.‭ ‬Other measures designed to encourage middle-class spending include raising the interest rate on deposits and lowering taxes.

China's infrastructure initiative aims at genrating more shipments of export cargo and import cargo in international trade.

Global Logistics: President Xi’s Belt and Road Forum

China’s biggest diplomatic event of the year is on May 14–15, when President Xi Jinping will welcome leaders from 28 countries and delegates from 110 countries at the Belt and Road Forum in Beijing.

The Center for Strategic and International Studies put together the following Q&A to explain the initiative and the forum.

What is the Belt and Road initiative?

Announced in 2013, the Belt and Road initiative (formerly known as One Belt, One Road, or OBOR) aims to put China at the center of global economic affairs. It consists of two main components: an overland Silk Road Economic Belt connecting China with Central Asia and beyond, and an ocean-based 21st Century Maritime Silk Road to China’s south. Functionally, the initiative aims to improve hard infrastructure, soft infrastructure, and even cultural ties. Geographically, it includes roughly 65 countries comprising about 70 percent of the world’s population. Economically, it could involve Chinese investments approaching $4 trillion. The scope and scale of the initiative are somewhat elastic, but all signs point to an ambitious and consequential endeavor: a future where all roads lead to Beijing.

What does Xi hope to accomplish at the forum?

The Belt and Road initiative is Xi’s signature foreign policy effort. Following on from his meeting last month in Florida with President Donald Trump, the forum represents the next way station in a series of carefully choreographed events designed to burnish Xi’s international leadership credentials and showcase his domestic strength on the road to the 19th Party Congress in the fall, where he hopes to recast the new Politburo lineup in his own image and further establish his position of primacy within the leadership. The forum also will provide Xi with a stage for tweaking the overall vision—as well as laying out some new specific projects—of the initiative after what is widely acknowledged to have been a slow and uneven start. He likely hopes, for example, to demonstrate how the initiative can serve as an integrative platform for coordinating China’s alphabet soup of initiatives—such as the Shanghai Cooperation Organization (SCO), the Brazil, Russia, India, China, and South Africa (BRICS) forum, and the Forum on China-Africa Cooperation (FOCAC)—which were begun under his predecessors but have had little to show in terms of concrete accomplishments.

How are other countries in the region and beyond responding?

The Belt and Road has elicited a range of interest, competition, and caution. Reactions are strongest within Asia, which has enormous infrastructure needs. According to the Asian Development Bank, developing Asia must spend $26 trillion by 2030 to maintain its growth, eradicate poverty, and respond to climate change. Many of Asia’s smaller economies have been eager to cooperate with the Belt and Road, particularly to attract infrastructure investment as they aim to develop further and grow into hubs along emerging trade routes. For similar reasons, there are also eager participants in Africa, South America, and some parts of the Middle East.

But Asia’s smaller economies are not limiting their options, and many are also tapping into competing initiatives. Indeed, China is not the only country with big connectivity plans. Japan has launched the Partnership for Quality Infrastructure, a $200 billion, five-year effort that prioritizes east-west connections, particularly in Southeast Asia. India is primarily focused on improving its internal connectivity but has invested in a few strategic projects beyond its borders. Russia’s Eurasian Economic Union covers much of the territory through which overland routes between China and Europe must pass, and President Vladimir Putin will be attending the forum. South Korea, Turkey, and others are advancing their own visions for the region.

Europe and the United States have been more cautious. Reactions within Europe vary widely, with Eastern European states generally more eager to participate in the Belt and Road than their Western neighbors. To date, Prime Minister Paolo Gentiloni of Italy is the only leader from a Group of Seven (G7) country expected to attend the forum. France and Germany are expected to send senior officials. The United States is not expected to send a high-profile representative.

The primary reasons for caution are threefold. First, there are concerns about standards, particularly whether new projects will adhere to adequate environmental and social safeguards. The Chinese-backed Asian Infrastructure Investment Bank (AIIB) claims it will apply existing best standards but more efficiently; AIIB president Jin Liqun has said the bank will be “lean, clean, and green.” Second, there are economic concerns about unsustainable debt and financial risks, given China’s desire to export its overcapacity, the challenging nature of large infrastructure projects, and the difficult geographic and political environments the Belt and Road aims to traverse. Finally, there are strategic concerns about the Belt and Road’s drivers and implications. Railways, ports, and other infrastructure projects are dual use, leading to speculation that the real value in some economically questionable projects is their military utility. Over the longer term, even more consequential would be the economic power and influence that would accrue to China if the Belt and Road’s ambitions are fully realized.

How does the Belt and Road impact US interests?

As an Asia-Pacific power, the United States has significant economic and strategic interests at stake in the region’s infrastructure push. US infrastructure companies, including related service providers, have an opportunity to tap into this dynamic market and grow with it. Along with US officials, they can bring experience setting standards and safeguards that will help Asia connect in a more inclusive and sustainable way. Strategically, the United States has an interest in ensuring that no single entity dominates the Eurasian landmass, where a majority of the world’s people and economic power resides and where unrestrained competition led to global conflict twice during the last century.

Christopher K. Johnson holds the Freeman Chair in China Studies, Matthew P. Goodman holds the Simon Chair in Political Economy, and Jonathan E. Hillman is a fellow with the Simon Chair and director of the Reconnecting Asia Project at the Center for Strategic and International Studies (CSIS) in Washington, DC. CSIS does not take specific policy positions. All views, positions, and conclusions expressed here are solely those of the authors.