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China’s Communist government, through its Belt and Road Initiative, is pouring US$1-trillion into building railways, ports and pipelines in what many experts regard as a state-directed effort to bolster Chinese political influence and extend its military reach from Asia to Africa.JASON LEE/Reuters

Canada’s overseas development finance arm is joining forces with a U.S. government agency that is being set up to act as a counterweight to China’s Belt and Road Initiative, a state-sponsored foreign-investment scheme by Beijing.

The U.S. government’s Overseas Private Investment Corp. (OPIC) says in a statement the agreement it signed with both Canada’s FinDev and the European Union last month creates an alliance of development finance institutions that will enhance co-operation and underscore their collective commitment to "providing a robust alternative to unsustainable state-led models.”

The statement didn’t name China but the biggest example of state-led foreign development in the world today is Beijing’s overseas investment spree known as the Belt and Road Initiative.

China’s Communist government, through its Belt and Road Initiative, is pouring US$1-trillion into building railways, ports and pipelines in what many experts regard as a state-directed effort to bolster Chinese political influence and extend its military reach from Asia to Africa. Critics in the West have accused China of ensnaring developing countries by offering them immense loans for questionable infrastructure projects that the countries will struggle to repay.

OPIC is a U.S. government agency that encourages American businesses to invest in emerging markets.

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Last fall, U.S. President Donald Trump signed a bill into law that will transform OPIC into the U.S. International Development Finance Corp. Its US$60-billion budget for investments, lending and political-risk insurance will be double that of OPIC’s previous budget. Vice-President Mike Pence in an October speech described the new U.S. entity as part of an effort to give “foreign nations a just and transparent alternative to China’s debt-trap diplomacy.”

Angela Rodriguez, spokeswoman for Development Finance Institute Canada, also known as FinDev, which signed the memorandum of understanding with OPIC and the European Development Finance Institutions in April, played down the OPIC statement about offering an alternative to “state-led” overseas development. She said FinDev has signed a number of agreements with foreign-development finance institutions such as African Development Bank Group.

Ms. Rodriguez said the Canadian government’s development finance arm has a very clear mandate: to encourage private-sector investment in Latin America, the Caribbean and sub-Saharan Africa in businesses that operate in areas including renewable energy, waste management and water management. It is being funded with $300-million from the retained earnings of Export Development Canada, the federal government’s export credit agency.

“Each of the signatories to this agreement has their own objectives and their own mandate,” Ms. Rodriguez said. “Although each one of the development finance institutions have different goals, there are common goals that we share.”

Canada, the United States and the EU development finance institutions want to encourage private investment, rather than state investment, in overseas development.

Jonathan Miller, a senior fellow with the Japan Institute of International Affairs, said the three-way deal between Canada and the United States and the European Union matches what the Americans are doing with other partners. Last November, the United States struck a similar alliance with Japan and Australia, announcing their venture was intended to “provide an alternative to state-directed initiatives that can leave developing countries worse off.”

He described the U.S. development financing push as a “clear counter to the Belt and Road Initiative” and said that Canada’s participation offers Ottawa a quiet way to support Washington’s efforts.

Mr. Miller said U.S. allies are eager to encourage the Trump administration to remain engaged abroad, particularly after the United States pulled out of the Trans-Pacific Partnership accord, a free-trade deal intended to lay down Western-style trading rules in Asia-Pacific. So it would be hard for Canada to reject a U.S. invitation to work together on international development finance. “It’s an impossible one to turn down because of our interests in keeping the U.S. engaged,” Mr. Miller said.

Guy Saint-Jacques, a former Canadian ambassador to China, said Canada’s involvement in the U.S. initiative is a geopolitical wake-up call.

“It is now part of a bigger realization that collectively we have to be a lot more attentive and concerned about what China is trying to do internationally,” he said. “What is important is the signal that Canada is sending that we want to be more active ourselves. There are also business implications and we want be involved and we don’t want to be cut out of projects.”

Mr. Saint-Jacques said the United States, European Union and Canada have been slow to recognize that China is using its Belt and Road projects to expand the country’s political and economic influence and diplomatic leverage.

India and Japan were far quicker to realize the potential threat with Chinese support for military-use projects in Pakistan and Beijing investment in countries that historically were close to Japan, he said.

The European Union became alarmed after China made inroads into the EU trading bloc, with some European leaders fearing Beijing’s activities could derail unity among member states.

Last year, Greece signed on to the Belt and Road program, after years of relying on Beijing to help ease its own financial crisis. Last month, Italy, which is facing its third recession, became the first Group of Seven country join the scheme in a bid to boost exports and upgrade its port facilities.

It is not clear whether Canada’s participation in the U.S.-led development alliance closes the door to Canadian companies that want to take part in the Belt and Road program.

The United States has been particularly critical of the Belt and Road Initiative. Last week in London, Secretary of State Mike Pompeo slammed China for peddling “corrupt infrastructure deals in exchange for political influence” and using “bribe-fuelled debt-trap diplomacy.”

At a 150-country summit in Beijing last month, China sought to tackle concerns that its opaque financing could lead to unsustainable debt and that it aims to promote Chinese influence more than development, promising to make the program sustainable and green and follow international standards, especially regarding debt.

With a report from Reuters

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