Fixing the Build Act is necessary to counter Chinese hegemony

The Trump administration’s national security strategy calls for consolidating aid programs and making them efficient and effective at U.S. foreign policy. Great idea. Unfortunately, it’s led some on Capitol Hill to propose legislation that will, if anything, make matters worse.

The administration’s initial idea — to establish an U.S. International Development Finance Corporation (DFC) by consolidating several existing programs to promote U.S. investment in developing countries — is a sound one. The hope is to use the DFC to “counter America’s competitors” and provide better alternatives to government-directed initiatives.

{mosads}So the White House pitched a proposal in the president’s FY 2019 budget request to consolidate an existing federal agency, the Overseas Private Investment Corporation (OPIC), and several other development finance activities under one roof to reduce fragmentation, realize budget savings, and support U.S. business. It also wanted the new institution to explicitly support U.S. foreign policy and national security goals, in particular compete with China’s Belt and Road Initiative.

Congress has responded with the Better Utilization of Investments Leading to Development Act, or the BUILD Act. Yes, the BUILD Act would consolidate OPIC and the other entities as proposed by the administration. But it ignores other priorities, such as cutting budgets, supporting U.S. business, and providing an explicit mandate to counter America’s competitors (China, in particular).

In fact, the BUILD Act actually doubles the size of the DFC compared to OPIC and other consolidated programs, permits the U.S. government corporation to support and purchase equity in foreign businesses and state-owned enterprises, and fails to require the DFC to counter China and other U.S. adversaries.

Unless changes are made, the BUILD Act would only create a supersized OPIC. What can we expect from that?

Well, OPIC has this year approved a loan-guarantee project for a Texas company to acquire 104 Starbucks stores and develop 45 additional stores in Brazil and a $20 million loan establish up to eight McDonald’s-branded restaurants in Georgia. That’s great for Starbucks and Brazil and McDonalds and Georgia, but it’s hard to say how that counters U.S. adversaries or advances our strategic interests.

The House Foreign Affairs Committee Build Act improved the BUILD Act in some ways during a recent markup, but not all concerns were addressed. As my Heritage Foundation colleagues James Roberts and Brett Schaefer wrote, “While the new text makes some tweaks to address a few of the concerns raised, most of the serious flaws of the bill remain in place.”

The BUILD Act doesn’t just build a bigger version of OPIC, it makes it even less accountable to Congress. The DFC will have lengthy authorization — seven years in the House bill, and 20 in the Senate bill — to independently direct projects. Moreover, the Senate bill (unlike the House version) allows the DFC to operate without annual appropriations by using fees and other resources to pay for its operations. As a result, Heritage analysts point out, the DFC “would be less subject to regular congressional oversight than OPIC.”

Both Congress and the administration ought to be lauded for taking on a tough task. China’s Belt and Road is a strategic challenge to the U.S. More than a benign economic development program, the manner in which Beijing is implementing the project has become a significant destabilizing force across the Indo-Pacific.

In some cases, the Chinese have developed little more than debt in the countries where they “invest.” In others, they have fueled corruption. Further, the BRI gives the Chinese a wedge to meddle in the foreign policy, internal politics and security affairs of nations in the region. 

The new agency ought to be specifically directed to counter Chinese destabilizing efforts where they significantly impact U.S. strategic interests. In addition, in service to its focus on promoting private-sector development and not displacing private sector options, the DFC should not work in upper middle-income countries, which overwhelmingly have access to international financial markets and have well-developed domestic financial markets, without specific congressional approval based on a foreign policy and national security justification.

Most importantly, the DFC should be accountable to Congress, which should:

• ensure that administrative activities and operations require annual appropriations;
• cut the DFC’s contingent liability to $30 billion from the $60 billion authorized under the BUILD Act;
• reject the provision of the BUILD Act that automatically increases the DFC’s contingent liability according to inflation;
• prohibit the DFC from supporting or partnering with state-owned enterprises; and
• reduce authorization of the agency to a maximum of 3-5 years.

There is no one-size-fits-all instrument to address the challenge posed by the Belt and Road Initiative, and the U.S. needs more flexible tools to work with partner nations such as Japan, Australia and India to support investment that make national security and economic sense.

The DFC could be that tool, but not without some thoughtful and targeted fixes to the Build Act to make it more focused on its national security mission and accountable to the Congress.

James Jay Carafano is a vice president in charge of national security and foreign policy research at The Heritage Foundation.