Both Western nations and China are converging on a miserly point where foreign aid is commercialised and limited, prioritising national self-interest over generosity.

Critics of the Trump administration’s assault on foreign aid warn that it will undermine the United States’ capacity to compete with China. But restructuring and limiting aid to serve narrow, national self-interest has preceded Trump 2.0 and is not confined to the United States. Trump is merely accelerating these priorities.

Western donors have progressively become more like China, slashing their Official Development Assistance (ODA) and commercialising development assistance. And China too has become more like Western donors, slashing international lending for infrastructure megaprojects and tightening governance to reduce risks.

Rather than expanding aid to court the loyalties of developing countries in their ‘New Cold War’, the United States and China are engaged in a miserly convergence. This convergence’s roots lay deep in both sides’ political economies.

For the West, neoliberal strictures are to blame. Post-2008 austerity hammered domestic budgets for foreign aid. And surging estimates of global development financing gaps prevented aid spending from rising to the levels needed. Donors turned to the private sector. The ‘billions to trillions’ agenda, launched in 2015, sought to refashion aid using ‘billions’ of ODA dollars to mobilise ‘trillions’, mainly in private-sector investment into developing countries.

This quickly became the template for practically every international challenge, from climate change to the Partnership for Global Infrastructure Investment — the G7’s answer to China’s Belt and Road Initiative (BRI).

Despite these initiatives, private investors simply are not interested. Private investment into developing nations’ infrastructure has fallen since ‘billions to trillions’ was launched, from US$37 billion per year from 2008–14 to just US$9.3 billion from 2019–22.

Commercialising Development Assistance

While ODA figures appeared to rise over the decade to 2023, they had actually been cut. Austerity-wracked Western states increasingly raided aid budgets for domestic spending on research, healthcare and refugee costs. By 2023, a fifth of ‘overseas’ aid was being spent in this way. Donors covered their retreat by changing the definition of ODA to fudge the figures and inflate their generosity. Nonetheless, in 2024, before Trump’s return to power, ODA fell by over 7 per cent in real terms.

Western donors have also become more China-like by commercialising their development assistance, particularly via development finance institutions like the US Development Finance Corporation and British International Investment. These institutions focus on mobilising private investment, seeking ‘win-win’ outcomes that benefit both donor-state companies and recipients. Masked by commercial confidentiality, development finance institutions have made Western development financing more opaque, undermining environmental, social and governance (ESG) standards that wealthy countries often invoke to signal their superiority over China.

China has been moving in the other direction, albeit from a low base. Beijing’s ESG standards have markedly improved, with 57 per cent of projects enjoying ‘strong de jure safeguards’ and 18 per cent displaying ‘strong de facto ESG risk mitigation’ by 2021, up from two per cent in 2001.

The crisis in China’s predominantly commercial overseas development financing has driven this trend. While Western states largely deliver aid through fiscal allocations, 85 per cent of Chinese development financing involves loans, overwhelmingly at commercial rates. China’s key lenders — policy banks, China Development Bank and Export–Import Bank of China — are mandated to make profits on these loans.

White Elephants

Irrational exuberance, pressure to externalise vast industrial overcapacity and fragmented and weak oversight led to a lending splurge after China’s President Xi Jinping announced the BRI in 2013. Many projects quickly turned sour, with widespread evidence of environmental and social abuses, alongside high-profile ‘white elephants’ attracting accusations of ‘debt-trap diplomacy’. China’s dollar-based lending was also affected by the US dollar’s appreciation, pushing some borrowers into debt distress.

China responded by reining in its overseas lending and tightening governance. Lending for new infrastructure projects — the BRI’s hallmark — fell by over 70 per cent from its 2016 peak to just US$24 billion in 2021. Over half of Chinese lending is now designed to help borrowers service their existing debts — bailing out China’s banks rather than developing countries.

China has collected on its debts ruthlessly, seizing cash collateral and insisting in bruising talks with other creditors that repayments should only be paused or rescheduled to protect its lenders’ balance sheets.

Beijing has covered its retreat through its Global Development Initiative, which promotes less costly and risky, projects.

Increasingly risk-averse, China is unlikely to fill the gap left by USAID’s implosion. Doubtless, China will look to score public relations wins by replacing US aid in some high-profile areas. Beijing spent a meagre US$5.3 billion on ODA-like activity in 2021, compared with US aid spending of around US$64.7 billion in 2023. Like their miserly Western counterparts, Chinese leaders are unlikely to increase aid spending by taxing their own citizens.

Retrenchment is the dominant theme on both sides. However much the West and China may wish to compete for the Global South’s affections, the constraints of their respective political economies limit their offer. Trump’s dismantling of USAID dispenses with even the pretence of generosity. In the much-heralded ‘New Cold War’, developing countries are unlikely to be empowered to pursue autonomous development pathways.

Shahar Hameiri is Professor of International Politics and Australian Research Council Future Fellow in the School of Political Science and International Studies, University of Queensland and Research Associate of the Second Cold War Observatory.

Lee Jones is Professor of Political Economy and International Relations at the School of Politics and International Relations, Queen Mary University of London and Research Associate of the Second Cold War Observatory.

This piece has been sourced from the East Asia Forum of the Australian National University.

Image: Wikimedia