Trump's first step to outcompeting China: Gutting USAID?

According to recent reports, the Trump administration is pursuing a major downsizing and restructuring of U.S. foreign aid institutions, with plans to close USAID and fold it into the State Department to better align foreign assistance with U.S. national interests. One of the key drivers behind this shift? Competing more directly with China’s Belt and Road Initiative (BRI) by transforming aid into a stronger geopolitical tool.

Trump’s proposed overhaul shifts U.S. foreign aid from a humanitarian and development-oriented model to one that more aligns with the administration’s strategic objectives (though those have yet to be fully defined). At the core of this drama, USAID has been gutted and is being restructured as the U.S. Agency for International Humanitarian Assistance, soon to be under the State Department’s control. Its mandate would be narrowed to disaster response, global health, and food security, stripping it of its traditional role in economic development, governance support, and democracy-building.

This shift reprioritizes foreign aid toward short-term strategic leverage over long-term stability and institution-building. This would maintain some level of aid deployment toward areas where the U.S. sees immediate humanitarian needs (in line with its interests). It however reduces engagement in longer-term capacity-building programs that have historically been used to foster stability, economic growth, and investment, especially in conflict-prone and post-conflict societies.

In parallel, the reported administration plan aims to consolidate the Millennium Challenge Corporation (MCC) and the U.S. Trade and Development Agency (USTDA) under the U.S. International Development Finance Corporation (DFC) to create a more investment-driven foreign aid model. The move mirrors China’s development-as-aid approach, but instead of state-backed and state-guided private sector investment, the U.S. would leverage market-driven, private-sector financing for infrastructure, energy, and technology projects in developing countries. Curiously, the types of programs these are likely to push are those previously funded by USAID, including Trump’s 2020 “Clean Network,” which sought give developing countries secure network technology and push them out of China’s tech orbit. Another is the joint USAID and State Department “Transaction Advisory Fund”—the U.S. government’s “rapid response” program which provided financing for project preparation in strategic sectors in the Indo-Pacific, Western Hemisphere, and Africa, in a bid to compete again China’s BRI. These were the tip of the iceberg, but underscore that USAID did help China compete - a point made by Hudson Institute’s Michael Sobolik in his argument about “retooling, not destroying” USAID.

The pitch is that this strategy will position U.S. foreign aid to outcompete China’s BRI by promoting market-driven, private investment-backed solutions. However, the approach comes with tradeoffs—U.S. financial tools may struggle to match the scale and flexibility of China’s state-backed loans, and a heavier reliance on private-sector investment could limit aid accessibility for countries with weaker investment climates, where bilateral government-to-government assistance has traditionally been more effective.

Another key element of the proposal involves shifting politically oriented aid programs—including democracy promotion, religious freedom, women’s empowerment, and anti-human trafficking—under the direct control of the State Department. These programs have long drawn scrutiny and, in some corners of the administration, open hostility. It remains unclear how robustly they will be funded, but placing them under State’s authority could leave them more exposed to political considerations, weakening their independence and perceived neutrality. If democracy and governance programs are increasingly framed as tools of geopolitical competition, recipient governments may view them as extensions of U.S. foreign policy, rather than impartial support for institutional development—undermining their credibility and effectiveness. This is a shift that U.S. competitors like Russia have welcomed, as it would blunt the pressure that U.S.-funded civil society actors place on regimes that violate human rights.

The practical impact of these reforms will vary by region. Daniel Runde argues - at a broad level - the DFC is uniquely positioned to deploy capital in high-risk regions or sectors where private investors hesitate to venture, for example, in sectors such as communications technology, critical minerals, and energy. He points out that investments in these sectors can address global development needs while advancing U.S. strategic interests. However, the emphasis on development may take precedence over rights and governance.

At a regional level, these changes could evolve in a number of ways. In Africa, the U.S. may expand infrastructure and technology investment as a direct response to China’s BRI while reducing engagement in governance and institution-building. In the Middle East, the DFC could become a more prominent vehicle for integrating U.S. investments into GCC infrastructure projects, potentially reinforcing economic partnerships and attracting reciprocal GCC direct investment in the US—Saudi’s Crown Prince already floated the potential for $600 billion investment into the US. In Latin America, a shift toward investment-led aid could increase competition with China for influence in energy and transportation sectors, but it may also force recipient countries to navigate more complex financing arrangements than the concessional loans offered by Beijing (look no further than Trump’s pressure on Panama over the Panama canal).

Overall, this restructuring of foreign aid introduces tradeoffs in terms of influence, flexibility, and long-term development impact. While it may strengthen U.S. ability to counter China’s economic reach, it remains to be seen whether this model will be as effective in fostering durable partnerships and sustainable development outcomes.

At the same time, the immediate consequences for U.S. global influence are severe. The gutting of USAID and the shift away from traditional aid will leave critical gaps in lifesaving programs, from food assistance to global health initiatives. These are gaps China is unlikely to fill, but Beijing will benefit from the narrative win—portraying itself as the more reliable global partner while the U.S. appears to retreat from its traditional leadership role.

The international community may also view this shift as a sign of U.S. disengagement, reinforcing perceptions of America’s declining commitment to global stability and humanitarian responsibility. Regardless of whether the structural changes ultimately enhance U.S. competition with China, the damage to U.S. soft power in the immediate term is a profound and tragic blow to American foreign policy. The erosion of U.S. credibility, trust, and influence in key regions will have lasting effects that may be difficult to reverse, undermining Washington’s ability to shape international norms, build alliances, and project power on the global stage.