China’s Belt and Road Initiative – It’s about the Trade Opportunity, Stupid

Posted by

Op/Ed by Chris Devonshire-Ellis

China’s Belt & Road Initiative has come under a great deal of criticism the past 12 months – we estimate about 70% of all articles worldwide written about it are negative. Our weekly “China’s Belt And Road & Beyond” has featured about 1,820 articles about the BRI the past year. Of these, about 95% and 85% of all articles coming from the United States and EU respectively are overly critical. (A complimentary subscription can be obtained here.)

Why is this a concern? Because political scores and disagreements are hindering the ability for one of the main aspects of the Belt & Road being properly heard and identified – increased trade opportunities. This damages the ability for their respective exporters to understand the value of the BRI infrastructure.

Instead of being a balanced discussion, the political debate concerning the BRI has been somewhat biased, lacked concentration of the primary trade issue, and concentrated instead on the US fixation of debt, and the EU about lack of BRI project access. This misses the point, and in doing so it collectively serves up a dis-jointed and overly negative picture of the entire BRI. An example is a recent European Chamber of Commerce report on the BRI. Of Eurocham’s 1,700 members in China, only 20 of those had any experience of bidding for contracts, a total of 3.4%. Yet it was the views of that 3.4% that made up the premise of the reports findings, rather than that of the entire European business community in China.
I wrote about this and what EU businesses should be doing about the BRI in the article European Union Businesses & The Belt And Road Initiative: A Guide To Changing The Modus Operandi And Getting Involved.

Fortunately, at Silk Road Briefing we are able to sift through the political nonsense, highlight the real concerns, and address the trade aspect. As we have stated several times, Cashflow Opportunities Come After Infrastructure Investment China has spend US$500 Billion on Belt & Road Infrastructure. It’s a lot of money, but then borrowing and lending money has never been cheaper the past decade. It makes a lot of fiscal sense to be doing this now.

In terms of China lending to poorer countries – there are simple economic reasons – China can afford to raise capital at lower rates than many smaller nations can, and is providing the low-interest finance than traditional lenders have shied away from. We discussed how this works in the article Typical China Loan Deals To Belt & Road Countries Revealed.

So while the US bangs the drum about China landing poorer countries in debt, and the EU complains about a lack of sovereign respect and inability to have its contractors involved, what has been missing from much of the dialogue has been the larger, and longer term potential impact on trade.

Andre Wheeler, over at Splash 247 comments “The new infrastructure has seen block train trips reaching 8,225 in 2019, facilitating the movement of 725,000 teu along the China-Europe trade corridor. This is a significant increase over 2018, some 36%, with the target of 1 million teu by the end of 2020 firmly set in their eyesight. With the change in subsidy policy, there has been an improvement in container optimisation. Westbound (China-EU) loaded trains are now reported at 98% full, whilst eastbound (Europe-China) loaded trains are at 82% full.”

The World Bank also provides some interesting observations on how the BRI will impact on global trade: “BRI transport corridors will help in two critical ways: by lowering travel times and by increasing trade and integration. Along the corridors, transit times are expected to decline by up to 12 percent. This matters: one day less in transit would increase trade by 5.2 percent. Transit times are also estimated to decrease by an average of 3 percent with the rest of the world, showing that even countries that don’t participate in the BRI will benefit from roads, rails, and ports built in BRI corridor economies.
We estimate trade could grow from between 2.8 and 9.7 percent for BRI corridor economies, and between 1.7 and 6.2 percent for the world. Not all countries would see positive trade effects, but aggregate effects would be positive—because all countries would experience a decline in trade costs. Sectors that are time-sensitive (such as fresh fruits and vegetables) or require time-sensitive inputs (such as electronics and chemicals) will benefit the most. Low-income countries could see a 7.6 percent increase in foreign direct investment.”

The Bank also goes on to suggest that things will only improve in terms of trade capability because of the BRI infrastructure, stating “Trade in BRI corridor economies is estimated to be 30 percent below potential, and FDI is an estimated 70 percent below potential. If fully implemented, BRI transport projects could increase trade between 1.7 and 6.2 percent for the world, increasing global real income to 2.9 percent.”

There are some caveats, and these include issues that both China and the EU must address with Russia and the Eurasian Economic Union (EAEU), and these have to do with systematic reform with customs unions: “Real incomes for corridor economies could be an estimated two to four times larger if they implement reforms to reduce border delays and ease trade restrictions.”

The good news is that China and numerous other countries are negotiating tariff reductions with the EAEU. The challenge for the EU is to re-balance its political and trade relationships with Russia and China, and to fully address the lack of export drive that negativity towards China’s Belt & Road Initiative brings. At some point, and especially now with Brexit, the EU needs to fill a €420 billion gap in terms of preferential exports it sent to the UK in 2018. It is time for EU business leaders and politicians to fully understand the export and trade value the Belt & Road Initiative provides, and let Washington do the complaining.

Related Reading

 

About Us

Silk Road Briefing is written by Dezan Shira & Associates. The firm provides strategic analysis, legal, tax and operational advisory services across Eurasia and has done since 1992. We maintain 28 offices throughout the region and assist foreign governments and MNC’s develop regional strategies in addition to foreign investment advice for investors throughout Asia. Please contact us at asia@dezshira.com or visit us at www.dezshira.com

 

Leave a Reply

Your email address will not be published. Required fields are marked *