COVID19: A Long Term Socio-Economic Issue for China’s Belt & Road Initiative?

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Op/Ed By Andre Wheeler

Stories of the economic impact of the Coronavirus are plentiful, with daily reports of financial and market meltdown. Panic buying and strained supply chains through travel and border restrictions has seen global trade contract at alarming rates. Trying to balance economic and health priorities has unfortunately seen a polarisation of world opinion, with blame for the virus being apportioned along nationalistic lines. What is obvious from the numerous commentaries is the greater focus on the human cost of the virus is making people rethink the geo-political make up of the global market.

There is now a deep questioning of open borders and what the benefits of free trade with open markets. Many now argue that offshoring of manufacturing, particularly to Asia, has exposed the West unnecessarily to risk. Increasingly being questioned are consequences associated with the West’s open capitalism approach to that of the China model espoused in their global corporate governance model under the banner of the BRI.

In a sense, the economic debate is more tangible in that it can be measured. It also shows the success of the BRI in integrating China’s integration into global supply chains. You cannot obfuscate data showing the decline in all sectors of the global economy, with reports highlighting the impact on tourism, manufacturing, services and supply chain. The available data and commentaries corroborate the global economic cost of the virus on the global economy being US$1.1 trillion dollars. Economic indicators supporting this narrative include a decline in industrial activity with companies like Samsung moving manufacturing plants to Vietnam in order to maintain operational capacity.

With the virus set to wipe approximately 1% from 2019’s total global trade volume (1.7 million teu) as shipping lines withdraw services out of the container market, the impact on supply chain is very real. Consider that 80% of world trade / supply is conducted through ocean freight. Further supply chain constraints have been caused by the decline in Asia to North Europe container shipments by a third. This potentially could reduce container cargo volumes through Chinese ports, by 6 million teu in the first quarter of 2020. Exacerbating the situation are the number of airlines reducing or suspending flights in and around China. This has placed pressure on getting parts to manufacturing plants, reducing capacity and creating the conditions for product shortages like smart phones and motor vehicles.

It is expected that these constraints will lower China’s GDP growth to below 5%. This is an important indicator for the global economy as China’s contribution to global GDP is 16%.

However, when it comes to the human cost, it is more difficult to quantify. This begins to highlight some of the weaknesses in China’s model of State Capitalism. There does not appear to be enough transparency in the level of infection or deaths associated with the virus. Reports on the level of infection and death is to a large extent, driven by the media narrative intent i.e. anti-China media reports higher levels of contagion. It also raises questions around the efficacy of the development model underpinning the BRI, namely the use of migrant labour from rural parts to resource manufacturing plants. The convergence of COVID19 and the Lunar New Year resulted in stranded productive labour as Cities and transport were shut down to contain the virus.

The human impact highlights the single biggest issue within the China BRI economic model and raises the prospect that irreparable damage is being done to the BRI. The consequence of the virus has morphed from socio- economic considerations to that of questioning the geo-political intent of the BRI. Central to the debate is the question of trust. The corporate values incorporated into the BRI formulation spoke of a shared human destiny that would achieve international win-win partnerships. The people to people objectives would deliver these outcomes by helping developing countries leapfrog poverty through economic development that created local employment and participation through mutual consultation, co-building and sharing. Many of the BRI projects were signed up based on these principles.

However, COVID19 has brought this intent into question. Essentially it now raises questions around the transparency and equality of gains pronounced by the BRI. Trust in the system is at an all time low. Supply chain disruptions has created a greater awareness of BRI projects labour resourcing, equipment and machinery being sourced from China. With 133 countries imposing entry restrictions there affecting countries such Indonesia, Malaysia and Cambodia, these disruptions have seen major project delays being announced. But scrutiny has shifted to a closer look as to the nature of these delays.

Indonesia and China Railway International Group’s US$6bn high speed rail project is an example of the deep questioning around the BRI’s declining trust dividend. Whilst less critical parts of the project can still be done, the essential elements cannot. The reason for this is not only are critical equipment, machinery and parts not available but the project employed 100 Chinese in management and key positions. These employees are now quarantined in China. Local communities are now asking why there are no locals employed in these positions that would enable progress? Why no local equipment suppliers? The situation has enabled detractors of the BRI to exploit these concerns, using the low local content as proof that China’s BRI is nothing more than a plan to address China’s over capacity and employment issues. This would make China the chief beneficiary of the BRI, and as the COVID19 virus now highlights, recipient countries, the supplicants.

China has tried to minimise the impact by pointing to the likes of CPEC’s Gwadar port and Qatar’s Lusail Stadium are continuing projects. These examples lose significance when one considers that the essential and critical elements of these projects were already undertaken before the virus took hold.

Whilst the socio-economic impacts are severe, China will recover from these setbacks, just as the world recovered from the annual mutation of Flu and the global financial crisis. However, the same cannot be said for the geo-political fallout that impacts the credibility of the BRI. Detractors of the BRI have taken the opportunity to destabilise China’s efforts. With the BRI at an important crossroad, China seems to have responded by elevating its people to people intervention. This is marketed through China’s increased medical equipment aid to BRI participant countries, such as Italy, as well as Jack Ma’s recent donation of COVID-19 test kits and masks to the USA. Whilst these are tangible actions that demonstrates that their State Capitalism model can deliver the corporate governance values encapsulated in the BRI, they are being done within a context that the current world health pandemic is seen by the West, as originating in China.

The real test comes if soft diplomacy can sell this message in an environment where there is increasing cynicism over China’s intent to allow meaningful local community BRI participation.

We are grateful to Andre Wheeler of Wheeler Management Consulting for contributing this commentary. Please contact him via linkedin.com/in/andre-wheeler-7a9a1a23 or via email at andre@wheelermanagement.com.au

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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

 

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