Transportation Systems Casebook/China’s Belt and Road

Summary

The Belt and Road Initiative (BRI) is a cross-regional infrastructural initiative unveiled by China in 2013. It has since had global commentary both positive and negative and sparked criticism and support from various political regimes. It is currently as controversial as it is ambitious. Currently, China has spent an estimated $200 billion with Morgan Stanley estimating that by 2027 China would have spent between $1.2- $1.3 trillion on the BRI.[1] China plans to complete this multi-billion dollar initiative in 2049.

Annotated List of Actors

·      Hillary. R. Clinton, U.S. Secretary of State (2009-2013)

·      Xi Jinping, General Secretary of the Chinese Communist Party and President of China

·      Central Committee (of the Chinese Communist Party wrote the comprehensive reform blueprint of the Initiative in November 2013).

·      State Council of the People’s Republic of China. (The chief administrative authority of China)

·      National Development and Reform Commission. (NDRC)

·      Ministry of Foreign Affairs. (China)

·      Ministry of Commerce. (China)

·      Asian Infrastructure Development Bank (AIIB), China-ASEAN Maritime Cooperation Fund, China-Indonesia Maritime Cooperation Fund and Silk Road Fund. These financial institutions lend out loans for infrastructure projects on BRI mostly in the Asia-Pacific region.

·      ASEAN. The Association of Southeast Asian Nations is a regional intergovernmental organization of the member countries that promotes and facilitates economic, political, security, military, educational, and sociocultural integration among its members.

·      Participating countries and international organizations.

Timeline of Events

• Initiative unveiled in September and October of 2013 by Chinese leader Xi Jinping.
• Blueprint of the Initiative was made by the Central Committee with the approval of the State Council in November 2013.
• In March 2015, detailed plans of the BRI were laid out by the National Development Reform Commission (NDRC), Foreign Affairs Ministry and Ministry of Commerce.
• Asian Infrastructure Development Bank although established in 2013 began its operation in December 2015.
• The first and inaugural forum on the Belt and Road Initiative was held in May 2017.
• October 2017, the BRI is added to the Chinese Communist Party’s constitution.
• Second forum on the BRI was held in April 2019.

Clear Identification of Policy Issues

The Chinese Belt and Road Initiative foster regional, economic and international development for about 64% of the World’s population.  This initiative has the following:

Pros:

• Fosters economic development and integration resulting in growth to both developed and developing countries.^[1] This initiative seeks to make this integration a win-win cooperation and prosperity for all.
• Improving upon and influencing current international economic system reforms and architecture.^[2] Having had slow and difficult international economic reforms in decades, China on becoming an emerging power seeks to play an important role in shaping the global economic system.
• Provides hard infrastructure in the form of roads, railways, pipelines ports and others which will lead to a reduction in transportation time and other costs associated with trade.^[3] The creation of the infrastructure will help countries export their products easily to other countries leading to such benefits as earning of foreign currencies, creation of jobs and increased market shares of goods and services.

Cons:

• Although not fully executed, the BRI faces certain challenges, criticisms and oppositions. Some of the major challenges of the BRI stems from the risk associated with how broad and ambitious the BRI is and also based on political values of participating countries as against that of the Chinese. Some of these challenges, criticisms and opposition include:
• Lack of information and transparency of BRI investments. Some of the BRI investments have the requirement that they can only be awarded and undertaken by Chinese contractors.  Contractors use this requirement as a basis to not disclose information which allows them the opportunity to inflate the costs of infrastructure. This has led to over-inflated cost and increase debts on the part of borrowing countries partaking in the building of infrastructure. This has then led to mistrust and opposition and even withdrawal from the BRI in some countries.^[4]
• The BRI is considered as neocolonialism or a ploy by China to dominate Asia and trade. Given the low-interest loan rates accessible to participating countries in developing the infrastructure for the BRI, critics see this as a way of China creating unsustainable debt burdens for its neighbors and potentially taking control of regional choke points.
• Excess exports by China are another sign that raises questions and criticisms on the dominance of China on trade. Some Chinese experts are of the view that one of the benefits of the BRI investments is to be able to absorb China’s excess capacity which although true could create unfavorable trading terms for other countries. India is one of the countries that see China as using such a ploy.[5]
• The risk of clashes of political values and culture across countries. Since the BRI has a broad and rich mix of political regimes and economic systems such as capitalism, socialism and others, there are bound to be challenges in cooperation and coordination among countries, which may result in delays in the execution of projects. ^[6]
• Difficulty in achieving financial sustainability of cross-country projects. To be able to sustain these cross-country infrastructure projects, the return on investment should outweigh the cost. Most Foreign Direct Investment (FDI) undertaken by the Chinese government and companies have not been profitable. This shows that China does not have lot of favorable outcomes running cross-border projects which makes the profits to be derived from the BRI questionable.[7]

Narrative of the Case

From ancient Silk Road to the Belt and Road Initiative: a historic perspective of transcontinental trade in Eurasia.

The human being has historically been in search of more favorable conditions to live in. This desire has been driving him to explore new destinations and open new routes.

The emergence of cross-continental trade networks in the Eurasian continent date back to the period of the Han Dynasty in China, when the unique Chinese merchandise like silk and spices reached Europe. Trade in silk and related byproducts in the broader Eurasian continent opened small-size trade linkages between and among the regional commercial hubs in the Central Eurasia, and stimulated the growth of medieval cities like Samarkand, Bukhara, Aleppo etc. These small trade linkages emerged into major trade routes connecting China to European markets as transcontinental trade began to evolve. Historians named the network of commercial trade routes connecting China to Europe as the “Silk Road”.

Transcontinental trade between China and Europe was flourishing until Constantinople – the capital city of Byzantine Empire and the major trade hub on the crossroads of Europe and Asia, fell to Ottoman Empire in 1453. Constantinople’s fall dramatically changed the geopolitics in the broader Eurasian continent and stimulated the European explorations of alternative trade routes to China.[1]

Although, the commerce in the city re-established following the conquest and Istanbul^[2] regained its dominance over transcontinental trade routes shortly, overland trading eclipsed by the exploration of new maritime routes.[3] Improvement in technology which could support long maritime journeys, as well as significant scientific changes about the understanding of the World in late fifteenth century would encourage the Europeans to find new ways for trade with China, avoiding trade middlemen of Central Asia and then less friendly Turkish control of the overland trade routes.

Throughout the history wars and geopolitics significantly shaped and reshaped the Eurasian transcontinental trade routes on micro and macro levels. Decline of the overland trade via Silk Road had mirrored onto the development of the trade hubs in Eastern China, Central Asia and Caucasus. Only in eighteenth century the Silk Road region regained its strategic importance as it had become the intersection of three major geopolitical powers-Russian, British and Chinese empires – now mostly from cultural and archeological point of view.[4] 

Establishment of Russian dominance over the Central Eurasian region and the Caucasus in early nineteenth century and emergence of the Soviet Union in 1920s significantly affected the flow of people and goods through the Silk Road.

The collapse of the Soviet Union in 1991 opened unique opportunities for the regional trade, integration and re-emergence of the ancient Silk Road, as this region become attractive again for foreign investments. In 1993, the European Union introduced the “Transport Corridor Europe-Caucasus-Asia” (TRACECA) program to develop transport corridor from Europe to China, via the Black Sea, the Caucasus, the Caspian Sea and Central Asia.[5] Central Asia and the Caucasus has significantly enjoyed the Western political and economic support until recently. On July 20, 2011, in Chennai, India, U.S. Secretary of State Hillary R. Clinton laid out the United States’ vision of the new Silk Road and the U.S. support to re-establishing the “international web and network of economic and transit connections” in Eurasia. The U.S. policy concerning the trade and transit connections in the Central Eurasia would later be dubbed as the New Silk Road Initiative.^[6]

In 2013, in the light of the NATO’s (North Atlantic Treaty Organization) gradual withdrawal from Afghanistan, as well as the U.S.’ active engagement with the Central and South Asian countries to forge the regional integration, China introduced the “Belt and Road Initiative” – a new transcontinental integration policy which would stimulate closer economic ties and deepen cooperation in the greater Eurasian region – but this time, under Chinese dominance.

Belt and Road Initiative as an economic tool for the integration of regional economies

Officially, the BRI was introduced by the Paramount leader of the People's Republic of China Xi Jinping during his visits to Kazakhstan in September 2013 and to Indonesia in October 2013. The multi-billion dollars initiative which covers 71 regional economies, including China involves two major components: Silk Road Economic Belt and the New Maritime Silk Road.

In his speech at the Nazarbayev University in Kazakhstan, Chinese leader Xi Jinping proposed a new integration policy to improve the transcontinental connectivity and cooperation by building “economic belt along the Silk Road” which would span from the Pacific to the Baltic Sea.[7]

A month later, Chinese leader Xi Jinping during his speech before the Indonesian Parliament introduced the New Maritime Silk Road Initiative, which envisages strengthening the China-ASEAN maritime cooperation and investments through the China-led China-ASEAN Maritime Cooperation Fund and China-Indonesia Cooperation Fund.[8]

For the implementation of this initiative China has signed intergovernmental agreements and memorandums of understanding with number of countries trying to bind the economies to the emerging transcontinental network. However, the BRI geography still remains debatable due to lack of integrated transportation linkages, disparity in regional economic development and huge cost burden that the initiative can put over smaller economies.

According to the RAND Corporation report, poor development of overland transportation networks, particularly rail connection between neighboring countries significantly affects the regional trade. Rail connection and harmonization of border-crossing processes are of the greatest importance for the trade facilitation in the Central Eurasian region as the 25% of BRI countries in this region are landlocked, thus are heavily depended on the rail communication. The RAND Corporation estimates with regard to the correlation of rail connection to the level of trade in the BRI region show that adding rail connection between trading partners increases trade by 2.8 per cent in average (Table 1).[9]

Table 1. Sensitivity test of the impact of transport connectivity on export trade volumes

Change of transport indices	Change in trade
Added rail connection	2.8 per cent
Air distance reduced by 10 per cent	0.41 per cent
Maritime distance reduced by 10 per cent	0.13 per cent

Source: RAND Corporation

From economic point of view, experts argue that if fully implemented, the BRI can reduce travel time for transcontinental delivery of goods and stimulate foreign investments to the regional economies. With proposed level of investment and improved regional trade relations between and among the regional countries, the BRI’s realization would not only affect the level of trade in the BRI region but also would have impact on the non-BRI markets. According to the World Bank report (2019), if fully executed the BRI transport infrastructure can reduce travel time by up to 12 per cent and increase world trade between 1.7 and 6.2 per cent.[10]

The multibillion dollar initiative is heavily dependent on the Chinese investments. It is funded through different China-led programs and financial institutions, most importantly Asian Infrastructure Investment Bank, China-ASEAN Maritime Cooperation Fund, China-Indonesia Cooperation Fund and the Silk Road Bank. Although most of the popular sources indicate that Chinese investments for the BRI projects is from $1 trillion -$8 trillion, the World Bank estimates that the overall BRI investments do not exceed $575 billion.[11]

According to the World Bank statistics, the BRI financing is rapidly increasing public and corporate debt in emerging markets, which have already reached the historic pick since 1980s.[12] In this circumstances, increasing debt burden in less developed economies create challenges for sovereign debt sustainability and make them vulnerable to debt distresses. The Center for Global Development has identified 23 BRI economies relevantly susceptible to the raising debt burden. Eight of them are of particular concern: Djibouti, the Kyrgyz Republic, Lao’s People’s Democratic Republic, the Maldives, Mongolia, Montenegro, Pakistan and Tajikistan.[13]

Belt and Road as the foreign policy tool

In 2017, the 19^th National Party Congress of the China’s Communist Party formally incorporated the Belt and Road Initiative into the Chinese Constitution by writing the following wording into it: “[] following the principle of achieving shared growth through discussion and collaboration, and pursuing the Belt and Road Initiative.”[14] This was significant adjustment into the BRI, as it now represents the Government’s policy rather than Chinese overseas investment program.

Although China’s BRI project has widely been seen mostly in economic terms, it has always had strategic meaning for the Chinese Government. The BRI policy identifies five major elements for the transcontinental integration: policy communication among regional countries; hardware improvement; trade facilitation; monetary policy; and people-to-people contacts.[15] Almost all these elements hold national security importance for China.

Experts assert that by investing in BRI Chinese Government aims to stabilize border regions by mitigating threats time-to-time emanating from peripheries; securing energy supply and transport routes by establishing overland oil transportation systems; and the last but least to cultivate stronger diplomatic and economic influence in the region by signing partnership agreements and memorandums of understanding and investing in the development of regional economies.[16]

Effective implementation of the BRI in a broader perspective is shaped by the expectations and reactions of the major World powers, like the United States and the European Union. Although the U.S. Government in many occasions voices that the U.S.’ New Silk Road Initiative and BRI are complementing each other, the trade confrontations between the two, as well as increasing Chinese influence over the regions once dominated by the western investments can prove the opposite. During the hearing before the Senate Armed Services Committee, Secretary James Mattis commented on the BRI in a following way:[17]

Regarding 'One Belt, One Road,' I think in a globalized world, there are many belts and many roads, and no one nation should put itself into a position of dictating 'One Belt, One Road.' That said, the 'One Belt, One Road' also goes through disputed territory, and I think that in itself shows the vulnerability of trying to establish that sort of a dictate.

Another factor that makes the BRI an issue of the national security for China is the security and safety concerns associated with Chinese business involvement in remote and unstable areas like Africa, Middle East and Central Asia. These threats include but not limited to examples as anti-Chinese sentiments in Yemen – deportation of 500 Chinese nationals from Yemen; killing of Chinese citizens in Syria in 2015 and in Pakistan in 2017 etc.[18]

The withdrawal of NATO and U.S. forces from Afghanistan and U.S. distancing from Central Eurasian affairs in recent years have created a geopolitical vacuum in Central Eurasian which has become more susceptible to the increasing Chinese influence, most importantly through the Belt and Road Initiative.

Lessons Learned / Takeaways

·       The BRI now a part of the Constitution of the Communist Party of China represents the Government’s policy rather than Chinese overseas investment program.

·       Although China’s BRI project has widely been seen mostly in economic terms, it has always had strategic meaning for the Chinese Government.

·       China seeks to reform existing international economic systems through the BRI.

·       There are oppositions to the BRI because the benefits to be derived by the Chinese far exceed the benefits to other participating regional countries.

·       According to the World Bank statistics, the BRI financing is rapidly increasing public and corporate debt in emerging markets

Discussion Questions

·       Is it fair to limit some contracts to Chinese contracts?

·       How can transparency be enforced for the BRI?

·       Do the overall benefits of the BRI outweigh the current human, economic and political cost?

·       How else can the BRI be funded besides Chinese investments?

·       Will BRI make fair trade more difficult?

For more information follow the link below

https://openknowledge.worldbank.org/bitstream/handle/10986/31878/9781464813924.pdf

References

[1] United Nations Educational, Scientific and Cultural Organization (UNESCO). Silk Roads, Dialogue, Diversity and Development (UNESCO). Istanbul: https://en.unesco.org/silkroad/content/istanbul

[2] Following the conquest of Constantinople, the city was renamed to Istanbul.

[3] Peyrouse, Sebastein. The Ohio State University. Building a New Silk Road? Central Asia in the New World Order: https://origins.osu.edu/article/building-new-silk-road-central-asia-new-world-order

[4] UNESCO. The End of the Silk Road. Chapter six: https://en.unesco.org/silkroad/sites/silkroad/files/knowledge-bank-article/the%20end%20of%20the%20silk%20route.pdf

[5] European Union. Central Asia-Transport: https://ec.europa.eu/europeaid/regions/central-asia/eu-support-transport-development-central-asia_en

[6] Clinton R, Hillary. Secretary of State (2009-2013). Remarks at the New Silk Road Ministerial Meeting, September 22, 2011, New York: https://2009-2017.state.gov/secretary/20092013clinton/rm/2011/09/173807.htm

[7] Jinping, Xi. President of the People’s Republic of China. Transcript of the speech at the Nazarbayev University, September 7, 2013, Almaty, Kazakhstan: https://www.fmprc.gov.cn/mfa_eng/wjdt_665385/zyjh_665391/t1078088.shtml

[8] Jinping, Xi. President of the People’s Republic of China. Transcript of the speech at the Indonesian Parliament, October 2, 2013, Jakarta, Indonesia: https://reconasia-production.s3.amazonaws.com/media/filer_public/88/fe/88fe8107-15d7-4b4c-8a59-0feb13c213e1/speech_by_chinese_president_xi_jinping_to_indonesian_parliament.pdf

[9] Hui Lu, Charlene Rohr, Marco Hafner, Anna Knack, “China Belt and Road Initiative: Measuring the impact of improving transportation connectivity on trade in the region”, (RAND Europe, 2019) p. 14-15: https://www.rand.org/pubs/research_reports/RR2625.html

[10] The World Bank Group Report, “Belt and Road Economics, Opportunities and Risks of Transport Corridors”, 2019, p 5

[11] Ibid., p. 37

[12] Ibid., p. 39       

[13] John Hurley, Scott Morris, Gailyn Portelance, “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective”, (Center for Global Development, 2018), p. 11: https://www.cgdev.org/sites/default/files/examining-debt-implications-belt-and-road-initiative-policy-perspective.pdf

[14] An Baijie, China Daily: http://www.chinadaily.com.cn/china/19thcpcnationalcongress/2017-10/24/content_33644524.htm

[15] Jinping, Xi. President of the People’s Republic of China. Transcript of the speech at the Nazarbayev University, September 7, 2013, Almaty, Kazakhstan: https://www.fmprc.gov.cn/mfa_eng/wjdt_665385/zyjh_665391/t1078088.shtml

[16] Dr.Joel Wuthnow, Research Fellow, Center for the Study of Chinese Military Affairs Institute for National Strategic Studies, U.S. National Defense University, Testimony before the U.S.-China Economic and Security Review Commission Hearing on “China’s Belt and Road Initiative: Five Years Later” (2018) https://www.uscc.gov/sites/default/files/Wuthnow_USCC%20Testimony_20180123.pdf

[17] CSIS, Reconnecting Asia: https://reconnectingasia.csis.org/analysis/entries/many-belts-and-many-roads/

[18] Dr.Joel Wuthnow, Research Fellow, Center for the Study of Chinese Military Affairs Institute for National Strategic Studies, U.S. National Defense University, Testimony before the U.S.-China Economic and Security Review Commission Hearing on “China’s Belt and Road Initiative: Five Years Later” (2018) https://www.uscc.gov/sites/default/files/Wuthnow_USCC%20Testimony_20180123.pdf

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[1] China Power, https://chinapower.csis.org/china-belt-and-road-initiative/

[2] Yiping Huang, “Understanding China’s Belt and Rad Initiative: Motivation, framework and assessment” China Economic Review, Vol 40, September 2016, pp 314-321.

https://www.sciencedirect.com/science/article/pii/S1043951X16300785#fn0005

[3] Chatzky, A and McBride, J., “China’s Massive Belt and Road Initiative”, Council on Foreign Relations, May 21, 2019, accessed October 12^th, 2019

https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative

[4] Chatzky, A and McBride, J., “China’s Massive Belt and Road Initiative”, Council on Foreign Relations, May 21, 2019, accessed October 12^th, 2019

https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative

[5] Chatzky, A and McBride, J., “China’s Massive Belt and Road Initiative”, Council on Foreign Relations, May 21, 2019, accessed October 12^th, 2019

[6] Yiping Huang, “Understanding China’s Belt and Rad Initiative: Motivation, framework and assessment” China Economic Review,Vol 40, September 2016, pp 314-321.

https://www.sciencedirect.com/science/article/pii/S1043951X16300785#fn0005

[7] Yiping Huang, “Understanding China’s Belt and Rad Initiative: Motivation, framework and assessment” China Economic Review, Vol 40, September 2016, pp 314-321.

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[1] Chatzky, A and McBride, J., “China’s Massive Belt and Road Initiative”, Council on Foreign Relations, May 21, 2019, accessed October 12^th, 2019

https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative