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China’s Belt and Road Initiative

The origins of the Belt and Road Initiative (BRI) can be traced back to the Silk Road, established during the Han dynasty and used frequently from 130BCE. The road connected China with the Roman Empire, stretching from Chang’an (now Xi’an) in the east to the Mediterranean in the west. The road consisted of multiple trade routes between China, India, Arabia, Greece, Rome and Mediterranean countries. Similar benefits are behind the motivation for the Belt and Road Initiative today. Chinese President Xi Jinping formally announced the Silk Road Economic Belt during a visit to Kazakhstan in 2013. A year later the program was expanded to include the Maritime Silk Road. Both are commonly referred to as the Belt and Road Initiative. The former refers to the land route that links China with Europe. The latter is the maritime route around Southeast Asia, Africa and Europe. The ultimate aim is to capitalize on the proposed trade routes and encourage economic development along the routes.
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How will this benefit China?

Despite the vast coverage of the Belt and Road Initiative, the majority of benefits will favor China. With the domestic economy slowing relative to previous years, China’s leadership has had to search externally for growth. This search for growth is met by the increasing demand and need for development amongst neighboring countries. Thus allowing for China to offload their overcapacity from sectors such as steel, cement and aluminium. Furthermore, excluded from the Trans-Pacific Partnership countries, the Transatlantic Trade and Investment Partnership and the EU-Japan Initiative, China is at threat from increasing trading costs. The Belt and Road Initiative could resolute this issue as China will seek to negotiate free-trade Initiative with the 65 countries originally along the route.

 

Who else will benefit?

It is not just China who will benefit from this project. A multitude of outbound capital and infrastructure projects will be created. Specifically the supply of equipment, technology and intellectual property, also, related areas of engineering, construction and project finance. Where foreign companies are able to form partnerships with Chinese counterparts, they can leverage their relationship in accessing the Chinese market itself. The opportunity also presents itself to foreign companies that may not have succeeded in entering China previously by being able to partner with Chinese firms and benefit from the aforementioned reasons. Although, the majority of beneficiaries thus far have been China’s state-owned enterprises (SOE’s), the opportunity to partner with these players will provide huge rewards for foreign firms.

 

What are the challenges?

Further reading into the Belt and Road Initiative unravels multiple problems that will be faced by all those involved. Amongst foreign countries scepticism ensues around Chinese motives. Specifically regarding Chinese economic dominance and political influence. Further challenges surround the actual construction with the rough terrain the route will dissect and the regional conflicts in neighboring countries, in addition to the high level of corruption many of the nations are riddled with. More issues transpire regarding the management of the route and there has yet to be any answers provided by the Chinese government. For example, will this be achieved through its own bureaucracy? Or will it be, as separate departments in different ministries? President Xi Jinping addressed these issues by emphasizing the “Three No’s”:

No interference in the internal affairs of other nations
Does not seek to increase the so called “sphere of influence”
Does not strive for dominance

President Xi will no doubt continue to suppress any doubts that are raised and seek to assure other nations of the benefits they will also receive. Foreign Minister Wang Yi has also attempted to clarify the Belt and Road Initiative as an open initiative, rather than expansionism.

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Chinese President Xi Jinping meets with Greek Prime Minister Alexis Tsipras in Beijing to discuss the Belt and Road Initiative.

 

The Belt and Road Initiative so far…

Starting at 70+ countries, participants in the Belt and Road Initiative have grown to over 125 countries, almost doubling the figure at the time of the project launch in 2013. Chinese investment in these countries also accounted for nearly half of outbound investment last year, doubling 2017 investing figures.

Three years ago, China signed cooperative agreements on jointly building the Belt and Road with over 30 countries. At that time, over 900 deals were in negotiation regarding the Belt and Road, together worth a total of $890 billion USD, including a rail link between Beijing and Duisburg, a transport hub in Germany. While figures from 2015 show that the trade volume between China and participating Belt and Road countries surpassed 1 trillion USD, accounting for 25% of China’s total foreign trade volume, in recent years the Belt and Road Initiative has experienced setbacks.

These setbacks include a growing criticism from the US which has influenced decision making with Belt and Road partners. The US has accused China of employing debt-trapping diplomacy, a strategy to overload a foreign project with debts that cannot be realistically paid back, resulting in the handover of infrastructure ownership to Chinese government-owned companies. To reflect this, in 2017, Sri-Lanka handed over a strategic port as it struggled to pay its debts to Chinese firms. Beijing has dismissed any international suspicious and has since stepped up in improving strategies for sustainable development. One of the more significant advances is the BRI’s transformation into a multilateral initiative, allowing partner countries to meaningfully engage in projects and collaborate in their developments. Policy developments such as these have led to a more positive international reception of Chinese infrastructure investment . Positive impact of the BRI in trade is crystal clear – considering a drop in 2017 amid international backlash – trade continues to steadily grow with 2018 figures showing growth rates of just over 17%.

Experts have commented that only two known projects can reignite growth globally, the Trans-Pacific Partnership and the Belt and Road Initiative. To keep the BRI train steaming forward, China has set its focus to international cooperation.

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The foreign ministers of China and Hungary sign an agreement on the Belt and Road.

In summary, the Belt and Road Initiative arguably presents a new era of international trade for China. The agreements are to follow principles of openness, cooperation, inclusiveness and win-win cooperation. Consequently, the Belt and Road contracts are likely to have a long-term focus. There will be a shift from Chinese firms simply building the infrastructure and then handing it over, to actually managing the infrastructure they build.

With the building blocks of the project firmly in place and President Xi’s commitment to the agreement as a key component of the Communist Party of China’s (CPC’s) foreign policy, it is too late to step back now. Once completed, smoother trade flows will be facilitated throughout the Belt and Road creating shorter lead times and reducing transportation costs. The land route will emerge as a key method for the transportation of goods, being more cost effective than airfreight and a quicker alternative to sea transportation. Therefore, the benefits to firms that rely largely on raw materials will be huge in addition to firms seeking to penetrate consumer markets in Asia with their finished products. There will be many challenges along the way, but careful planning can solve such problems – enabling firms and surrounding nations to reap substantial rewards.

If you have any questions in regard to the Belt and Road Initiative, please do not hesitate to contact Maxxelli Consulting at info@maxxelliconsutling.com
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