June 13, 2017    12 minute read

The End Of Asian Isolationism: Chinese Trade Catapults With 21st Century Silk Road

China Rejects Isolationism    June 13, 2017    12 minute read

The End Of Asian Isolationism: Chinese Trade Catapults With 21st Century Silk Road

A monumental economic and diplomatic program, aimed at transforming China’s relations with the world through revitalising trade routes, connections and diplomatic ties, the One Belt One Road policy is a scheme predicated on the investment in and development of trade routes in the Euro-Asian region. However, this program has ramifications for global trade, particularly in the new protectionist era. At a time when the European Union has seen members become restless, with the world’s 5th largest economy electing to leave, and a new American Presidency has focused putting the US first, how will the OBOR policy affect global trade and relations?

Sitting diametrically to the protectionist policies of Western nations, the OBOR policy, a multi-year plan to establish and build a web of infrastructure, transport links and trade routes connecting Asia, Europe, Africa and other regions in one, large network, contends to “build new platforms for global development, and rebalance economic globalisation so mankind will move closer to a community of common destiny.”(President Xi Jinping, Beijing Summit, May 2017). Furthermore, the policy establishes China as a heavyweight in the program, contending with the Trans-Pacific Partnership (TPP), a regional trade pact that excludes China.

What is the One Belt One Road Policy: The Belt and The Road

The plan is composed of two elements: a physical, land-based route and a maritime, sea-faring venture. The Belt is the physical, inter-connected infrastructure, of road and rail, leading into Europe and The Road is the maritime trade routes, connecting European harbours to the Asia-Pacific. Combined, these elements cover “65% of the world’s population, about one-third of the world’s GDP, and about a quarter of all the goods and services the world moves.”

At the moment, many of the partner nations lack the strong infrastructure to support the trade routes and, thus, the OBOR is going to extend Chinese influence and infrastructure to many of these countries, most of them emerging markets. Moreover, with the question of method also comes the question of means; how will OBOR be funded?

Projected to cost $1.4trn, about 12 times larger than the Marshall Plan, the OBOR will require a plethora of funding sources. There are three notable sources. The Asian Infrastructure Investment Bank (AIIB) – officially opened in January 2016, the bank aims to support the building of infrastructure in the Asia-Pacific region, providing $100bn to the OBOR policy. China currently controls 26% of the vote in a system that mandates a three-quarters majority for certain decisions. Secondly, the Silk Road Fund, a State owned, $40bn investment fund, backed by the Chinese Government aims to facilitate the early projects and stages of development. $1.65bn was put towards the Karot 720,000-kilowat hydroelectric power project in Pakistan, a priority in the China-Pakistan Economic Corridor (CPEC) flagship project within the OBOR, shortening the route for China’s energy imports.

Lastly, the China Development Bank, under direct state jurisdiction, pledged $890bn in over 900 One Belt, One Road projects across 60 countries. These funding sources kick-started the early stages of the program.

Importance of OBOR for China

The Communist Party of China is working to transition away from a growth led by investment, exports and foreign imports to development through domestic consumer demand and services after experiencing the slowest annual growth in 25 years, including stock market crashes. China will also seek to maintain stable growth, “setting a growth target of 6.5% in 2017 at the National People Congress in March, down from a 2016 target of 6.5% to 7%.”

Currently, China is suffering from overcapacity in its overbuilt construction sectors, especially in the steel sector, OBOR is aimed to help ameliorate pressure and put idle construction power to use. This also ties in with helping to rebalance the economy by opening new markets and enabling China to become more competitive, an important objective as China’s economy begins to shift. Add to this the rising labour costs and environmental demands, a successful trade network and closer international relations will strengthen the demand for Chinese produce, further facilitating the offshoring of manufacturing as the infrastructure will be there to easily move people and manufacturers abroad.

Along the corridor, countries with generally low investment rates and low per-capita incomes could experience a boost in trade. The infrastructure would also grant China a further avenue to secure natural resources, including raw minerals and energy, and greater protection of its import routes, as currently, China relies heavily on importing via the chokepoint of the South China Sea. China is dependent on foreign trade, 90 percent of which travels by sea through the Strait of Malacca, a series of islands, many of which are secured by the world’s dominant navy, the United States. This is problematic as, should China find itself engaged in war or adversarial disputes, its trade and import routes can be intercepted relatively easily.

A further benefit of the OBOR is the political prowess it offers Beijing, by providing China with a large, political presence in the region. Most notably, China has seen a growing influence in Pakistan, having already undertaken a $46bn infrastructure spending plan, which will connect China with the region. China can use this influence in conjunction with Pakistan to weaken India’s influence in the area, pressing for more open trade routes and better cooperation. Furthermore, having a politically stable neighbour only adds to the strength of the project, minimising the risk that political instability spills over into minorities in western China. What’s more, there is clearly an international agenda at play, with President Xi signing China up to the World Economic Forum in 2017, the OBOR could lay the foundation for the Renminbi to become Asia’s prominent currency.

Opportunities for Business

In addition to being a welcome opportunity for the stabilisation and enhancement of EU-China trade relations, OBOR also sports a plethora of opportunities for western companies.

Siemens, for example, has won a $1bn order from China’s Shandong Electric Power Construction 3rd Company (SEPCOIII) for the construction of a combined cycle power plant at the Ras Al-Khair Plant in Saudi Arabia. The renewable energy opportunities will flourish with OBOR especially for Western NGOs and their stakeholders, particularly considering President Xi’s proclamation that China will remain committed to the Paris Agreement. This also includes further constructing opportunities, for companies such as Caterpillar, from sharing technology to importing machinery.

Further, there are opportunities for project financing and leveraging Chinese partnerships abroad, allowing firms that previously failed in the Chinese market to acquire a better market position outside of China and then funnel their products or services in through the Chinese partner.

Western accountants, consultants and other professionals including brokers and insurance firms could overshadow and outshine the State Owned Enterprises, which typically lack transparency when dealing with Western partners of the OBOR. The reliability and prestige of such companies and firms could help exert a Western influence on the financing and consulting of the OBOR.

OBOR also expands access to markets as, with improved infrastructure, producers and manufacturers can reach new consumers along the road and belt. For the West, particularly phone makers and pharmaceuticals, the advent of simple online banking and e-commerce services will go hand in hand with the access to new emerging markets, presenting ripening fruit for Western companies to compete with their Chinese rivals.

Digital Silk Road

Aimed at enhancing telecommunications in the region, the elevation of OBOR to the digital space has further positive impacts for the region, from better digital infrastructure to greater e-cooperation. For example, Chinese private companies, Huawei and ZTE are engaged in OBOR projects, including the large optic-fibre network in Afghanistan, enabling more regions to get access to stable online access. Added to this is the Beidou Satellite Network, a competitor to GPS, which will consist of 35 satellites by the end of the decade aimed at delivering global coverage in 2020. The digital clout of the OBOR can help extend the success of the project, facilitating more integration and cooperation along the route.

The digital infrastructure also has implications for data and data management, as well as cross-border data cooperation. China’s latest cybersecurity standards, coming into effect soon, could require data that passes through China to be stored in China. Thus, any business in another nation that utilises the OBOR Digital Road to connect with consumers in China could find itself in a very difficult position. Furthermore, any company that conducts business with Chinese consumers and consequently collects their data must store the data in China. This creates a Chinese monopoly on data storage and usage for any company able to access the Chinese market through OBOR.

Risks and Challenges of the OBOR

Despite possessing ample resources for building up infrastructure in the Belt and Road corridors, the security implications and political hurdles could cause difficulties for China. Expanding transport links into underdeveloped or conflict-ridden regions will create further security concerns, from protecting construction teams and to the infrastructure itself. To adequately protect its interests, China will have to plan to improve host nation security for its projects. There are countless examples – simply look to the 10,000 troops specifically deployed to protect Chinese workers in the restive province of Balochistan, Pakistan.

An unintended side effect of the improved road routes is also the greater speed with which illicit goods can be moved and imported into countries. To combat this, the enhanced presence of Chinese domestic law enforcement to extend assistance to security operations along the road will present further financial burdens. However, regional neighbours may worry that the new wave of Chinese security cooperation will come at the expense of their national sovereignty and interests, especially in Central Asia, as Russia is keen to protect its dominant role in regional security. Furthermore, the exporting of Chinese law enforcement and military oversight could lead to the oppression of minority groups in the region. This heightened surveillance to ensure the integrity of the OBOR is not compromised could create areas of tension.

Geopolitical threats also exist, particularly with the perceived, under-hand motivations of the Chinese government in executing this policy. The project could come under criticism for the level of Chinese intervention in domestic projects. This was the case in Sri Lanka, where Chinese construction on Colombo Port City (a $1.4bn artificial island) was suspended after the election of President Maithripala Sirisena, citing his predecessor’s over-generous concessions to China, resulting in a daily loss of $380,000.

This also builds into China’s transition economically as the OBOR threatens to add pressure to a system that is unable to fully support it. Despite having a large investment backing with the AIIB, Silk Road Fund and the New Development Bank, whether or not this sum can fund the project for the many years it will take to complete is another matter. Comparatively, the political uncertainty in certain regions, both surrounding the transparency of China’s intention in a politics vs. business debate alongside the suspicion and scepticism around whether “this is part of China’s emergence as the next world power,” adds to the worries of the long-term output of the project. Worries could rise for smaller, in-need nations about how to best protect their own interests, particularly weaker institutional powers like Cambodia and Laos. Is this “global commerce on China’s terms?

The legal implications of cross-border cooperation also present a unique challenge for OBOR. The governing jurisdiction of any single section of the road will change as one travels through it. The correct choice and adequate application of the law is critical to the success of OBOR. Add to this the incomprehensible size of OBOR, and it soon becomes unthinkable that OBOR will be treated as a single, legal creature but rather split into the individual projects.

Such issues will require careful oversight from planning to security. For one, security law in China focuses on the security of physical assets, yet large projects hold value in non-physical assets including contracts and money. To this end, Chinese banks are comparatively less experienced than their Western counterparts in securitising trans-national operations, alongside whether using Chinese law as the operating jurisdiction is the optimal setup. Issues from currency fluctuation to maintenance agreements all increase the complexity of legal oversight.

Additionally, the program rears its head at a time when there is an erosion of support for globalisation. This poses tangible risks for China because the future economic prospects are ‘deeply intertwined with its integration into world markets.’ OBOR seeks to mitigate this by avoiding protectionism in Asia, pushing for greater openness and trade. Building off of the Paris agreement and OBOR’s renewable energy projects, President Xi is pushing for greater international cooperation, for more trade, not less. Tinged by the US’s steadfast attitude of ‘US first,’ the momentum for open support of trade in Asia might dampen OBOR’s ability to open new avenues of trade in the long-run. Combined with suspicion about China’s political motivations, OBOR is heavily reliant on OBOR nations accepting Chinese projects which only increases the political tension surrounding the project.

Conclusion

Mitigation of trade vulnerability appears to be a cause that justifies the incomprehensible price tag attached to the construction, maintenance, security and continued use of the OBOR. Moving away from relying on a single chokehold, China is diversifying its trade routes, strengthening itself against blockades by sea and land. The sheer scale and ambition present in the OBOR, combined with the projected needs for capital (human and financial) can leave some with a sour taste. Will it succeed? How will it convince foreign nations that its attitudes are win-win? Can China’s slowing growth and transitioning economy sustain the momentum? Will political relations remain stable or will they be aggravated? What is for certain, is that projects already underway are a welcome advance of Asian-pacific infrastructure and the noble intention behind the OBOR should be hailed as such.

Get articles like this straight to your inbox each morning with our Breakfast Briefing. Sign up by clicking here!

Log in with your details

or    

Forgot your details?

Create Account

Send this to friend