China signs the Belt and Road agreement with over 30 countries

The origins of the Belt and Road agreement 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 agreement 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 agreement. 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 capitalise 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 agreement the majority of benefits will favour 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 neighbouring countries. Thus allowing for China too 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 agreement, China is at threat from increasing trading costs. The Belt and Road agreement could resolute this issue as China will seek to negotiate free-trade agreements with the 65 countries along the route. Twelve free-trade agreements have already been signed including Singapore, Switzerland and Iceland. A further eight are under negotiation with Japan, Australia and Norway, to name a few.

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. Were foreign companies able to form partnerships with the Chinese this would allow them to leverage these relationship when 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 agreement 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 neighbouring 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 emphasising the “Three No’s”:

  1. No interference in the internal affairs of other nations
  2. Does not seek to increase the so called “sphere of influence”
  3. 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 agreement 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 agreement.

The Belt and Road agreement so far…

The success of the Belt and Road agreement thus far is evident in the 70 plus countries that have actively participated in the program. Furthermore, China has signed cooperative agreements on jointly building the Belt and Road with over 30 counties. Moreover, the financial environment regarding the Belt and Road to date is reflective of the seriousness of the venture. There are currently around 900 deals in negotiation regarding the Belt and Road worth a total of 890 billion USD, including a rail link between Beijing and Duisburg, a transport hub in Germany.

Thus far, Chinese enterprises have invested over 14 billion USD and created over 60,000 employment opportunities related to the Belt and Road agreement. 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. The focus of China’s FDI towards Belt and Road countries is clear. In 2015, 44% of China’s new engineering projects were signed with Belt and Road countries. In the first 5 months of 2016 this figure increased to 52%.

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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 agreement 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. However there will be many challenges along the way, but careful planning can solve such problems and the firms and surrounding nations will be able to reap  substantial rewards.

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

 

1 Comment
  1. 您的博客拥有旺盛的生命力!!

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