Promises and Pitfalls of the Belt and Road Initiative


July 20, 2017

Asia Pacific Bulletin
Number 388 | July 19, 2017
ANALYSIS

Promises and Pitfalls of the Belt and Road Initiative

By Bipul Chatterjee and Saurabh Kumar

China’s signature economic and foreign policy project – the ‘Belt and Road Initiative’ (BRI), also known as ‘One Belt, One Road’ (OBOR) – is the most ambitious global connectivity project ever launched by China or any country. The project aims to connect 65 Asian, African, and European countries comprising two-thirds of world’s population, through various sub-projects. The estimated investment cost for realizing this project is $4-8 trillion.

The goal of BRI is to connect China with Asia, Europe, and Africa through a network of railways, highways, oil and gas pipelines, fiber-optic lines, electrical grids and power plants, seaports and airports, logistics hubs, and free trade zones.

The promise of BRI

First, a promising aspect of this initiative is the potential reduction in transportation costs which would reduce the price of trade more broadly. At a time when countries are looking for specific measures to reduce trade costs and shying away from free trade agreements, a reduction in transportation costs as a substitute for trade deals can effectively widen the volume of international trade. A Bruegel study pointed out that a 10% reduction in railway and maritime costs can increase trade as much as 2%, while the effects of a reduction in tariffs would take a much longer time to be felt. An Asian Development Bank and Purdue University study estimated that improvements in transport networks as well as trade facilitation measures could increase the gross domestic product (GDP) by 0.3 % for India and 0.7 % for the South Asian region as a whole.

Second, BRI presents huge business opportunities for companies engaged in infrastructure development. A total of over $900 billion is expected to be invested in roads, ports, pipelines and other infrastructure as part of the project. This could immensely benefit countries suffering from inadequate infrastructure for their economic development.

Third, from the point of view of trade facilitation there are a number of factors that will create dynamic effects. China may accrue significant long-term trade benefits if it reduces tariffs through free trade zones, particularly on products from BRI countries. Beijing is also expected to reduce some of the non-tariff barriers hampering the prospects of foreign firms doing business in China including in those emerging areas such as internet banking and electronic commerce.

Potential Implications

Apart from the sheer number of participating countries, BRI appears to be both economic and strategic in nature. This became visible during the recently held Belt and Road Forum for International Cooperation in Beijing. The initiative came under scrutiny after European Union officials voiced apprehensions over transparency, labor, and environmental standards. This resulted in the EU’s refusal to endorse a trade statement tied to BRI. India’s non-participation due to sovereignty issues relating to the China-Pakistan Economic Corridor passing through part of Jammu and Kashmir also served as a serious dampener.

Even though BRI seeks to create trade infrastructure around India, it also encircles the country by creating a ring through land and sea routes passing through several countries with which India has sensitive relationships. However, India – with around 90% of its international trade through maritime routes and only 10% by rail and road – is comparatively less likely to see much benefit through enhanced connectivity under the initiative. Most of India’s maritime trade occurs from its western ports located in Arabian Sea and via land routes within the Bangladesh-Bhutan-India-Nepal network.

In presenting BRI, China appears to be unaccommodating with respect to political and diplomatic issues as well as economic concerns. Trade facilitation alone cannot drive trade flow upward. There needs to be smart and secure management of trade routes so that end-to-end supply and value chain networks can be strengthened. In recent times, piracy has emerged as a major potential threat for railways and highways as well as maritime routes. BRI does not address these challenges in a meaningful way.

Although the project was launched around four years ago, it suffers from a lack of key information, operational strategy, terms of reference, and detailed work plan for the role of partner countries. This has eroded trust.

The Next Steps

While it is true that China’s economic and strategic interests are intertwined, it would have been beneficial for the BRI to be planned more holistically in order to give due consideration to the economic and political interests of other participating countries. For a large project like BRI, an international governance structure involving all the participating countries to institutionalize objectives and safeguard the interests of participants has to be established now with a particular emphasis on financial mechanism. The decision-making structure for the execution of BRI should be based on consensus.

“While it is true that China’s economic and strategic interests are intertwined, it would have been beneficial for the BRI to be planned more holistically in order to give due consideration to the economic and political interests of other participating countries.”

Several sub-projects of various Chinese companies to receive political and financial support from the Chinese government are being touted as part of this initiative but have nothing to do with it and should be de-coupled so that ambiguity can be cleared and only official BRI projects can be materialized. Participating countries should also get equal treatment in the financing of BRI, so that they can also reap the long-term benefits of the project, a step in this direction could be the revamping of the New Development Bank. A clear operational strategy for the entire project with an economic and political matrix should now be made to increase trust and transparency. This should clearly indicate relative as well as absolute potential losses and gains of participating countries. Active participation of global institutions such as the United Nations, the International Court of Arbitration, and International Court of Justice should be included for reliability as well as to resolve a potential dispute.

BRI should be executed in a selective manner with focus on economically viable sub-projects developing trade and economic corridors, for example a Bangladesh-China-India-Myanmar Corridor in the case of South Asia.

About the Authors

Bipul Chatterjee and Saurabh Kumar are Executive Director and Policy Analyst, respectively, at CUTS International. They can be contacted at bc@cuts.org and sbk@cuts.org.

The East-West Center promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through cooperative study, research, and dialogue.

Established by the US Congress in 1960, the Center serves as a resource for information and analysis on critical issues of common concern, bringing people together to exchange views, build expertise, and develop policy options.

The Asia Pacific Bulletin (APB) series is produced by the East-West Center in Washington.

APB Series Editor: Dr. Satu Limaye, Director, East-West Center in Washington
APB Series Coordinator: Peter Valente, Project Assistant, East-West Center in Washington

The views expressed in this publication are those of the authors and do not necessarily reflect the policy or position of the East-West Center or any organization with which the author is affiliated.

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2 thoughts on “Promises and Pitfalls of the Belt and Road Initiative

  1. The biggest problem with OBOR? Even as wealthy as China is, there is not enough money to fufill the ambitions. Fact is the trillions needed cannot come from China but everyone expect to get at least most of it from China which is still not feasable. The promoters are too enamoured with the prospect of just billions available to any one thing they are involved with, a small portion enough to satiate anyone of them..

    In other words. OBOR is a Pea in a Shell game, those around are being asked to look for the Pea under the moving shell, some will win temporarily but in the end the game ends in dissapointment for almost everyone, if not definitely everyone.

  2. Good write-up.

    Headwinds aplenty in Central Asia among the ‘Tans and East European countries who don’t see any local benefit. Germany and Western Europe will just watch this grand silk debacle, until the string of pearls unravels. Japan and S. Korea too. Then, they may pick up the pieces.

    Japan still has the first option on the collapsed TPPA, and yes, FTA with EU. Didn’t anyone mention that carbon fiber is stronger than silk?

    ASEAN may still benefit enormously from OBOR, but the cost will balloon as the value proposition and ROI collapses, due lack of will to reform politically, competitively and economically. A matter of scalar dimensions.

    PRC ain’t no pushover. Negotiations must take into account local sensitivities and political minefields, but typical PRC SOEs’ don’t care two hoots, especially since our local UMNOb politicians have lost their family jewels (cojones) to avaricious Bik Mama. For instance, the only thing Min of Transport is in charge of is the route. SPAD under corrupted PMO decides all the rest. Does that make any sense?

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