international analysis and commentary

China’s drive to create a long-distance trading network in Eurasia

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In September 2013, the newly-elected President of China, Xi Jinping, visited Kazakhstan and other Central Asian states. In his speech at the Nazarbayev University he presented the “Silk Road Economic Belt” project, which was followed by the signature of a number of relevant bilateral agreements in the energy, telecommunications and transport sectors. A month later Xi attended the ASEAN summit in Indonesia and on this occasion delivered a speech where he proposed that the ASEAN countries join China in developing a “21st century Maritime Silk Road”.

The two projects announced by China´s President seem to be part of a single strategy designed to fully exploit China´s central geographic stance in the Eurasian continent. Such a strategy would establish the country as the first “amphibian” geo-economic power in Eurasia, taking the lead of a continent-wide integration, based on cooperation and economic-cultural exchange.

Both the Road and the Belt, as they were soon labeled, have attracted much interest, for this is the first time the Chinese leadership has announced such an organic plan. A few months ago, a map published by the newly launched news agency Xinhuanet uncovered the geographical dimension of the plan, drawn up by the Chinese National commission for reconstruction and development.

Recently, more details have been revealed by Zhao Xiaogang, an adviser to the China Institute for Innovation and Development Strategy. According to this source, China will invest $117 billion in rail infrastructure in the country in 2014. Also, Beijing plans a $150 billion investment by 2020 in developing the 6,000km railway line stretching from the autonomous province of Xinxiang to Eastern Europe, passing through Kyrgyzstan, Tajikistan, Uzbekistan, Turkmenistan, Iran and through to Turkey and Bulgaria and/or Greece, linking with the Pan European Corridors numbers 4 and 10 which reach Austria and Germany through the eastern Balkans. While technical and geopolitical problems still need to be solved, the Chinese government has already been negotiating with Central Asian countries to coordinate its projects with the national transportation strategies of each.

In the medium to long term, China is indeed envisaging a quantic leap in the quality of Eurasian continental integration. This should not simply revolve around gas and oil pipelines but more broadly around the development of complex logistics, trans-regional intermodal services, the expansion of hard infrastructure (rail, roads, ports and dry ports) and the overcoming of still existing soft barriers to trade in order to foster connectivity.

In this vision, the continental dimension seems to assume even more relevance than the maritime one. Indeed, the “Belt” aims at re-connecting those landlocked countries that were once part of the Silk Road trading route, like the Central Asian states. This should happen via bilateral and multilateral free trade agreements and joint infrastructure projects. Hence, this overall project aims at facilitating route and market diversification for Chinese and Asian final goods while matching the geographic transformation taking place in the productive structure of China´s central and western regions.

By developing inland and coastal areas, as well as the less prosperous middle and western regions of the country, new opportunities will be opened for Chinese and foreign companies to easily reach the European markets by alternative continental routes or by means of intermodal transportation, as the China Railway Construction Company has underscored in its annual report. Europe is still the main market for Chinese (and Asian) products.

China is the second largest trade partner of the European Union after the United States, the first exporter to the EU and the third importer of European goods. The People´s Republic exported goods worth a total $335 billion to Europe in 2012, up from little more than $40 billion in 2000. This sum accounts for more than half of the entire exports of developing Asia to Europe, positioning China clearly at the forefront of Asian-Europe trade relations.

To be sure, due to low tariffs, high reliability, increasing use of containers, the development of larger vessels (up to 20,000 TEU, the so-called New Panamax Vessels) and rising competition amongst ports, 98-99% of all traded goods between Asia and Europe are trans-shipped on the sea routes from south-eastern Asiatic ports to north-western European ports, around the Cape of Good Hope or through the Suez Canal. But whilst maritime trade will still remain paramount for international Eurasian connections, overloaded Chinese ports, matched by geopolitical risks linked to the volatility of the Malacca and Hormuz strait, have been leading China to increasingly focus on developing land routes to mitigate these imbalances: overland connections will integrate with maritime ones, offering alternatives to the sea lines for specific categories of goods (high-tech,  automotive, complex chemicals), integrating them for container transport or offering much needed connections to raw material extraction sites overland.

Against this background, the Chinese strategy could match the interest of some Central Asian countries in diversifying their income structure and their economic basis by tapping the potential of their geographic location. Indeed, by shifting 8% to 10% of the container traffic from sea to overland routes, from the current actual figure of 2%, as predicted by the Asian Development Bank program CAREC, the traffic volume in US dollars would be around $50 to $100 billion.

Kazakhstan, Turkmenistan and Azerbaijan are among the most active countries in investing great sums in non-pipeline transport infrastructure, but a similar process is also taking place in Turkey and Iran, the two key transport bridges to the European and Middle Eastern markets respectively. Indeed, massive investments in Kazakh, Azerbaijani, Turkmen, Turkish and Iranian transport infrastructure are bringing this vision a bit closer to reality. The new ports, logistic centers and railway lines financed by Chinese capitals are all starting to make sense not only from a national perspective but also from a continental viewpoint.

Plans for reviving the famous Silk Road have been around for the last 20 years, with little success but much rhetoric. Interestingly, these plans, which aimed at eventually integrating landlocked continental Eurasia, have mainly come from the EU and the US and, most recently, from Russia. The focus of European and American efforts has been on re-linking the central part of the continent to the global market by means of oil and gas exports, which essentially meant diversification of transport routes away from the Russian centered pipeline system for the EU and US.

China’s drive now represents for many countries a concrete alternative to Western but also to Russian plans, although strong Chinese influence is not welcome everywhere.

However, if China will be able to present itself as a peaceful power and an agent of economic progress and integration, Beijing may place itself at the core of a tight network of transport connections spanning from China to Russia, Central Asia, Europe and the Middle East. If such an ambitious project is pursued in cooperation with the Europeans, it might even recreate a unified trade system reminiscent of the long-distance network or “world system” of classical times.