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Reinventing the Silk Routes of Eurasia

  • Richard E. Crandall
May/June 2017

Trade routes between Asia and Europe date back at least 3,000 years. At that time, the center of civilization was in Mesopotamia, an area between the Tigris and Euphrates rivers that roughly corresponds to modern-day Iraq, Kuwait, eastern Syria, southeastern Turkey, and regions along the Turkish-Syrian and Iran-Iraq borders (Mark 2014). These routes, known as the Silk Routes—because they moved silk from China to other parts of Eurasia—thrived during some periods but, at other times, were blocked or destroyed by invaders. Now, centuries later, China is looking to rebuild the routes to improve international trade.

First announced in 2013 by Chinese President Xi Jinping, the One Belt, One Road (OBOR) project aims to invest several trillion dollars to create two new trade corridors—one overland and one by sea—to connect China with its neighbors in Central Asia, the Middle East, and Europe, and position the republic as the center of Eurasian trade (Bruce-Lockhart 2016).

According to The Economist (2016), OBOR is a bit of an amorphous system because it does not have an official list of member countries, although the rough count is 60. The proposed new belt, formally known as the Silk Road Economic Belt, is an overland route connecting China to Europe, the Persian Gulf, the Mediterranean, and the Indian Ocean (Jinchen 2016). The new road, called the 21st Century Maritime Silk Road, would create connections between Asia, Europe, and Africa among regional waterways.

There are as many as 900 deals worth $890 billion underway to build these trade networks, which ultimately could include a gas pipeline from the Bay of Bengal through Myanmar to southwest China and a rail link between Beijing and Duisburg, Germany (The Economist 2016). China has promised to contribute $4 trillion to the efforts.

President Xi sees these new trade routes as a way of extending China’s “commercial tentacles and soft power” (The Economist 2016). “In addition, China is facing a period of strategic opportunity between now and 2020, meaning the country can take advantage of a mostly benign security environment to achieve its aim of strengthening its global power without causing conflict,” The Economist reports.“OBOR, officials believe, is a good way of packaging this strategy.”

Secondary reasons for wanting to increase the opportunities for added trade in the future include the following:

  • China is expanding its manufacturing capabilities inland from the coast to improve the economic conditions of an area that has not fully participated in the nation’s rapid growth.
  • As a result of increasing wages, environmental concerns, and costs in mainland China, some manufacturing contracting is moving south to countries such as Vietnam, Indonesia, Thailand, and Malaysia.
  • The transition from coal (of which China is the world’s leading consumer) to oil makes it more critical for the nation to have access to other countries’ oil.
  • China has overcapacity in some industries (such as steel) and is looking for new markets.
  • PwC predicts that China will be the top country in terms of gross domestic product at market exchange rates by 2030 (Hawksworth and Chan 2015). (See Figure 1.) Enhanced trade networks would position China to achieve this future.

Gross domestic product (GDP) at market exchange rates (MER) rankings for the five largest economies

Dumitrescu (2014) reports that OBOR is one of the most complex projects launched in recent history based on the magnitude of its objectives; the number of countries involved; and the friendly approach of the initiator, China. Its objectives are stated as respect for sovereignty; territorial integrity of the countries; non-aggression; non-interference in each other’s affairs; and equality, mutual benefit, and peaceful coexistence. Although some may question China’s real motives, there is no doubt that the nation is taking the initiative in developing tighter relationships with its neighbors and markets.

By land and by sea

This economic plan not only includes the overland belt and the water-based road, but also incorporates pipelines and railways. Let’s take a look at each of these trade routes in greater detail.

  • The Silk Road Economic Belt starts in Xi’an, China; stretches west through Lanzhou, Urumqi, and Khorgas, China; continues  west through the countries of Central Asia, including Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, and Turkmenistan; traverses Azerbaijan, Armenia, Georgia, Pakistan, Afghanistan, Iran, Iraq, Syria, and Turkey; crosses the Bosphorus Strait; stretches through Europe to Bulgaria, Romania, Poland, Russia, Belarus, the Czech Republic, Germany, and the Netherlands; and then turns to Italy, where it converges with the Maritime Route (Dumitrescu 2014).
  • The 21st Century Maritime Silk Road begins in Quanzhou, China; heads to the Malacca Strait, Malaysia, Bangladesh, Sri Lanka, and India; crosses the Indian Ocean toward Kenya; continues north along the Horn of Africa; enters the Red Sea through the Gulf of Aden; reaches Egypt; enters the Mediterranean Sea through the Suez Canal to reach Greece; crosses the Adriatic Sea to Italy; and the connects to the land route (Dumitrescu 2014). To support the water-based trade, China also is promoting the construction of new or enlarged ports. For example, China Merchants Holdings, Cosco Pacific, and a third investor paid close to $1 billion to gain a controlling stake in a Turkish container terminal (Knowler 2015).
  • China is heavily dependent on coal to generate its electricity. To ensure its future, leaders are looking to the oil-rich countries of Eurasia, including Pakistan and some former Soviet possessions, and building oil and gas pipelines to connect to those areas (Knowler 2015).
  • Railroads are starting to be implemented in Indonesia, Thailand, Laos, and Europe. Also, in addition to the 29 rail lines from 17 different Chinese cities to Europe, China recently announced a train route connecting Beijing and London. In an 18-day journey, freight will cover 7,456 miles, crossing Kazakhstan, Russia, Belarus, Poland, Germany, Belgium, France, and the United Kingdom (Webb 2017). This means that a variety of products will be able to reach London in half of the time it would take the goods to travel by sea. Upon completion, London will be the 15th  European city with a direct link to China (Carvatho 2017).

An eye on global partnerships

Beyond connecting China with other countries on its continent, Chinese officials are working to strengthen their ties with global powers, including Australia and Egypt. The Chinese government wants to link OBOR with Australia’s plans to develop its northern region. This is part of the effort to increase business ties between China and Australia after the expected implementation of the China-Australia Free Trade Agreement later this year. 

 

President Xi also announced plans to help Egypt improve its infrastructure and industrial capacity by aiding in the construction of approximately $15 billion worth of projects ranging from the energy to the transportation sectors. Chinese and Egyptian officials have signed 21 deals that could lead to a major increase in Chinese investment in the most populous Arab country.

Challenges to overcome

Of course, connecting more than 60 countries through deals and infrastructure comes with a number of obstacles. First is the challenge of complexity. The various countries involved have diverse terrain, infrastructure, political stability levels, languages, laws, regulations, and cultures. These differences require individual treatment if they are to be effectively resolved. In addition, because of the large number of countries involved, it’s likely that the leaders of nations that will benefit the most may be more agreeable, and officials in countries with little to gain may push for greater concessions in exchange for their cooperation.

The project also could face opposition from major global powers, such as Russia and the United States. Matlack (2014) points out that China is beginning to court countries that Russian leaders consider to be part of their domain, such as Kazakhstan, a major oil producer; Kyrgyzstan, which boasts large mineral deposits; and Turkmenistan, which produces natural gas. In recent years, Russia’s economy has restricted the amount of aid it could provide to these areas, but China’s recent, rapid growth has enabled more liberal investments in the contested countries.

Additionally, it is conceivable that the United States may, at some point, contest China’s continued dominance in some areas, especially those with oil and gas reserves that the US government believes should be relatively free from outside control. Although the United States and China are active trading partners, this relationship is always subject to modification.

Political strife within its own country could be another roadblock for China. Although President Xi appears to be in a strong position, the rapid growth of the country and the movement from a state-controlled economy to a more market-based one offers the potential for disagreements among leaders. In addition, Matlack (2014) reports that the western part of China has not participated in the economic growth that the coastal areas have experienced, and there is a separatist insurgency that Beijing wants to quell.

Beyond political issues, there’s going to be a pretty large financial gap to fill. So far, the project is supported by the Asian Infrastructure Investment Bank, the Silk Road Fund, and the New Development Bank. Together, these lenders, along with private-sector partners, can mobilize as much as $1.5 trillion of new capital in the coming decade (Cheng 2017). However, experts estimate that the project will require $8 trillion in the next decade.

Lastly, there’s the element of unpredictability. Major changes in governments, economic conditions, or other variables always could alter the plans.

However, as Alibaba founder Jack Ma says: “If trade stops, war starts. We have to actively prove that trade helps people communicate” (Stock 2017). For centuries, when given a chance, the Silk Routes have demonstrated that it is better for countries to trade goods, not gunfire. If OBOR is successful, several nations will be better off, both economically and socially.

References

  1. Bruce-Lockhart, Anna. 2016. “Why is China Building a New Silk Road?” World Economic Forum, January 3. https://www.weforum.org/ agenda/2016/06/why-china-is-building-a-new-silk-road/.
  2. Carvatho, Ritvik. 2017. “First Freight Train from China to Britain Arrives in London.” Reuters, January 16. http://www.reuters.com/article/us-china-britain-train-idUSKBN1521YP.
  3. Cheng, Allen T. 2017. “Updating the Silk Road.” Institutional Investor: 54–59.
  4. Dumitrescu, G. C. 2015. “Central and Eastern European Countries Focus on the Silk Road Economic Belt.” Global Economic Observer 3, no. 1: 144–153.
  5. The Economist. 2016. “Our Bulldozers, Our Rules.” The Economist, July 2. http://www. economist.com/news/china/21701505-chinas-foreign-policy-could-reshape-good-part-world-economy-our-bulldozers-our-rules.
  6. Hawksworth, John, and Danny Chan. 2015. “The World in 2050: Will the Shift in Global Economic Power Continue?” PwC. www.pwc.co.uk/economics.
  7. Jinchen, Tian. 2016. “‘One Belt and One Road’: Connecting China and the world.” McKinsey & Company, July. http://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/one-belt-and-one-road-connecting-china-and-the-world.
  8. Knowler, G. 2015. “Pakistan, India Have Big Plans to Expand Trade Corridors.” Journal of Commerce, September 10.
  9. Mark, Joshua. 2014. “Silk Road.” Ancient History Encyclopedia, March 28. http://www. ancient.eu/Silk_Road/.
  10. Matlack, C. 2014. “Putin Is Losing out to China in Central Asia’s Latest ‘Great Game.’” Bloomberg Businessweek, November 6.
  11. Stock, Kyle. 2016. “Movers.” Bloomberg Businessweek, February 13–19.
  12. Webb, Jonathan. 2017. “The New Silk Road: China Launches Beijing-London Freight Train Route.” Forbes, January 3. http://www.forbes.com/sites/jwebb/2017/01/03/the-new-sil-kroad-china-launches-beijing-london-freight-train-route.

Want more? Read a digital-exclusive sidebar about the history of the Silk Routes and the political and environmental factors that influenced trade. 

Richard E. Crandall, PhD, CFPIM, CIRM, CSCP, is a professor emeritus at Appalachian State University in Boone, North Carolina. He is the lead author of Principles of Supply Chain Management, Second Edition. Crandall may be contacted at crandllre@appstate.edu.

To comment on this article, send a message to feedback@apics.org.

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