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One Belt, One Road: When a Trade Route Isn’t a Trade Route

July 13, 2017 This economic initiative is a political solution, not a commercial enterprise.

Deep Dive

|July 14, 2017

Summary

In the fall of 2013, just months after assuming office, Chinese President Xi Jinping unveiled the One Belt, One Road initiative during visits to Kazakhstan and Indonesia. Before Xi, Chinese strategy had been inspired by Deng Xiaoping’s warning in the 1990s. Chinese leaders, he insisted, should “hide our capacities and bide our time; be good at maintaining a low profile, and never claim leadership.”

It is tempting to think of OBOR as a consequence of Chinese maturation, an ambitious program of economic development that will vault the country into the 21st century. To some, it’s a direct challenge to the United States, something that requires a new strategy from Washington if it is to remain on top of the global order. The problem with this line of thinking, and in analyzing the U.S. perspective on OBOR in general, is that there’s very little in this economic initiative to be for or against. It is little more than a pipe dream. And what has materialized from the dream, at least so far, doesn’t hurt the United States’ position. If anything, OBOR helps its position.

One Belt: Eurasia

OBOR is really two plans combined to form a larger framework of new trade routes. The first of these is One Belt, which refers to the development of new infrastructure, particularly railroads and highways, to connect China’s interior provinces with Europe by way of Russia, Central Asia and the Middle East.

One of the most important provinces for One Belt is Xinjiang, the restive province in which China’s Uighur Muslims reside, and its experience is a useful example of the limitations inherent within One Belt. Xinjiang has seen impressive growth in recent years – its regional gross domestic product increased 62 percent between 2010 and 2014, according to the National Bureau of Statistics. The problem is that even for Xinjiang, the gravity of the global economy still pulls its economic activity east to the sea, not west to the center of Eurasia. There are no open-source numbers available that break down Chinese exports by mode of transport, but the vast majority of China’s export destinations in 2016 were all countries to which Chinese goods arrived by sea, not by land.

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Of course, insufficient regional infrastructure has tempered expectations of increasing overland exports. But the bigger problem with One Belt is geopolitical: Eurasia is in a state of crisis, and several of the countries China borders will feel the crisis particularly acutely in the coming years. Central Asia, a patchwork of states whose borders were drawn to make the countries more easily controlled from Moscow during the Soviet era, is hardly a promising market for Chinese goods. Furthermore, it is one of the most politically unstable regions in the world. One Belt is not a long march into prosperity – it’s a long march into disaster.

For the United States, there is a single overarching strategic imperative in Eurasia: to prevent the rise of a power that could potentially challenge U.S. hegemony in the world. No such power is likely to appear anytime soon, and even if One Belt were able to achieve its extremely ambitious goals, such a power would still be constrained by geography and regional rivalry. If anything, the U.S. would welcome the possibility of improved infrastructure and increased trade, providing new economic opportunities to some of these impoverished and increasingly destabilized regions. The Middle East, for example, has descended into chaos largely because of the limited economic opportunities available to young people. If the construction of a vast network of trade infrastructure brings economic opportunity to Eurasia’s most unstable regions, even if it enhances China’s international prestige, the U.S. could easily live with it.

One Road: Maritime

More important to the United States is the One Road component of the initiative – China’s vision of a new Maritime Silk Road. According to the United Nations Conference on Trade and Development, roughly 80 percent of global trade by volume and over 70 percent of global trade by value is conducted by sea. The One Road portion of OBOR is meant to increase Chinese construction of ports in countries along maritime routes that are already used in seaborne trade. China has already seen this strategy pay some dividends, having been awarded contracts to build ports in Myanmar and Sri Lanka. China also, however, has had some setbacks; a deal Beijing had with Bangladesh fell through in 2016 when Dhaka decided that an offer from Japan to build a port better suited its needs.

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Washington’s strategic imperative in the seas is similar to its imperative in Eurasia: to prevent the rise of a potential challenger, an imperative that entails dominating the seas and ensuring the flow of international trade. This is why One Road is a little more concerning than One Belt; the U.S. can accept and even benefit from Chinese influence in Eurasia, but it cannot tolerate a Chinese navy commensurate with the ambition of One Road. It signals Beijing’s intent to expand the size and capability of its navy.

Still, from a U.S. perspective, the importance of China’s projects along the Maritime Silk Road is significantly overinflated. Constructing ports will not provide China with permanent bases for Chinese destroyers or armies – the countries in question have yet to agree to host them. More important, the Chinese navy, despite its impressive advances over the past 25 years, is not capable of extended, long-term deployments in countries far away from the mainland.

As Dr. Bernard Cole, a professor at the National War College, notes in his latest book on the Chinese navy, the navy “lacks seaborne air power, and it has no fixed-wing capable ships, only nascent in-flight refueling capacity, no airborne air control, and limited joint operational capability with the [air force].” Though equipped with an aircraft carrier to parade its advances, the Chinese navy does not currently have a single carrier battle group trained and ready for action.

The priority of China’s navy is to protect Chinese territorial claims in its littoral waters. The drama that surrounded U.S. President-elect Donald Trump’s phone conversation with the president of Taiwan in 2016 emphasized just how weak China is relative to the United States: China can’t really stop the United States from “meddling” in Taiwan, let alone match its navy pound for pound. So long as this is the case, China’s interests are actually in sync with those of the U.S., at least when it comes to global maritime trade. This is because the Chinese economy depends on exports and the vast majority of those exports are shipped via sea.

There are other reasons One Road will be ineffectual. The U.S. favors the status quo in Asia and so has no desire to change the balance of power. Smaller countries are suspicious of Chinese intentions; though they would happily accept Chinese money, there’s no guarantee they will always do Beijing’s bidding. U.S. allies, such as Japan, India, Australia, South Korea and Taiwan, moreover, have formidable navies that can curb Chinese assertion.

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All this elides a bigger flaw in China’s strategy. Even if Beijing were able to scrounge up the trillions of dollars needed to build infrastructure in the world’s most inhospitable places, the fact remains that it is appreciably cheaper to transport by sea than to transport by land. It’s partly the reason why so much trade is conducted by sea, and there’s no reason to think this will change any time soon. One Road may be the more geopolitically significant aspect of OBOR, but maritime trade already forms the basis of the global economy without any help from China.

An Empty Vessel

OBOR is frequently and incorrectly compared to the Marshall Plan, the initiative by which the United States solidified its political influence in Europe by providing economic and technical assistance to war-ravaged countries.

The differences between the two are stark. The Marshall Plan was codified into law as the Foreign Assistance Act of 1948. The Foreign Assistance Act of 1948 is a dry, 23-page document that lays out clear guidelines for the organizations that were set up to administer the funds, the advisory boards that oversaw those organizations, and the salaries and residences of the officials in charge of these organizations. The Marshall Plan was a highly focused and specifically targeted set of measures formulated and executed with a clear goal in mind: rebuild Europe so that the Iron Curtain would not creep farther west than it did.

The OBOR action plan, published by various organs of the Chinese government in 2015, bears no resemblance to this document. It begins by touting the virtues of what it calls the “Silk Road Spirit” – “peace and cooperation, openness and inclusiveness, mutual learning and mutual benefit.” (That the Silk Road was first and foremost about trade, i.e. making money, seems to have been forgotten or ignored, as has the fact that some Central Asian territories were conquered and that many dynasties paid tribute to the various tribes and enemies along the route.) There are no concrete action items set out in the Chinese government’s action plan for what has become one of Xi’s most visible policy initiatives. The document contains a number of generic proposals interspersed with platitudes about cooperation and understanding.

Those who are bullish on OBOR note that China has actually enacted some of this flowery language. For example, the Chinese government has established a Silk Road Fund worth $40 billion. In October 2014, the Asian Infrastructure Investment Bank was founded with $100 billion of funding, more than a third of which came from China. The New Development Bank, which is a funding source for BRICS countries, has another $100 billion of investment it can draw on. These appear to be positive steps for OBOR.

But appearances can be deceiving. In truth, $240 billion is nothing compared to the trillions of dollars OBOR calls for. (HSBC has projected that OBOR will require at least $4 trillion-$6 trillion over the next 15 years. Likely, that estimate is too low.) OBOR is supposed to create multiple economic corridors covering almost two-thirds of the world’s population and a third of global GDP. The infrastructure necessary to bind Eurasia together will require the construction of roads, railways, ports and other elements across vast distances in some of the harshest geographies and least populated areas in the world. The fact that more than 4.4 billion people account for only a third of the world’s GDP is often glossed over when the goals of OBOR are touted, and that’s because it shows just how poor many of these areas are.

And yet, besides the capital necessary to get its ambitious programs off the ground, there are two bigger problems with OBOR. The first is that even if China and the various countries it has identified as its Silk Road partners come up with the money, OBOR does not have a centralized organizing body or a strategic goal it is meant to accomplish beyond enriching all of Eurasia. Looking at the projects the AIIB has approved in recent months is telling: rehabilitating a hydropower plant in Tajikistan, investing in Indian infrastructure service companies with high growth, a highway project in Georgia, a dam improvement project in Indonesia. Though they benefit local populations, they are all far-flung, one-off infrastructure projects that do not connect to form a new Silk Road and, thus, do nothing to increase Chinese power.

The second problem is that China’s main goal for OBOR is to accomplish what each successive Chinese leader has failed to do: distribute the wealth of the coast to the impoverished parts of China’s interior without destabilizing the country. China has chosen to dress its OBOR strategy in the raiment of the Silk Road, which to most of the world conjures up images of history and nostalgia for a simpler time. But that should not obscure the differences between the Silk Road and OBOR. The Silk Road was built on the exchange of goods between equally willing trading partners. China possessed silk. India possessed spices. The Romans and later the Europeans possessed silver and other precious metals. British historian Peter Frankopan estimates that in the 1st century nearly half the money produced by the mint of the Roman Empire was used to buy Chinese silk. The Silk Road was a constantly evolving marketplace that moved goods across a vast continent where they could be exchanged for other goods. And unlike today, Eurasia was the center of world civilization, home to the most important economies.

That world is gone, and Eurasia is no longer what it was. China may be the world’s second-largest economy, but the U.S. economy is still much larger. The U.S. is the largest consumer of Chinese exports and, just as important, it does not rely on exports for growth. The most concrete part of the OBOR action plan is how Chinese provinces are to profit from developments in infrastructure and increased trade. As the U.S.-based Center for Strategic and International Studies pointed out in a study published in March 2016, OBOR is not about China’s geopolitical ambitions but rather about achieving two domestic economic objectives.

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The first objective is to enrich the interior provinces, which remain woefully impoverished compared to the richer coastal regions despite China’s preternatural growth rates in the last three decades. The second objective is to find new overland markets that can absorb China’s massive excess capacity of steel, coal and other key commodities. China is struggling to cut the production of these commodities but has found that it cannot do so without sacrificing economic growth rates, and for the Chinese Communist Party, whose legitimacy has been built on the enrichment of the masses, this is not a realistic option. Beijing is hoping OBOR will help China find a place to dump the surplus commodities it has produced and to justify increased infrastructure spending in these less-developed parts of the country.

OBOR ultimately matters relatively little. The initiative itself is ill-defined and has produced little of tangible importance in the three years since it was announced. Any successes achieved through OBOR do not threaten to upend the global balance of power. And as for U.S.-China relations, Washington has far more pressing issues with China, the most important among them being trade policy, developments in the Chinese navy, and the maintenance of U.S. power in the Asia-Pacific region. For China, OBOR is about weaknesses in its domestic economy and about increasing its national prestige so as to appear more powerful than it is. China has already succeeded at the latter, but if OBOR is to be truly transformative, it must help China deal with the former, and whether it can remains an open question.