Date Published: May 2018 (10 Min Read)

There is a splendid irony about the respective positions being taken by China and the US in their current trade dispute. The “leader of the free world” is promoting protectionism, while the communist autocracy lauds liberalism. While the media rightly focuses upon this alarming dialogue, there is another, and ultimately greater, trading strategy underway. “The Chinese Dream” is a phrase popularised throughout China by the Chinese Communist Party (CCP) and is most closely associated with Xi Jinping. What exactly this “dream” constitutes is debatable but its general implication is that of a better future for the Chinese people.

Fundamental to realising this vision of the future is the Belt and Road Initiative (BRI). This is a multidecade long project that has been dubbed the largest development plan in history,  encompassing cooperation between more than 65 nations within Asia, Africa and Europe, with the current projects worth around $230bn and expected to reach $4tn at maturity. Highways, railways, pipelines, seaports, airports, dams, telecommunication networks and new cities all make up the various components of the plan. Together they form a connection between China,
its neighbours and beyond, by land, sea, air and telecommunications.

Since China joined the World Trade Organisation (WTO) in December 2001, their foreign exchange reserves have swelled from $212bn to almost $4tn in June 2014. This substantial increase has put China in a position to invest enormous amounts into the BRI. However why have they chosen the path of BRI, rather than to invest heavily domestically?

Firstly, to cut the time it takes to import and export goods. A freight train’s travel time from Yiwu International Trade City to London is 18 days in contrast to 30-45 days for the traditional sea route. On the other hand the container capacity of a ship is about 1000 times that of a freight train, and shipping costs per container are still about half that of a freight train. But many of the regions involved in the BRI do not have the option of maritime trade as they are land locked.

Secondly, boosting regional development in China is essential for maintaining the CCP’s grip on power. China’s economy has grown over the past four decades, as a result of its export-oriented
strategy, but so too has regional inequality. China’s success is skewed substantially towards its coastal regions whereas many of the inland regions have struggled. The province of Shanghai is five times wealthier per capita than China’s poorest region, Gansu.

Thirdly, to upgrade Chinese industry. China has become known as the ‘factory of the world’, largely as a result of having such low labour costs. However, the wage rate has risen substantially so that mass production of low-cost goods is becoming less viable (see chart of China’s Average Yearly Wages, below) The Chinese leadership now aims to capture the higher end of the global value chain, and to offload the lower cost manufacturing opportunities to countries that are in earlier stages of development. These countries are seen by Chinese policy makers as likely early customers of higher-value Chinese industrial products, unlike the developed countries in the West.

Fourthly, there is the need to deal with the excess capacity of Chinese industry. This burgeoned as a result of the Chinese fiscal stimulus package implemented in response to the global financial
crisis. The strategy was effective at avoiding financial collapse in China and other parts of Asia, but the mammoth $586bn expenditure has led to an oversupply in many industries, especially in
the cement and steel sectors which are crucial for infrastructure.

Chinese industrial state owned enterprises (SOEs) have therefore been seeking foreign demand for infrastructure projects to mitigate the overproduction at home.

Finally, China is also trying to meet its ever-growing demand for raw materials. A network of pipelines connecting oil and gas rich economies such as Turkmenistan, Saudi Arabia, Kazakhstan and Russia to China are under construction to alleviate their current dependence on oil and gas imports crossing the disputed South China Sea territories.

China’s aspirations may be much more than just economic, and perhaps they have ambitions of at least parity with the US and potentially of world leadership. One can only surmise that BRI is the road towards attaining that goal.

While the Washington Consensus sought to develop the world by diminishing the role of government and allowing markets to make miracles, the Chinese model puts much more emphasis on the role of state pragmatism. Politics will be at the heart of the BRI’s realisation.

If successful, creating a China-centric cooperative network within the continent would be an effective counterbalance to the dominant US-centric multilateral institutions that uphold the current
world order. The US may slowly but surely find itself “relegated to the position of a distant island, floating between the Atlantic and the Pacific.” [1].

The prospect of a combined geo-political and socioeconomic shift towards China, with a renascent and increasingly militaristic Russia, may explain the assertive rhetoric from President Trump.

Article written by
Simon James