The Blood of Trade: Advantages of One Belt One Road for China

The Blood of Trade: Advantages of One Belt One Road for China

Source: Jacques (2019)

Source: Jacques (2019)

In 2013, President Xi launched his One Belt, One Road project. It has other names: the Belt and Road Initiative, the New Silk Road, and OBOR. One belt (land roads), one road (maritime routes). This article will outline why the Chinese state is pursuing this policy, and the many advantages to China to do so. There are multiple things worth addressing.

Creating Demand and Employment

There is the issue of supply outstripping demand. Despite the size of China, and the population of it, the cities have been heavily developed, leaving China with a large amount of unused labour and a large supply of steel, cement, and talent for building infrastructure. Jie (2019) points out that One Belt One Road will allow China to build additional infrastructure in developing countries; made of what materials, I ask? In particular, China will be building railways, highways, and energy infrastructure (Chatzky and McBride, 2019); these are all technologies, particular that of railways, that China prides itself in producing. 50 Chinese state owned enterprises are leading most of these projects (China Uncensored, 2017b). In fact, China has been overproducing steel recently (Xin, 2016). We would assume then that the price of steel is dropping as supply outstrips demand. Consider the graph below (TradingEconomics.com, 2019): 

Source: TradingEconomics.com, 2019

Source: TradingEconomics.com, 2019

We can also see that steel exporting increased dramatically when One Belt One Road began, as we can see in the graph below:

Source: International Trade Administration, (2019)

Source: International Trade Administration, (2019)

The International Trade Administration report (2019) shows more evidence: the export share of the goods rose from 7.3% in 2013 to a high of 13.8% in 2015, and has remained higher than average (currently 8.8% in 2018). Since Xi came to power, the export share has more than tripled. Under the recent trade war, that share has fallen.

While production across the world has been increasing (at least in China), the price of steel has been climbing.I am sure that people will notice the drop around mid-2018; that would be the effects of the trade war on steel prices, which also serves to prove that China is a focal point of this steel pricing. When supply is increasing, and price is increasing, that means there is a corresponding demand increase. The One Belt One Road provides China a chance to build across the world, with steel as a principal ingredient. One Belt One Road has allowed China to set up a profitable industry where it was once known as a “zombie industry” due to the lack of profit and the government subsidies keeping it alive.

This allows China to export these industries, providing yet more employment for the uneducated labourers in the form of both work abroad, and work producing these materials at home. Many labourers, as seen in Xin (2016), are happy with this. The government has pledged to reduce this industry due to pollution concerns, and yet more and more factories are opening up across China; I suspect for the sake of employment. The government is quite capable of shutting down factories (ask any producers near Beijing recently), and as the people say: 

“The government can control the weather”

A joke that whenever there is an international event such as the Olympics, the government shuts down the traffic and factories to keep the skies blue, until eyes turn away.

To Reinforce and Re-establish Diplomatic Ties

There is the issue of China having been quite isolationist and introverted for the majority of its time as the People’s Republic. One Belt One Road re-establishes diplomatic and trade relationship beyond simple import and export. China’s trade partners have all signed up to OBOR; we can check quite simply. In the International Trade Administration Report (2019), we can see with whom China trades most of its steel:

Source: International Trade Report, (2019)

Source: International Trade Report, (2019)

  In 2019, the Second One Belt One Road Forum for International Co-Operation (Xinhua News Agency, 2019) had 40 countries attend; the following countries leaders attended from the above chart: Indonesia, Myanmar, the Philippines, Thailand, Pakistan, Chile, Malaysia, Vietnam; over a third of the steel exports of China had come to this conference and joined it, benefitting from the steel above, and placing China at the heart of these negotiations; the Middle Kingdom indeed. The only countries missing from the above list of significant trade partners are India and South Korea, which sit safely within the American-Western sphere of influence.

In response to this, the United States have expressed belief that One Belt One Road is an expansionary measure to spread Chinese influence across the world (Chatzky and McBride, 2019). 

Source: Xinhua New Agency, (2019b)

Source: Xinhua New Agency, (2019b)

To Protect the Currency

There is the current trap of Chinese yuan is currently under a ‘crawling peg’ with the U.S. dollar (Kroeber, 2014); this is reflected in the effects of the trade war. The One Belt One Road project will provide China as way to allow other countries to use RMB as a primary currency, or at least trade in it. China is pledging $1 trillion to OBOR (China Uncensored, 2017b). Experts put the number at $1.3 trillion. Don’t worry; this money will be renminbi, and thus create the use of renminbi on a large, international scale.

The other aspect of this crawling peg is that of the Chinese yuan being stable, so other countries will move away from using U.S. dollars, and towards using Chinese yuan (Chatzky and McBride, 2019). Kenya, for example, has nearly 60% of its’ loans from China (China Uncensored, 2017a). By doing so, the foreign reserve of U.S. dollars in China will remain higher and therefore safeguard the value of the yuan internationally. Remember; the Chinese government abhors instability or surprises. It will also allow China to move closer to being the financial centre of the world. Combine that with being the trade centre and production of the world, and we end up with an economic Middle Kingdom.

An Expansion of Markets for Exporting To

In 2030, according to Tsinghua estimates, China will account for 34% of global GDP (PPP), making it disproportionately economically powerful (Jacques, 2019); in the future, China will require markets to expand this massive GDP into, and import from. As China is a country with 50% of its GDP dependant on trade, the OBOR will allow China to increase its trade. According to Jie (2019) of China Daily, One Belt One Road creates 13.4% of global trade volume alone. Apparently 131 countries have joined the OBOR Initiative, which will certainly create long-term trade prospects. A slowing economy has also placed pressure on Chinese leaders to open new markets for Chinese goods (Chatzky and McBride, 2019). The trade war and anti-Chinese view that America is taking with China certainly isn’t helping Chinese exports.

These new markets will allow China to transition into its’ developed stage of exporting capital intensive and luxury goods, rather than the cheap goods we expect; this is part of China’s 2025 plan; the hope is to avoid the Middle Income trap that plagues so many countries (Chatzky and McBride, 2019). Thus China will be able to export these luxury goods to these alternative markets, and allow the middle class to flourish (China Uncensored, 2017a).

Imports of Rare Materials

China, like most of Asia, is very poor in natural resources (Jacques, 2019). With China’s 2025 plan, the most important part is that of raw materials. China is poor in these materials, and when these materials are unable to reach China, companies suffer (see ZET without the materials for batteries). OBOR will allow the Chinese to get these materials at low cost (China Uncensored, 2017a). It will also allow China to access energy resources through land routes via the Middle East, allowing China to maintain energy in the event of a war with America, providing China with long-term military provisions that the U.S. cannot touch (Chatzky and McBride, 2019).

A Focus on the Countries of the Future

The focus of the OBOR on South countries (which make up a majority of population and consumption, and will only increase over time) will provide long-term benefits for China. Over two-thirds of the worlds’ population has signed onto OBOR (Chatzky and McBride, 2019). In 2030, 67% of GDP will belong to the South countries, as shown below:

Source: Jacques, (2019)

Source: Jacques, (2019)

In the future, China’s relationship with these poorer countries will benefit them in the long run, as 85% of the world lives in the South economies. A London School of Economics estimate places the centre of the global economy in 2050 as seen below (Jacques, 2019):

Source: Jacques, (2019)

Source: Jacques, (2019)

In the above chart, we can see that the majority of trade will take place on the Sino-Indian border (Jacques, 2019).

Chinas’ importing of materials has boosted the price in poorer countries, which in turn increase the wages of the workers in those countries (Jacques, 2019). Naturally, in turn, these countries will have the wages to import Chinese goods, which in turn benefits both the developing countries and Chinas’ economies.

China has also focused on the infrastructure of the countries in Africa, unlike most European and American aid to those regions (Jacques, 2019).

An Alternative from the Western Model and Leadership

“China has never been like the West, isn’t like the West, and never will be like the West” Martin Jacques (2019)

The focus of OBOR on South Countries provides them an alternative model to follow; should they try to get western help or investment, they face political pressure to change. China asks for nothing; China also will be given none of that pressure. The Chinese model of being a global power is that of the Middle Kingdom; that China is the centre of the world, the heaven,  of civilisation. So unlike the European model of spreading their order through colonialism, China believes in a ‘stay-at-home’ universalism (Jacques, 2019).

There will be a change in governance due to the influence of China through OBOR (Jacques, 2019), as well as an increase in the Chinese laws, courts, and governance. China has built two courts in China purely to listen to these OBOR disputes; one in Xi’an, one in Shenzhen. This will likely expand into business and commercial law across the world.

Some see OBOR as China exerting its own global order over that of Americas’, an “expression of China’s power ambitions” (Chatzky and McBride, 2019). Indeed, Chinese general Qiao Liang (2015) called OBOR as a move against the Wests’ eastward ambitions.

The lack of strings attached to deals certainly appeals to authoritarians, who do not have to deal with the public backlash of debt and corruption that these deals may bring (Chatzky and McBride, 2019). China has always run with a basic level of respect for the other; as long as you don’t cross the central authority (whoever that may be near you), you’re left alone (Jacques, 2019). This works quite well with the differing regimes under the OBOR.

To Do Good for Developing Countries

China has, through state investment and infrastructure development, pulled together the second biggest economy in the world in less than half a century. Why not spread this knowledge and technique across the world, especially many of the poor countries in the Eurasian landmass (Jacques, 2019)?

China argues that it understands the problems of the poorer countries, having been poor itself only 50 years ago. This may be a fair point; Europe and the U.S. have usually been capital rich for the past 500 years (Jacques, 2019). This is why China has developed such a strong relationship with African countries. 

With China throwing more and more resources at these poorer countries, it will be seen as a more benevolent world power. The World Bank believes that South East Asia suffers an $800 billion shortfall each year in infrastructure spending, and OBOR would help this, trying to improve China’s image (Chatzky and McBride, 2019). 65% of African have a favourable attitude towards China (Jacques, 2019).

However, accusations from countries who have not done well under OBOR of power abuse, selfishness, and not providing work to locals have led to cries of “neo-colonialism”. Unlike Western aid models, OBOR is a low-interest loan. Some OBOR deals require the use of Chinese firms and employees, thus providing Chinese employment (but none for the locals). Contractors may also inflate costs at the expense of the host country (Chatzky and McBride, 2019). This may lead to cancelled projects; consider the recent move by Malaysian President bin Mohamad to cancel a project, then renegotiate the price to be $9 billion less, nearly half the original price. In Sir Lanka, Chinese debts led to the government of Sri Lanka being forced to give a port to the Chinese for 99 years on a lease. Pakistani debts to China led to further debt taking, from the IMF and China, among others. This is based on the tributary system of China in the Imperial times; all China asked was for the recognition of the empire and the superiority of the empire, and for the occasional tribute to be left alone (Jacques, 2019). Otherwise, China left you alone.  French President Macron spoke of the potential that OBOR may make Chinese partners ‘vassal states’ (Chatzky and McBride, 2019)

China’s moves have forced the West, led by the Trump White House, to produce the USAID, a Western equivalent to help south countries develop. Any focus on the poorer countries with an aim of improving their quality of life is worth pursuing. Obama’s White House spent billions on a gas line through the Middle East as well as infrastructure in the Middle East (Chatzky and McBride, 2019). The lack of taking part from the West has allowed China to be the major player in the development of these countries, and the Western alternative has a fraction of the spending of OBOR.

Conclusion

There are many ways to project power across the world. Traditionally, it was militarism. Today, it is economics. OBOR is an economic projection of power. In 500 years, between the 14th Century to the mid-19th Century, China only fought only one way (which they lost, against Vietnam). Compare this to Britain and France, who fought 142 wars just between each other in this same time period (Jacques, 2019). China is not Russia; it does not believe in military competition (Jacques, 2019). It relies on economic pressure to win. One Belt One Road is this economic conquest of the world, and through the above circumstances, China will expand its’ influence through the world.

Chinas’ focus on the poorer countries that will one day become rich; Chinas’ looking away from, or encouraging regimes that the West will not touch; Chinas’ expansion into the economies of the entire world without the interference of the West. Combine the above with the expansion of Chinese exports, the use of the renminbi instead of the dollar in some regions, and the increasing strength of the Chinese vision, means that One Belt One Road is the most vital project that Xi Jinping is embarking on. The above reasons are why China cannot, and will try their best to ensure, fail this project. Failure means the collapse of the Chinese economy under monetary expansion and a lack of markets as the U.S. crushes them down. Success with this project means the eventual return to China being the Middle Kingdom of the world


Bibliography:

In all articles, I provide as much information for sources as possible, including links. I encourage everyone reading this article to read deeper, and make their own conclusions. For students, links are here so they can read the original source themselves.

Chatzky, A. and McBride, J., (2019), “China’s Massive Belt and Road Initiative”, published by the Council of Foreign Relations, retrieved from https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative on 14th May 2019.

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Qiao, L, (2015), “One belt, one road”, published by Rivista Italiana Di Geopolitica, Rome, Italy, retrieved from http://www.limesonline.com/en/one-belt-one-road on 14th May 2019.

TradingEconomics, (2019), “Steel”, published by TradingEconomics.com, retrieved from https://tradingeconomics.com/commodity/steel on 14th May 2019.

Xin, Z., (2016), “The zombies return: why are steel firms in China coming back from the dead?”, published by the South China Morning Post, Hong Kong, retrieved from https://www.scmp.com/news/china/economy/article/1944568/zombies-return-why-are-steel-firms-china-coming-back-dead on 14th May 2019.

Xinhua News Agency, (2019), “40 leaders take a group photo during the leaders’ roundtable meeting”, published by Xinhua News Agency, retrieved from https://eng.yidaiyilu.gov.cn/qwyw/rdxw/88297.htm#p=40 on 14th May 2019.

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