What Can China’s New Silk Road Do For Global Trade?

By Wolfgang Lehmacher and Victor Padilla-Taylor

In October 2012, Wang Jisi – professor at Beijing University – urged China to re-open its ancient commercial trade routes with the West. In 2013, China’s President, Xi Jinping proposed to its neighbors the “One Road, One Belt” initiative. China’s aim? To achieve $2.5tn in additional annual trade with the nations along the proposed routes over the next 10 years.

What is the Current State of the Project and How Likely is it to Succeed?

The private sector, for one, has started reinforcing the connectivity between the East and the West. In 2011, supply chain operator DB Schenker started weekly trains between China and Germany. It carried 40,000 TEU containers (20 foot equivalent unit) from 2012 to 2014.

In 2015, the Port of Rotterdam welcomed its first containers by rail from China. This route shortens the delivery time of goods from around 60 days by sea to about 14 days by land. In the future, trains from Chongqing in China to Duisburg in Germany transiting 10,800 km (6,700 miles) are expected to reduce delivery time to 10 days. Companies such as Hewlett Packard are connecting European customers with the factories in China through the new route. Returning containers are filled, for example, with western luxury cars.

The result is that the modern caravan has started rolling. Thus, the “New Silk Road” development project – which embraces an area that is home to about 70% of the world’s population, produces about 55% of global GDP and has about 75% of known energy reserves – has been taken its first steps. Of course, challenges remain.

The ambition requires efficient and effective collaboration between the 40 countries located alongside the historic silk routes, both those that went overland from China to Europe and those that went by sea. China has taken the initiative to start aligning the participants, signing partnership agreements related to the initiative from 2013 onward with Russia, Kazakhstan and Belarus.

The project requires significant funding – an estimated $8tn between 2010 and 2020 alone. The China government announced several commitments including a $40bn Silk Road Fund to be focused on projects in the Central Asia region, a $50bn Asian Infrastructure Investment Bank (AIIB) and a $10bn BRICS-led New Development Bank. Some sources suggest that Beijing is prepared to support the projects to the tune of between $160bn to $300bn. The China Development Bank and the Maritime Silk Road Bank are set to reinforce such support.

The New Silk Road project needs to overcome technical and regulatory challenges. The trains require at least two changes of gauge – as China and Europe use the standard of 1435 mm gauge while Belarus, Russia, Mongolia and Kazakhstan use the broad gauge of 1520 mm. Many borders need to be crossed. Customs clearance processes need to be standardised – advanced information technology and digitisation might help. Ideally, the New Silk Road will become a free-trade corridor.

Each country needs to understand what to contribute, such as what infrastructure and policies to launch, how to finance the initiative and what benefits to be expected from the investments. A well-designed business model which features a plan outlining how the Silk Road will work is critical to ensure that additional value – new businesses, new industries and new jobs – is created along the entire value chain and not merely at both ends (China and Europe).

Imbalances in economic strength and the flows of goods – China exports are traditionally stronger than those of most of its trading partners – and seasonality like slow months and peaks need to be factored in the model.

The success of the New Silk Road depends as well on clear governance rules and mechanisms. This includes the answer to the question of whether this project requires an independent organisation or can handle strategic decision-making and dispute resolution in a bilateral or multilateral way.

The incentive to get this right is huge. The participating countries will be able to tap in a new source of growth and need to balance spending with progress. Currently, China is carrying the lion share of the investment. In return, Asia’s leading economy expects significant stimulus for its market and favourable ties with countries along the belt.

The private sector will leverage the potential and increase investments proportional with the improvements in infrastructure and processes. If successful, the reboot of the ancient Silk Road will without doubt bring additional growth opportunities to business and nations, and provide also better access to no less than 66% of the world’s middle class, which is expected to live in China by 2030.

Wolfgang Lehmacher is head of supply chain and transport industry at the World Economic Forum. Victor Padilla-Taylor is community lead, supply chain and transport at the World Economic Forum.

Courtesy of World Economic Forum