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The Grand Design of China's New Trade

Routes

Assessments

Jun 24, 2015 | 09:15 GMT

(SAJJAD QAYYUM/AFP/Getty Images)

Forecast Highlights

Over the next several years, China will devote significant resources to the
construction of Eurasian trade routes under its Belt and Road Initiative.

As transit routes come online, the proportion of Chinese maritime trade passing
through South China Sea chokepoints will shrink.

The new infrastructure built as part of the Belt and Road Initiative will support China's
economic rebalancing by opening new markets, generating demand for higher
value-added Chinese goods and helping China build globally competitive industries.

Improving transit routes will lead to new security and political risks, and China's
efforts to mitigate these threats could create frictions in the very areas where Beijing
is trying to diversify its trade routes.

In 2013, China's President Xi Jinping proposed a plan to stimulate

development in Eurasia by constructing what he called the Silk Road
Economic Belt and the 21st Century Maritime Silk Road revivals of the
overland and maritime trade routes that once connected China and
Europe. Since then, the "Belt and Road Initiative" has become a xture

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in ocial Chinese discussions on both foreign and domestic policy.

Nonetheless, the initiative is still loosely dened. Beijing claims there
are about 60 Belt and Road countries, but there is no public listing of
these countries. Although the initiative clearly centers on infrastructure
investment, Chinese media coverage oers no straightforward denition
of what projects count as part of the program. A pledge to install signs
and information kiosks in Armenia is said to be under the banner of the
Belt and Road Initiative, as is a $46 billion infrastructure investment
package that Xi promised to Pakistan in April.
This lack of clarity makes it dicult to see what is special about the
Belt and Road Initiative. After all, China has long been involved in
infrastructure construction across Eurasia. However, with the Belt and
Road Initiative, China has for the rst time explicitly unied all of its
infrastructure investments in Eurasia under a single coordinated plan.
The initiative should not be understood as merely as the sum of its
infrastructure projects. Rather, it should be seen as a stratey with a
clear set of ends, ways and means, to be evaluated on its ability to
support China's geopolitical objectives.
The stratey behind the Belt and Road Initiative is to diversify transit
lines, thereby mitigating China's vulnerability to external economic
disruption and reinvigorating China's slowing economy. China's ideal
would be to link its inland cities to global markets with a diversied
network of transit routes and enery pipelines, many of which would
take inland routes and serve as alternatives to existing sea-lanes. The
name of the initiative, "One Belt and One Road," is slightly misleading;
this will not be a single overland road coupled with a single maritime
route. The initiative envisions six corridors across Eurasia, many of
which will mix land and maritime components.
Every project built along these corridors under the Belt and Road
Initiative will serve both strategic and economic purposes, though some
will prioritize one set of goals over the other. However, the overall
orientation of the Belt and Road Initiative will be toward strategic
objectives.

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Strategic Logic
China's economy is dependent on foreign trade, 90 percent of which
travels by sea. China's near seas the Yellow Sea, the East China Sea
and the South China Sea are bounded by what Chinese strategists call
the "First Island Chain," a series of islands (many of which are controlled
by U.S. allies) that stretches from Japan to the Philippines to Indonesia.
To reach ports on China's eastern coast, seaborne trade from the west
must pass through maritime chokepoints such as the Strait of Malacca
(through which 82 percent of China's crude oil imports passed in 2013).
Passage through these maritime chokepoints is secured by another
country: the United States, the world's dominant naval power.

The geographic enclosure of China's near seas would make it relatively

easy for an adversary to disrupt or interdict Chinese trade. China faces

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many challenges indeveloping the abilityto project sucient naval

power to safeguard seaborne trade as it passes through distant
chokepoints. Instead, China must rely on the United States to provide
security of the sea-lanes. Although maritime security is ostensibly a
public good, China worries that, as a potential peer competitor to the
United States, it will not always be able to rely on the United States to
protect its shipping.
U.S. war planners have certainly not ignored China's geographic
vulnerability. A 2015 Department of Defense report to Congress on
China mapped out chokepoints for Chinese enery imports, a move
unlikely to have gone unnoticed in Beijing. In the case of a war between
the United States and China, many U.S. strategists favor imposing a
distant blockade of Chinese waters. Although the U.S. Navy has
unchallenged supremacy over the open ocean, resource constraints
and the risks posed byChina's anti-ship capabilitiesin its near seas
suggest that U.S. forces would concentrate on blocking the chokepoints.
The Belt and Road Initiative aims to mitigate the risk of maritime
interdiction by constructing transit routes along six economic corridors:

The China-Mongolia-Russia corridor, anchored by the Trans-

Siberian railway

The New Eurasian Land Bridge, anchored by a set of railways

running from central China (Wuhan, Chongqing and Chengdu) to
Europe via Kazakhstan, Russia and Belarus

The China-Central Asia-Western Asia Corridor, speculated to

follow the overland Silk Road Economic Belt as depicted in maps
released last year by the state-owned Xinhua News Agency,
passing through Central Asia, Iran and Turkey to reach Europe

The China-Pakistan Corridor, which would extend the Karakoram

Highway, which already crosses the mountains between China
and Pakistan, and build highway and rail links all the way
through Pakistan to the port of Gwadar

The Indochina Peninsula Corridor

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The Bangladesh-China-India-Myanmar Corridor

In these corridors, China will enhance existing transportation

networks, construct new roadways and build intermodal transport hubs
andenery pipelines. Alongside these projects will come investment in
attendant infrastructure, including power plants and communications
technoloy such as ber-optic cables. China will not be starting from
scratch it has already built up a patchwork of infrastructure across
Eurasia, andmuch of the Belt and Road work will simply link existing
segments of road and railway.
Two of these corridors, the China-Mongolia-Russia corridor and the
New Eurasian Land Bridge, will be entirely overland. They center on
existing transcontinental rail lines and mainly focus on delivering

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relatively high value-added goods, such as electronics, which are

sensitive to rapid changes in demand. China will shift a small fraction of
its total trade to these routes, providing an outlet for industries in
China's interior and giving the country a measure of insurance against
naval interdiction.
Recognizing that it can only shift a small amount to inland trade
routes, China will continue investing in port infrastructure along other
corridors in the Belt and Road Initiative, particularly in theIndian
Ocean region. However, China will nd ways to link land and maritime
routes, aiming to bypass the South China Sea chokepoints and minimize
the distance of any single maritime leg of Chinese shipping. For
example, the China-Pakistan Corridor could allow some Chinese goods
to travel overland to Pakistan before embarking for Europe at the
Chinese-constructed port at Gwadar.
The Belt and Road investments will also serve to build political
support for China. Many countries along the proposed transportation
corridors face huge budget shortfalls in the area of infrastructure
development, together totaling trillions of dollars between 2010 and
2020.With its large nancial resources, China is well poised to ll some
of these gaps. In fact, some of the planned infrastructure projects will
have no obvious connection to the development of transit routes. For
example, China signed an agreement with Georgia in May to construct
30 greenhouses as well as provide additional agricultural assistance.
However, China will be happy to meet these seemingly unrelated
demands, both to bring in business for its construction industries and to
secure the political support necessary to ensure the safe conduct of
Chinese commerce through neighboring countries.

Economic Logic
The strategic value of these corridors will be realized in the long term
as the routes become fully linked. Aside from its long-term value as a
contingency plan for Chinese trade, the Belt and Road stratey serves
China's goal of alleviating its economic slowdown and correcting its
internal geographic disparities. By ocial gures, China's economy is

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expected to grow at about 7 percent a year, though in reality, growth is

likely to become substantially slower. To handle the slowdown, China
aims to shift its industry away from the coast to the relatively
underdeveloped inland provinces. Meanwhile, it seeks to produce
higher value-added goods in coastal regions and expand coastal
consumer bases to absorb manufactured goods from the newly
industrialized interior.
The Belt and Road Initiative will aid in this process by constructing
physical links between China's inland industry and new markets. Belt
and Road infrastructure projects may give China a way to ooad some
of its growing surpluses in construction materials and rural labor.
Although it may not be economically or politically feasible to tap into
these surpluses for every project, overall the initiative will help alleviate
some of China's overcapacity problems.
In addition to building up the "hardware" of infrastructure, China will
try to streamline trade by pushing for new customs agreements and
unied technical standards. These trade facilitation measures will
complement the development of special economic zones and industrial
parks along the Belt and Road corridors. Improved transit infrastructure
and the elimination of trade barriers could make it cost-eective for
China's inland industry to access new markets.
The construction of new roads may stimulate foreign demand for
higher value Chinese manufactured goods, such as locomotives and
train cars. As China builds up its construction companies, Belt and Road
projects will create opportunities for them to gain more international
exposure and experience. A higher international prole will enable
Chinese industry to build prociency and compete globally in sectors
traditionally dominated by competitors such as Japan's Kawasaki Heavy
Industries, South Korea's Samsung Heavy Industries and Germany's
Siemens.

Carrying Out the Initiative

The tools China is using to implement Belt and Road expose the
political objectives at the very heart of the program. To carry out this

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vast construction initiative, Beijing is relying on its panoply of

state-owned enterprises, which reects the Belt and Road stratey's
orientation toward strategic, rather than solely nancial, gain. Although
state-owned entities sometimes sacrice eciency, they will enable
Beijing to exert tighter central control over its projects.
These state-owned enterprises will receive nancial backing either
directly from Chinese policy banks, such as China Development Bank
(which has pledged $890 billion for Belt and Road projects, most likely
over the course of several years) and the Export-Import Bank of China,
or from infrastructure investment funds such as the Silk Road Fund,
which holds $40 billion. Additional money for these investment funds
will come from China's foreign exchange reserves and China's sovereign
wealth fund, which have $3.7 trillion and $220 billion available
respectively. In addition, China will enlist other countries to nance
these eorts through multilateral banks such as the Asia Infrastructure
Investment Bank, which is scheduled to come online later this year with
an initial capital base of $100 billion. China will not be able to devote all
of this money to the Belt and Road stratey because of multiple
competing demands, but the relative abundance of its nancial assets
suggests that China can aord to be generous. More Belt and
Road-related deals in the $20 billion to $50 billion range will not be
unusual or unduly taxing of Chinese resources.

Risks and Challenges Ahead

Although China has ample resources for building up infrastructure in
the Belt and Road corridors, serious security and political challenges
are likely to arise. Many of the Belt and Road projects, by their very
nature of expanding transport links intounderdeveloped or conict-
riddenregions, will generate additional security concerns. Construction
teams and the infrastructure itself will need protection. To safeguard its
interests, China will negotiate for improved host nation security for its
projects. For example, Beijing and Islamabad appear to have secured an
agreement under which Pakistan will allocate an army division
composed of 10,000 troops specically to protect Chinese workers,

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many of whom will be working on infrastructure projects in therestive

province of Balochistan.
Improved transit links would provide new routes for the illicit
movement of goods and people into China itself. China is especially
sensitive to these transnational threats because of longstanding
problems with separatist militants in its westernmost territory,Xinjiang,
a critical node that is also where three of the six Belt and Road corridors
exit China. To combat these transnational risks, China will provide
assistance for domestic security organizations in countries along the
Belt and Road networks. An indication of China's plans is Politburo
member and chief of Chinese security Meng Jianzhu's prominent role in
promoting law enforcement exchanges under the rubric of the Belt and
Road. These exchanges most likely will include enhanced intelligence
sharing and could lead to China conducting more joint law enforcement
training with its Belt and Road partners. However, powerful regional
stakeholders may worry that the expansion in Chinese security
cooperation will come at the expense of their interests, especially in
Central Asia, where Russia is wary of attempts tochallenge its dominant
role in regional security. China will need to engage in very active
diplomacy to allay fears of displacement, but this will most likelybe an
uphill battle.
In addition to security hazards, considerable political risks could
create diculties for China's construction projects. Chinese aid could
become politicized and draw criticism domestically. In Sri Lanka,
Chinese construction on Colombo Port City, a $1.4 billion articial
island, was suspended in January after the election of President
Maithripala Sirisena, who accused his predecessor of oering too many
concessions to China. Chinese rms involved on the project lost
$380,000 per day, and construction was only cleared to resume three
months later. Similar localized headaches are likely to occur frequently.
More seriously, regional tensions in areas such asCentral Asia's Fergana
Valley,which crosses the borders of countries that line the China-
Central Asia-Western Asia corridor, and political instabilitywithin
countries like Kazakhstancould present long-term perils for Chinese
eorts to implement the Belt and Road stratey.

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Ultimately, the geographic scale of the Belt and Road stratey and the
complex geopolitics involved mean that China's success in building the
six Belt and Road corridors will be highly uneven. Yet, although the Belt
and Road stratey will be expensive and face formidable hurdles, the
mitigation of trade insecurity will make the project well worth the cost
in the eyes of China's leaders. As the transit routes come online, this
network will provide several alternatives to the vulnerable sea-lanes
through the South China Sea, giving China's economy some insurance
against any single point of failure. In an instance of war, the Belt and
Road infrastructure would greatly complicate potential U.S. plans to
impose a distant blockade. Inland transit routes would naturally be
insulated against naval interdiction, and the proliferation of short
maritime transit legs would force the U.S. Navy to spread its assets over
a large expanse rather than concentrate on a small number of
chokepoints. In peacetime, these options would enhance China's
political leverage by preventing any individual country from threatening
to disrupt China's economic lifelines.
Lead Analyst: Thomas Vien
Additional Research:Kevin Yan, Production Editor:Robin Blackburn

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