Logistics And Frieght Forwarding

Analysis: China to shape international trade via Belt and Road

China’s investment in ports as far afield as Piraeus, Greece, hold serious implications for US corporations, consumers, and supply chains.

The Belt and Road Initiative’s potential impact on international trade — cargo volume and velocity, shipping routes, supply chain reliability, and transparency — has strategic benefits and risks for the United States because of its dependence on importing raw and strategic materials for manufacturing processes, and exporting finished goods to emerging markets where consumer catchment areas are expected to be created or expanded.

While the US Congress grapples with the best way to rebuild aging US infrastructure, supported, in part, by what would be a £1 trillion investment plan over a 10-year period, reports indicate that the China-led Belt and Road[1] initiative has already committed nearly £2 trillion over the past three years from a variety of sources, including the Asian Infrastructure Investment Bank, China’s policy banks, and multilateral and bilateral co-financing arrangements.

This chasm in funding became clearer as the United States wrapped up its fifth annual Infrastructure Week series of events last month, during which congressional and executive branch officials, regional politicians, and industry leaders called for sustainable revenue sources, deeper public-private partnerships, more effective uses of the Highway Trust Fund and Harbor Maintenance Tax, and more.

Although Chinese president Xi Jinping and the purported 68 signatories of the joint communique of the recent Belt and Road Forum committed sums expected to rise toward £7 trillion in the years to come, some US attendees at an Infrastructure Week reception held at the US House of Representatives Transportation and Infrastructure Committee hearing room had not heard of China’s massive Belt and Road campaign.

So, although the Trump administration’s £1 trillion infrastructure plan[2] is critical to the US national economy, it is only a first step toward keeping pace with our nation’s biggest economic competitor: China.

It almost goes without saying, but the most dynamic, demand-driven economies that will largely define the state of global affairs in the years to come — including possibly the US’s role in the world — are those in Asia.

Although greater infrastructure connectivity in Asia could deepen integration, and expand prosperity, it has the potential to reconfigure geopolitical relationships, reroute flows of goods and people, and shift power within and between states in ways never seen before.

As alluded to earlier, the largest and most ambitious global infrastructure project is China’s Belt and Road Initiative — the centerpiece of China’s grand strategy for the 21st century that aims to create a series of physical and virtual trade connections across the Europe-Asia continent and along its maritime periphery. According to ambassador Chas W. Freeman Jr. (US Foreign Service, Ret.), Belt and Road “constitutes the largest and potentially the most transformative engineering effort in human history.”

Geographically, Belt and Road’s footprint encompasses nearly three-quarters of the world’s landmass, extending from the Pacific to the heart of Europe via Central Asia, and down to nearly the southern tip of Africa.

It accounts for almost two-thirds of the world’s population, and nearly all the world’s Muslim countries.

Politically, it is forging bilateral agreements with developing countries, many in need of poverty alleviation. Economically, it accounts for 60 percent of global GDP and is expected to stimulate greater than £7 trillion in investment over the next three decades. It also accounts for 70 percent of global energy reserves, much of which is likely to be sourced from the Middle East and East Africa.

To promote the Belt and Road Initiative, China is leveraging international organizations and forums in which it plays a dominant role, such as the Shanghai Cooperation Organization, the Association of Southeast Asian Nations 10+1, Asia Pacific Economic Cooperation, and the China-Arab State Cooperation Forum.

And Xi recently added more to the mix by announcing increased financial commitments from its policy banks; aligning the initiative to development strategies outlined by the Russia-led Eurasian Economic Union, Turkey, the United Kingdom, and Poland; and signing a strategic cooperation deal with Interpol.

Belt and Road is expected to improve China’s connectivity outside of its borders, and China is also improving freight transport systems within its borders, which is expected to lower their domestic logistics costs, and help make their industries more competitive.

Many US industry executives, including Nathan Associates’ Paul Kent, believe we need to follow a similar path of improving home-based logistics systems. New York City’s trucking industry, for example, absorbs nearly £1 billion in congestion-related costs. These, in turn, are reflected in higher freight rates throughout the supply chain.

Improving our domestic supply chains reduces the cost of business, and hence, renders our products more price-competitive, Kent says.

Perhaps President Donald Trump’s plan to rebuild US infrastructure will yield lower domestic logistics costs as well.

More broadly, it has been said that international trade benefits consumers by creating lower prices and increased choices, and that lower costs of raw materials and labor inputs increase the competitiveness of US companies and manufacturers in global markets. Per the US Chamber of Commerce, the importation of intermediate goods, raw materials, and capital goods tends to decrease costs for domestic manufacturers and businesses, and helps to amplify the purchasing power of the average US household by approximately £10,000 per year.

But the benefits of international trade, either as US imports or exports, can only occur if there are reliable and efficient supply chains, most of which are inextricably linked to maritime transportation.

Let’s not forget about the temporary, yet pronounced US West Coast port slowdown of 2015 that reduced US fourth-quarter GDP by 1 percent, and where exports alone amounted to an unprecedented annualized decline of more than 18 percent. The network effects of this single event rippled through the US economy.

Apple farmers lost £19 million during each week of the slowdown.

The North American Meat Institute estimated their losses to be more than £40 million each week. The price of shipping a 40-foot container from China to the United States jumped 50 percent in a single day. Overall, according to a global management and consulting firm, the supply bottleneck cost US retailers approximately £7 billion.

As dependent as the US economy is on international trade, what if an unexpected bottleneck occurred not in our own backyard, but rather, in the Belt and Road?

And to what extent could we recover from it under a China-centric system? With the introduction of the initiative, supply chains are emerging as one of several battlegrounds for geoeconomic competition among nations.

Thus far, other than sending a delegation to the recent Belt and Road Forum held in Beijing, the US government’s response to the initiative has been minimal. Now four years since its inception, the important question is not should the US participate in Belt and Road activities, but rather, how should it do so to protect its core economic and security interests.

This distinction, made knowing the strategic implications of not participating, acknowledges the reality that the Belt and Road Initiative has already generated enough momentum to survive and thrive — even without US participation.

On the other hand, if the United States is to reap the benefits from the Belt and Road’s new markets, it must act quickly if it is to effectively influence the direction and speed of a global economy upon which it so greatly depends. And “acting quickly” means looking closely at how the initiative could benefit US job growth, economic competitiveness, and the strength of the US economy at large.

But to respond effectively, one must take stock of the reality that the United States faces. First, according to the US Department of Commerce, 95 percent of global consumers live outside US borders.

Many of them, as mentioned earlier, reside in Asia, and are poised to see rising disposable incomes from greater connectivity.

Second, over 90 percent of internationally traded goods, including US imports and exports, are transported on marine vessels — you know, those big ships that you may only see occasionally and don’t fully understand because they’re part of an industry that’s “out of sight, out of mind.”

Third, about 98 percent of those internationally trading marine vessels calling at US ports are foreign-flag ships — a concern that many have identified as a risk to national security because they are so integral to the functioning of US supply chains, including those related to national defense assets.

Fourth, Beijing has supported its state-owned enterprises, such as Cosco Group, China Merchant Holdings International Co., and China Harbour Engineering Co., among others, by spending billions expanding its global ports network to secure sea lanes and establish itself as a maritime power, according to a recent Financial Times investigation. As of 2015, nearly 70 percent of global container traffic passed through Chinese-owned or Chinese-invested ports located around the world. Other reports suggest that Chinese officials may be able to control key ports, such as those running along the Asia-Europe route via the Suez Canal, which could give priority to Chinese vessels.

For example, two of several ports — Gwadar in Pakistan[3] and the port of Piraeus in Greece[4] — are important because they could move Chinese cargo first.

And it doesn’t stop there; if one looks along the maritime periphery of the Indian Ocean, China has taken up leading positions at ports located in Bagamoyo, Tanzania; Djibouti; Gwadar, Pakistan; Hambantota, Sri Lanka; and Kyauk Pyu, Burma, among others, using a pattern of “checkbook diplomacy” with countries seeking greater economic growth.

So, if enough infrastructure capacity is built whereby a degree of control over port or terminal operations could be exercised, then by extension, that influence could also be exercised over the flow of economic value being carried by various shipping lines. This then opens up a debate over strategic intent and the potential for economic coercion, which is beyond the scope of this article, nor does it dive into similar trends, such as the acceleration of Chinese investments in airports.

Fifth, on Feb.

14, 2017, China announced proposed changes to its 1984 Maritime Safety Law, which included revisions for rescue at sea, maritime labor and safety, and six “refinements” for “protecting maritime rights.” Analysts have suggested that only one of these refinements are compatible with the United Nations Convention on the Law of the Sea, but four others, including provisions related to innocent passage and the right of hot pursuit in Chinese “jurisdictional waters,” have been viewed as incompatible with international maritime law.

Sixth, it should be noted that an in-depth analysis released this year by Business Monitor International concluded, “The successful completion of China’s ‘Belt and Road’ vision would significantly weaken US influence in Eurasia, and by extension, the world.” This also brings to mind the following quote from late, former president Thomas Jefferson:

“The marketing of our productions will be at the mercy of any nation which has possessed itself exclusively for the means of carrying them and our policy may be influenced by those who command our commerce.”

Many of these observations are, of course, related to the maritime environment, but could it reflect the broader, increasing trend of complaints by US executives that doing business in Chinese markets is becoming more complex, thereby eroding profit margins and reducing the flow of economic value back to the United States?

It apparently does, according to reports, and a recent policy paper of the American Chamber of Commerce that warns that “China’s aggressive mercantilists policies are one of the most serious threats facing the future of [the United States].” Furthermore, could we characterize “Chinese markets” as those also being created along the maritime component of Belt and Road, which runs along the Indian Ocean’s periphery?

As someone who has sailed extensively with the US Navy (USN) along the maritime silk road, and understands the strategic importance of sea power, in particular, the significance of maritime logistics, the aforementioned set of circumstances remind me of a century-old quote by Rear Admiral Alfred Thayer Mahan — revered naval strategist, inventor of the term “Middle East,” advocate of US expansionism in Asia, and father of the modern USN, who said:

“Whoever controls the Indian Ocean will dominate Asia. The ocean is the key to the seven seas in the 21st century; the destiny of the world will be decided in these waters.”

It’s time, now more than ever, that we heed Rear Adm Mahan’s warning and shore-up our maritime sector — militarily and commercially.

It’s time that we listen to the intellect of one of our modern-day naval strategists, Admiral Jim Stavridis, and recognize the connection between naval power and the power structure of enduring civilizations. It’s time, as a report from the Center for Strategic and International Studies states, to “reinvigorate US economic strategy in the Asia Pacific.” It’s time, as former officials from the US departments of state and commerce have said, to “step up our efforts,” “work closely with foreign governments,” and acknowledge that “US geoeconomic leadership depends, in part, on our ability to deliver infrastructure overseas that serves as the backbone for prosperity abroad and creates jobs and strengthens our economy at home.”

Addressing these issues requires a portfolio of solutions, which may include lobbying for transparency in the bidding for contracts in Belt and Road-related markets while focusing on the formidable problems of international material movement and supply. That should include strengthening a range of strategic commercial and maritime capabilities — significantly.

It should also include transporting strategic petroleum products on US vessels to energy-thirsty Asian economies, re-establishing our shipbuilding sector, bolstering our maritime workforce, improving our inland waterway system, providing more cargo opportunities for US shipping lines, and, ultimately, ensuring sufficient control over our global supply chains that serve as critical enablers of US prosperity.

So, as I walked out of the Transportation and Infrastructure Committee hearing room, I noticed an excerpt from a quote astutely placed on the wall in boldface font by Chairman Bill Shuster:

“The Congress shall have Power To lay and collect taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States … [and] To regulate Commerce with foreign Nations …”

But in an increasingly interconnected world where global supply chains are blind to political boundaries, it becomes critical not only to regulate commerce, but to create, protect, and expand it.

The ability to move cargo efficiently and reliably, connecting manufacturers to consumers anywhere in the world without interruption, is essential to strengthening the US economy. Our national economic competitiveness and the well-being of our citizens depend on it.

As an Asia Pacific power with enormous economic and strategic stakes in the Belt and Road region, the United States cannot afford to sit on the sidelines and watch these infrastructure developments abroad unfold. By accepting Belt and Road, the United States could ensure that companies and investors are able to participate in what might become the biggest economic development project in history.

But it must do so cautiously, balancing the benefits of greater access to developing markets while taking a leading, complementary role with our Chinese counterparts to help shape a transparent, frictionless, and equitable global trade network.

On the other hand, rejecting Belt and Road outright, or signaling US indifference will only backfire and expose US internationally trading businesses, and indirectly, US consumers, to the whims and discretion of Chinese-created laws, regulations, and commercial terms on matters related to physical and virtual connectivity, supply chain performance, project development, customs procedures, credit agreements, transport protocols, and government relations.

Doing so would ultimately enable China to unilaterally draw the contour lines of the world’s next epic chapter of geopolitics and geo-economics.

Let’s not let that happen. Now is the time to get in the game and be a positive agent of change on the Eurasian chessboard.

Tony Padilla served in the USN as a supply officer with tours of duty in Asia, Europe, and the Middle East. He worked on supply chain issues for GE Transportation, and on maritime issues for the US Senate Commerce Committee.

He currently serves as senior adviser for international affairs at the US Department of Transportation (DOT).

DISCLAIMER: For the purposes of this article, the opinions and views expressed herein are solely those of the author and do not necessarily represent the views, opinions, or interests of DOT and the US government.

US DOT and the US government, as a matter of policy, disclaim responsibility for any private publication or statement by any of its employees.

References

  1. ^ Belt and Road (www.joc.com)
  2. ^ £1 trillion infrastructure plan (www.joc.com)
  3. ^ Gwadar in Pakistan (www.joc.com)
  4. ^ port of Piraeus in Greece (www.joc.com)



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