Month: June 2015

“One Belt, One Road”, or the New Silk Road for China?

That is the new China initiative to rebuild the Old Silk Road along modern principles.  The plan is a bit of a grab bag, but seems to include the following:

a. A deepwater naval base in Pakistan, plus a $42 billion aid/investment package for Pakistan.  Here is some background on what already has been done.

b. A Chinese route to the sea through Myanmar and Bangladesh.

c. Northern shipping routes to Europe, through the Arctic, as the ice melts.

d. A rail line from Zhengzhou through Russia to Hamburg (already running, a 17-day trip).

e. Power stations and manufacturing plants for the Central Asian republics, in return for gas supply.  This infrastructure transfer is also supposed to limit excess capacity in China by sending infrastructure abroad.

f. A railway and highway to connect China to the Arabian Sea.

Arnold Kling, telephone!  Are these sustainable patterns of trade and specialization?  Or are they slated to be proverbial white elephants?  Does anyone know?  Bueller?

A few points are striking here.

1. Much of this seems to be defensive geopolitics.  Most of China’s oil supply, and much of China’s trade, runs through the Straits of Malacca.  This plan, assuming it can be well-executed, affords China a good deal of protection.  Yet that insurance does not add growth on top of the status quo, which currently is an open, well-functioning (mostly), trade channel at the Straits.  At best it would hold a future catastrophe at bay for China.

2. The gravity equation in international trade economics suggests that countries trade much more when they are “near each other.”   But what does proximity in this context mean exactly (pdf, an interesting trade paper by the way, on the “death of distance” theme and where it fails)?  The most successful gravity models cite “distance between national capitals” rather than “distance between closest borders.”  For evaluating this plan, that difference matters a great deal!  I say distance between capitals is likely the more relevant variable, all the more for an economy dominated by state-owned enterprises.

3. The idea of easing excess capacity by sending infrastructure to other countries seems unlikely to succeed.  Other than gas, how much do these countries currently have to offer China?  And how much infrastructure can be transferred how quickly?

4. China’s economic growth has been dominated by the coasts, and the Great Canal, for approximately one thousand years; today Xi’an is a backwater for instance, although in the Tang dynasty it was possibly the most advanced city in the world.  Can this now-deeply entrenched pattern — water transport beats land transport — be reversed by a lot of government spending?

5. To date China’s main external ally is North Korea, even though China is the world’s second largest economy.  How well will relations with all these other nations evolve, and what does that mean for the value of those investments?  Sri Lanka already has decided to redo its deals with China, and it doesn’t seem China can bully them out of that, though read this update.

During my China visit, I heard repeatedly that this New Silk Road plan will limit the pending decline of China’s growth rate.  Each time I expressed skepticism about that prospect, my words were met with great dismay and, I felt, disbelief.  Yet I do not see how these pieces are supposed to fit together as a growth-boosting enterprise.  They do seem well-designed to extend China’s political influence in the western direction, and to transfer more contracts to state-owned firms.  But to raise living standards for most of the Chinese people?  I don’t see it, or even see it coming close.