What is China’s Belt and Road Initiative (BRI)?

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The One Belt One Road Initiative (OBOR), also known as the Belt and Road Initiative (BRI), is an ambitious plan from the Chinese government, spearheaded by Chairman Xi Jinping, to enhance trade between China and the rest of the world. China has heavily invested in infrastructure to support this plan and harmonized legal and financial relations with participating countries.

Origins and Objectives

Initiated in 2013 by Chairman Xi, the Chinese government has promoted the project as a transformative force for global trade. The initiative aims to revive the ancient Silk Road trade routes, creating a vast network of railways, highways, maritime ports, and airports to connect Asia, Europe, and Africa. The overarching goal is facilitating smoother, faster, and more cost-effective trade flows.

While the plan primarily benefits Chinese firms by facilitating goods and services export, no restrictions prevent foreign firms from utilizing OBOR infrastructure. With careful assessment and planning, OBOR could benefit foreign firms within China and abroad.

Implementation and Investments

To implement the OBOR Initiative, the Chinese Government has entered into numerous bilateral agreements, harmonized customs duties, eliminated practices of double taxation, and invested in various infrastructure projects along multiple routes. According to the Xinhua Finance Agency, the harmonization of the legal framework and the protection of intellectual property rights under OBOR have also accelerated.

China has committed substantial financial resources to OBOR, with investments estimated to exceed $1 trillion. These funds have been directed towards building and upgrading infrastructure such as railways, highways, ports, and energy projects. Key projects include the China-Pakistan Economic Corridor (CPEC), the Mombasa-Nairobi Standard Gauge Railway in Kenya, and the Piraeus Port in Greece.

Global Reactions and Criticisms

However, American and European governments have been openly critical of the initiative, viewing it as a strategy for China to bolster its trade at the expense of local firms in recipient countries. Concerns over China’s trade surplus, especially from the US, contribute to their ambivalence. For instance, the Economist Intelligence Unit suggests that China aims to use OBOR to address its domestic overproduction in industries like steel, aluminum, and cement. As reported by CNN, Jin Yong Cai, former head of the International Finance Corporation, stated that China is leveraging its capital to help other countries develop, thereby creating new markets for Chinese products.

Several think-tanks, as noted by Xinhua, argue that Western opposition has slowed the progress of harmonizing rules and regulations necessary for the Belt and Road Initiative’s growth. Additionally, questions remain on how internationally isolated countries within OBOR will be integrated. For example, Iran, an OBOR member, faces challenges in conducting payments due to ongoing US sanctions.

Benefits for Foreign Firms

Though OBOR initially appears to be a policy aimed at strengthening the Chinese economy, a crucial question is how foreign firms can benefit from it. The initiative presents significant opportunities for foreign companies to optimize their supply chains, reduce costs, and access new markets.

Infrastructure and Logistics Development

A unique feature of OBOR is its new logistics channels, particularly the train routes financed by China. Additionally, the maritime component, the 21st Century Silk Road Maritime Road, spans from China to Europe through the Indian Ocean, Red Sea, and the Mediterranean, improving the security of sea routes and enhancing port facilities. Currently, two train routes are operational, arriving in Europe via Russia and Kazakhstan. Train freight is particularly appealing for firms that find sea transport too slow (approximately 30 days) and air freight too expensive. Rail transport offers a middle ground, cheaper than air freight and faster than sea freight (approximately 15-21 days by train, depending on the destination). Trains traverse the cold steppes of Kazakhstan and Russia, entering the EU through Poland and continuing to their final destinations across Europe. Regular freight trains already operate between Germany and China.

Foreign companies can optimize their supply chains and gain a competitive edge by using OBOR infrastructure. Industry experts from DHL highlight that sectors such as fashion, automotive, and electronics could benefit from the new logistics routes due to their time-sensitive nature.

For example, the first train from the UK to China was loaded with baby milk and whisky. The train, named “East Wind,” covered the 12,000-km journey with a capacity of 88 containers, significantly lower than the 10,000 to 20,000 containers typical of sea carriers. This capacity difference contributes to the price disparity between the two transport modes.

Currently, goods primarily flow from China to overseas markets, with return trips often carrying fewer products. This presents an opportunity for firms that need an alternative logistics channel in China from Europe or other OBOR recipient countries.

Additionally, the strong encouragement from the Chinese government and various route countries suggests potential additional advantages for businesses using BRI infrastructure.

Regulatory Reforms

Under OBOR, China has engaged in several regulatory reforms. As explained by Xinhua News, China has signed new double taxation agreements (DTA) and revised existing ones to ensure Chinese businesses remain competitive and adhere to global standards. Since 2014, these revisions and new agreements have eliminated 13.1 billion RMB in double taxation.

OBOR aims to boost trading efficiency and speed, with customs clearance procedures expected to be optimized. Changes are likely to occur gradually, reflecting the Chinese policy approach. OBOR is China’s largest outbound project, encompassing trade liberalization, customs harmonization, infrastructure construction, and other reforms expected to develop further.

Environmental and Social Considerations

The environmental and social impacts of OBOR projects have also garnered attention. While the initiative promises economic growth and development, it has faced criticism for potential environmental degradation and displacement of local communities. Large-scale infrastructure projects can lead to deforestation, loss of biodiversity, and increased carbon emissions. Additionally, there are concerns about the debt sustainability of recipient countries, with some fearing that they may fall into a “debt trap” due to heavy borrowing from China.

Looking Ahead

The Belt and Road Initiative is still in its early phases, with Chinese policymakers indicating that developments toward a more open and connected China are ongoing. Since 2013, initial progress has included the operation of two out of five planned routes for the initiative. Future legal, economic, and logistic developments are anticipated to advance the initiative further.

As the initiative evolves, it is expected to foster greater connectivity and cooperation among participating countries, potentially reshaping global trade patterns. OBOR’s success will largely depend on China and its partners’ ability to address the economic, political, and environmental challenges that arise.

At MSA, we closely monitor developments in China and are always ready to share our insights on future directions. If you have any questions, please do not hesitate to reach out to us.