Chinas Belt and Road Initiative (BRI), An Economic Game Changer
By Antonio Graceffo, PhD, Legal 500 3/10/17
Oct 11, 2017 - 3:57:27 PM
China’s Belt and Road Initiative (BRI), originally called One Belt One Road (OBOR), is a $56 billion dollar, transnational infrastructure development program led by the Chinese government. The BRI, the brain child of Chinese President Xi Jinping, is a modern version of the ancient Silk Road, and consists of roads, ports, fiber optic cables, pipelines, power grids, communications infrastructure and even financial networks and banking systems that connect countries as far apart as Singapore and Iran.
The intended benefits for countries participating in the BRI include transportation and connectivity as well as infrastructure and economic development. The benefits to China include greater soft power through increased political and economic influence, the spread of the Chinese language and culture, and tremendous profits earned from carrying out infrastructure construction projects as well as interest earned on concessional loans.
Planned infrastructure projects include high speed railways in Indonesia, hydroelectric plants in Vietnam, container transportation links in Malaysia, and natural gas pipelines across Central Asia as well as the refurbishing of ports in Pakistan. The construction of these projects will largely be carried out by Chinese companies, and utilize supplies, labor, and raw materials imported from China. The financing will occur through a number of Chinese institutions such as Asian Infrastructure Investment Bank, New Development Bank, and Silk Road Fund. Essentially, China will loan money to participating countries who will then pay the money to Chinese construction companies, and later, make loan and interest payments to Chinese financial institutions.
The rationale for host countries to take on this massive debt is based on projections that BRI would generate X amount of GDP and the host countries could use this revenue to service the loans; however, one of the issues many economists have cited is that the GDP projections include revenues earned by Chinese companies along the BRI route. Therefore, this money will not be available to local governments for debt service. Additionally, as part of the terms of financing, many of the host countries have awarded tax free operation to Chinese companies for a number of years. This means that the revenue earned by these firms in the host countries will not contribute to the tax basis and will leave local tax payers to support loan payments.
Geographically, BRI can be divided into two major components: the eastern part which runs through The Association of Southeast Asian Nations (ASEAN) and the western component, the China Pakistan Economic Corridor (CPEC), which connects Central Asia with Pakistan. The largest amount of attention and press coverage has been given to the ASEAN component of BRI, although CEPEC has much greater implications for the world’s geopolitical and economic landscape. Beyond the pure economics of international trade, the ASEAN component of BRI touches on the politically sensitive topic of the South China Sea; however, The CPEC component is the staging ground for a major political game of shifting alliances between some of the world’s largest and most influential players, namely The United States, China, Russia, India, and Pakistan. While the ASEAN component of BRI is important, it is the CPEC component which could be a global economic and political game changer.
BRI in ASEAN
ASEAN is a regional economic cooperation between ten countries: Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar (Burma), and Vietnam.
Many economists believe that Donald Trump’s decision to remove the US from the Transpacific Partnership (TPP) created opportunities for China in Southeast Asia; however, this opinion ignores several key points. The TPP never actually existed, so the US pulling out could not have changed anything. The US is heavily engaged with Southeast Asia, and US trade within the region has not decreased as result of the decision to disengage from TPP. The US already runs trade deficits with most of the ASEAN countries, and free trade agreement would not have dramatically increased US imports from ASEAN as the ASEAN products are already cheap for Americans and the current duties are low. Similarly, decreasing duties on US exports to ASEAN would most likely not have had much impact on US exports as US products are generally higher-end products which, even duty-free, would be expensive for most ASEAN residents who may earn as little as 2% of what the average American earns. For example, the average per capita GDP of Cambodia is $1,200 per year compared with the $56,000 per year in the US. The US abandoning the TPP does not represent a reduction in US engagement with ASEAN. It is simply that the US prefers to maintain bilateral trade relations rather than engage in multi-national trade agreements.
Another point disproving this idea is that China is already heavily involved economically with ASEAN, meaning US withdrawal does not create any new opportunities for China. China is the largest trading partner of ASEAN. China is also among the top five trading partners of each ASEAN member taken individually. In 2015, total trade between China and ASEAN had reached $471 billion. In the first half of 2017, China invested $4.8 billion in ASEAN.
Although China is not a member of ASEAN, it is a member of ASEAN Plus Three which also includes Japan and South Korea. The economies of ASEAN and China are also linked through a large number of China-lead agreements and institutions such as the Regional Comprehensive Economic Partnership (RCEP), ASEAN China Free Trade Area (ACFTA), Asian Infrastructure Investment Bank (AIIB), China-ASEAN Investment Cooperation Fund (CAF), New Development Bank (NDB), Free Trade Area of the Asia-Pacific (FTAAP), Asia-Pacific Economic Cooperation (APEC), ASEAN-People's Republic of China Comprehensive Economic Cooperation Agreement, and the Asia-Pacific Trade Agreement. China also has individual free trade agreements with Thailand and Singapore. Clearly, China already has deep economic involvement with ASEAN and all of these various trade associations and financial institutions will be investing in BRI projects.
Sovereignty over The South China Sea is the major politically sensitive issue associated with the ASEAN component of BRI. In the past, China has taken a more aggressive stance in asserting its claim over the region. However, more recently, China has been using the BRI as a bargaining chip. When Singapore stated that they would uphold the Hague’s ruling which went against China’s South China Sea sovereignty claims, China decided that it might be better to reroute part of the BRI transportation links to a port in the Malaysian peninsula rather than continuing on to the port of Singapore. Similarly, China considers Indonesia an integral component of BRI and has consequently invested heavily in the country. Indonesia’s president Joko Widodo has publicly stated that the South China Sea claims are so complicated that he does not want to get involved. Similarly, even The Philippines and Malaysia have quieted their disputes with China regarding sea sovereignty.
China-Pakistan Economic Corridor (CPEC)
The History of Sino-Pakistani Economic Relations began in 1950 when Pakistan was one of the first countries to recognize the People’s Republic of China (PRC) and this relationship has been key in the development of CPEC. This segment connects China’s North Western Xinjiang Province to Central Asia through Pakistan and the Gwadar Port, which connects with the oil fields of Iran. Pakistan’s economy has experienced stagnation for the better part of two decades, plagued by high unemployment, low wages, and a lack of infrastructure. For Pakistan, CPEC is meant to bring in much needed infrastructure upgrades and an increase to GDP. The presence of Chinese investment, as well as the improved infrastructure, have served to increase Pakistan’s received-foreign-direct investment (FDI) from other countries as well.
Benefits to China include a shorter, safer, and cheaper route for energy imports by moving oil from Iran overland through Pakistan and bypassing the South China Sea all together. Another benefit to China is that CPEC will open new markets for its exports. The project is also meant to strengthen the so-called Iron Brotherhood linking China and Pakistan, a dynamic which will serve to counterbalance the economic and political influence of the US and India in South Asia. CPEC, while new, is actually built on a long history of Chinese engagement with Pakistan.
The History of Sino-Pakistani Economic Relations began in 1950 when Pakistan was one of the first countries to recognize the People’s Republic of China (PRC). Consequently, Pakistan became one of the first recipients of Chinese outbound investment. In 1962, Pakistan supported China in the Sino-Indian War, and China reciprocated support in 1965 and 1971 when Pakistan went to war with India. 1982 saw the establishment of the China-Pakistan Joint Committee of Economy established. Chinese leader Jiang Zemin visited Pakistan in 1996, which marked the beginning of the comprehensive friendship between the two countries. In 2002, China helped to build Pakistan’s Gwadar Port after being guaranteed sovereign usage rights.
In 2005, with the signing of the Treaty of Friendship, both parties agreed not to enter any organization or agreement which infringed on the sovereignty of the other. In 2007, the Pakistan-China free trade agreement was signed. In 2010, Chinese leader Wen Jiabao visited Pakistan, followed by Chinese Premier Li Keqiang in 2013.
In the early stages of CPEC, Pakistan is expected to benefit from a surge of FDI; however, much of CPEC is being financed with concessional loans and loans from state-owned Chinese banks which will have to be repaid. This looming debt could trigger an economic crisis for Pakistan. External financing needs of the country will jump by almost 60%.
From a public relations perspective, China’s willingness to utilize Sharia-compliant Islamic financing in CPEC will help the project to be accepted in Pakistan as well as other Islamic majority countries such as Indonesia, Malaysia, and Brunei, the Central Asian republics, and the Middle East. The challenge of using Sharia-compliant financing is that in Islam, it is forbidden to either charge or pay interest. As a result a range of Islamic finance instruments such as Sukuk (bonds) and Ijara (leasing agreements) can be used to replace traditional, interest bearing loans.
The use of Islamic financing will represent cooperation between public and private financing in Pakistan, and Beijing has stated that it plans to issue approximately 20% to 40% of its funds through Islamic financing in CPEC. Asian Development Bank (ADB) and the new, China-backed Asian Infrastructure Investment Bank (AIIB) will provide much of the total funding for CPEC, both utilizing Islamic financing. Shariah-compliant funding is already being used for coal mining project Thar region of Pakistan.
In 2016, CPEC the first components of CPEC became operational. CPEC represents a modern “Great Game” played between the China, Pakistan, India, Russia, the US, and Great Britain. The China-Pakistan and India dynamic is particularly volatile as both China and Pakistan have fought wars against India. CPEC strengthens the relationship between China and Pakistan, causing India to move closer to the US and to also form relationships with Afghanistan and Iran. Xi Jinping’s visited Pakistan and further alienated India by offering concessions to India’s neighbors and allies.
Russia has always been a bit of a wild card in the region, periodically swinging towards or away from China. Initially, Russia had declined to join the Belt and Road Initiative. However, recently the Russian ambassador to Pakistan, Alexey Y Dedov, announced that Russia is in discussions with Pakistan to merge CPEC with Russia’s Eurasian Economic Union.
Russia’s joining of CPEC creates an opportunity for China, Russia and Pakistan to improve their relationship. As a result of Russia’s acceptance of CPEC, Russia is now being permitted to use Gwadar port for its exports.
CPEC has implications for the United States and the UK as well. Increased Chinese investment through CPEC may reduce Pakistan’s dependence on US support. Irrespective of CPEC, Pakistani authorities worried that US support would be at risk after the Trump election because of his pro-India stance. Britain has encouraged its companies to invest in Pakistan along CPEC. Being a former British colony and a member of the British Commonwealth, India cannot be happy about an apparent shift in British interest toward a Chinese-based project in Pakistan.
There have been talks of China potentially building an overseas military base in Pakistan. A Chinese military presence may seem attractive to Pakistan whose military is much smaller than India’s. Meanwhile, this is worrying for the US who has long been a military ally of Pakistan. The Chinese base may become a component of a loan forgiveness program as most economists believe Pakistan will most likely not be able to repay its debts. The presence of a Chinese military base in Pakistan would seem like a definitive shift of global alliances with Pakistan firmly in the Chinese camp.
Apart from reshuffling global alliances, CPEC has the potential to destroy Pakistan’s economy. The loan repayments for CPEC will begin in 2021. In theory, Pakistan is meant to repay the loans through the increased GDP generated by CPEC; however, estimates of the total revenues include money earned by Chinese retailers along the New Silk Road, Chinese construction companies, finance companies, telecom companies, energy companies, and most of this wealth will likely be repatriated to China. It has been reported that China has brought in raw materials and labor for its infrastructure projects rather than buying locally. The Pakistani government has begun granting tax-free operation to Chinese companies. There is a danger that the more developed and better funded Chinese businesses could crowd out local industry and possibly even wreck the Pakistani economy. CPEC had already increased Pakistan’s trade deficit with China.
The fate of Sri Lanka now stands as a warning to Pakistan. The Times of India reported that the interest rate on Sri Lanka’s Chinese loans is 6.3% while loans from the World Bank are only .25-3%. As a result of Sri Lanka being unable to keep up with its payments, the Sri Lankan government has converted some of this debt into equity by allowing Chinese firms to control 80% of the Hambantota port for a period of 99-years. Similar arrangements are being made for the country’s Mattala Airport. The Times of India warned that giving up control of such important transportation infrastructure is a threat to national security.
The importance of Pakistan to the entire western route of the Belt and Road Initiative is as a conduit to the oil fields of Iran. During years of economic isolation by the US and the world economy, Iran was dependent on China. From 2016 to 2017, Iran’s trade with China increased by 41%. Today, China is Iran’s largest trading partner, and Iran runs a trade deficit with China. Iran has stated that it wants its Chabahar port to become the sister port of Pakistan’s Gwadar, which would fit perfectly with Chinese plans to connect Iran and Pakistan. There is concern in Iran that the country will become too dependent on China; however, because of fears of possible repercussions with the US, Western countries have been slow to invest in Iran. This leaves Iran little choice but to move deeper into the Chinese sphere of influence.
BRI is linking numerous countries to China economically and facilitating the expansion of China’s soft power. While the ASEAN segment has primarily regional economic impact, it serves as a powerful political tool for China, especially in regards to the South China Sea issue. By selectively investing in countries that side with China in this dispute, China may find an alternative favorable to its ambitions. CPEC, with its deeper political and economic implications, will have the most impact on global relations. Not only will countries ultimately become closer to China through shared economic activity, they may also find themselves indebted to China which could change the power dynamic between these countries, China and the United States. An additional impact along CPEC is the improvement of China’s relationship with key nations which can strength China’s global position and influence both in the region and in the world
Source: Ocnus.net 2017