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the Belt and Road Initiative
Promises
and Pitfalls of the Belt and Road Initiative
Asia Pacific Bulletin, July 18, 2017
By Bipul Chatterjee and
Saurabh Kumar
"Bipul Chatterjee and Saurabh Kumar, Executive
Director and Policy Analyst, respectively, at CUTS
International, explain that “China may accrue significant
long -term trade benefits if it reduces tariffs through free
trade zones, particularly on products from BRI countries.”
A China’s signature economic and foreign policy project –
the ‘Belt and Road Initiative’ (BRI), also known as ‘One
Belt, One Road’ (OBOR) – is the most ambitious global
connectivity project ever launched by China or any country.
The project aims to connect 65 Asian, African, and European
countries comprising two-thirds of world’s population,
through various subprojects. The estimated investment cost
for realizing this project is $4-8 trillion.
The goal of BRI is to connect China with Asia, Europe, and
Africa through a network of railways, highways, oil and gas
pipelines, fiber-optic lines, electrical grids and power
plants, seaports and airports, logistics hubs, and free
trade zones.
The promise of BRI
First, a promising aspect of this initiative is the
potential reduction in transportation costs which would
reduce the price of trade more broadly. At a time when
countries are looking for specific measures to reduce trade
costs and shying away from free trade agreements, a
reduction in transportation costs as a substitute for trade
deals can effectively widen the volume of international
trade. A Bruegel study pointed out that a 10% reduction in
railway and maritime costs can increase trade as much as 2%,
while the effects of a reduction in tariffs would take a
much longer time to be felt. An Asian Development Bank and
Purdue University study estimated that improvements in
transport networks as well as trade facilitation measures
could increase the gross domestic product (GDP) by 0.3 % for
India and 0.7 % for the South Asian region as a whole.
"The East-West Center promotes better relations and
understanding among the people and nations of the United
States, Asia, and the Pacific through cooperative study,
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develop policy options."
This type of development is necessary for a country like
India, where a lack of infrastructure and connectivity
hampers cross-border trade. According to the Global Enabling
Trade Report of 2016, India was ranked 102 out of 136
countries, which is indicative of its limited capacity to
facilitate cross-border trade. The Doing Business Report of
2017 estimated that the cost to export (which includes
border compliance and documentary compliance) is too high in
India ($505) in comparison to other South Asian countries
such as Nepal ($373), Bhutan ($109) or Sri Lanka ($424).
Second, BRI presents huge business opportunities for
companies engaged in infrastructure development. A total of
over $900 billion is expected to be invested in roads,
ports, pipelines and other infrastructure as part of the
project. This could immensely benefit countries suffering
from inadequate infrastructure for their economic
development.
Third, from the point of view of trade facilitation there
are a number of factors that will create dynamic effects.
China may accrue significant long-term trade benefits if it
reduces tariffs through free trade zones, particularly on
products from BRI countries. Beijing is also expected to
reduce some of the non-tariff barriers hampering the
prospects of foreign firms doing business in China including
in those emerging areas such as internet banking and
electronic commerce.
Potential Implications
Apart from the sheer number of participating countries, BRI
appears to be both economic and strategic in nature. This
became visible during the recently held Belt and Road Forum
for International Cooperation in Beijing. The initiative
came under scrutiny after European Union officials voiced
apprehensions over transparency, labor, and environmental
standards. This resulted in the EU’s refusal to endorse a
trade statement tied to BRI. India’s non-participation due
to sovereignty issues relating to the China-Pakistan
Economic Corridor passing through part of Jammu and Kashmir
also served as a serious dampener.
Even though BRI seeks to create trade infrastructure around
India, it also encircles the country by creating a ring
through land and sea routes passing through several
countries with which India has sensitive relationships.
However, India — with around 90% of its international trade
through maritime routes and only 10% by rail and road — is
comparatively less likely to see much benefit through
enhanced connectivity under the initiative. Most of India’s
maritime trade occurs from its western ports located in
Arabian Sea and via land routes within the
Bangladesh-Bhutan-India-Nepal network.
“While it is true that China’s economic and strategic
interests are intertwined, it would have been beneficial
for the BRI to be planned more holistically in order to give
due consideration to the economic and political
interests of other participating countries.”
In presenting BRI, China appears to be unaccommodating with
respect to political and diplomatic issues as well as
economic concerns. Trade facilitation alone cannot drive
trade flow upward. There needs to be smart and secure
management of trade routes so that end-to-end supply and
value chain networks can be strengthened. In recent times,
piracy has emerged as a major potential threat for railways
and highways as well as maritime routes. BRI does not
address these challenges in a meaningful way.
Although the project was launched around four years ago, it
suffers from a lack of key information, This has eroded
trust.
The Next Steps
While it is true that China’s economic and strategic
interests are intertwined, it would have been beneficial for
the BRI to be planned more holistically in order to give due
consideration to the economic and political interests of
other participating countries. For a large project like BRI,
an international governance structure involving all the
participating countries to institutionalize objectives and
safeguard the interests of participants has to be
established now with a particular emphasis on financial
mechanism. The decision-making structure for the execution
of BRI should be based on consensus.
Several sub-projects of various Chinese companies to receive
political and financial support from the Chinese government
are being touted as part of this initiative but have nothing
to do with it and should be de-coupled so that ambiguity can
be cleared and only official BRI projects can be
materialized. Participating countries should also get equal
treatment in the financing of BRI, so that they can also
reap the long-term benefits of the project, a step in this
direction could be the revamping of the New Development
Bank. A clear operational strategy for the entire project
with an economic and political matrix should now be made to
increase trust and transparency. This should clearly
indicate relative as well as absolute potential losses and
gains of participating countries.
Active participation of global institutions such as the
United Nations, the International Court of Arbitration, and
International Court of Justice should be included for
reliability as well as to resolve a potential dispute.
BRI should be executed in a selective manner with focus on
economically viable sub-projects
developing trade and economic corridors, for example a
Bangladesh-China-India-Myanmar Corridor
in the case of South Asia.
Bipul Chatterjee is Executive Director and Saurabh Kumar
is a Policy Analyst at CUTS International.
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