Original publication: January 2018
Authors: Steer Davies Gleave: Bianca COSENTINO, Dick DUNMORE, Simon ELLIS, Alberto PRETI, Davide RANGHETTI, Clémence ROUTABOUL
MDS Transmodal for Steer Davies Gleave: Mike GARRATT, Antonella TEODORO
Drew Management Consultants for Steer Davies Gleave: Jeremy DREW
Short link to this post: http://bit.ly/2B6oyxJ
This research study analyses the opportunities and challenges for the European transport system resulting from the Chinese “One Belt, One Road” (OBOR) Initiative. “One Belt, One Road” refers to the combination of the “Silk Road Economic Belt” (six major land corridors across the Eurasian continent) and the “21st Century Maritime Silk Road” (a network of maritime trade routes connecting Asia with Africa and Europe). This study refers to the Initiative as the “Belt and Road Initiative” (BRI), which is the name more recently used by Chinese governmental sources.
The development of this research study was based on desk research, quantitative analysis of trade and transport flows between Asia and Europe and interviews with business and institutional stakeholders both in Europe and Asia.
Definition and geography of the Belt and Road Initiative
No official or generally accepted definition of the BRI exists. Its geographical scope includes 65 countries which jointly account for some 60% of global Gross Domestic Product (GDP) and 30% of the world’s population. The analysis of the BRI shows that it:
- involves a significant amount of communication and branding, with multiple projects labelled as BRI projects apparently because they fall within its geographical scope;
- is not subject to a clearly-defined development plan, programme or budget, and that there is no clear list of projects that it is intended to include; and
- has no clear geographical or economic boundaries – the BRI appears to have evolved in response to individual countries’ engagement, with China rather than in line with an overarching strategy.
Objectives of the Belt and Road Initiative
China’s stated objectives for the BRI refer to a broad intention to foster international understanding and collaboration with the countries involved, which focus on five areas: (i) policy coordination, (ii) capacity building, (iii) liberalisation and facilitation of trade and investment, (iv) financial cooperation and (v) people-to-people exchange.
The review of academic discussion about China’s underlying objectives for the BRI conducted for the purpose of this study suggests that they are likely to include the following:
- supporting Chinese exports of products and equipment, as well as its engineering and construction capabilities and technologies;
- controlling logistics chains to support Chinese trade with Europe;
- encouraging economic convergence and more balanced development across China;
- providing a mechanism for increasing the use of the Renminbi (RMB), China’s national currency, as a means of international payment; and
- creating alternative overland energy routes to supply oil and gas from Central Asia, Southeast Asia, and Pakistan.
Chinese engagement in the BRI, specific initiatives and projects
China’s financial engagement in support of the BRI is mainly through loans arranged through national financial institutions and investment in foreign businesses. Overall, more than 80 transport-related projects benefitting from Chinese financial engagement have been identified in the course of this research study. They cover air, road, rail and maritime investments in a large number of countries. Furthermore, it can be observed that:
- investments in the EU mainly concern transport nodes and take the form of equity/acquisition of shares in ports, railways and airports;
- there is a concentration of investments at the borders of the EU, in particular in the Balkans as well as in central and eastern European countries; and
- port investments are spread along the whole maritime trade route connecting Asia to Europe.
Cooperation between China and Europe
China’s engagement with the EU on the BRI has been primarily through bilateral discussions with individual EU Member States rather than through EU institutions. In particular, since 2014, EU Member States, and a number of other non-EU countries (mainly in Central and Eastern Europe), have signed Memoranda of Understanding (MoUs) with China within the framework of the BRI. In addition, a specific framework for cooperation between China and Central and Eastern European countries (the “16+1 Format”) has been implemented as a means to enhance the development of the BRI in these regions of Europe.
A coordinated and pan-European approach is only slowly emerging. Key areas of EU-China cooperation concern:
- reciprocity and the creation of a level-playing field in trade and investment;
- equal market access;
- promotion of jointly-agreed international standards; and
- coordination of infrastructure investments and transport services.
The EU-China “Connectivity Platform” is intended to be a forum to coordinate the infrastructure policies of the EU and China. Based on the findings of this research, the “Connectivity Platform” should be strengthened in a number ways, as discussed below.
The effect of the BRI on transport
Predicting the effect of the BRI on the transport network is particularly challenging, as there is no clear definition or programme for the BRI. In addition, it is not possible to distinguish trade specifically generated by the BRI from wider trade between the Far East and Europe. Investments attributed to the BRI are only a small part of the overall investment which will anyway be made by the owners and managers of air, sea, rail and road infrastructure across Eurasia.
For maritime freight, it is estimated that the total westbound and eastbound trade flows between Far East and the EU were just over 16 million TEUs in 2016. According to forecasts presented in this research, the total two-way freight traffic will be around 40 million TEUs by 2040. For air freight, the total two-way volume flown between Europe and the Far East was 3.3 million tonnes in 2016. It is estimated that this will grow to 5 million tonnes by 2040.
Moreover, this research assessed the extent to which cargo currently carried by maritime and air modes between Europe and the Far East will in future shift to rail as a result of improved services attributed to the BRI. The results of the analysis indicate that around 2.5 million TEUs could transfer to rail from maritime transport, and 0.5 million from air transport, by 2040. It is estimated that this is equivalent to 50 to 60 additional trains daily, or 2 to 3 trains per hour, in each direction. Rail services can be expected to target higher value and more time-sensitive goods than the current maritime transport.
The opportunities and challenges of the BRI
In the course of this research, the following opportunities as a result of the BRI were identified:
- Chinese parties are willing to take construction risk and to develop construction projects.
- Commercially viable rail services between China and the EU can be beneficial to European operators, shippers and industry.
- The BRI can be a platform to streamline customs arrangements.
- EU businesses may be involved in transport infrastructure projects in countries along the BRI, in particular in Central Asia.
- The BRI may be beneficial to the environment, reducing CO2 emissions as a result of the projected mode shift to rail freight between the Far East and Europe.
On the other hand, the following challenges were detected, and should inform the EU’s policy response to the BRI:
- Infrastructure projects may be implemented because Chinese funding is available, with little focus on the demand for, or sustainability of, the services that they are intended to support.
- The lack of a clear BRI investment plan may generate investment projects which compete with or duplicate others, either inside or outside the EU.
- Chinese dominance in rail transport, or control of the entire logistics chain, may significantly increase its market power in respect of EU trade.
- Construction or operational EU standards in non-EU countries could be undermined by the promotion of different and sometimes lower Chinese standards.
- Improved accessibility for trade between China and the EU may alter the relative competitive position of individual EU Member States.
The readiness of the EU transport system for the BRI
The assessment of the routes most likely to be used in the future for the shift of container traffic to rail indicates that the most likely route is north of the Alps, towards EU Member States bordering the North Sea and the Baltic Sea. The containers carried by rail would primarily be those previously shipped to North Sea ports, and would mainly travel along the route from Moscow (Russia) through Brest (Belarus) and Warsaw (Poland) to Berlin (Germany), including part of the TEN-T North Sea – Baltic Core Network Corridor.
The review of the European Commission’s North Sea – Baltic Core Network Corridor Study found that that rail infrastructure capacity in 2030 should be capable of meeting the current and forecast demand to that date. However, the Study appears not to include the volume of BRI-related traffic which may emerge by 2040. While bottlenecks may still emerge in the EU’s transport network, specific changes to the TEN-T programme are not justified at the moment. Such changes would be premature and might be inadequate or redundant, depending on the future evolution of the BRI.
The study recommends the following:
- While continuing a constructive dialogue and cooperation with China, the EU should seek greater clarity on the BRI’s future plans, and encourage the development of studies concerning the connection of specific TEN-T and BRI corridors in the framework of the “Connectivity Platform” (starting from the North Sea – Baltic Core Network Corridor of the TEN-T and the New Eurasian Land Bridge Corridor of the BRI).
- At the moment, TEN-T does not need to be modified due to the BRI. However, it is proposed that the TEN-T corridor studies are reviewed and developed periodically as the work of the “Connectivity Platform” progresses and the BRI is more clearly defined. This would require TEN-T policy to become more outward-looking.
- To ensure that Europe remains a global hub for standardisation, EU institutions should foster the establishment of modern standardisation systems, in particular with reference to the European Railway Traffic Management System (ERTMS) technology, one of the largest beneficiaries of TEN-T funding in the 2007-2013 and 2014-2020 multi-annual Programmes.
- EU institutions should continue to engage with the Chinese Government to agree possible specific contents of an EU and China Investment Agreement as soon as possible.
- The European Parliament and the European Council should support the proposal of the European Commission (EC) to establish a framework for the Member States to screen foreign direct investments in the European Union (EC 2017/0224 (COD)). This would ensure the EU’s ongoing openness to foreign direct investments while preventing the capture of key European intellectual property by competitors.
- The European Parliament and the European Council should support the development of a legislative instrument, based on the European Commission’s COM(2016)34, to guarantee reciprocity of access to public markets in the EU and China by European and Chinese businesses.
- Finally, the Chinese Government should be encouraged by its EU partners to become a participant in the OECD Arrangement on Guidelines for Officially Supported Export Credits. In particular, it is recommended that, in monitoring progress towards a Comprehensive Agreement on Investment, the European Parliament seeks to ensure that China’s participation in the OECD framework is a key objective of the EU’s negotiating strategy.
Link to the full study: http://bit.ly/585-907
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The Committee on Transport and Tourism (TRAN) has requested scientific analysis of the possible impact of the Chinese ‘One Belt One Road’ initiative on the European transport system. This Briefing [short link: http://bit.ly/602-014] summarizes the main elements of a study prepared for TRAN Committee on ‘The new Silk Route – opportunities and challenges for EU transport‘.