The Belt and Road Initiative
will benefit the whole world
Australian business leader Mr. Darren Guppy of Darwin, NT, said recently
"In the long run the benefit of the Belt and Road Initiative is in the expansion of trade and the development of a harmonized trade environment to the world," Mr.Guppy said and he added that it was unwise for businesses to turn their back on the wide variety of infrastructure and business opportunities presented by the Belt and Road Initiative. "We need to look beyond and realize that the winners of the Belt and Road Initiative also include bankers, infrastructure investors, consultants, professional services firms, equity fund managers and companies that are exporting both to China and the rest of the world." he said.
Benefits of the Belt and Road initiative
and, ultimately, free trade
The theory of comparative advantage
The inherent comparative advantage of counties can only be realized when connectivity with world markets by way of efficient infrastructure, is optimized and this is what the Belt and Road initiative has set out to achieve: connect some 68 or more countries with high speed rail connections, efficient maritime transfer points, automated port facilities and streamlined customs procedures.
by specializing in goods where nations have a lower opportunity cost, there can be an increase in economic welfare for all countries. Free trade enables countries to specialize in those goods where they have a comparative advantage.
Reducing tariff barriers leads to trade increases
Trade creation occurs when consumption switches from high-cost producers to low-cost producers.
The graph below shows the UK and the European Union as an example:
• Effective and fast transportation to markets and removal of tariffs leads to lower prices for consumers (Prices fall from P1 to P2)
• This fall in prices enables an increase in consumer surplus of areas 1 + 2 + 3 + 4
• Imports will increase from Q3-Q2 to Q4-Q1
• The government of the exporting country will lose tax revenue of area 3. Tax revenue from imports was T (P1-P2) × (Q3-Q2)
• Domestic firms producing product or services will sell less and lose producer surplus equal to area 1
• In fact, overall there will be an increase in economic welfare of 2+4 (1+2+3+4 – (1+3)
• The magnitude of this increase depends upon the flexibility of supply and demand. If the demand is elastic, consumers will have a big increase in welfare
• Essentially, cost reductions resulting from infrastructure improvements as envisaged with the Belt and Road initiative and removing tariffs leads to lower prices for consumers and, ipso facto, the price of imported commodities and services will be lower and PPP (Purchasing Power Parity) i.e. more spending money in the pockets of consumers
Increased exports by countries on Belt and Road routes
As well as benefits for consumers importing goods, companies exporting goods with a comparative advantage will also see a significant improvement in economic growth and welfare of the citizenry.
Economies of scale
If countries on the Belt and Road initiative can specialize in certain goods they can benefit from economies of scale and lower average costs; this is especially true in industries with high fixed costs or those that require high levels of investment. The benefits of economies of scale will ultimately lead to lower prices for consumers and greater efficiency for exporting firms.
Increased competition
With more trade, domestic firms will face more competition from abroad. Therefore, there will be more incentives to cut costs and increase efficiency. It may also prevent domestic monopolies from charging too high prices.
Trade is an engine of growth
World trade has increased by an average of 7% since 1945, causing this to be one of the more significant contributors to economic growth.
Tariffs encourage inefficiency
If an economy protects its domestic industry by increasing tariffs industries may not have any incentives to cut costs.
What respected economists
said about infrastructure and free trade
Adam Smith
In his book "The Wealth Of Nations" (1776) Smith generally supported free trade, arguing countries should specialize in their areas of expertise. He made the argument that there is no point in protecting locally produced products if it would cost 30 times the price of a similar product from a country with comparative advantages. Smith also argued that if competitors become well off, they will be able to buy more exports from other countries. Smith saw trade as a way for all countries to become better off. In contrast to the zero-sum Mercantilist theories popular at the time and that, sadly, are re-emerging from countries with populist governments, resulting in inefficiencies, political corruption and a reduction of the PPP in such countries.
Adam Smith surmised that, if a foreign country can supply a commodity cheaper than what can be made locally, it is better buy it with the proceeds of part of the produce of the local industry that has a comparative advantage.
David Ricardo
Ricardo also made a case for free trade on the basis of comparative advantage. He tried to show that the removal of tariffs would lead to a net welfare gain – the gain of consumers outweighing the loss of producers.
“Under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole.”
John Maynard Keynes
Keynes supported free trade and supported the logic of specialization.
“In a regime of Free Trade and free economic intercourse it would be of little consequence that iron on one side of a political frontier, and labor, coal, and blast furnaces on the other. But as it is, men have devised ways to impoverish themselves and one another; and prefer collective animosities to individual happiness.”
Greg Mankiw
Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.
What others are saying today
How European businesses can benefit
There are a number of ways European companies can benefit, either directly or indirectly.
Firstly, new supply chain networks. With more railway and port development projects, logistics companies can build new supply chain hubs and routes. For example, in order to connect Lianyungang and Istanbul, multinational logistics company DHL has arranged to handle more freight traffic and now provides peer-to-peer services along the new route.
Next, lower transportation costs. As a result of improved infrastructure, European companies will be able to benefit from lower costs and faster transportation times if they want to sell products to BRI countries.
The Chongqing-Duisburg railway line built in 2016 can reduce transportation time between the two cities by 12-13 days. For international trading companies in Europe, this is highly beneficial to expand their businesses in China.
How European Businesses Can Benefit from the Belt and Road Initiative
How European Businesses Can Benefit from the Belt and Road Initiative French President Emmanuel Macron and UK Prime Minister Theresa May both made trips to China in early 2018. During their visits, they expressed interest in the opportunities presented by China’s Belt and Road Initiative BRI
One of the main goals of the BRI is to connect China and the East Asian economic circle with the EU. Under the framework of BRI, China and Europe will build new international economic corridors – such as the “New Eurasia Land Bridge” – to decrease trade costs and promote cross-regional cooperation.
The Eurasian Railway Program plans to build 81,000 km of railway lines for moving freight and passengers overland between China and Europe. This is an important project for connecting national boundaries in BRI countries and developing regional integration. Much of this infrastructure aims to accelerate power generation and resource extraction. BRI countries hold more than 50 percent of the world’s potential oil supply and 70 percent of its gas supply. Already, more than 40 energy projects have begun and a further 20 projects agreed upon.Beyond infrastructure and trade, the BRI seeks to develop people-to-people exchanges through the culture and tourism industries, by capitalizing on the history and legacy of the ancient Silk Road.
US companies benefit from gigantic 'Belt and Road' initiative
China's "Belt and Road" program is showing up in the earnings calls of some companies around the world, including some in the U.S. Roughly 70 countries covering about two-thirds of the world's population are participating in Belt and Road projects, which could involve trillions of dollars in Chinese investment, Jonathan Hillman of the Center for Strategic and International Studies said in a January Congressional testimony. A range of companies including Waters, a Massachusetts-based producer of analytical instruments and Honeywell, see benefits and business opportunities from the Belt and Road program.
US consulting firm Rhodium Group
The Belt and Road initiative is in the interest of the rest of the world, Daniel Rosen, Founding Partner of US consulting firm Rhodium Group, said the “New Normal and China’s New Role in the World Economy” in New York and that the “Belt and Road” initiative could not only benefit countries that lag behind China in the development process, but advanced economies as well. “For the advanced economies, China has strategically decided to deploy its resources in this manner...not fighting over an existing pie, but rather adding to the size of the pie by putting a lot of money to work around the world,” said Rosen, who is also a board member of the National Committee on US-China Relations. Rosen said that the strategy can also be seen as “a new model that extends what China has learnt from its development successes and mistakes to other countries in the context of Chinese financing and support.”
Executive Officer of US infrastructure firm AECOM
Broad consultation is crucial, “The size and scale of the project cannot be done by any one country, and it cannot be done by the private sector alone or the public sector alone,” said Michael S. Burke, Chairman and Chief Executive Officer of US infrastructure firm AECOM.
CICC US Securities, Inc
Zhang Lanlan, CEO of CICC US Securities, Inc., noted that the initiative is to use China’s profound experience in construction and infrastructure investments in the previous 30 years to help other countries.“It is an extension of what China was pursuing for its domestic development and also making contributions by using the competitive advantages we were able to accumulate in the last decade,” Zhang said.
Asian Infrastructure Investment Bank
“Financial sustainability is key to the long-term success of the initiative, said Jin Liqun, President of the Asian Infrastructure Investment Bank (AIIB), People’s Republic of China, which is instrumental in its funding. “We should never do a project that would be a white elephant,” he warned, such as loss-making showcase projects by politicians built with public money.
Sinomach
Although the initiative is spearheaded by China, to succeed it must unite multiple stakeholders. “The Belt and Road is more than just an infrastructure project, it is a crucial engine for building a more socially inclusive tomorrow,” said Ren Hongbin, Chairman, China National Machinery Industry Corp. (Sinomach), “It belongs to everyone. This will be a tremendous opportunity for China to help to build a better system that allows the world to participate in the next phase of growth for the world economy.”
Investment in BRI projects
China has so far invested more than $900 billion in projects in countries on the Belt and Road routes. Examples are a gas pipeline in Pakistan, a 336 kilometer rail line linking Budapest to Belgrade, and a high-speed rail link in Thailand. In 2016, China established the Asian Infrastructure Investment Bank (AIIB), and the International Development Bank to help build infrastructure in BRI countries. China’s imports and exports with BRI countries have risen by 13.2% in the past year.
Asian Infrastructure Investment Bank
Financial sustainability is key to the long-term success of the initiative, said Jin Liqun, President of the Asian Infrastructure Investment Bank (AIIB), which is instrumental in its funding. “Protectionism is a reality you have to live with,” he added. “But when we promote connectivity and infrastructure projects which can bring people together with shared benefits, I think there will be less market for protectionism.”
US infrastructure firm AECOM
Broad consultation is crucial, participants agreed. “The size and scale of the project cannot be done by any one country, and it cannot be done by the private sector alone or the public sector alone,” said Michael S. Burke, Chairman and Chief Executive Officer of US infrastructure firm AECOM.
UN Development Program (UNDP) for Africa
On the relevance of the initiative to the AU’s Agenda 2063, James Wakiaga, economic advisor at the UN Development Program (UNDP), noted that the BRI is vital to address the infrastructure deficit in Africa. “The Belt and Road Initiative is very important particularly in terms of closing the infrastructure gap… so we need to look for the different sources of financing to Africa’s infrastructure to be able to accelerate structural transformation and diversification,” Wakiaga said.
Market rules
Carnegie Endowment for International Peace: From the European perspective, the BRI has the potential to be hugely positive as long as it adheres to EU market rules as well as to international requirements and standards. Europe is a prime investment destination for the BRI. Chinese foreign direct investment in Europe has soared from under €1 billion in 2008 to €35 billion, more than three times the amount of European financing flowing in the opposite direction.
Prime Minister of Singapore
“Singapore welcomes the Belt and Road Initiative,” said Chan Chun Sing, of the Office of the Prime Minister of Singapore. As a financial hub, Singapore can provide support to bring about a more tightly integrated global economic system. “We should move beyond the perspective of a zero-sum game,” he stressed, and create more interdependencies.
Prime Minister of Pakistan
Shahid Khaqan Abbasi, Prime Minister of Pakistan said in Davos, Switzerland: “The Belt and Road Initiative is a physical manifestation of the bond between countries that have existed throughout history” and can result in “freer movement of people, goods and ideas, and a greater culture of openness.” And that “The Belt and Road Initiative is a unique opportunity to connect continents through infrastructure, cultural and technological exchange in order to drive sustained economic progress, “The Belt and Road Initiative is perfectly in sync with the World Economic Forum Annual Meeting 2018 about creating a shared future in a fractured world.
Davos, Switzerland
The Belt and Road Initiative is a unique opportunity to connect continents through infrastructure, cultural and technological exchange in order to drive sustained economic progress, agreed participants at a Caixin debate.
Addis Ababa University
Professor Kassahun Berhanu from the Political Science Department of Addis Ababa University said the BRI initiative is envisioned towards increased understanding, enhanced recognition of multiculturalism and diversity, and peaceful collaboration for achieving mutually rewarding goals and objectives.
Kenya Railway
Kenya launched its first Chinese built high-speed railway In May 2017,. It connects Nairobi to the major port city of Mombasa. The 290-mile railway was built by the China Road and Bridge Corporation. It was financed almost completely by the China Eximbank. The railway is planned to extend to Uganda, the Democratic Republic of Congo, Rwanda and Burundi, South Sudan, and Ethiopia.
Belt and Road and the environment
Clean and green infrastructure is another shared priority. “We will be able to finance infrastructure projects without leaving a big footprint on the environment,” said Jin Liqun, stressing the need to work in the interests of local communities. “Instead, we should be able to improve the environment.” The Belt and Road as energy policy is one of the main drivers of the BRI project, adhering to clean energy policies is of the utmost importance. In advancing the project, clean energy policies must prevail, as global warming and environmental degradation are causing serious problems for humanity and the world’ eco-systems. The new Silk Road should be cherished as a “precious legacy” for today’s world.
BRI not restricted to trade
The BRI has not restricted itself to trade only. It is a comprehensive plan which considers other areas of cooperation between involved countries, Bai Chunli, president of the Chinese Academy of Sciences (CAS), said that China is willing to strengthen cooperation with BRI countries in scientific research on climate change, biodiversity and epidemics and infectious diseases.