Connect with us

Economy

Chinese Economic Policy Strategy after the Global Financial Crisis: A pseudo Bretton Woods in the Making?

Published

on

China adopted economic policies in regards to the crisis with internal as well as external implications. The external aspects which this study is focusing on include new policy drives and visions that are unprecedented in history adopted by a Chinese government. From the present research it is visible that China has a broad vision to create its own Bretton Woods system. The 2008 global financial crisis made it clear to the new ruling elite how vulnerable it is to global imbalances, and that the classical approach of hoarding US dollar reserves served no more its economic and political interests. As a result of the crisis and due to the fact of holding huge US dollar reserves, China incurred big losses with the dollar loosing value in the aftermath of the crisis thereby melting the dollar stock it had accumulated for decades. China has come to realize that a pragmatic policy approach is in its interest when competing with the US. Hence the new policy drives towards a framework resembling that of Bretton Woods.

The Bretton Woods system was a major tool for the US in shaping and dominating the international financial system. Its purpose was to govern and shape the international monetary relations of states. Although the so called Bretton Woods system collapsed in 1971, the institutions it created survived and to this day are the main pillars of the international financial system. China seems to establish a similar system, when looking at the policies adopted. The Asian Infrastructure Investment Bank, New Development Bank, the ‘one belt one road’ initiative, the Silk Fund, and the Internationalization of the RMB. China seems to follow the same path such as the US half a century ago by establishing very similar institutions to that of the Bretton Woods. 

Thus the outcome of the Bretton Woods system catapulted the US into a hegemon of the global economic world order. The question to be asked now is whether China is about to follow the US footsteps and create a ‘Bretton Woods’ on its own, by cooperating with other states?

This paper is organized in the following structure. Section 2 is the literature review. Section 3 presents the road to the Chinese Bretton Woods system, Section 4 describes the internationalization of the RMB, Section 5 provides for a conclusion.

Literature Review

Since the developments are very new, and the mentioned institutions and policy drives by China are a recent phenomenon, the literature is very limited on the subject. Duggan (2013) focuses more on the international clearing union (ICU) and the effects it would have on Sino-US relations. According to the empirical results an ICU would have prevented de-industrialization in the US and allowed for Chinese export led growth (Duggan, 2013). Hence there would be no need for the Chinese to seek for alternative initiatives. There are related studies on the Bretton Woods system and China, Dooley (et al. 2003) review the Bretton Woods System, and Dooley (et al., 2011) come up with the notion of Bretton Woods II, and argue that it still rules the international monetary system. Furthermore Eichengreen (2011) elaborates on the possibility of the internationalization of the Chinese renminbi and the subsequent challenge to the US dollar. However to the best of the author’s knowledge, there is so far not a study that is directly assessing the establishment of a pseudo Chinese Bretton Woods system.

The Pseudo Chinese Bretton Woods System

As far as China is concerned one can indeed see a policy shift that is more proactive in international relations. Thus looking at the policies adopted and the active foreign policy drive one can indeed argue that China aims to create its own unique form: a ‘Bretton Woods’ system with Chinese characteristics. Of course the conditions and international situation at the time the Bretton Woods was adopted were completely different to the conditions states’ face nowadays. However, the term ‘Chinese Bretton Woods’ seems to be appropriate when looking at the Chinese policies, they resemble the creation of similar institutions and regimes like that of the Bretton Woods system. Below are the main policy moves that arguably justify this view:

-New (BRICS) Development Bank based in Shanghai -similar to the IMF

-Asia Infrastructure Investment Bank (AIIB) –similar to the World Bank

-One Belt One Road/Silk Fund- A Chinese Marshal Plan

-Internationalization of the RMB: Currency swap Agreements and China International Payment System-

Indeed when looking at these newly established institutions one can see the vision behind these policy drives. Similar to the USA in being the major force behind creating the intuitions of the Bretton Woods system, China also seems to follow a similar strategy by creating institutions and regimes that are vital to broaden its own international sphere of influence with the aim of eventually taking the lead. Now let’s have a closer look at these institutions.

Asian Infrastructure Investment Bank (AIIB)

By many seen as a rival to the World Bank and IMF, its main aim is to provide for infrastructure development in the Asia-Pacific region. The blueprints of the creation of the Asian Infrastructure Investment Bank surged in October 2013, mainly due to the frustrations by the Chinese government with the current international intuitions such as the IMF and World Bank, with little or no room for reforms that would enable greater Chinese input into the respective organizations (Braningen, 2015). Despite major critics by the US that the creation of a new international investment bank is unnecessary, many states and major international institutions disagree. Head of the International Monetary Fund Christine Lagarde as well offered support for the Chinese-led multilateral lender; Lagarde and her counterpart from the Asian Development Bank said at a conference in Beijing that they were in talks with the AIIB for cooperation (Miller and Goh, 2015).

It is obvious that the US is opposing the AIIB initiative on political grounds since it poses a challenge to the US led international economic system that it created decades ago, and with the rise of China as another main actor in the global economy that has a vested interest in pursuing its own developmental goals, we will see such initiatives in the future more.

Thus notably one has to remark that in the immediate aftermath of the Second World War, it was relatively easy for the US to create its own international economic order, since all the major economies of the period were ravaged by war and indebted themselves to the US. The situation is different for China today, basically because the terms and conditions are not the same as faced by the US in the post-World War II period. There is already a global hegemonic order in place through which the US and other major powers are operating and cooperating. Examples include the IMF, World Bank, OECD, OSCE (Organization for Security and Co-operation in Europe), the Asian Development Bank, ASEAN, G7, G20 etc. Furthermore the global economic system is so interdependent and integrated nowadays, that it is not easy establishing new international regimes. Thus China will face a challenge in its endeavor for creating its own ‘Made in China’ Bretton Woods system, but the developments of the AIIB so far show a very positive outcome for China.   

The countries joining the AIIB are not just usual countries, on the contrary they are major allies of the US, especially the United Kingdom, the founding member and a country that had such a great impact on building the Bretton Woods system now joins an initiative that is seen by many as an act to counterbalance the role of the IMF and the World Bank. Perhaps the most interesting move besides initial UK membership comes from Israel, a staunch ally of America heavily depending on it for security, economic and regional issues, Israel too applied for membership (Reuters, 2015). A country heavily depending on the US for its security, economy and international support against sanctions from the UN, is bidding to join the Chinese led AIIB despite US opposition marks indeed a shift in the global economic policies of nation states.   

The Obama administration made from the beginning its position vis-a-vis the AIIB clear, it is vehemently opposing the establishment of the AIIB initiated by China on the grounds that there is no need for a further lending institution since there is the IMF and the Asian Development Bank and that it has concerns over transparency, procurement practices and environmental safeguards and concerns over lending practices alike (Northam, 2015). Nevertheless, according to Bergsten from the Peterson Institute for International Economics, there is a very big demand for infrastructure projects in most parts of Asia, since the lack of vital infrastructure such as roads, airports and power facilities constitute a big barrier to Asian development. His estimation is that in the coming decade about 8 trillion US dollars are needed for infrastructure projects in Asia, and he argues that the AIIB can fill that gap (Bergsten, 2015). It is projected that China is prepared to provide for half of the initial 100 billion US Dollar Budget. Thus it is seen by many as a move by China to compete for global, economic, and political leadership (Northam, 2015).    

These developments indicate that the new policy drive of China after the Global Financial crisis that resemble that of the US leading to the establishment of the Bretton Woods system may not be a far reached goal after all, but a deliberated policy action as a result of the effects that the global financial crisis brought with it along the way. These actions can be seen as a policy response to the crisis, like every country, China suffered from the crisis, and not satisfied with the current international financial system, that led to incur China big losses, it is in the trial of making and developing new structures and institutions, attracting prospective members. This major shift in the Chinese policy drive can be seen as a move by China to develop its own ‘Bretton Woods’ system just like the USA did in the post-World War II period.

Since the creation of the World Bank and IMF in the 1940s the US has dominated these institutions and the major European countries seem to look for a change and position themselves stronger within global finance and trade by joining this new initiative led by China (Mason, 2015).

Chinese Foreign Minister Wang Yi said in an interview that China is trying to foster a “new type of international relations featuring win-win cooperation […]” (CCTV, 2015).

The move by China to tunnel its massive currency reserves into infrastructure investments in Asia has led to a lot of debate, long had Western countries asked China to use its trade surplus in the development of transport, energy and telecommunication in developing countries, only they expected it to be done through US dominated institutions such as the World Bank and Asian Development Bank (Taylor and James, 2015), an alternative model, i.e. the AIIB prevailed at the end detrimental to the US and Japan. Conversely one has to acknowledge the US share in the lead to the establishment of the AIIB.

The fact that Congress did not ratify in 2010 an agreement that would increase the voting rights of China and other emerging economies within the IMF literally pushed China and alikes to seek for alternatives. Members of Congress openly started to acknowledge this situation. However the United States is not watching bluntly to the current events that put a drift between itself and major traditional allies, as a counter movement the US initiated the Trans Pacific Partnership (TPP) trade pact with eleven Asia-Pacific states excluding China (Taylor and James, 2015). It aims to boost US export to the region, but also to help gain the US a foothold in the Asian markets, but mainly it’s a move to limit growing Chinese influence in the region. President Obama made this clear in his address to Congress; he stated that without the active involvement of America, “China will be free to ‘write the rules of trade in the 21st century’ ” (Brodbeck, 2015). 

For sure we will see a steady competition among the two major global players on the international economic system, the former the hegemon the latter posing serious challenges to the status-quo.

For instance this cleavage became visible as soon as China announced its plan for the creation of the AIIB. The US response was prompt warning its allies and any potential member states that there is no need for another multilateral lending institution, expressing concerns over the transparency of the Bank, good governance, and concerns over corruption and abiding to environmental standards among other things. Although the IMF generated much criticisms with its structural adjustment programs, as well as the World Bank with some major projects conceived environmentally questionable, with more and more public scrutiny in the last decade minor reforms were undertaken to satisfy public concerns as well, which led to some best practice operational conduct in the mentioned institutions, but still many scholars find these steps not far reaching enough.

Thus indeed the strategic policy move of China establishing the AIIB, upset many decision makes and led to new formations and the adaptation of positions by major players of the international financial system such as Europe and some Asian countries. It led to the shift away between the US and its traditional allies such as the UK, Germany, France and Italy and even Israel. It seems the European countries want back the ‘golden age’ period of the early Bretton Woods system and join a similar initiative that has the prospect to deliver on those promises. 

The developments are stunning on the one hand the hegemon (America) tries to undermine the participation of other states in the Chinese-led AIIB, and on the other hand we have witnessed unexpected moves by Western powers belonging so far to the US-led international economic order. It becomes visible that the 2008 global financial crisis shook all the existing relationship between states, since like China, the European countries are also not contend anymore with the status-quo of the system and aspire change. The AIIB could be regarded as being one of the main pillars of the new policy drive initiated by China to create its own Bretton Woods system, thus the success of this institution will play a major role for the other mentioned pillars.

The membership looks promising, with 4 of the 5 permanent UN Security Council members aboard, 17 out of the 34 OECD members, and all ten countries of the ASEAN. The only major global economies abstaining from joining the AIIB are the USA and Japan (Olsen, 2015).These developments already indicate that the new policy initiatives by China managed to attract attention around the globe, and pave the way ahead for the establishment of a pseudo Chinese Bretton Woods. 

Abstention by both countries comes to no surprise, since the US views the AIIB as a challenger to the US dominated Bretton Woods institutions and has possible fears over a spill over that gradually a rising China might challenge its dominant position in the global system. For Japan under the leadership of Prime Minister Shinzo Abe the reasons are similar, it fears that the AIIB will be a competitor to the Japanese dominated Asian Development Bank (ADB) in the region and undermine Japanese economic interests in Asia.

As opposed to the other traditional US allies Japan does not want to jeopardize its relations with the US, especially not in times when it has disputes with China over some islands in the Pacific Ocean, and the fact that Japan leads the ADB is another vital factor for its abstention. Its customary that the Manila based ADB is led by a former senior official from the Bank of Japan or the Japanese Finance Ministry (Kajimoto, 2015).  

Although the AIIB is an Asian Infrastructure Investment Bank, its reach is indeed global as seen by its membership, it managed to attract members from diverse regions of the world reaching as far West as Latin America and North as Sweden or Denmark, per capita rich countries such as Switzerland and poor ones such as Nepal, all are on board. Moreover it has shown the increasing rift between the US and its traditional allies, perhaps it is unprecedented in the post-World War II period where the US was not able to convince or force its allies from a policy move that it vehemently disapproves of. Major staunch allies that have been so reliable in the past such as the United Kingdom and even Israel did turn its back on the US. For the first time in the century was the USA so alone on its position, leaving it isolated from a major global initiative.

For example in the follow up of British negotiations to join the Bank, the White House has accused Great Britain from constantly accommodating China, showing its disapproval and posing as threat to other potential candidates.

Besides the voiced critics to the AIIB related to transparency, environmental standards, good governance and so on; there is the concern that China does not have enough experience to lead a multilateral infrastructure investment bank due to its lack of experience and it would be advised to seek help from peer institutions, i.e. the institutions of the Bretton Woods: the IMF and World Bank, or Asian Development Bank or Western member states that have the necessary know-how. However, the critics seem to fail to mention the China Exim Bank; which is already operating for almost more than a decade in these regions, already undertaking infrastructure projects not only limited to public sector projects but also the private sector. Former Chairman of the China Exim Bank Li Ruogu highlighted in an interview that they have been doing projects such as city rail systems, ports, railway systems, and power facilities among other things on the ‘belt way’ for decades and to his accords countries in the region started to favor the China Exim Bank over the competitors of the World Bank and Asian Development Bank (Li Ruogu, 2015). That indicates that China not only has the financial resources in place to pursue the creation of its own brand of the Bretton Woods system, but also the required international experience in gradually getting closer step by step to its envisioned grand strategy of the creation of the ‘Chinese Bretton Woods’ system. One has to understand that this is a long term project; China does not have the luxury the US enjoyed in the 1940s when it emerged after the War as a Superpower, which enabled it to act fast and impose its will relatively easy creating the Bretton Woods. Since we live in a different world than in the late 1940s, with different conditions and different global power structures, China’s choice is to adopt a gradual long term approach in getting there. It seems to have found its way, since it is not taking the classical confrontational way that the former colonial powers as well as the US did in the past, but it’s taking the way of diplomatic conduct.    

New Development Bank

Also called BRICS Development Bank is one of China’s latest initiatives on the way to establish its own version of the Bretton Woods. Like the AIIB the New Development Bank (NDB) is also a multilateral development Bank, only limited in its membership compared to the AIIB. It was set up with the aim to foster greater financial and development cooperation among the BRICS (Brazil, Russia, India, China and South Africa). This is another important step, a milestone in development since the original BRIC states excluding South Africa together comprise more than 3 billion people; 41.4 % of the world population, cover about a quarter of the world’s land area spread over 3 continents, and account for about 25 % of global GDP as of 2014 (NDB, 2015). One can easily see why it is of such high importance.

It’s headquartered in Shanghai, and as opposed to the World Bank and for the matter the IMF, where votes are based on capital share, in the New Development Bank each participating state has one vote and there is no veto power in its structure (NDB, 2015). The mere fact that member states have equal voting rights regardless of capital share and no veto power is an indication that the emerging economies of the BRICS countries want to go a different way than the orthodox international financial institutions of the IMF and the World Bank of which most participating states are voicing their complaints about. In a way it’s a show off of the soft power China projects in the 21st century, since in this establishment it’s the biggest economy.

Like its counterpart the AIIB, the NDB is also focusing on infrastructure projects, with authorization of up to $34 billion annually. The initial founding members agreed that any member cannot increase its share of capital without the agreement by the other 4 founding members, the Bank also allows for new members to join but the BRICS capital share cannot fall below the threshold of 55 percent (NDB, 2015). Again this arrangement does not allow the institution to be dominated by one member country. Perhaps the reason why many see the NDB as a competitor to the IMF lies in the major detail, that this new initiative also has a ‘Contingent Reserve Arrangement (CRA).

The CRA was designed with the intent to support countries with liquidity in response to actual or potential short term balance of payments pressures. Thus the mentioned reserve has the objective to protect states against global liquidity pressures, including cases of member countries where national currencies are being negatively affected by global financial pressures or in times of crises. Due to the exit by the US from its expansionary monetary policy the Bank also aims to provide for assistance to other states as well(NDB, 2015).Thus the NDB is another vital pillar of the Chinese response to the 2008 crisis and its drive in creating a Chinese Bretton Woods system.

Rapoza points out that in most emerging economies the private sector has grown rapidly with the public sector lagging behind to provide the necessary infrastructure projects, emphasizing that regulatory measures by Western governments have made it very difficult for institutional investors to provide enough funding. Furthermore he stresses the fact that it will be in Chinas interest to provide for infrastructure developments since it needs the infrastructure to place its goods in the market and expand its export base (Rapoza, 2015).

Moreover Totten points out to the fact that with the so needed IMF reforms desired by most of the nations, especially the BRICS, it is no surprise that after the devastating global financial crisis of 2008, the BRICS patience would come to an end especially when the US Congress vetoed any new reforms to the IMF. Thus like Keynesianism was the outcome of the Great Depression, so could the global financial crisis lead to the establishment of a “paralleling international financial system” as pursued as a long term goal by Beijing. A very important aspect one shall emphasize is that the paid in capital and reserves are planned to be denominated in the national currencies of the member states of the Bank (Totten, 2014). This is a very important fact one cannot neglect, this means a shift away from the traditional dollar and the US dominated global economic order.

Thus so far the emerging economies of the BRICS nations followed the line and pursued undisrupted economic growth under the current traditional global financial system with future prospects of playing a larger role in those institutions when time is due, and they played along. However, the 2008 global financial crisis led to unforeseen events that upset the whole current system of global financial governance and a major cleavage emerged over the say in the future decision making structure of the global financial system and the respective institutions, in which the current power holders were not ready to share their power in those institutions. Add to that the IMF reform bill was rejected by the US, it practically disillusioned the BRICS among other countries, which saw that it is very hard and difficult to put though their concerns and active participation in those institutions controlling the major global economic order. 

It should come to no surprise to anyone that there would be a challenger seeking better terms to the current global financial system.

Just like the US challenged the British gold standard system earlier this century even leading to war among them. So it is the course of history that a country acquiring a major power status in the international system, which China did by becoming the number two of the world economy,will instigate new policies and initiatives different from the current global financial system that led to the illusion of not only the emerging countries but also many other states. This is not the only example, there are many states eager to see a change to the current hegemonic structure established and dominated by the USA over many decades. One has to acknowledge that change does not come overnight, these new initiatives established by China are laying down the ground framework and paving down the way for structures that have the potential to the create a new ‘Chinese Bretton Woods’ system or a ‘parallel global financial/economic order’. The key concept one has to understand is that this shift will come gradually over time, and will be perhaps less painful than the one we have seen during the events that led to the two World Wars.

One has also to see the development in light of the South-South economic cooperation, thus instead of competing with each other the BRICS realized a coordinated effort in place is much more valuable to them, and the New Development Bank just serves well this purpose. Comparatively speaking the value of South to South trade exceeds North to South trade by approximately $2.2 trillion, which is over 1/4 of global trade. There is also the surge in South to South foreign aid, with countries like China, Brazil and India increasing their share in foreign aid. Another important fact to notice is that China became Africa’s most important trading partner and Brazil for example has more embassies there than the former colonial giant Great Britain (Desai and Vreeland, 2014). All this necessitates a coordinated approach within the BRICS, since each country on their own competing against the former colonial powers and another BRICS member would definitely be to the disadvantage of the latter. With a structure such as the New Development Bank in place, this coordination and cooperation among the BRICS will ease the entry to new markets.

This new initiative will enable the BRICS to play a greater role in the world economy than is the case under the current system. The group of the BRICS comprises one fifth of the global economy, but have only 11 percent of votes in the IMF. With all reform attempts to increase the share of the BRICS in the IMF stalling, mainly due to US but also to some smaller European states concerned not to lose voting shares to others, the establishment of the NDB was almost inescapable. We have seen a forerunner to the NDB in Latin America for example, with frustrations from the World Bank and the IMF a regional ‘Development Bank of Latin America’ the CorporacionAndina de Fomento (CAF) was developed to bypass the strict infrastructure rules of the World Bank. The CAF funds more infrastructure projects in Latin America than the Inter-American Development Bank and the World Bank combined. According to Desai and Veerland the NDB has the same potential and its loans could surpass that of the World Bank (Desai and Veerland, 2014).

Moreover, as mentioned throughout the research, the 2008 Global Financial Crisis has upset all the current balances of the global financial order and led to major cleavages especially between China and the US, the number two and number one economies of the world, respectively. Before the crisis China was financing the US debt by buying US Treasury Bills, which the US used to import goods from China. As a result China was accumulating huge US Dollar reserves, earning interest on them as well, but with the global crisis, this option became no more in the economic interests of China, since it incurred big losses due to the dollar loosing value. Sitting on $4 trillion in foreign currency reserves and the rate of return of US Treasuries not anymore promising, something needed to be done with the vast reserves (Bloomberg, 2015). Thus with considering the Obama administrations ‘pivot to Asia’ making China uneasy it has no options but to look to alternatives. Bearing in mind also that we are still in the aftermath of the crisis which disillusioned and affected many states negatively, including major US allies, the time seemed to be ripe for the fomenting of a parallel international economic order, or simply balancing US domination of the world economy by establishing alternative economic policies that might look uncorrelated at the first glance, but are all inter-related in creating a Chinese Bretton Woods system; the AIIB, NDB, One Road One Belt, and the Currency swap Agreements and China International Payment System. Connected together under one roof they constitute the main pillars of the Chinese Bretton Woods.

The AIIB initiative just serves well in demonstrating the new role played by China and its capacity for providing for an alternative gravitational point in the world economy that has the potential ultimately to lead to a Bretton Woods made in China. Seeing this as an opportunity the powerful economies of Europe joined the Chinese led initiative of an Asian Infrastructure Investment Bank, despite heavy opposition from the US. 

After having discussed the two key pillars of the new initiative that paves the way down for a new global economic order, now let’s focus perhaps on the most important pillar that complements all these combined efforts in the making of the ‘Made in China” Bretton Woods system, the ‘One Belt One Road’ initiative. Not only a grand economic policy but also a geopolitical maneuver that will have a huge impact once completed not only to all the states involved but also to the different geographical regions of Europe and Asia as a whole, changing the economic and political landscape by bridging continents together. 

One Belt One Road

The ‘one belt one road’ program initiated by President Xi Jingpin is perhaps an unprecedented bold move in Chinese foreign and economic policy since the days of Deng Xiaoping. It covers and combines so many inter-related issues such as economic development, export promotion, FDI, and new investment opportunities for Chinese companies when looking solely from the economic perspective but it is for sure not only limited of being a tool to fomenting a new economic order which has huge potential to bring development to the states in question as well, that is not dictated by World Bank and IMF adjustment or structural programs.

The ‘one belt one road’ initiative was first announced by Xi Jingping in October 2013, it’s a policy that constitutes two complimentary projects connected together to one another, on the one hand to review the historical Silk Road between Europe and Asia, there is the ‘New Silk Road’ initiative and on the other hand to connect China to the markets of Southeast Asian countries, Europe and Africa throughout the sea, or the so called ‘21st Century Maritime Silk Road’. So on the one hand a Maritime network and on the other hand a land based road-train network that will serve China to further assert itself into the world economy and increase its economic and political influence further in the global arena eventually perpetuating a Chinese Bretton Woods system. President Xi is attaching a great importance to the project, since he allocated a budget of $40 billion to a newly created Silk Road Fund, intended to improve trade and transport routes in Asia. He stressed that the purpose of the Fund is to support the ‘one belt one road’ project’, i.e. the New Silk Road Economic Belt and the 21st Century Maritime Silk road (Caixin, 2014).   

On November 2014 giving a speech to the APEC Central Leading Group on Financial and Economic Affairs, President Xi stressed on the urgency of the construction of the ‘one road one belt’ initiative. Thus the timing of the announcement of the Silk Fund Road was interesting, at the signing of the memorandum of understanding establishing the AIIB, he announced the creation also of the Silk Road Fund, stating that the former and latter are complementary in nature rather than being a substitute to other institutional development banks (Chen, 2014). As mentioned earlier the AIIB, the NDB, and the Silk Road Fund are all a well calculated and executed policy strategies in the road towards fomenting the Chinese Bretton Woods system and serve for that purpose. Under the new leadership of President Xi, China has found a creative way to use its huge currency reserves for lessening its dependency on the US led global financial system that is prone to incur China big losses and at the same time to use these reserves for a grand policy strategy that will lead to the creation of its own economic gravity area, or sphere of influence that will help maintain the much needed economic growth figures in the future years ahead.

The ‘one belt one road’ initiative is also called China’s Marshall Plan, referring to the US development and reconstruction plan of post-World War II Europe, and integrating its markets thereby establishing a grip over the postwar European economic order. Now if we compare the ‘one belt one road’ initiative to that of the Marshall plan one can indeed see some similarities, since the ‘belt and road’ projects were envisioned to serve China’s increasing needs, be it economic expansion or creating alternative secure routes to its markets beyond its borders.    

Like the Marshall Plan, the ‘one belt one road’ policy is aiming to cement the framework for the export sector of China in those states. However, here one has to look to the role China has played so far in the region and in the regional institutions such as the ASEAN. China promises a win-win cooperation system where both the investor as well as the host country will gain; this is visible in the stance it takes in those institutions, by setting up a relatively fairer operating system and giving space to its partners, like forgoing of the veto power in the NDB although it’s the biggest contributor by far. Moreover as opposed to the Marshall Plan it’s all encompassing by welcoming new members, the Marshall Plan was limited only to Western Europe. Furthermore due to its vast scope it faces bigger challenges by competitors, such as roadblocks by US like the TPP initiative etc. However, its impact will be huge to the region and the global economic system, and since all the countries involved have a high stake in this project as well, it has a promising outlook (Dingding, 2014). 

Thus the aim of the ‘one belt and one road’ projects incorporates the development strategies of participating states into regional cooperation thereby linking those states’ economies with the Asia-Pacific, European and African area. Thus China is well suited to lead this initiative, with being the largest trading partner of more than 120 states, engaging in different types of partnerships with 67 countries and five regional organizations. More importantly the developing world as well as economic powers and staunch allies of the USA don’t shy away anymore entering into initiatives led by China; more than 60 states have expressed willingness and interest in the ‘one belt one road’ initiative (Zhang, 2015).With the implementation of the ‘one belt one road’ policy Xi aims to double the 2010 GDP per capita and build a prosperous China by 2021, thus connecting China and Europe by both land and sea. These new initiatives are by no means to be compared with traditional foreign policy or economic development policies adopted by states’.

Just to highlight and understand the scope and pace of the ‘one belt one road’ initiative one simply needs to look at its routes; the sea route or Maritime Silk Road (MSR) is set to start from Fuzhou in Southeast China and glide south through the ASEAN states, crossing the Strait of Malacca turning west to countries along the Indian Ocean till reaching the land based Silk Road in Venice via the Red Sea and the Mediterranean. Moreover under the structure of the MSR China has plans to broaden this initiative and build hard and soft infrastructure projects form the Indo-Pacific area to Africa (Deepak, 2014).

The mentioned design of a ‘one belt one road’ policy looks promising; however one cannot also deny the geopolitical competition that has roots in the formation of such a policy. China is highly energy dependent and imports most of its energy from abroad. To keep a balance in its energy supply new projects such as the Central Asia Gas Pipeline (CAGP) were established, including the Central Asian nations of Turkmenistan, Kyrgyzstan, Tajikistan, and the Turkmenistan, Uzbekistan and Kazakhstan line that roughly supply half of Chinas gas imports. However gas has only a 4 % share in Chinas total energy consumption, oil accounting to 20 % that is mainly coming from the Middle East (Qureshi, 2015).

For about 40 % of its oil supply China relies on the Straits of Malacca also in the Maritime Silk Road, the Malacca Strait is the key gate to the West. However the strong presence of the US Navy in the Strait of Malacca and the threat of piracy stipulate for the search of alternative routes as well, this is where the New Silk Road comes in as a complementary measure. China has no option but to diversify its supply routes, the Trans-Myanmar oil and gas pipelines just come as another lucrative option for securing oil and gas resources (Qureshi, 2015).

Figure 1

Source: Qureshi; 2015

As one can see the ‘one belt one road’ option not only provides China with an increased role in the global economy, but at the same time it serves its economic interests in diversifying the supply routes for its energy needs. In the North-West it has set up land based pipelines with the Central Asian Nations, in the South-West it has set up pipelines reaching Kunming that provides for an energy corridor giving it direct access to the Bay of Bengal. These initiatives are still regional in nature. However the pearl of the ‘one belt one road’ project connecting China to the far West by land is indisputably the New Silk Road railway project starting from Yiwu crossing the heartlands of Asia and Europe finally reaching Madrid. This railway network connecting dozens of states and creating a direct line from the East Coast of China to the far West up to Madrid not only serves the purpose of fomenting China further into the global market, increasing its role, and providing a cornerstone for the ultimate goal of a Chinese Bretton Woods system. This project is of major strategic value to China since it helps circumvent US naval superiority and strives for greater business efficiency between Europe and Asia, thus bridging the continents. It’s a win-win scenario since the countries along the belt would get the necessary infrastructure investment and benefit from this route (Qureshi, 2015). 

Figure 2

Source: Qureshi; 2015.

Perhaps the ‘one belt one road’ initiative is one of the biggest economic and political endeavors of the 21st Century, thus its success along with the other Chinese initiatives resembling the Bretton Woods would change the outlook of the global economic order and create a different ‘parallel economic and political order’ that can pose as a major challenge to the US led system.

One has to understand that in this one China does not go it alone, it would be too costly, open to sabotage of the project by competitors and other difficulties such as coordination issues since it is encompassing such a diverse region and different countries with different backgrounds, add to that the financial burden solely placed on China, opening the success of the project to more vulnerabilities. But it’s not only the Chinese policy makers who grasp the importance of this unique project and the incorporated win-win option for all participating states makes it lucrative to join; it will benefit them in multiple ways, not to mention better infrastructure, easier and broader access to markets due to deepening integration etc.

It should be for that reason that the Shanghai Cooperation Organization (SCO) declared it will combine its development plans with the ‘one belt one road’ policy initiation, thus giving it more cloud and international leeway in its course of actions. The Secretary General of the SCO, Dimitry Mezentsev gave in an interview on CCTV more insights and details on the shape of such cooperation between the SCO and the ‘Silk Road’ project. The SCO prepares a draft of cooperation plan between itself and the ‘one belt one road’ initiative to be handed over to member states for review and ratification. The focus is on mutual benefits on the area of politics, economy and culture; in addition all observer states as well will be invited to join the Silk Road Economic Belt initiative (Mezentsev, 2015).

Not only brings the Silk Road Economic Belt initiative states closer to each other by means of providing them with a common economic interest where all sides win, but also fosters stability and decreases the chances for conflict in the region, since with the deepening integration the costs of conflict becomes much higher than cooperation. So states are much more likely inclined to cooperate out of sheer self-economic and political interest rather than choose the path of conflict. Add to that the increasing role of the Shanghai Cooperation Organization, which has a huge potential not only as mentioned above in fostering and developing ‘political, economic, and cultural’ traits but also providing states with a forum to litigate their differences and promote harmonious relations among them by taking a leading role in this new initiative, and the fact that the SCO has by now longstanding professional operational structure where states are already engaging each other for quite some time now. Hence it has a good reputation among the member states, thus making it a viable organizational tool for the smooth functioning of the New Silk Road Economic Belt.

The importance of this initiative lies not only in providing for infrastructure investments, such as ports, railways, and power facilities and a network of connecting geographical regions, but also the additional benefit of generating economic growth.

According to a study conducted by Minsheng Securities the ‘one belt one road’ initiative will have an impact on 4.4 billion people in 26 countries and regions whereby the economic effect is estimated at about $21 trillion. Furthermore, on the one hand the investments are expected to include domestic provincial infrastructure investments in China, in areas like railway, highway and airport construction totaling $ 1.04 trillion. On the other hand, international projects are expected to be $ 52.47 billion in areas of Central and South Asia, with highway, railway, and of course energy projects. The funding for these projects comes from the ‘custom made’ Silk Road Fund consisting of $ 40 billion. Thus China started already in funding some projects that are in line with the Silk Road Economic Belts philosophy (Wang, 2015).

In light of these developments one can see, how important the ‘one belt one road’ policy is to China, since it is not only a vital pillar of an economic strategy to gradually foster the Chinese Bretton Woods system, but also an economic policy tool to stimulate economic growth at home at times of downward economic pressures. Thus summing up the ‘one belt one road’ initiative by China, it is an ambitious project that has the potential to change the outlook of the current global economic order. As discussed in the section above, it has many sides; economic, political, geo-politics, as well as cultural aspects that provides for the further integration of the region of Asia that will according to analysts foster regional peace. Moreover it’s not only bound to bridge the continents of Asia and Europe, but reach out to the entire world. The reason why so many countries embrace the ‘belt and road’ project cannot only be explained by economic motives and gains of the countries encompassing it, another reason includes the fact that it is built on a win-win concept as opposed to the Bretton Woods system that is criticized of being mainly Western dominated.

In order to accomplish this goal, many Chinese Scholars for example refer to the “three no” notion, i.e.: non-interference into domestic affairs of other states, not to create a sphere of influence, and lastly not to seek for hegemony (Deepak, 2014). Thus one thing is for sure, there is a big need in the development of the infrastructure of Asia, which the AIIB has the potential to fill in the gaps, and other initiatives such as the ‘one belt one road’ provide even a bigger potential in integrating continents. However all these pillars of the Chinese Bretton Woods system mentioned so far are not complete without the internationalization of the RMB.

The Internationalization of the RMB

Already being traded in currency markets in London, Singapore and elsewhere the RMB is on its way to full internationalization. Many Asian central banks and some non-Asian states have also RMB reserves. Furthermore China has currency swap agreements with almost all states in the Pacific region, many in Europe, and beyond to enable for direct trade in the Chinese Yuan, circumventing the long established passage through US dollars (Smith, 2015). Though one has to note the internationalization of the RMB does not mean that it will at the outset replace the dollar; it means that like the Euro it will become another powerful reserve currency and be dealt in with international transactions.

Barry Eichengreen (2011) for example elaborates on how long it will take for the Chinese renminbi to attain international currency status. By referring to the historical analogy of the US dollar that managed to gain international currency status from 1914 to 1924; only in a decade did the US Dollar surpass the British Sterling and became by 1924 the leading international and reserve currency (Eichengreen, 2011). Moreover he points out to the fact that the internationalization of the RMB does not need to come at the demise of the US Dollar or the Euro for that matter, according to Eichengreen: “it is possible to complete the internationalization process quickly if the authorities set their minds to it.”

For sure it seems that China set its mind to make the RMB an international currency when one looks at the policies adopted, like the currency swap agreements between major trading partners and also other states and moves such as the China International Payment System (CIPS) and applying to the IMF for the placing of its currency in the Special Drawing Rights (SDR) basket of currencies in the IMF. Since the monetary pillar of the Chinese Bretton Woods system requires the internationalization of the RMB, these policy moves show a willing Chinese government to enter the international stage and play a bigger role.

Coming back to Eichengreen’s historical analogy of the British Sterling and the US Dollar, there are challenges to the internationalization of the RMB but also advantages in going ahead with the policy. Just like the USA today with the Bretton Woods institutions and its major global financial status, so was London an established center for global trade and the international financial market. It had the entire infrastructure needed with sets ranging from specialized investment banks to foreign branches and institutional and individual investors. Like the US Treasury market nowadays, London was the single most liquid market in the world (Eichengreen, 2011). Just like New York had to face this situation a century ago and compete for its position, so does China face similar challenges that New York faced when jockeying for the number one position in global finance.

Eichengreen (2011) argues that there are sequencing stages in order to internationalize a currency: first the use of the RMB in invoicing and settling trade; second promoting its use in private financial transactions; third encouraging the RMB to be held as foreign reserves by central banks and governments. Thus China has to provide for greater exchange rate flexibility to accompany the transition to capital account convertibility and allow a higher amount of capital flows. The Chinese policy authorities seem to follow the lines as argued; they have begun promoting the use of RMB for trade transactions, initially at the infant stage the authorities permitted the RMB to be used by special eligible companies in cross border trade with neighboring states such as Cambodia, Vietnam, Mongolia, Nepal and North Korea and the special administrative zones of Hong Kong and Macao. In addition to this it set currency swap agreements in 2010, starting with Brazil to allow the two countries’ currencies to be used in bilateral trade settlements (Eichengreen, 2011).     

Moreover in the same year of 2010 the Monetary Authority of Hong Kong got the approval from Beijing to liberalize supervisory regulations about the RMB denominated business in the region, granting the right to any company in the world to open a RMB denominated account. This basically unleashed the way of open trade in RMB denominated transactions in Hong Kong. The conventional finance packages started to be provided in RMB’s. A year later in January 2011 the Bank of China was authorized by the government to provide for RMB based deposit accounts in New York. Thus as opposed to critics, the internationalization of the RMB will be a positive development for the global financial system as Eichengreen (2010) puts it; the existence of alternative international reserve currencies to the US dollar such as the Euro and the RMB will be an improvement for the smooth functioning of the international monetary system, since countries will not be forced to accumulate hoards of dollars. Thus: “No one reserve-currency country will be able to finance its current account deficit as freely as did the United States in the years leading up to the recent financial crisis” (Eichengreen, 2010). The competitive nature of the international monetary system will provide for an auto balance system that prevents irresponsible financial behavior as showcased by the United States during the 2008 crisis.        

Regarding the internationalization of the Chinese renminbi, it will come sooner than expected by many; the China International Payment System is a vital move in that direction. It will not elevate the RMB to the level and status the US Dollar shares on the international arena, but will pave the way for future developments. Obviously it’s questionable whether the Chinese renminbi will manage to surpass the US dollar within a decade as the US currency did a century ago vis-à-vis the Sterling. However Eichengreen (2011) points out to the possibility of this, by outlining the major sequences that need to be done if Shanghai wants to surpass New York as the international center of finance. 

Conclusion

When one looks to the different policy initiatives of China such as the establishment of the AIIB or the New Development Bank, one belt one road policy or financial instruments such as the CIPS and currency swap agreements on their own then these developments might not show us the grand strategy that lies behind these initiatives. However, analyzing those major moves in combination as part of a bigger strategy one can indeed see a move towards the establishment of a Chinese Bretton Woods system, a mechanism ultimately leading to the challenge of the status quo that is dominated mainly by the US. Thus this analysis has tried to shed light on the Chinese policy drives that have the potential to challenge the current world economic order in the future by the emergence of a new economic as well as political gravitational point that will be possible with the creation of a Bretton Woods system made in China.

Continue Reading
Comments

Economy

Russia’s ‘Growth-Stability’ Dichotomy

Published

on

Russian economic growth has underperformed the global average almost every year since the 2008-09 financial crisis. But it’s far from a homogenous pattern: in fact, since 2017, there has been a pronounced trend toward increasing divergence across the main sectors of the Russian economy. This has been significantly accentuated by the Covid crisis. The sectors exhibiting the highest growth appear to be those that benefit from Russia’s relative macroeconomic stability and are less sensitive to the country’s lack of growth momentum. This rising differentiation in growth across sectors has important implications for investment strategies, as we expect growth in sectors such as IT, agriculture and financials to continue to outperform the rest of the economy.

Since the 2008-09 financial crisis, Russia’s economic growth has underperformed the world’s average almost every year, with notable gaps observed versus the rest of EM and the CEE region throughout the past decade. The sluggish growth performance was partly attributable to the structural deficiencies, external factors, but also in no small degree to the macroeconomic policies that favoured the maintenance of macroeconomic stability over attaining high growth rates. The priority accorded to securing macroeconomic stability was in particular embodied in the operation of the fiscal rule within the fiscal policy framework, as well as inflation-targeting in the monetary sphere.

Indeed, the growth-stability dichotomy in Russia’s economy is a feature that has persisted for an extended period due to the frequency and intensity of crises erupting over the course of the past decade. After a period of attaining high growth rates in 2006-07, the paradigm of Russia’s economic policy shifted towards prioritizing macroeconomic stability after the global financial crisis of 2008-09. The geopolitical perturbations of 2014 and the most recent Covid crisis have served to reinforce this policy focus. While Russia has certainly had its periods of strong growth in the past several decades, the intensity of the external headwinds over the past 12-13 years has tilted the balance between pro-growth and pro-stability policies in favour of the latter.

Another dimension to the “growth-stability” dichotomy in Russia is the significant emphasis placed in economic policy on securing high levels of reserves. The lack of conversion of these sizeable reserves accumulated by Russia into boosting economic growth has been due to a number of factors. One was the lack of institutional capacity to ensure an efficient spending of fiscal reserves on large-scale infrastructure projects. This in turn was compounded by the pre-cautionary motives associated with concerns regarding the effects of economic crises (2008-2009 crisis) and geopolitical shocks (2014 crisis episode). As a result, Russia stands out across EMs as an economy with among the lowest fiscal deficits and government debt levels, while at the same time exhibiting a combination of high reserves but low economic growth. This pattern contrasts with the one observed in some other emerging economies during crisis periods, at which time greater efforts were made by EMs to boost growth at the expense of higher deficits and debt levels.

During the Covid crisis this pattern was yet again replicated as Russia exhibited greater caution in unleashing anti-crisis measures compared to many developed and emerging economies.

But while Russia’s overall economic growth has been rather modest in recent years — particularly since 2014 — there has been a rising asymmetry in the growth across Russia’s sectors. Over 2012-16, the divergence in growth across sectors was stable or gradually declining (except in 2015-16, when the economy was hit by the drop in oil prices and sanctions). However, the divergence began to grow markedly in 2017, and was later on significantly magnified by the Covid crisis.

Indeed, the Covid crisis generated notable differentiation across sectors as some were disproportionately affected by the pandemic and quarantine measures (tourism, travel), while others were given a major boost (telecommunications, IT and computer services). Russia’s macroeconomic policy, including sectoral taxation patterns, may have contributed to the differentiation patterns observed throughout the economy. Apart from Russia-specific factors, global sectoral factors may have also contributed to the patterns observed in Russia — in particular the rising dichotomy between manufacturing and extraction industries on the one hand and the services sector on the other.

As a result, sectors such as financials and IT have been increasingly diverging from the lacklustre performance in the transportation, construction and public sectors. The oil and gas and agricultural sectors have occupied the middle ground, broadly reflecting industry-specific and global factors. Overall, services such as finance and IT exhibited improved growth performance in 2016-19 compared to the 2011-15 period, while extraction of raw materials and transportation were among the sectors with deteriorating growth dynamics.

One of the best performers in recent periods has been the financial sector, which benefited from the organic growth in the sector via increasing financial penetration, as well as the significant expansion in the array of services offered to the population. Most importantly, however, the high real interest rates sustained by the CBR to maintain macroeconomic stability resulted in the greater attractiveness of investment in financial instruments than capital investment. The high real rates incentivized investment in financial instruments at the expense of the real sector.

The above observations concerning sectoral growth patterns suggest that greater differentiation across Russia’s sectors may be warranted in devising top-down investment strategies. If the current prioritization of macroeconomic stability were to persist, sectors such as IT, agriculture would be well positioned from a top-down perspective. Finally, it is important to note that the outperformers from the services sector that benefit from Russia’s growth-stability dichotomy also exhibit relatively good scores in the ESG ratings, most notably compared to the natural resource sectors. As investors increasingly focus on ESG issues, the longer-term implications for sectoral growth performance may prove significant.

From our partner RIAC

Continue Reading

Economy

Virtual-Reality Leaderships Await Digital-Guillotines

Published

on

When national leadership starts acting more as if Virtual-Reality based illusionary leadership games, it calls immediate testing to ensure digital future of the virtualized economies of the nation. Just as billion mile highways need cars, trillion-node digital highways need smart digitized enterprises. Just as highways and transportation need qualified Ministries dedicated to control national mobility, similarly digital platforms economies need virtualization; layers of platforms, hyper-interactive, live in action, motion and execution, floating on global digital arenas and creating mini-micro-mega trade opportunities and serving the common good of the world. Futurism demands futuristic literacy.

If there are some 200 nations outside a miniscule number, most nations along with their ministries and government departments already crushed under the weight of their own bureaucracies. Translated into simple language; when a single piece of urgent and serious business-trade query enters any government office building, decked with thousands desks and many thousands of filing cabinets, expecting quick response within a few days, if lucky may get some broken answer in many months. Those who slowly circumnavigate the world, require no proof on this, those educated exclusively on social media allowed screaming in denial. There are many such office buildings, each with many floors, in each city, in each nation. Some billion people occupy such global bureaucracies, strangling their own nations and stealing their own future from their next generations. Visible in open daylight, the barren landscapes, untapped resources, wasted talents lingering as wasted over a century. Today, against tidal waves of almost free technologies and digitalization, we need quick do or die solutions.

The cruelty of incompetence fermenting on mahogany furniture in dark offices now needs digital-guillotines.

The Paper-Processing-Age created Bureaucracies, Rubber-stamps glorified and corner offices mesmerized the fermentation process of incompetency and guaranteed permanence of seniority as gold standard. Like a tsunami, “digitization” is now bureaucracy free, office-free and tantrum free, only measured precisely in right columns with right amounts and ‘true’ numbers to evaporate filing cabinets and desks. Productivity, performance and profitability are what have been missing the last few decades bringing nations to their knees. The future of governments now measured by meritocracy will rule and manage future economies; the rest will stay hidden in the fog of confusion.

Over a century ago, H.G. Wells wrote about aircrafts and Jules Verne, the submarines. Now, we live in a time where digitally floating enterprises and virtually accessible national economies must thrive. Now, is the turn of our times to optimize our ‘mental powers’ functioning way above automation, performing our intellectualism over mechanical robotization and achieve superior commercialization while considering diversity, tolerance and common good? Now is the time to claim our rights, design our economies and better sustainable lifestyles. A brighter future waits.

Nevertheless, within the coming years, elimination of bureaucracies, digitization of enterprises and virtualization of economies will quadruple performance on a national basis for most nations; unfortunately, getting this thinking may take another decade for many other nations. Observe their starving children.

 As a crude and only available measurement, amongst the 190 nations of the world, there are only top 20 nations where *GDP Per-Capita-PPP is about USD$50,000 and more. Everyone else is lower, as an example, a sample of 50 nations, where their per capita is USD$5000 or $13.00 per day. Now observe their governments, their Ministries, Institutions, Trade Associations, Chambers and various government agencies are deeply stuck in the last century, robbing their own future. Disconnected with global age, now clearly visible all across their front line teams points to continued financial calamites.  Any 10% to 90% elimination of bureaucratic ponderings, indecisive floor-by-floor rubber stamp approval dances will quadruple their national performances. Nation-by-nation, strangulations due to the lack of decisive skills now make bureaucracies the most backward frontier left in critical need of upskilling and reskilling realignments, to stand up to global standards of productivity. Therefore, across the board, national economies must qualify at specified speed and accuracy with due diligence to attract FDI, collaborations and alliances to survive in global-age. Local political parties scared of their own re-elections will never tackle such issues. Immediate testing of any frontline management team of any top departments will expose the gravity.

The biggest tragedy is that all of these nations have unlimited talents, great minds and great skills potential, but crushed by bureaucracies, in darkness mode, where sun never rises, where digitization is feared for fears of exposing competency levels. The Covidians of the new post-vaccinated world with new thinking now have a real chance to ride out the storms, bring mega changes, and create highly efficient economic models. No country without national mobilization of hidden talents of entrepreneurialism on digital platforms of upskilling to foster exportability and outbound exposure will survive. This is what Silicon Valley did; study slowly to deeply appreciate the process.

Upskilling as a mandatory testing requirement drowning in crypto-economies and fictionalized as success ignoring tent cities, nation’s biggest losses hidden in the untapped entrepreneurialism of the national citizenry. Study more on Google, how business education actually destroyed businesses across Western economies.

Rules of economic revolutions:

Do not fix, just break it, and start on a new page.
Do not fire, upskill them, bring a brighter future closer.
Do not fumble, upskill yourself, become a lifelong learner.
Do not fail, there is no plan B, economic damage now commonplace.
Do not runaway, take a stand; there is no other way out.
Do not deny the bright future to your next generations.

There are some 100 national elections scheduled within the next 500 days… national leadership must demonstrate their literacy to read futurism. Identify their local teams with the right expertise to address national challenges, urgently respond with right answers, and develop clear narrative to address realities. Expothonis tabling a new agenda, in a global debate series with global experts on such bold issues to advance the discussions on such mega-change processes.

The strategy: The Covidians, survivors of bankruptcies, body bags have little or no tolerance for bureaucracies and with free rains of technology have no patience for paper-based-sluggish and dysfunctional economies. Citizens will vote for real and pragmatic truth. National leadership must face the music and learn to tango: Eliminate bureaucracies, virtualized economies and carve straight paths for climate control protocols.

Is this a perfect storm in the making or a new sunrise of the early spring?

The rest is easy

Continue Reading

Economy

Suez Canal Shutdown revealed the importance of the Middle Corridor

Published

on

On March 23 of 2021, a container ship called the “Ever Given” ran aground in Suez Canal, one of the most important waterways in the world, and blocked other vessels from using it. This human-made waterway is one of the world’s most heavily used shipping lanes, carrying over 12% of world trade. This canal is also responsible for the transportation of 7% of the world’s oil and 30% of daily container shipments.  Therefore, the blockage of the canal has considerably affected global trade.  According to Lloyd’s List, a London-based shipping news journal, the estimated daily value of cargos passing through the canal is $9.7 billion, with $5.1 billion traveling westward and $4.6 billion traveling to eastward directions. The incident forced some ships to use the alternative route around Africa’s southern tip, which is dangerous and increases the transportation costs and time.

Shipment delays because of the incident in the Suez Canal also negatively affected the already-disrupted global supply chain. Since the start of the pandemic, shipping delays and shortages have considerably strained the global supply chain. As the commodities become increasingly difficult to obtain and produce for the companies, customers face limited options and higher prices. Several big companies such as Nike, Honda, and Samsung have already expressed that supply-chain issueshavesignificantly impeded production volumes. Thus, the blockage of the canal made the supply chain crisis even worse.

Almost a week after the “Ever Given” halted the canal, on March 29, it became possible to free the vessel and the Suez Canal opened for business again; tugboats managed to refloat the stuck vessel away from the canal’s sandy bank. During the blockage, at least 367 vessels were left waiting for the canal to be unblocked. However, it remains unclear when the traffic in the canal will return to normal, as it will take a couple of days to clear the backlog of ships. Some experts have estimated that it could take more than 10 days.

Despite the fact that the canal was freed, it has raised questions on the risks of the world’s overreliance on this route. The economic damage of the blockade of the Suez Canal proved the fragility of global transportation architecture. This in turn brought up the issue of the development of alternative land or maritime transport routes. Hence, after the incident, Russia and Iran have called for the need to find alternative shipping routes, especially recalling potentials of the Northern Sea Route (NSR) and International North-South Transport Corridor (INST).By explaining the reasons for considering the NSR, on its official social media account Russian state company Rosatomflot declared that rapid melting of the Arctic and the existence of powerful Russian icebreakers improve the accessibility of the North Sea, which could become an alternative to the Suez Canal. Iranian officials, on other hand, called for the activation of the INSTC as a reliable and “low risk” alternative.

The other alternative route that has the potential to become one of the mainland routes for the transportation of goods between Asia and Europe is the Trans-Caspian East-West-Middle Corridor Initiative, shortly called “The Middle Corridor”. This corridor is considered as one of the most important routes in reviving the ancient Silk Road. The Middle Corridor begins in Turkey, passes through the territories of Azerbaijan and Georgia, crosses the Caspian Sea, reaches Central Asia, and extends to China through the Turkmenistan-Uzbekistan-Kyrgyzstan or Kazakhstan routes. 

The formation and development of the Middle Corridor began after the November of2013, when as a part of the II International Transport and Logistics Business Forum “New Silk Road” in Astana, the leaders of JSC “National Company” of Kazakhstan, CJSC “Azerbaijan Railways” and JSC “Georgian Railway” signed the agreement on the establishment of Coordination Committee for the development of the Trans-Caspian International Transport Route. In December 2016, the participants of the Coordinating Committee decided to establish the International Association”Trans-Caspian International Transport Route”, which started its activities in the following year. The main goal of this project is to increase the volume of freight transportation between East Asia, Central Asia, the Caspian and Black Sea basins and European countries by creating alternative or complement to the traditional land routes that go through the territory of Russia.

Middle Corridor has several advantages in comparison to traditional transportation routes. Compared with the Trans-Siberian Railway, which is also called the “Northern Corridor”, it is 2 thousand km shorter and has more favorable climate conditions. Compared with the traditional sea route, it shortens the travel time of goods between Europe and China by about three times, making it only 15 days. In 2015, the first pilot shipment took place and a container train, which started its trip from Western China reached Baku through Kazakhstan and the Caspian Sea in 6 days. Besides, the Middle Corridor creates great opportunities for cargo transportation within Asia and to Africa. Using this corridor, cargos from east and south-east Asia could be easily transported to the Middle East, North Africa and the Mediterranean regions using port infrastructures of participating states.

The Middle Corridor initiative is also supported by Afghanistan and Tajikistan as this route creates new transportation opportunities for them. By integrating the “Lapis Lazuli” corridor, an international transit route that links Afghanistan to Turkey, to the Middle Corridor, these countries could easily transport their goods in all directions in Asia. Integration of these corridors is also advantageous for the participating countries of the Middle Corridor. The agreement on the establishment of the Lapis Lazuli corridor was signed by Georgia, Afghanistan, Turkmenistan, Azerbaijan and Turkey in November 2017, which added a new artery to the Middle Corridor in the southern direction.

Along with the mentioned advantages, the Middle Corridor also holds precedence in comparison to other proposed alternatives, which have obvious shortcomings. In the case of NSR, most of the year it is covered in snow and for transportation of goods through this road ships of special nature and capabilities are required. So, the competition of NSR with the Suez Canal could only be of seasonal nature. The INSTR on the other hand, despite its advantages, cannot become the direct competitor to the Suez Canal as it serves for the connection of the Indian Ocean and the Persian Gulf with Northern Europe, not for the connection of east and south-east Asia like the Suez Canal. It could compete with the Suez Canal only if it is integrated into the Middle Corridor. Hence, the advantages of the Middle Corridor and shortcomings of other alternatives reveal the importance of the Middle Corridor and make it the best alternative for the transportation route that goes through the Suez Canal.

Continue Reading

Publications

Latest

Trending