the belt and road from the other end: a european perspective by alicia garcia herrero, natixis chief...
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The Belt and Road from the other end: A European Perspective Alicia Garcia Herrero, NATIXIS Chief Economist Asia Pacific and Senior Research Fellow at BRUEGEL
April 2016
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Outline
1) Xi’s Grand Plan: What it is about?
2) Any lessons from a similar Grand Plan for Europe: The Marshall Plan 3) An empirical analysis of trade impact of Belt and Road: Who is to benefit? What about Europe?
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1. Xi’s Grand Plan: What it is about? Based on Natixis Research
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Outline of Section 1: Xi’s Grand Plan
1.1 What is it?
1.2 Key drivers a) Trade as the key reason b) Infrastructure key to further foster trade c) New funds/institutions serving the Belt and Road vision d) RMB internationalization
1.3 How much so far?
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1.1 What is it? Roadmap of the initiative
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Source: HKTDC
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1.1 What is it? Trade facilitation through infrastructure
• China proposed the Belt and Road (B&R) Initiative to enhance the connectivity and cooperation among countries in Eurasian area.
• The main target of the initiative is to integrate Central Asia, West Asia, the Middle East and Europe into a economic zone through building infrastructure, enhancing regional trade cooperation to increase international trade within the region.
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Key figures of B&R countries Value Why is this important?
Total population 4.4 billions 63% of world population
Total GDP USD 2.1 trillion 29% of global economy
Transport and Infrastructure Investment
USD 5 trillion in the next 5 years
2.5 times the market size in China
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1.2a Trade as the key reason Growth flat but in a dual mode
4567891011121314
6.0
6.5
7.0
7.5
8.0
14 15 16
GDP,RetailSalesandIndustrialProduc5on(%YoY)
RealGDPRetailSales(rhs)IndustrialProducBon(rhs)
Source: Bloomberg, Natixis
35
40
45
50
55
60
35
40
45
50
55
60
07 08 09 10 11 12 13 14 15 16
PurchasingManagerIndex(PMI)
Caixin(Manufacturing)Caixin(Services)Official(Manufacturing)
Sources : Markit, China Federation of Logistics and Purchasing, Natixis
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1.2a Trade as the key reason …and therefore China starts exporting its overcapacity
0%
2%
4%
6%
8%
10%
12%
14%
16%
65%
70%
75%
80%
85%
90%
95%
100%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
SteelProduc5onU5liza5onRateandGlobalExportsMarketShare(%)
UBlizaBonRate(lhs) GlobalMarketShare(rhs)Source: China Iron and Steel Association, UNCTAD, Bloomberg, Natixis
60%
65%
70%
75%
80%
60%
65%
70%
75%
80%
08 09 10 11 12 13 14
CementU5liza5onRate(%)
China WorldSource: China Cement Association, Bloomberg, Natixis
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1.2b Infrastructure key to further foster trade
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1.2b Infrastructure key to further foster trade The need is for infrastructure is there
0 2 4 6 8
Total
Water and Sanitation
Transport
Telcom
Energy
8trillionUSDinvestmentisneededto2020
Source: ADB, Natixis
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
MY CN TH ID IN VN PH PK
QualityofInfrastructureinAsiaisbelowaverage(1=lowest,7=highest)
Score Avg
Source: WEF, Natixis
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1.2c New funds/institutions serving the B&R vision The AIIB, BRICS Bank and the Silk Road Fund
20
47
50
100
103
129
163
223
331
ERBD
IslamDevelopmentBank
BRICSDevelopmentBank
AIIB
AfricanDevelopmentBank
Inter-AmericanDevelopment
AsianDevelopmentBank
WorldBank
EuropeanInvestmentBank
Source: Stratfor, Natixis
European Bank for Reconstruction and Development
Asian Infrastructure Development Bank
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Capitalbaseofworlddevelopmentbank(USDbn) SilkRoadFundInvestment
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1.2c New fund/institutions serving the B&R vision …but it’s also about diplomatic battle and sphere of influence
Top 5 shareholders Top 5 by vote share
0 5 10 15 20 25 30 35
Korea
Germany
Russia
India
China
0 10 20 30
Korea
Germany
Russia
India
China
0 5 10 15 20
France
Germany
China
Japan
U.S.
0 5 10 15 20
France
Germany
China
Japan
U.S.
AIIB
W
orld
Ban
k
Source: AIIB, World Bank, Natixis
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1.2d RMB internationalization
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0
5
10
15
20
25
30
35
40
0
100
200
300
400
500
600
700
800
900
12 13 14 15 16
RMBTradeSeUlement
Trade(RMBbn,lhs)
%ofChina'stotalcrossbordertrade(rhs)
Source: SWIFT, Natixis
0
10
20
30
40
50
0
10
20
30
40
50
11 12 13 14 15 16
Shareasinterna5onalpaymentcurrency(%)
USD EUR GBP JPY CNYSource: SWIFT, Bloomberg, Natixis
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Table1:ToptradingpartnersofAsiancountries
Country 2008 Latest
Indonesia Japan China
Malaysia Singapore China
Philippines US Japan
Singapore Malaysia China
Thailand Japan China
Vietnam China China
India US China
Pakistan SaudiArabia China
Source:Bloomberg,Na1xis
1.2d RMB internationalization Increasing trade means potential in more RMB settlement
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1.3 How much so far?
0
10
20
30
40
50
60
70
80
Russia OtherAsia ASEAN Africa Europe
Belt&RoadInvestmentsbyCountry(bnUSD)
Energy Rail IndustrialPark Materials Port RoadSource:Na1xis *Confirmedandhighlylikelyprojectsincluded.
Telecom0%
Road2%
Port3%
Materials5%
IndustrialPark6%
Rail41%
Energy43%
Belt&RoadInvestmentsbyIndustry
Source:Na1xis *Confirmedandhighlylikelyprojectsincluded.
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2. Any lessons from a similar Grand Plan for Europe: The Marshall Plan Based on Lessons for China’s Road and Belt Strategy from Europe’s Marshall Plan by Juan Carlos Martinez Oliva
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A European perspective to the Belt and Road: The Marshall Plan
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• For some, unwarranted comparison • Marshall Plan (1848-1952) perceived as a US geopolitical device to
control Western European nations and containing the Soviet Union. • Belt and Road not seen as an alliance or coming with any political strings.
• China stresses that Belt and Road is based on “open cooperation” regardless of the state of their relations with China.
• We move to describing some of the key features of the Marshall Plan (MP) and how the may compared with Belt and Road.
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• Two years after creation, in 1950, Marshall plan started to shift from original purpose of Europe’s reconstruction to security and military cooperation.
• Based on recommendations by the US National Security Council for military spending to be the number one priority of the US federal government.
• Can this happen with Belt and Road as China’s military becomes more powerful and more eager to pursue a similar objective?
2.1 MP: From an economic device to a security one
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• MP was meant to be a jump starter which should activate a self-feeding virtuous circle, and then evaporate.
• Stimulated by the conditionality imposed by the plan on its beneficiaries, European countries found themselves forced to coordinate/cooperate and create their own multilateral institutions.
• Origin of EU
• Belt and Road also meant to be a visionary and long sighted strategy but China’s pragmatism will make it such that its survival will depend on its ongoing success. For this, Belt and Road must be a win-win strategy rather than a zero-sum game.
2.2 MP: Helping activating a self-feeding virtuous circle
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• The European Payments Union enabled the European countries to restore multilateral trade and currency convertibility in only eight years.
• By forcing the European governments to pursue, and eventually establish, currency convertibility, the US accomplished the Bretton Woods’ goal to have an international monetary system fully based on the dollar.
• Belt and Road also has the objective of supporting RMB internationalization by using RMB for trade and infrastructure finance
2.3 MP as catalyst for free movement of capital
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• MP told to have contributed to the world polarization which prevailed during the Cold War era.
• By keeping the Soviet Union and its satellites outside MP, US were able to concentrate their resources on selected countries, thus easing management issues, and making the Plan’s action more effective.
• Belt and Road also has a sense of China dominance rather than inclusivity. For some it is China’s response to China’s exclusion from TPP
2.4 Challenges brought by MP
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2.5 All in all
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• The Europe’s experience with the Marshal Plan indicates that the Belt and Road could be come more than a device for China to expand its exports of goods and services (construction of infrastructure).
• It could help China foster the use of its currency/develop a regional payment system and perhaps even create a security zone as the US did with Europe.
• Still, such ambitious project can only be successful in a win-win situation as Belt and Road countries may be in a relatively stronger position to explore other options than war-torn Europe in 1948.
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3. The trade aspect of the Belt and Road: Who is to benefit? Also Europe? Based on One Belt One Road and the China-EU Trade Alicia Garcia-Herrero, Bruegel & NATIXIS Jianwei Xu, Bruegel & Beijing Normal University
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Outline of Section 3: Empirical analysis of the impact of B&R on trade
3.1 Trade and transportation costs: Maritime and Railway routes to be improved
3.2 Empirical exercise a) Literature b) Purpose and results c) Conclusions
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3.1 Trade transportation
Maritime • Cheap but Slow. Still dominant for China’s trade
Air
• Expensive but quick. Not relevant yet Road
• Cheap but only applies to short-distance transportation Rail
• Medium priced • Suitable for both short-distance and long-distance travel but needs huge
infrastructure investment
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3.1 Trade transportation New maritime routes under the Belt and Road
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3.1 Trade transportation And new Railway ones for the Northern Route of the B&R
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Data Source: Eurostat http://ec.europa.eu/eurostat/statistics-explained/index.php/Freight_transport_statistics_-_modal_split
3.1 Trade transportation Europe dominated by road transportation
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3.1 Trade transportation China dominated by maritime one
Maritime, 60.5%
Rail, 0.4%
Road, 17.4%
Air, 21.0%
Other, 0.6%
Maritime Rail Road Air Other
Maritime 57.0%
Rail 0.3%
Road 18.5%
Air 23.7%
Other 0.6%
Maritime Rail Road Air Other
Data Source: Calculated using 2013 China Custom Data by the Authors
Chinese Exports by type of transportation Chinese Imports by type of transportation
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3.2a Transportation Time/Cost as a Trade Barrier
• Hummels et al.(2013, AER) finds that time is a important, but long ignored, type of trade cost in international trade.
• Each day in transit is equivalent to an advalorem tariff of 0.6% to 2.1%.
• Belt and Road related projects estimated to reduce average shipping time by 15 days (360 hours): equivalent to a reduction in tariffs by 10% to 30%!
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VARIABLES w/o. MR term w/o. controls
w/o. MR term w/. controls.
w. MR term w/o. controls
w. MR term w/. controls.
OLS Bilateral tariff -0.03** -0.01** -0.03** -0.03***
Ln Rail Distance -0.16* 0.01 -0.23*** -0.13*** Ln Martime Distance -0.64*** -0.39*** -0.38*** -0.28***
Ln Air Distance -0.14 -0.18** -0.30** -0.07 PPML
Bilateral tariff -0.10*** -0.04 -0.17*** -0.18*** Ln Rail Distance -0.38** 0.06 -0.49*** -0.17***
Ln Maritime Distance -0.65*** -0.25 -0.33** -0.21 Ln Air Distance -0.50* -0.58** -0.37* 0.20
, ,
,
ln( ) ln( ) ln( ) 'ln( ' ) °l ln( ' )ln( ' )
ij i j ij
ij ij
ij ij ij
T rade Y X TariffRailC A irCOceanC controls
b b b bb bb b e
+ = + + ++ ++ + +
0 1 2 3
41 4 2
4 3 5
1A 1% reduction in air and rail transportation cost can lead to 0.1% to 0.5% increase in international trade, which is equivalent to 3 to 15 times a similar reduction in tariffs
3.2b Estimation results: trade to be fostered by reduction in transportation costs
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• We suppose that B&R initiative reduce railway cost by 20%. Most European countries to win while others to lose in terms of increase in trade with rest of world
0%
2%
4%
6%
8%
10%
12%
FRA DEU BEL CHE RUS HUN NLD CZE BLR DNK -4%
-3%
-2%
-1%
0%
AFG PHL ISR QAT NPL OMN JOR AZE PAK GEO
Top 10 Winners
Top 10 Losers
3.2b Impact of Belt and Road very heterogeneous: What about Europe?
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3.2b Impact on Trade: Who Win Trade with China?
0%
5%
10%
15%
20%
25%
30%
35%
40%
BEL NLD FRA DEU CHE RUS CZE HUN SVN BLR
Increase in trade with China
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3.2b Regional impact: Europe as a major winner More trade generally and also more trade with China
-1%
0%
1%
2%
3%
4%
5%
6%
7%
European Countires Asian Countries(except
China)
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
China-Asian Trade
China-EU Trade
Asian-EU Trade
Impact on Trade by Region Impact on Inter-regional Trade
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3.2b Interpretation of the Results
• Apparently most European countries will benefit from the B&R initiative.
• There is no gain without a corresponding loss. With better connections to Europe, some Asian countries is possible to lose their trade with China.
• China’s trade with both the Europe and Asian region is enhanced, though most benefits still come from the European countries.
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3.2c All in all
• The Belt and Road is really a Grand Plan which will require enormous focus and leadership from the part of the Chinese authorities.
• Based on the experience of the Marshal Plan, it has the potential to evolve
into other areas, such as security but also relevant support for RMB internationalization.
• Still, even if the better known objectives of the Belt and Road, namely fostering trade, the impact looks pretty large and especially positive for European countries (as a reduction of railway transportation costs).
• Europe has not yet given to much thought about the Belt and Road but it should certainly start doing so.
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