Could Change Global Economics Forever
by Robert Berke
OilPrice.com (May 21 2015)
Beginning with the marvellous tales of Marco Polo’s travels across Eurasia to China, the Silk Road has never ceased to entrance the world. Now, the ancient cities of Samarkand, Baku, Tashkent, and Bukhara are once again firing the world’s imagination.
China is building the world’s greatest economic development and construction project ever undertaken: The New Silk Road. The project aims at no less than a revolutionary change in the economic map of the world. It is also seen by many as the first shot in a battle between east and west for dominance in Eurasia.
The ambitious vision is to resurrect the ancient Silk Road as a modern transit, trade, and economic corridor that runs from Shanghai to Berlin. The ‘Road’ will traverse China, Mongolia, Russia, Belarus, Poland, and Germany, extending more than 8,000 miles, creating an economic zone that extends over one third the circumference of the earth.
The plan envisions building high-speed railroads, roads and highways, energy transmission and distributions networks, and fibre optic networks. Cities and ports along the route will be targeted for economic development.
An equally essential part of the plan is a sea-based “Maritime Silk Road” (MSR) component, as ambitious as its land-based project, linking China with the Persian Gulf and the Mediterranean Sea through Central Asia and the Indian Ocean.
When completed, like the ancient Silk Road, it will connect three continents: Asia, Europe, and Africa. The chain of infrastructure projects will create the world’s largest economic corridor, covering a population of 4.4 billion and an economic output of $21 trillion.
Politics and Finance
The idea for reviving the New Silk Road was first announced in 2013 by the Chinese President, Xi Jinping. As part of the financing of the plan, in 2014, the Chinese leader also announced the launch of an Asian International Infrastructure Bank (AIIB), providing seed funding for the project, with an initial Chinese contribution of $47 billion.
China has invited the international community of nations to take a major role as bank charter members and partners in the project. Members will be expected to contribute, with additional funding by international funds, including the World Bank, investments from private and public companies, and local governments.
Some 58 nations have signed on to become charter bank members, including most of Western Europe, along with many Silk Road and Asian countries. There are twelve Nato countries among AIIB´s founding member states (UK, France, Netherlands, Germany, Italy, Luxembourg, Denmark, Iceland, Spain, Portugal, Poland and Norway), along with three of the main US military allies in Asia (Australia, South Korea and New Zealand).
After failed attempts by the US to persuade allies against joining the bank, the US reversed course, and now says that it has always supported the project, a disingenuous position considering the fact that US opposition was hardly a secret. The Wall Street Journal reported in November 2014 that “the US has also lobbied hard against Chinese plans for a new infrastructure development bank … including during teleconferences of the Group of Seven major industrial powers.
The Huffington Post’s Alastair Crooke had this to say on the matter:
For very different motives, the key pillars of the region (Iran, Turkey, Egypt and Pakistan) are re-orienting eastwards. It is not fully appreciated in the West how important China’s “Belt and Road” initiative is to this move (and Russia, of course is fully integrated into the project). Regional states can see that China is very serious indeed about creating huge infrastructure projects from Asia to Europe. They can also see what occurred with the Asia Infrastructure Investment Bank (AIIB), as the world piled in (to America’s very evident dismay). These states intend to be a part of it.
Buttressing this effort, China plans on injecting at least $62 billion into three banks to support the New Silk Road. The China Development Bank (CDB) will receive $32 billion, the Export Import Bank of China (EXIM) will take on $30 billion, and the Chinese government will also pump additional capital into the Agricultural Development Bank of China (ADBC).
The US: Unlikely Partner on the Silk Road
Will the US join the effort? If the new Trans-Pacific Partnership (that pointedly leaves out both Russia and China, two Pacific powers) is any indication, US participation seems unlikely and opposition all but certain.
But there’s no good reason that America should sacrifice its own leadership role in the region to China. A project as vast and complicated as the Silk Road will need US technology, experience, and resources to lower risk, removing political barriers for other allied countries like Japan to join in, while maintaining US influence in Eurasia. The Silk Road could enhance US objectives, and US support could improve the outcome of the project.
An editorial in the Wall Street Journal argues that the US proposed trade agreement and China’s sponsored Silk Road project are complimentary, with the trade agreement aimed at writing rules for international trade, while the Chinese aim at developing infrastructure is necessary for increased trade.
A look at the first project, currently under development, provides a good example of how China plans to proceed.
The first major economic development project will take place in Pakistan, where the Chinese have been working for years, building and financing a strategic deepwater port at Gwadar, on the Arabian Sea, that will be managed by China as the long-term leaseholder.
Gwadar will become the launching point for the much delayed Iran-Pakistan natural gas pipeline, which will ultimately be extended to China, with the Persian section already built and the Pakistan-Chinese section largely financed and constructed by the Chinese.
The pipeline is also set to traverse the country, following the Karakoram Mountain Highway towards Tibet, and cross the Chinese western border to Xinjang. The highway will also be widened and modernized, and a railroad built, connecting the highway to Gwadar.
Originally, the plan was to extend the pipeline to India, with Qatar joining Iran as natural gas suppliers, forging what some considered a “peace pipeline” between India and Pakistan, but India withdrew, under pressure from the US along with its own concerns over having its energy supplies dependent upon its adversary, Pakistan.
Not surprisingly, India, a US ally, countered China’s initiative with one of its own, announcing a new agreement to build a port in Iran on the Arabian Sea, only a few hundred miles from Gwadar, bringing Iranian energy to India via Afghanistan, bypassing Pakistan.
Although it would offer an alternative to the Chinese-backed Gwadar initiative, the US warned India not to move ahead with the port project before a final nuclear agreement between Iran and the West is actually signed.
Both the Chinese and Indian projects are clearly in defiance of international sanctions on Iran, but both countries appear unconcerned. The Chinese could also be accused of a ‘double dip’ sanctions violation, given the immense and continuing trade deals it negotiated with Russia.
The rest of the business world is sure to follow, or risk losing out in what is certain to be a new “gold rush” towards Asia in a world still struggling with the lingering effects of the great recession. And New Delhi pointed out the harsh truth: American energy companies are also trying to negotiate deals with Iran. Following on the heels of the US visit, the German mission is due in Tehran soon, with the French beating everyone to the punch in an earlier visit.
What then of sanctions? Sanctions only work in a world united behind them. If a large part of the world chooses to ignore sanctions, they become unenforceable.
China and much of the world is intent on developing the largest economic development project in history, one that could have dramatic ripple effects throughout the world economy.
The project is expected to take decades, with costs running into the hundreds of billions of dollars, if not trillions. What that will mean for the world economy and trade is almost inconceivable. Is it any wonder then, that the world’s largest hedge funds, like Goldman Sachs and Blackstone, are rushing to market new multi-billion dollar international infrastructure investment funds?
No doubt a project as large and complex as this is likely to have failures, and is certain to face many western geopolitical obstructions. Assuredly, the “great game” will continue. Look no further than US President Barack Obama, who also senses the urgency. “If we don’t write the rules, China will write the rules out in that region”, he said in defence of the Trans-Pacific Partnership.
In a world where economic growth is tepid, with Europe still struggling with the aftermath of the global recession, along with China’s growth slowdown, where else could a project that promises so much opportunity be found?
It’s a good bet that giant iron mining companies like Vale, that have seen their business fall to a thirteen-year low, are currently busy figuring how much steel goes into construction of a new, high speed 8,000 mile railroad. If the project is successful, it could very well spark a boom across the entire depressed international mining, commodities, and construction sectors.
Consider how many jobs could be created in a decades-long construction project that spans a huge region of the world. In practically every sector, the prospects are enormous for a revival of trade and commerce.
The ancient Silk Road increased trade across the known world, but the Road also offered far more than trade. One of its least anticipated benefits was the widespread exchange of knowledge, learning, discovery, and culture.
Beyond the riches of silks, spices, and jewellery, it could be argued that the most important thing that Marco Polo brought back from China was a famous nautical and world map that was the basis for one of the most famous maps published in Europe, one that helped spark the Age of Discovery. Christopher Columbus was guided by that map and was known to have a well-annotated copy of Marco Polo’s travel tales with him on his voyage of discovery of a new route to India.
For the world at large, its decisions about the Road are nothing less than momentous. The massive project holds the potential for a new renaissance in commerce, industry, discovery, thought, invention, and culture that could well rival the original Silk Road. It is also becoming clearer by the day that geopolitical conflicts over the project could lead to a new cold war between East and West for dominance in Eurasia.
The outcome is far from certain.
Coming in May, Part 2: Cold War or Competition on the New Silk Road.
Robert Berke is an energy financial analyst with experience as a government consultant to the State of Alaska: http://oilprice.com/contributors/Robert-Berke