Higher School of Economics - HSE Moscow

Higher School of Economics - HSE Moscow Faculty of World Economy and International Affairs School of Asian Studies Department of Socioeconomic and Political Development of Modern Asia

“The Belt and Road Initiative, a gift to the world or reason behind PRC’s resiliency to trade wars?”

Wilfred Oliver Antwi

Part 1 of a three series Research Paper on the BRI and Asia © June 2018

APA citation* Antwi, W.O. (2018). “The Belt and Road Initiative, a gift to the world or reason behind PRC’s Resiliency to trade wars?”Part.1. Series Research Paper on the BRI and Asia. ResearchGate.

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Abstract In the field of International Relations and Economics, it is erroneous to think that bridges are better than walls, a statement the neo-realist and mercantilist will agree to without a second thought. New trajectories of increased investments, trade, infrastructure and human connectivity remain obvious in the BRI. With a wide-range web of consensus among over 65 and counting participating countries, the impression is almost created that decision to stay out can be tagged as divisionism on one hand, and desperate attempt to participate described as an indecorously high risk. Politically, it could a be thankless endeavor since it can be regarded as supporting the paradigm shift towards a new Orient global superpower poised to expand its economic prowess with the 21st Marine Silk Road and the Silk Road Economic Belt. The PRC wants to perpetuate its unparalleled trade surplus, export overcapacity, and perhaps internationalise the RMB. The BRI will accentuate consumption of Sino products which has become inevitable at least in the last two decades. There is hardly any trade issue that can be resolved without Sino involvement. China has put to maximally good use the mantra for free trade and open markets more than any other single country. With deep-rooted tentacles of goods export to almost every country largely to the US, China is resilient to any trade war. Aside from its trade surplus with the US, it owns the biggest portion of the US foreign debt. This is a foundation for an unparalleled resiliency for the PRC to engage in any form of a trade war with a win in sight at least in the shortrun.

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Introduction

The ASEAN has not been left out in its share of the dilemma because over the years, it has forged closer ties with the West and other superpowers. The ASEAN Economic Community (AEC) is a leapfrog pragmatic economic integration with an ingrained dividend for its huge market of US$2.6 trillion having over 622 million populations (ASEAN Secretariat, 2017), a key reason why the PRC cannot afford to sidestep the ASEAN in the BRI. The European Union has the biggest trade deficit with the People’s Republic of China (PRC), a situation the former seem to have no control over or an immediate plan to avert. EU-China trade amounts to about $1billion a day with a close to 50% surplus inuring to the benefit of the PRC (European Commission Report on EU China, 2016).

The EAEU (Russia, Belarus, Kazakhstan, Kyrgyzstan, and Armenia) sits on the middle ground because it stands to lose and gain in point with the advent of the BRI. China cannot afford to overlook the numerous resources of the five member countries of the EAEU needed to make the BRI a reality. Aside from land and oil resources three (3) of the six (6) corridors of the BRI connect directly to the EAEU member countries.

Trade surplus over these three blocs is enough for the PRC to control the global trade because it already has the US in the box with a surplus of over $370,000 billion. The current trade war may turn the tables though, as it will present a temporal challenge for the PRC. The EU can only watch because it is not ready to be tagged as pursuing Neo-realist and Mercantilist strategies since over the years it has chided the PRC over its protectionist trade ideologies. The world cannot extricate itself from the BRI, it only has to unravel its content, adapt and adopt means of equally benefiting from the pool of infrastructure connectivity that seems to link Europe, Asia, and African.

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The Neo-realist perspective of the BRI State external motives are reflected in the nature of policies at the international level which covers politics, economics, security and at times intersections of these areas. These policies are pursued with projected or disguised national interests competing for dominance at the expense of others. In the contemporary, the quest for power would not be presented in only military capacity but more clandestinely within political and economic spheres. The resulting ends are “war of all against all” because of limitation in resources as accordingly mentioned by Thomas Hobbs. States are rational national actors to the extent that their actions must inure to the greater benefit of its own citizens whose interests they owe allegiance to prioritise even at the expense of other states. The international system is regarded as “anarchical” because of the above factors and more. States are sovereign and “therefore concurrences are glued by “forcible (coercion)” or “their own (consent)” implying that “hegemony (enough power)” threatens rival countries making its unsafe.1 Global power domination continues to be of chief concern to many countries. The shift is clearly from the Occident to the Orient with the latter doing so with economic capacity and geopolitical influence. The shift therefore, presents yet another tranquil “neodominance” in the field of power and international relations. The use of force has been threatened, and numerous wars have been fought on the peripheries yet, despite deep ideological and other differences, peace prevailed at the center of international politics”.2 Kenneth Waltz’s “structural realism” or “neorealism” is supported by contemporary scholars such as John Mearsheimer and Randall Schweller. Waltz presented an improved phase of the theory of Realism by asserting that state is not the only actor in the international arena but also the active roles of private bodies and international organisations hence broadening the scope of the competition. He made a proposition of a “structural

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Slaughter, A. (2011). International Relations, Principal Theories. https://www.princeton.edu/~slaughtr/Articles/722_IntlRelPrincipalTheories_Slaughter_20110509zG.pdf 2 Waltz, K.N. (Autumn, 1993)The Emerging Structure of International Politics International Security, Vol. 18, No. 2., pp. 44-79 http://links.jstor.org/sici?sici=01622889%28199323%2918%3A2%3C44%3ATESOIP%3E2.0.CO%3B2-R

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traid” thus selfish nature of man, internal nature of a state, and systematic reasons to characterise international relations.

Waltz (1979: 117) as was quoted by Donnelly 3 defines structural realism with the following features: First and foremost, states must survive and compete in the international spheres as a motive; and to survive security in economic, political and military among others are key. “State’s interest provides the spring for actions, the necessity of policy arises from the unregulated competition of states.”4 The state will not act unless it has enshrined benefit or motive which is either immediate or deferred. To capitalise on a loose political, security and economic atmosphere among opposing states sometimes inform policies of other states. This is common because competition and “autonomy of the political sphere” is unregulated according to Morgenthau,5 and Mearsheimer reckoned that Realists assert that there is no higher authority that overrides that of states and the lack of arrangement of these states in a hierarchy of power is termed anarchy.6 A state may propose favorable or otherwise, a trade agreement to another, during economic down turns with hidden or clear motives. Waltz also added that “calculations based on these necessities can discover the policies that will best serve a state’s interest”. The ASEAN-China FTA in 2010 is the world’s largest-ever free trade area although it remains unbalanced. The populations of this region together present the world’s biggest market and consumption unit and a cursory look at world trade imbalances indicates that hardly can economic issues be resolved adequately without Sino involvement.7 The less regulated competition is responsible for such economic dominance by the PRC.

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Donnelly, J. (2000). Realism and International Relations. University Press Cambridge. UK ISBN052159728. http://catdir.loc.gov/catdir/samples/cam032/99053676.pdf 4 Donnelly (Ibid) 5 (Morgenthau, 1954: 4–10, Donnelly (Ibid) 6 Mearsheimer, J. J. (2002). Realism, the real world, and the academy. In Realism and Institutionalism in International Studies, ed. Brecher Michael and Harvey Frank. Ann Arbor: University of Michigan Press. 7 Ke, H. (2017). Paper on The Chinese “OBOR” Initiative and its impact on ASEAN Integration: From a Perspective of Structural Realism 5th International Conference on International Relations and Development (ICIRD). http://www.icird.com/conference

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Secondly, Waltz proposed that “success is the ultimate test of policy and success is defined as preserving and strengthening the state”8 therefore states are main actors in the international system. When state policies fail, it is clear that the state has failed to withstand the pressure mounted on it by the anarchic structure of the international system. In other to maintain the state hegemony, it must maintain the need to fight because “when leading states decline, other states rise to challenge them” according to Waltz. 9 Therefore international organisations are limited to act except states. This is also linked to his concept of “Unipolar, Bipolar and Multipolar” thus domination by a single power, two power and many powers respectively. Sino interest to be unipolar out of the multipolar system made up of Japan, South Korea, US and Russia in Asia and the ASEAN is well documented. The PRC manages to do this by supporting its state companies (SOEs) to win contracts in other countries serving as international actors. To make the BRI succeed without susceptibility to any failure, it encompasses both land and sea routes, six (6) corridors, over sixty (60+) countries in Asia, Middle East, Eastern Africa, and Eastern Europe, incorporation of existing bilateral and multilateral agreements among countries and along the routes, covering about 69% of the world population and slightly over half of the world’s GDP thus 51%.10 The lofty pursuance of the OBOR is through the strength of giant SOEs of China and CPC as a state dealing the cards. Thirdly, states have differing capabilities. Waltz proposes that “balance of power” that “if there is distinctively political theory in international politics, balance-of-power theory it is… When two or more states coexist” in an anarchic order “with no superior agent to come to the aid of states that may be weakening or to deny to any of them the use of whatever instrument they think will serve their purpose.”11 In this case, they tend to “balance” their power but in the hierarchic political order, “they jump on the bandwagon” of leading candidates because it doesn’t place their security; in this case economy security in jeopardy.

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Waltz (1979: 117), Donnelly (Ibid) Waltz K.N. (Autumn, 1993 P. 34) ibid 10 Baker McKenzie. (2017). Belt & Road: Opportunity & Risk The prospects and perils of building China‟s New Silk Road. Silk Road Associates. 11 Waltz (1979: 117-118) Donnelly 2000 (ibid) 9

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This has been the case of ASEAN-Sino relation. The ASEAN member states are largely developing and have similar problems of infrastructure needed for industrialization, urbanization and economic take off but suffer from “collective action dilemma” 12 which implies that Laos, Vietnam, Myanmar, and Cambodia are likely to will “jump on the bandwagon” of the BRI because their economies face difficulties as compared to the “multipolar” Singapore, Thailand, and Indonesia. As championed by Waltz, this authority is not imposed by the developed member states but by their interaction as formally equal political actors (states). Another tenet of Waltz’s “Structural realism” is competition and conflict which emanate from power-seeking. Morgenthau proposed that these ends are the core indications that help political realism to find its way through the scenery of international politics referring to the notion of interest defined as power which is ruled by objective laws that originate from human nature.13 In “Man, the State and War”, Waltz argued that conflict is caused by Selfish nature of man, internal nature of state and systematic reasons. 14 From this, it is at the core of humans and states to conflict which brood intense competitions for power dominance not with a military but with economic and geopolitical influences.

Limitation of the application of the Neorealist theory in the BRI Waltz’s structural neorealism just like other theories has received widespread criticism over the years as applied in the field of international relations. The case of the ASEAN Economic Community in the grand OBOR initiative may be situated in such a way that, not all the propositions of the neorealist could prevail and this is partly because the dynamism of politics in the field of international relation remains inevitable. To commence with, it may not be entirely true that “the necessity of policy arise from the unregulated competition of states”. First of all the competition in the world is regulated to a large extent being it economics, politics, security among others areas. These regulations come in the form of agreements, declarations, conventions, and enactments from the UN 12

Ke ( 2017: 9, ibid) Morgenthau (1954: 4–10) Donnelly ibid 14 Tsygankov, P.A. (2003).The Theory of International Relations. M.Gardariki, P. 98. 13

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and other international agencies. Further, there are laws that govern the international relations just to create a balance of coexistence and peace. For instance, the World Trade Organization exists to regulate trade laws and regulations in member countries. The Bretton Woods (1944) was to ensure all currencies are freely convertible to each other, the dollar made convertible to gold and to prevent trade manipulations for political gains. The brainchild of the Bretton Woods was the establishment of the International Monetary Fund (IMF) in 1974 “to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world”15 and in 2015 the Chinese RMB was approved by the IMF as a currency for reserve.16 The activities of the ASEAN member states are governed by rules that must be followed and backed by stricter sanctions for breaches. These are indications that the world’s competition and dominance of states are regulated at least in the field of economics. The success of state policies may not be a test of its power and strength because domestic policies influence state position in the international levels. Over the years, different states have adopted a number of policies both domestically and internationally which sometimes fail or are replaced by better thought ones. This does not render previous policies a failure; it may have outlived its usefulness or achieved its aim. This is very true among domestic policies. PRC’s One-Child policy adopted in 1979 was to slow down birth rate but was relegated to the background in 2015 after the policy outlived its purpose because of an aging population coupled with other factors.17 It can also be argued that Singapore as a staunch member of the ASEAN introduced the “Eligibility for the Tourist Refund Scheme” which was 7% discount given to tourist for making any purchase of more than $100 (including GST) at participating shops18, which was to promote tourism. Although this policy helped to marginally make Singapore an attractive destination for tourism, it has not in any direct way contributed to its power status. Therefore Waltz theory cannot hold in the domestic politics and cannot serve to develop policies of states concerning their international or 15

https://www.imf.org/en/About Bradsher, K. (November, 2015). China‟s Renminbi Is Approved by I.M.F. as a Main World Currency https://www.nytimes.com/2015/12/01/business/international/china-renminbi-reserve-currency.html 17 http://www.bbc.com/news/world-asia-34665539 18 http://www.visitsingapore.com/travel-guide-tips/tourist-information/gst-tax-refund/ 16

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domestic affairs. “His theory helps instead to explain why states behave in similar ways despite their different forms of government and diverse political ideologies, and why, despite their growing interdependence, the overall picture of international relations is unlikely to change.”19 Finally, the internal nature of states is not static. Undoubtedly, the Silk Road has existed since time in memorial as a trade route. However, it is under Mr. Xi that this route seems to have been revived as part of the OBOR because it was less spoken of since early merchants discovered an alternative shorter route to transport trade. In the least, Jiang Zemin and Hu Jintao as predecessors of Mr. Xi were less conscious of such a project. Mr. Xi can be described as twice ambitious with Chinese Nationalism being on the rise especially under his regime. Internal and external nature of states are not static and therefore it will be inadequate to perceive and insist patterns of behavior from their international policies even with regime changes and as summarised by Karpowicz & Julian “neorealism, like classical realism, cannot adequately account for changes in world politics.”20

What is the BRI? The “One Belt, One Road” Initiative, “Belt and Road” Initiative, “BRI”, and “B&R”21 fundamentally refer to the Silk and Belt initiative of the People's Republic of Chinese termed “yidai yilu” literally “one belt one road.”22 In the 19th century the term “Silk Roads” seemed to have been invented to designate the ancient trade route networks that connected Eastern Asia to the Middle East and ultimately to Europe (land and maritime route which intersected), however, the name coined as a result of the importance of silk outlived its usefulness when in the 15th century an alternative and relatively shorter route was discovered thus the possibility to travel by sea through south in the Atlantic Ocean to the 19

Karpowicz, K. & Julian W. (2017). "Political Realism in International Relations", The Stanford Encyclopedia of Philosophy Edward N. Zalta (ed.) https://plato.stanford.edu/archives/sum2017/entries/realism-intl-relations/. 20 ibid 21 In September 2015, China‟s National Development and Reform Commission (NDRC), Foreign Ministry and Ministry of Commerce (MOFCOM) announced that the scheme‟s official English name is „The Belt and Road or „B&R‟ 22 Schubert, J. (2017). New Eurasian Age: China‟s Silk Road and the EAEU in SCO space or “Noodles and Meatballs in a Breaking Bowl” Retrieved http://russianeconomicreform.ru/.

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bottom of Africa and then north again toward the Indian sub-continent and eastern Asia (ibid). The “One Belt-One Road” (OBOR) stratagem based on this account seemed to have been re-launched in September 2013 by President Xi Jinping in Kazakhstan (Silk Road Economic Belt - SREB) for the mainland area and in October 2013 in Indonesia towards the maritime area (Marine Silk Road of the 21st century -MSR)23, and considered perhaps over a decadelong largest and ambitious initiative to interconnect Asia, Europe and Africa. Later on 28th March 2015 the "Vision and Action aimed at promoting the joint construction project of the Economic zone of the Silk route and Maritime Silk Road of the 21st century"24 was officially published. The Institute for the Analysis of Global Security -IAGS in 2016 described the OBOR as not only “ambitious and an all-encompassing economic development” in the 21st Century but also as a “connect between China and Europe in a web of roads, high-speed rail, power lines, ports, gas pipelines, power plants, fiber-optic lines and other infrastructure with the goal of stimulating growth in the scores of developing countries in between”25 with an estimated beneficiary of about 3billion people and certainly the biggest market for trading in the world. The HKTDC as at September 2017 wrote that “the Belt and Road Initiative aims to connect Asia, Europe, and Africa along five routes. The Silk Road Economic Belt focuses on (1) linking China to Europe through Central Asia and Russia (2) connecting China with the Middle East through Central Asia and (3) bringing together China and Southeast Asia, South Asia and the Indian Ocean. The 21st Century Maritime Silk Road, meanwhile, focuses on using Chinese coastal ports to (4) link China with Europe through the South China Sea and the Indian Ocean; and (5) connect China with the South Pacific Ocean

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Jetin, B. (2017). “One Belt-One Road Initiative” and ASEAN Connectivity: Synergy Issues and Potentialities. Institute of Asian Studies, Universiti Brunei Darussalam Gadong Working Paper No.30. Retrieved http://ias.ubd.edu.bn/assets/Files/WORKING.PAPER.SERIES.30.pdf 24 "Экономического пояса Шелкового пути" и "Морского Шелкового пути 21-го века" ("Economic belt of the Silk Road" and "Sea Silk Road of the 21st century") http://ru.chineseembassy.org/chn/eyxxs/t1257322.htm 25

Luft, G. (2016). It takes a road, China‟s One Belt One Road Initiative: An American Response to the New Silk Road Initiative. Institute for the Analysis of Global Security. Retrieved http://www.iags.org/Luft_BRI.pdf

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through the South China Sea.”26 Through such routes six (6) key corridors emerge New Eurasia Land Bridge, China-Mongolia-Russia, China-Central Asia-West Asia, ChinaIndochina Peninsula, China-Pakistan, and Bangladesh-China-India-Myanmar.

Fig. 1.0 Source: HKTDC research report September 2017. Certainly, an initiative such as the OBOR is bound to have official objectives and possibly latent ones which may include the intention to promote infrastructural development and connectivity, and stimulation of economic integration across the Eurasian continent 27 and the northern part of Africa. Its five key major goals are policy coordination, facilities connectivity, unhindered trade, financial integration and people-to-people bonds28, opened to all nations to which President Xi mentioned in 2015 that there has been closely 70 countries and international organizations who have signed up unto its mammoth projects with 64 being identified along the OBOR accounting for about 62% of the global

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HKTDC Resource portal on Belt and Road Initiative. Retrieved http://china-trade-research.hktdc.com/businessnews/article/The-Belt-and-Road-Initiative/The-Belt-and-Road-Initiative/obor/en/1/1X000000/1X0A36B7.htm 27 Ghiasy, R. & Zhou, J. (2017). The Silk Road Economic Belt. Considering security implications and EU–China cooperation prospects. Stockholm International Peace Research Institute. 28 Baker Mckenzie (2017). International and the Silk Road Associates Report Belt & Road: Opportunity & Risk. The prospects and perils of building China‟s New Silk Road.

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population29 thus 4.6 billion, 40% of the global land area and 31 % aggregate gross domestic product (GDP). 30 Nevertheless the vagueness of this initiative cannot be overemphasised as mostly it is viewed as a national vision and foreign strategy, very so often a reminiscent of conceptual propaganda, especially when PRC has never made available any comprehensive list of all OBOR-related plans or deals31 but somewhat concrete projects investments reported to having over 50 state-owned (SOE) firms involved in over 1,700 OBOR projects since 201332 with major companies to include; China Communications Construction, China State Construction

Engineering,

PowerChina,

Sinomach

China

Railway

Construction

Corporation, China Railway Group, CNPC and State Grid.

Why China needs the BRI? Emphatically, a dim prospect of the PRC economy is inevitable without the BRI, it is a right step in the right direction by Beijing. The question of why China needs the OBOR may generate divergently and at times contradictory opinions based on factors that can be classified under, geoeconomical, financial, security, geopolitical. Efforts will be made to present obvious and to some extent clandestine economic and financial reasons behind the twining initiative 21st Century Maritime Silk Road and the Silk Road Economic Belt.

Economically, to maintain trade surplus; the OBOR is observably a way of galvanizing the Sino-Eurasia-Africa trade relation into higher levels. It is a way of creating new markets and expanding already existing ones. Sino trade relation with the entire world has been in surplus since 1995 with an overwhelming consistency recorded from 2004 to 2009 increasing over ten times33. The Sino economy has shown the following robust growth over 29

https://qz.com/983460/obor-an-extremely-simple-guide-to-understanding-chinas-one-belt-one-road-forum-for-itsnew-silk-road/ 30 Biliang, H. Qingjie, L. & Jiao, Y. (2017). Promoting the Belt and Road Initiative by Strengthening „5 + 1‟ Cooperation. Retrieved http://www.jstor.org/stable/pdf/j.ctt1trkk3v.25.pdf 31 https://www.pwc.com/gx/en/growth-markets-center/assets/pdf/china-new-silk-route.pdf 32 https://www.caixinglobal.com/2017-05-10/101088332.html 33 https://tradingeconomics.com/china/balance-of-trade

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the years; “9.3% in 2011 and slowed to 7.7% in both 2012 and 2013. In 2014, 2015 and 2016, GDP grew by 7.3%, 6.9% and 6.7% respectively. Per capita GDP reached RMB 53, 980 in 2016. In the fourth quarter of 2017, GDP grew by 6.9% in the first two quarters and 6.8% in the last two quarters, resulting in an average growth of 6.9% for 2017”. The latest recordings include 2017 when China's total external trade extended to US$4,104.5billion, with exports and imports increasing by 7.9% and 15.9% respectively, resulting in a trade surplus of US$422.5 billion.34 At the continental levels, China remains the EU's biggest source of imports and second biggest for its export with an international trade valued on the average of over €1 billion a day dominated by machinery, equipment, motor vehicles, chemical and consumer goods with unswerving Sino surpluses recorded.

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Its biggest trade surpluses are recorded with

Hong Kong, the US, the Netherlands, India, the UK, Vietnam, Singapore and Indonesia but mostly record trade deficits with Taiwan, South Korea, Australia, Germany, Brazil and South Africa. PRC overall imports from the ASEAN indicated 4.40%36 increase as against an export change of 11.50%.37 Succinctly, China’s terms of trade over the years have shown to be to its advantage and as other competitors like the US, Japan, South Korea, the EU and even some ASEAN members begin to fight for at least a balance of trade, it only becomes strategic for the PRC to entrench trade surpluses through with the BRI. Perhaps the BRI could be an arsenal of motivation for the recent trade war, as the PRC is almost geared up for alternative market. Especially since its desire to achieve a double of its 2010 GDP and the per capita income for urban and rural residents by 2020 as a means of realizing the “Chinese dream” according to Mr. Xi38stands undiminished.

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http://china-trade-research.hktdc.com/business-news/article/Facts-and-Figures/Economic-and-Trade-Informationon China/ff/en/1/1X000000/1X09PHBA.htm 35 http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ 36 http://info.hktdc.com/hktdc_offices/mi/ccs/index_static_type/ImportsbyCountryofOriginFinalDestinationim.htm 37 http://info.hktdc.com/hktdc_offices/mi/ccs/index_static_type/ExportsbyCountryofOriginFinalDestinationex.htm 38 Zhang Yunling & Wang Yuzhu. (2015). “ASEAN in China‟s Grand Strategy” (158-176) http://www.eria.org/ASEAN_at_50_4A.9_Zhang_and_Wang_final.pdf

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To export overcapacity remains another undoubted reason why the PRC needs the BRI. In 2017 similarly to the year earlier, the added-value industrial output grew by 6.6% up from 6.0% and 6.1% for 2015 and 2016 respectively (for industries with annual sales exceeding RMB20 million) whiles that for foreign-invested enterprises grew by 6.9%.39 As espoused by Ke, the OBOR is a precipitating factor for Sino industrial restructuring and “orderly transfer of overcapacity and uneconomic businesses to developing countries.40”Cheng of the South China Morning post argues that, although overcapacity has remained an undiminishing part of the industries in iron and steel (excessive capacities of 271 million tonnes), glass, cement, aluminium, solar panel, and power generation equipment, the situation has worsen with over 30% overcapacity which has opened the floodgates for loan defaults as firms that borrow witness profit declines because of overproduction.41,42,43 Karpov with more clarity points out that the lack of motivation on the part of the CCP to pursue financial deregulation and consumption-led instead of investment-led growth lead to excessive production in industry and infrastructure44 hence the need to redirect to the world over. Predictably, the mounting bottomless trade wars between Mr. Xi and Mr. Trump administrations would negatively contribute to the PRC’s overcapacity in terms of target products at least in the short term. With the advent of the BRI, China gets a room in during the construction phases of this initiative to export its overcapacity (labour, steel, solar, cement etc), because its companies are mainly involved in over 1,700 projects. Financially, internationalization of the RMB is another crucial reason for the BRI. The IMF in 2015 accepted the Chinese Yuen along with US Dollar, British Pounds, and Eurozone Euro as currencies for reserves. It is however the case that fluctuations and incessant devaluation of the RMB do not make it a better store of value as the PRC itself reserves in other stable currencies and gold, on top of its non-convertibility. The most recent attempt to 39

(ibid) (Ke, ibid p. 4) 41 USCBC (September, 2010). “China Accelerates Efforts to Combat Overcapacity”. China Business Review. Retrieved http://www.chinabusinessreview.com/china-accelerates-efforts-to-combat-overcapacity/ 42 Shuaihua Wallace Cheng.(September, 2015). “Overcapacity a time bomb for China‟s economy. Retrieved http://www.scmp.com/comment/insight-opinion/article/1862024/overcapacity-time-bomb-chinas-economy 43 Ross, S. (July, 2016). “U.S. vs. China: Is China Really at Overcapacity?” Retrieved https://www.investopedia.com/articles/markets/071116/us-vs-china-china-really-overcapacity.asp 44 Karpov, M. (2016). Temporary difficulty or the start of the “end game” Lua China Institute Policy Paper Series. Volume 1. Issue 3. 40

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allow convertibility of the RMB was in 2013 at the Shanghai Pilot Free Trade Zone (SPFTZ), an outcome of which is unclear since the RMB still remain nonconvertible. The fluctuations have also led to trust deficits in the RMB as a major currency for trade, therefore officially, the RMB is an international currency but hardly used by its owners. After the IMF declaration of the new status of the RMB the People's Bank of China (PBOC) for the first time issues an overseas bond to raise $787 million (5 billion yuan), offered at an interest rate of 3.1% to mature in 2016 as a way of exploring the Yuan offshore currency market and international tradability.45 The BRI is a possible way of promoting such a financial attitude through a cross-continental mercantilist strategy from which the ASEAN cannot extricate itself. In April 2017 the Bank of China priced USD 3 billion overseas bonds for the BRI related credit projects in six categories and four currencies, the US dollar, Euro, Australian dollar and RMB on Hong Kong Stock Exchange46 and more recently a 300million Yuan ($47 million) corporate bond was dispensed on the SSE on the BRI by the privately owned cement company Hongshi Holding Group for the acquisition of a cement plant in Laos (ASEAN member).47 The single smothering question is why is the RMB part of the face value of the bonds? The Chinese National Development and Reform Commission (NDRC) in the vision and action of the BRI indicated that “we should expand the scope and scale of bilateral currency swap and settlement with other countries along the Belt and Road, open and develop the bond market in Asia”48 therefore the answer is obvious. An optimist like Ke argues that the RMB is getting widespread acknowledgment as a trade settlement and through the BRI, the staggering foreign exchange reserve and profuse domestic savings “hot money” and

45

Russia Today (October, 2015)“Beijing issues first government bonds outside China”. Retrieved https://www.rt.com/business/319264-china-yuan-offshore-bonds-london/ 46 Sinocast (April, 2017) “Bank of China : BOC to Issue USD3bn Overseas Bond to Support OBOR” http://www.4traders.com/BANK-OF-CHINA-LTD-6498923/news/Bank-of-China-BOC-to-Issue-USD3bn-Overseas-Bond-toSupport-OBOR-24205939/ 47 China's first official Belt and Road bond issued in Shanghai https://www.rt.com/business/417251-silk-road-bondissued/ https://www.cnbc.com/2018/01/28/first-official-belt-and-road-bond-issued-on-shanghai-exchange.html 48 National Development and Reform Commission (March, 2015)Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road. http://en.ndrc.gov.cn/newsrelease/201503/t20150330_669367.html

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“independent global payment systems”, can be a robust dynamic strategy to promote economic development in other countries.49 What does the BRI mean to the world? As to whether the BRI would have positive or negative ramifications on politics and economics in Eurasia, a question of perspective and time. A new trajectory of increased investment, trade, infrastructure and human connectivity remain obvious in the BRI initiative and presents nearly an all-embracing web of consensus among participating countries leading to a situation where decision to stay out can be tagged as divisionism, and acute attempts to participate also described as desperation in an improperly calculated highrisk venture. Currently, other economic superpowers such as Japan, South Korea, and the US have not made their intentions about the BRI succinct, unlike the EU. Political corollaries of the OBOR include a shift in global power and dominance from previous superpowers in the Occident to the Orient. In the views of Cai it is the anticipation of Beijing to spur random growth in its hinterlands and rustbelt with infrastructure building aspect of the BRI, as an indigenous focus.50 Locally one of the corridors of the BRI thus the China-Pakistani Economic Corridor is designed to cover the autonomous region of Xinjiang which stretches to the West into the borders of Pakistan, apparently to strengthen Sino’s fragile grips of the region. As a political stratagem, it is purported to appease the Uighurs who over the years have registered their disquiets about the economic disenfranchisement in relations to the Hans. Southern Xinjiang Railway in Kashgar costing over US$60 Billion will perhaps enhance the lives of the Uighurs if it’s not the case that it will serve to entrench the economic supremacy of the Hans who are at the helm of affairs in almost all public offices. In another instance, the Java Sea plus and South China Sea projects will include a high-speed railway that will link China and another self-acclaimed region of Tibet strategically thus the China– Central

49 50

Ke (ibid) Cai, P. (2017). Understanding China‟s Belt and Road Initiative. The Lowy Institute for International Policy

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Asia–West Asia Economic Corridor. PRC’s containment policies towards these two regions have been quite inimical and the OBOR will serve more to this end. In the words of Ke the BRI is “global governance project”51 because it is a systematic initiative that meets all interest and again there is hardly any economic problem that can be resolved amicably without the involvement of the PRC. Internationally Beijing has positioned itself well in terms of agreements and close associations with regional blocs such as Eurasian Economic Union - EAEU (Russia, Belarus, Kazakhstan, Kyrgyzstan and Armenia), the European Union (EU with its 27/8 members), the ASEAN (with its 10 members) and its domineering Shanghai Cooperation Organisation (SCO + Pakistan and India since 2017). The BRI has the New Eurasia Land Bridge as part of the international railway line from Chinese Jiangsu through Xinjiang to the Netherland which without alternative passes through three (3) EAEU member states (Russia, Kazakhstan and Belarus) and Poland, reaching a number of coastal ports in Europe linking Chongqing directly to Duisburg (Germany). This implies a direct transport of goods between EAEU members and Germany with minimal inhibitions aided by the Land Bridge and perchance the China-Russia-Mongolia Economic Corridor. The China-Central Asia-West Asia Economic Corridor nonetheless is another strong trading route for central Asia members of the EAEU (Kazakhstan, Kyrgyzstan) through to Iran. HKTDC again reported that Kazakhstan, Tajikistan and Turkmenistan’s, “Road to Brightness”, “Energy, Transport and Food” and “Strong and Happy Era” as national initiatives respectively have been successfully merged into the OBOR.52 Strategically, Beijing and Moscow were to sign an agreements few months after the birth of the EAEU in May 2015 to enhance the realization of the BRI and the EAEU53 and largely because the OBOR is geographically deeply seated in EAEU member countries since three (3) of the six (6) corridors of the BRI connect directly. Moreover, China cannot deal without 51

Ke (ibid) (HKTDC, September 2017 ibid) 53 Biliang et al. (ibid) 52

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the energy (oil and natural gas) resources of some of these countries over which Russia is a power producing about 541 million toes, accounting for 12.4 % of global output in 2015 and ranking third behind the US and Saudi Arabia.54 On a broader perspective, Li Xin of the Valdai Discussion Club argued that all SCO and EAEU member states “also enthusiastically support and participate in the Chinese initiative to create the Silk Road Economic Belt and the 21stcentury Maritime Silk Road” because they are also constricted to “Greater Eurasia” firstly used by Timofei Bordachev.55 The Regional Comprehensive Economic Partnership (RECP) which is expected to be signed includes 16 countries (the ASEAN + Australia, China, India, Japan, South Korea and New Zealand) without the US. The RECAP when pulled through with a population of about 3.4 billion people of the world and accounting for more than a third of the world’s GDP will be the single biggest trading bloc surpassing the EU and NAFTA. It is guaranteed that the OBOR is a deal broker under which the RECAP will thrive because infrastructure is a necessary catalyst for global trade. Although the Kremlin is not participating in the RECAP, it is certain of its strong participation as a staunch member of the SCO and EAEU. The RECAP, ASEAN, EAEU, SCO, and EU are ostensibly under the large tentacles of the BRI, what is certain is the indistinct nature of how NAFTA and Mercosur will deal with their respective world trade without being part of the BRI. The OBOR has indirectly become a cult of international projects, an absenteeism of which sparks numerous questions including how other world trade will survive without it. Economic ramifications for the world at large The OECD asserted that “In the global economy, the new Silk Road deserves targeted attention” and that “Growing economic ties implies more than improved infrastructure and connectivity. New forms of mutual understanding, alliances and partnerships at multiple levels, including with businesses and local actors, are also accompaniments for realising the Silk Road’s potential to advance development in the 21st century”.56 Wolff of the German 54

British Petroleum. (2016), Statistical Review of World Energy, London: BP. www.bp.com/statisticalreview Li Xin. (2016) Chinese perspective on the creation of a Eurasian economic space. Valdai Discussion Club Report 56 OECD. (2015): A Silk Road for the 21st Century: Initial Reflections on new Opportunities for Partnership, Internal Document for Silk Road Forum 2015, Madrid 55

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Development Institute argues that possible significance of the BRI can be expected through improving regional supply chain networks and competitiveness, low tariffs and nontariff barriers (NTBs) in order to reduce the cost of importing inputs and favoring participation in value chains.57

Fig. 3.0 Source: ASEAN Secretariat 2016 report on trade58 China’s terms of trade with the ASEAN is always in the surplus as evident from the figure above for 2015 showing a total trade volume of US$345,764Billion with US$211,515 Billion representing 61% being ASEAN’s imports from China.

57

Wolff P. (2016). German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Retrieved https://www.die-gdi.de/uploads/media/Belt_and_Road_V1.pdf 58 ASEAN Secretariat 2016 report on trade. http://asean.org/storage/2016/11/Table19_as-of-6-dec-2016.pdf

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Fig. 4.0 Source: European Commission 2016 Report on EU China59 Again China as a single trading country with the EU records a strong surplus from the trade of machinery, transport, crude material, food and minerals and others products showing an import of US$169,686 Billion against a strong export of almost twice its imports at US$344,911Billion at US$175,225Billion.

Fig. 5.0 Source: World Trade Statistical Review 201660 59

http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf

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From the above according to the WTO data on world-leading traders from 2011-2015 as illustrated in the figure below, China was the leading exporter, with total exports of US$ 2.27 trillion and a 14 % share of world exports, followed by the US (US$ 1.50 trillion, 9%), Germany (US$ 1.33 trillion, 8%) and Japan (US$ 624 billion, 4%) however, the leading importer was the US at a total of US$ 2.31 trillion, representing a 14 %share of the global total, followed by China (US$ 1.68 trillion, 10%), Germany (US$ 1.05 trillion, 6%) and Japan (US$ 648 billion, 4%). However, it is clear that free trade policies always favors China and therefore removal of NTBs would rather serve this purpose as it further opens the doors for the proliferation of substandard pirated goods expressly from China. This has been substantiated by the EU Commission when it reported that it was dedicated to open trading dealings with China but noted that it would have to guarantee that China trades “fairly, respects intellectual property rights and meets its obligations as a member of the WTO”.61 Towards ensuring this end and many more, the EU-China launched a negotiation agreement on investment on transparency, licensing and authorization mechanisms to protect investors and their resources, as well as regulations on environment and labour.62 The BRI as an international trade enhancement specimen will promote global consumption and at the same time outdoor a large scale of the above listed concerns. Nonetheless, with a well regulated international trade environment, there would be the least concern for imbalance terms of trade especially since free flow of goods and erasing NTBs will be primary to the various pacts and consensus to be reached with countries participating in it. Problems of trade cost cannot be overemphasised especially in the field of custom activities and documentation which can increase time and cost of moving through borders where there is the need for communication, immigration checks, and technology. As the world 60

World Trade Statistical Review 2016. World Trade Organisation. https://www.wto.org/english/res_e/statis_e/wts2016_e/wts16_toc_e.htm 61 http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ 62 http://trade.ec.europa.eu/doclib/press/index.cfm?id=1435

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expects the obvious positive impact of the OBOR, it should brace itself for concerns from the inverse as well.

China’s temporal resiliency to the trade war with the US A decade after the US-China Relations Act signed by then POTUS Bill Clinton, China moved to become the second largest economy in the world by slightly overtaking Japan in the last quarter of 2010 as indicated by Bloomberg.63 The PRC’s trade surplus with the US rose from $273.1 billion to the highest $295.5 billion from 2010 to 2011 and this was after the former became the largest creditor/ holder of highest debt of the latter by once again outrunning Japan in 2008. 64 As China has gradually entrenched its trade surplus over the year, it is almost inevitable for the US to balance the trade. According to the U.S. Department of Commerce, Census Bureau, Economic Indicators Division, China-US trade value stood at $578 billion in merchandise in 2017 and whiles China is the third importer of US products at $129,894 billion, the US remains the highest importer of Chinese products at $505,470 billion with year on increase for both countries.65 Whiles there is a mere 2.5% tariffs on cars imported from China to the US, that of China was 25%, objectively this is an unfair trade protectionism practice adopted by the PRC over the years. From the above, it can be deduced that both countries have firm grips at each other’s throat when it comes to trade. The impact of fusillading trade wars could be temporally mutual because consumers in both countries would be the final bearers of the cost because whiles China cash in on from the above practices, US consumers also enjoy cheap products from China. It is not surprising that the POTUS has begun offering $12 billion bailout to farmers

63

Bloomberg. (August, 2010). https://www.bloomberg.com/news/articles/2010-08-16/china-economy-passes-japans-in-second-quarter-capping-three-decade-rise 64 https://www.cfr.org/timeline/us-relations-china 65 U.S. Department of Commerce, Census Bureau, Economic Indicators Division Report. 2017. Retrieved https://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_003364.pdf

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affected by the trade war with China.66 For the CNBC’s Cox, the U.S. Chamber of Commerce reported that it will cost at least $39 billion to bailout the various industries in areas ranging from farming to bakers, confectioners, cotton and fabric, iron and steel, to aluminum producers.67 This is to prevent producers from shifting the final burden to the ordinary consumer on the US market. However it the US hopes to win the trade war, it needs to build better ties with the European Union, Mercosur and other Asian countries because it is the only means of being able to negotiate for better terms of trade than China. The smothering question is, how is China responding domestically to cushion its own citizens as well from the direct impact of this trade war? And what will happen to China if this continues for long? This paper predicts that China’s arsenal for this current trade war will not win the battle but can only bruise and wound the US. China’s resilience to the trade war with the US is underpinned by several factors which can be categorised into temporal and permanent. The emphasis for now must be put on the temporal because this is not a hardcore economic research paper with strong predictability for future trends. Temporarily, the PRC has almost all the world regional blocks in its trade agreements all with which it records trade surpluses. The RECAP, when signed will be an immediate means of exporting more Chinese products to the countries on board the agreement. At least the RECAP seems to serve as an alternative potential market for China’s resiliency temporarily. With aspects of the Belt and Road Initiative such as transportation of goods from Chongqing to Duisburg in Germany, it can be an alternative market for Chinese products. The BRI could be Beijing’s resilience card in spite of its current industrial overcapacity and the further weight to be added unto the home manufactures by the US tariffs.

66

Wallace, C. (July, 2018).Trump Offers Farmers $12B Bailout For Trade War. Forbes. Retrieved https://www.forbes.com/sites/charleswallace1/2018/07/24/trump-offers-farmers-12-billion-bailout-for-tradewar/#17e50e8a1d89 67 Cox, J. (July, 2018). Full-scale bailout for industries impacted by tariffs would cost $39 billion, Chamber of Commerce says. CNBC. Retrieved https://www.cnbc.com/2018/07/30/full-scale-bailout-for-industries-impacted-bytariffs-would-cost-39-b.html

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The PRC can choose to further reduce the cost of its finished products to other countries either than the US so that the current goods affected by the trade war can gain grounds in new markets. This is a means to redirect the market as the State will temporarily bear the cost differences. This will not be a new approach to the large SOEs in China who have over the years been at the mercies of the CPC for survival. Soft Budget Constraint coined by J. Kornai has been used to describe the government’s relationship with the SOE’s in China. Soft Budget Constraint is underpinned by how credit allocation is organised by the State and not much different from what the POTUS has started in the US thus bailing out affected industries of the trade war. However, in the case of China, hard cash may not need to be provided immediately because the CPC’s yearly budget perhaps has an instrument for rectifying soft budget constraints of its SOEs. Finally, the PRC has the option of selling part of its treasuries in the US. China overtook Japan to become the largest US foreign creditor in 2008 holding over $600 billion of the total debt of the US Treasury,68 as a temporal measure, the PRC can sell part of this debt back to the US. In 2016, China spent a colossal amount of its foreign currency reserves to maintain the RMB and because of that lost its status as the largest US creditor to Japan, however it was able to bounce back in 2017 after it was able to purchase back in June $44.3bn of Treasuries taking its total to a whopping $1.147tn as recorded Rennison of the Financial Times.69 This is to create a frontier that prevents the RMB from appreciating against the US dollar in order to keep inflation and the interest of investors in China secured and it has been successful by investing in long-term private companies (corporate debt) and public securities. From the perspective of Morrison and Labonte of the Congressional Research Service argued that the purchase of debt by other countries weakens the real interest rate of

68

https://www.cfr.org/timeline/us-relations-china Rennison, J. (August, 2017). China returns to top of list of US government creditors. Financial Times. Retrieved https://www.ft.com/content/39489212-820a-11e7-a4ce-15b2513cb3ff 69

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the US and puts its entire economy at risk.70 Besides it is almost undeterminable the amount of interest US pays to the PRC per annum over the latter’s ownership of these securities. From the above basis, it is intriguing as to why the US would want to start a trade war with China. A possible outcome is for the PRC to commence selling off its debt in the US in order to maintain the RMB and the local economy in order to make up for the effect of the trade war. If China begins to sell off its debt and other countries such as Japan, Belgium, and Brazil follow suite (which is a possibility), it will throw the US economy into a total instability, a situation the Congress has been warned against way back in 2013 by Morrison and Labonte over growing PRC purchase of US debt. The US would need to also retaliate with Quantitative Easing (QE) perhaps which will lead to a perpetual geopolitical war fair. These are all predictable ends that work in no good way for the US or the PRC in the long run. However as it stands now, the PRC remains resolute in retaliating almost every single US trade tariff on its exports because at least it has an upper hand of a trade surplus which perhaps will soon crumble because the US has yet to throw its intercontinental ballistic missiles of the trade war.

And so what? The application of the neorealist theory has shown that the primary aims of states are to survive in the highly competitive international arena where motives are the drivers of actions and inactions. No matter what position one takes, it cannot be overemphasised that the OBOR/BRI is a neo-dominance and perhaps the PRC is playing the role of a great puppeteer in Asia, Africa, and Europe in spite of the massive infrastructure benefit. The motive of the PRC is quite clear, giving with one hand and taking back with the other. Further after a thorough examination of why China needs the OBOR, the following were the conclusions; indubitably, the world at large witnesses a temporary unresolvable trade deficit with the most populated country in the world at least since the last decade. The US, 70

Morrison, M. W. & Labonte, M. (2013). China‟s Holdings of U.S. Securities: Implications for the U.S. Economy. CRS Report for Congress. Retrieved https://fas.org/sgp/crs/row/RL34314.pdf

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East Asia and ASEAN records deficits and that of the EU remains woefully the biggest deficit of all time. The BRI will serve to maintain and promote China’s trade surplus. In another case well-developed infrastructure linking Chongqing (China) directly to Duisburg (Germany), and China to the UK through Russia Federation will help to export huge batches of 30% overcapacity and excess production possibly to hit Chinese industries because of the trade war with the US, in the least, the BRI will create a new unimpeded route for land and sea exports. What needs to be done is for other Asian countries, the EU and Africa to erect strong anti-dumping and check walls to ensure that goods entering their countries are not below standards and do not pose disadvantages to home industries because no country can resist Chinese cheap products at least not in the short run. The necessity to internationalise the RMB perhaps is another clandestine aim of the BRI since both internal and external bonds for the initiative has price values in RMB, British Pounds, US Dollars and few others. The financial instruments for the initiative are mainly Sino banks such as the China Development Bank and the Export and Import Bank, Silk Road Fund, the Asian Infrastructure Investment Bank and New Development Bank which are well represented in Southeast Asia. However, it is also the case that the need for resource contribution from participating countries will pose in the least temporal hardship since resources must be redirected. It was concluded on the implication of the BRI for Eurasia and the world at large that; the EAEU led by the Russian Federation and its member states cannot be left out in the OBOR because they have land and oil resources that China cannot do without. Therefore the New Eurasia Land Bridge will go through Russia, Kazakhstan and Belarus which will serve their economic interest as well. To the world, the OECD argues that the OBOR deserves attention as it implies more improved infrastructure and connectivity. Apart from this, cross-border consumption will be made easily a possibility. Hastily, it must be pointed out that currently, reciprocating cross-border consumption is lacking because China’s import from the world is low.

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Finally, the current trade war between China and the US is unpleasant to any country standing by. It is unpredictable how this might end and what may result from it. What is twice certain is the fact that both countries have temporal resilient measures to withstand each other at least for the time being. China seems to have an upper hand because Washington is the one hoping to reduce its trade deficit with Beijing. Washington has started bailing out its companies to be able to withstand the current trade war but it is unclear what Beijing will do prevent its industries as well. There is however no cause of alarm because over the years the PRC has augmented its SOEs with its Soft budget constraint. As a wildcard, China could choose to sell of its huge debt in the US in order to protect its local companies.

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"Экономического пояса Шелкового пути" и "Морского Шелкового пути 21-го века" ("Economic belt of the Silk Road" and "Sea Silk Road of the 21st century") http://ru.chineseembassy.org/chn/eyxxs/t1257322.htm

Hyperlinks https://www.bbc.com/news/world-asia-34665539 http://www.visitsingapore.com/travel-guide-tips/tourist-information/gst-tax-refund/ https://www.cfr.org/timeline/us-relations-china http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ http://trade.ec.europa.eu/doclib/press/index.cfm?id=1435 http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf

https://www.pwc.com/gx/en/growth-markets-center/assets/pdf/china-new-silk-route.pdf https://www.caixinglobal.com/2017-05-10/101088332.html https://tradingeconomics.com/china/balance-of-trade https://www.imf.org/en/About http://www.bbc.com/news/world-asia-34665539 http://www.visitsingapore.com/travel-guide-tips/tourist-information/gst-tax-refund/

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