Economics and finance, Trade and industry | Asia, East Asia, The World

17 May 2017

Rather than a regional trade agreement, China’s Belt and Road strategy is an extension of Beijing’s economic policy in foreign lands, Tristan Kenderdine writes.

Boxers throw feint punches, and magicians misdirect to the dummy hand. Such was the intention of the Belt and Road Forum which took place in Beijing on 14 and 15 May. China intended to project an image of a multilateral trade project of mutual benefit while obscuring the initiative’s problematic export of China’s industrial overcapacity and policy bank debt model. However, the forum will be remembered as a China foreign policy misstep rather than a sleight of hand.

The intended feint was not the spectacle it could have been because China concentrated on making inroads through the executive branch of other countries’ governments, ignoring the administrative branch where it is actually stronger. Rather than relying on powerful heads of state visiting Beijing, China should have concentrated on inviting technocrats and ministers to draft a genuine trade agreement.

Thailand, China’s strongest Belt and Road partner in Southeast Asia, perhaps missed the memo. Bangkok left Prayuth Chan-ocha, the head of the ruling military Junta and Prime Minister, at home, instead sending delegates from the ministries of Transport, Commerce, Digital Economy, Science & Technology, and Foreign Affairs.

Whether intended or not, these are exactly the state-to-state transfers China needs to encourage if the Belt and Road is to mature from mere foreign policy to a framework for regional cooperation.

More on this: Beijing needs to meet its One Belt, One Road partners half way

Other forum attendees indicate China’s strategy to cement the bilateral relations necessary for the success of Belt and Road. China’s key partner, Kazakhstan, obligingly sent President Nazerbayev to Beijing, and China’s fellow Central Asian partners, Kyrgyzstan’s President Atambayev and Uzbekistan’s President Mirziyoyev were also present.

But not all leaders answered Beijing’s beck and call.

Interestingly, Turkmenistan’s President Berdimuhamedow was absent. His country is vital to China’s strategy, as the rail ink from the Kyrgyz Republic to Uzbekistan to Iran must pass through Turkmenistan to have a chance of bypassing Russian influence.

More significant were the absences of high profile leaders from Iran, Saudi Arabia and Egypt. China’s Middle East investment strategy hinges on creating a geoeconomic axis from three of the most populous countries in the region. Their importance is attested by a 2016 Middle East policy paper, which outlined China’s strategy in energy equipment and agro-industrial capacity transfer.

China is also key to Saudi Arabia’s 2030 strategy to wean itself off oil dependency. Beijing is providing civil nuclear technology to spearhead the development of a network of 16 civil nuclear plants that aim to supply 50 per cent of Saudi Arabia’s energy needs.

The Belt and Road is effectively China’s answer to comparative advantage – allowing it to subvert Washington Consensus trade norms. As such, the plan is a vast state-planning policy to coordinate China’s trade and investment strategy in external geographies. It is not a resurrection of the liberal international order, it instead represents the institutionalisation of its own international industrial policy. As Jörg Wuttke has argued, rather than a regional trade agreement, the initiative is a one-way street.

The Eurasian Resources Group made a similar complaint, arguing that if China were serious about expanding international trade through the Belt and Road then there must be a reciprocal opening of consumer and capital markets in China.

More on this: ‘One Belt, One Road’ and India’s strategic autonomy

But the real feint is that Chinese money destined for Belt and Road economies is not meant for infrastructure investment. Instead, finance is to fund industrial capacity to produce the inputs for infrastructure investment – an important distinction. Under WTO rules, a state cannot dump cement into international markets, but there is nothing to stop a state from dumping a whole cement factory to an external geography.

China’s trade with Europe will likely develop into a two-way channel as China transitions from a net exporter to a net importer. However for the foreseeable future, investment in Central Asia and the Middle East will remain one-way trade on China’s terms, effectively extending China’s industrial matrix into Central Asia for re-export to China, without opening China’s deeper consumer and capital markets.

International media focus on the Belt and Road forum will likely centre on railroad and port infrastructure. Most of this is nothing new. China is fairly clear about the logistics lines it wishes to develop in order to bring goods in. In Central Asia and the Middle East, three western trunk lines are designed to pass through Russia-Kazakhstan, Georgia-Kazakhstan, and Turkey-Iran-Kyrgyzstan. On the Maritime Silk Road, the clear terminals for routes into China are from Piraeus in Greece, Oman, Pakistan, and East Africa.

However, to achieve these infrastructure goals, China must engage the state bureaucracies of host countries. Presidential handshakes and the choreographed Confucian ‘harmonious co-existence’ of photoshoots do not build railways and ports. And without a concerted effort to build international public rule of law, it will be difficult for China to shake the simplistic Sinophobia which plagues its international trade agenda.

Chinese investment in the geographies, industries and technologies that the West has ignored should be welcomed. There is no such thing as too much steel, cement, glass, paper or aluminium as far as Central Asia, the Middle East, and Africa are concerned.

But, do not lean into the feint. This is the Chinese domestic development model applied to external geographies, and it carries the seeds of a global debt-deflation scenario.

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