Belt And Road Initiative – Economic Expansion Or Vulnerability?

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TPM Consultants

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TPM was founded in 1999 as the first firm dealing exclusively in the field of trade remedies. TPM has assisted domestic producers, in India and overseas, suffering due to cheap and unfair imports to avail the necessary protection under the umbrella of the WTO Agreements. TPM also assists exporters and importers facing trade remedial investigations in India or other countries. TPM has assisted exporters facing investigations in a number of jurisdictions such as China, Argentina, Brazil, Canada, Egypt, European Union, GCC, Indonesia, South Korea, Taiwan, Turkey, Ukraine and USA. TPM also provides services in the field of trade policy, non-tariff barriers, competition law, trade compliance, indirect taxation, trade monitoring and analysis. It also represents industries before the Government in matters involving customs policy.
China launched the Belt and Road Initiative in 2013, with the stated intended objective of economic integration for developed and developing countries. The Initiative has helped partner countries with increased employment.
China International Law
  • China launched the Belt and Road Initiative in 2013, with the stated intended objective of economic integration for developed and developing countries.
  • The Initiative has helped partner countries with increased employment, development of mega projects, and increased investment in manufacturing capabilities. However, a major concern remains that the expenditure has been financed by China and Chinese backed banking and financing institutions.
  • In situations of default on debts, the geopolitical implications could be significant, such as China assuming control over key ports and infrastructure of foreign nations.
  • The Belt and Road Initiative has also witnessed an increase in Chinese investment-backed entities setting up manufacturing plants in special economic zones developed in partner countries, with a view to avoid actions against Chinese exports.
  • Entities setting up in the special economic zone enjoy lower cost of production due to support from the Chinese Government. This allows them a competitive advantage in their export markets, over domestic manufacturing in such markets.
  • The WTO Agreements provide limited leeway to governments of importing countries to take stringent steps to counter such unfair and uncompetitive imports.

In 2013, China launched the Belt and Road Initiative ("BRI"), in an attempt to revive the Silk Route. The BRI is often called the New Silk Road. The purpose of the project is to link South-East Asia, Central Asia, Middle East, Africa and Europe via land and sea routes and increase influence of China in such regions, by dominating trade and by becoming a global lender.

The BRI could potentially accelerate the rate of economic integration for both developing and developed countries. However, total debt financing by China with respect to this project has raised several concerns. A number of BRI partner countries have taken loans from China for standalone projects, some of whom may not have considered the larger picture. While standalone projects are important, a standalone project does not lead to generation of revenue without adequate accompanying infrastructure. Further, infrastructure projects take a long time to reach break-even point and generate revenue. Due to this, a number of countries may be unable to pay back their debt leading to debt-restructuring deals with China.

Debt Vulnerabilities

The total expenditure, as of recently, for BRI has already surpassed USD 1 trillion and has majorly been financed by China or Chinese backed banking and financial institute. A number of projects developed under the BRI are collaborations between the Chinese entities and the entities based in the partner countries. However, major financing activities are undertaken by the Chinese entities.

One of the examples of such projects is the Hambantota Port developed in South-East Sri Lanka. The construction was undertaken by a joint venture between China Harbor Engineering Company (CHEC) and the Sino Hydro Corporation. Out of the total expenditure of USD 1.5 billion, the project was financed by Chinese loans of about USD 1.3 billion. However, the project turned out to be commercially unviable. Due to this, Sri Lanka was forced to lease the port to a Chinese government linked entity for a period of 99 years, in order to generate revenue out of it and maintain its foreign reserves. Even after leasing the port, and having concluded multiple talks regarding the debt restructuring and way forward, Sri Lanka still owes a huge amount to China as debt repayment.

Similarly, China owns nearly 72% of Kenya's external debt. Over the next two years, Kenya is expected to pay USD 60 billion to China Exim Bank, risking the loss of control over the Mombasa port in case of defaulting on repayment of loans1. Therefore, the default on the debts can have serious consequences, in terms of global geopolitical factors.

Actual beneficiary of BRI Projects

BRI has been proposed and marketed to a number of nations as integrated development programs for China as well as the partner countries. While partner countries have indeed witnessed benefits such as increased investment in manufacturing, increase in employment, rapid development of mega projects, etc., the major beneficiary of the BRI remains China. The projects are being financed largely by Chinese state-owned and public banks and financial institutes. Since the infrastructure projects have a long incubation period, the profit generation from these projects takes longer and many nations have failed to pay their debts to Chinese institutions during the incubation period. This has led them to enter debt-restructuring deals with the Government of China. The Government of China has provided relief loans to a number of nations which have used this fund to pay back the banks and financial institutions in China. Hence, the financial aid provided by China has been eventually received back by the Chinese entities.

Impact on international trade

Further, China along with the partner nations have developed special economic zones in the partner nations. Some examples of such zones are Business International Investment Park in Bahrain and SETC-Zone in Egypt. A number of Chinese entities have been encouraged to set up their plants in such zones. This allows the Government of China to increase the global access to Chinese manufactured products, as well as reduce the burden on the producers in China, which already have excess capacities and face trade remedial measures in multiple countries.

This also has implications in terms of international trade. While the exports from China have been subjected to several tariff, non-tariff and trade remedial measures in several jurisdictions; the exports from the countries along such routes may not be subjected to the same measures. In fact, there have been instances wherein plants have been set up in the economic zones set up as a part of BRI, in order to avoid imposition of anti-dumping duty in other countries. For instance, European Union imposed anti-dumping duty on imports of glass fibre from China. Subsequent to the imposition of such duty, one of the Chinese producers set up a plant in the SETC-Zone in Egypt. The bond prospectus issued by the said Chinese producer clearly acknowledged that the imposition of anti-dumping duty had resulted in increase in prices of glass fiber, and that setting up the entity in Egypt would reduce the impact of the anti-dumping duty levied on Chinese exports.

Another important issue that arises is that the entities being set up in such economic zones enjoy a host of benefits conferred directly and indirectly by the Government of China, as part of the BRI. This allows them a lower cost, compared to their counterparts in other countries, allowing them to in turn also export at lower prices. This results in an unfair pricing advantage, to the detriment of the conditions of competition in the importing country. However, it is debatable whether the WTO Agreements allow sufficient teeth to governments of the importing countries to take strict action to address such situations. While certain investigating authorities, such as the European Commission, have already found means within the WTO Agreements to tackle imports from such Chinese investment-based entities located in third countries; the number of measures imposed on exports from such entities are limited. Therefore, the BRI also throws up a challenge to governments of importing countries to come up with innovative techniques to deal with the threat posed by the exports from this region to their domestic market.

Footnote

https://cnbc.com/2019/01/18/countries-are-reducing-belt-and-road-investments-over-financing-fears.html

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