The most likely outcome of the BRI
Professor Andrew Delios shares the possible outcomes of the BRI, from fulfilling strategic objectives to the Red Scare Scenario. To find out which is the most likely, he says we must first consider if the BRI is just a series of road, rail and ocean linkages across nations. And what is the point of a route of transportation, without a destination? He finds the answers in China's economic zones.
The Belt and Road Initiative (BRI)*, sometimes known as One Belt One Road, has garnered much press. This press has sparked much speculation about what is the ultimate goal of the BRI.
Although such opinions can only remain as speculations, we can envision what might be the possible outcomes of the BRI. To me, there are three possible outcomes.
The first outcome is that the BRI achieves its so-called strategic objectives. It connects a vast web of countries and cities across Asia, Africa and Europe. These connections improve regional coordination while also facilitating the growth of international trade and foreign direct investment.
The second outcome is what I call the Red Scare Scenario, in which there are increased fears of the rise of China as the dominant player in world politics and economics. Such fears can lead to decreased international coordination in tit-for-tat trade wars that reduce international trade and cross-border investment.
...assets that reside in a jurisdiction in which a foreign power has no military or civil authority cannot ever be truly owned by the foreigners.
The third outcome is one which accelerates the inevitable, which is the rise of the corporate sector of China as true global players through a deeper level of internationalisation. This outcome would create a situation of vibrant international competition, which if opened to fair competition, could create a series of win-win outcomes for consumers and countries alike.
Much press, especially that related to the so-called debt trap phenomenon, centres on the second outcome. The idea here is that Chinese politicians and business people are using the spectre of economic growth and eased- barriers to infrastructure development, to entice host country politicians to sign financial deals that can never be repaid. As such, observers perceive that the fall of Sri Lanka's Hambantota Port is but the first of many assets to fall into the hands of its Chinese allies.
Without disputing whether there is truth in the debt trap scenario, we must also be cognisant of the point that assets that reside in a jurisdiction in which a foreign power has no military or civil authority cannot ever be truly owned by the foreigners. Decades-old experience with the outright expropriation of foreign owned assets by local governments attest to this point.
More importantly, though, to identify which of the three outcomes is the most likely, we need a better understanding of the what and why of the BRI.
The BRI is a series of road, rail and ocean linkages across nations. But what is the point of a route of transportation, without a destination? Is the BRI simply a series of improved infrastructure routes, or is it more than that?'
China's history of setting up economic zones
The answer to this question rests in the history of China's development since the onset of the 1980s. Critical to China's development was the creation of well-defined zones for economic development. These zones provided the means to bypass institutional weaknesses in China, that would otherwise forestall investment even with the lure of China's magnificently-sized labour force and its equally compelling large market.
Even within the original five SEZs, not all have led to strong economic growth. But without these zones, China would certainly not be where it is today as an economic power.
The first type of zone that was established was the well-known Special Economic Zones or SEZs. The first SEZ was established in Shenzhen in 1980. We all know the end of that story. Shenzhen has grown from literally nothing but empty fields to one of present-day China's fourth largest economic areas, with a vibrant sense of entrepreneurship and aspirations.
Zhuhai, Shantou and Xiamen SEZs were also established around this time. These were later followed by an SEZ in Hainan.
SEZs are the most well-known zones but they were not the only type of zone. China's policy makers have been aggressive, experimental and proactive in their development of zones. After the SEZs, China introduced Economic Technology and Development Zones (ETDZs) in 1984 in 14 coastal cities. By the late 2010s, there were more than 200 of these ETDZs, including one called Beijing e-town.
Next up on the list came Free Trade Zones, which were upgrades of ETDZs. Then came National Innovation Development Zones as followed by National New Areas.
Not all zones have been successful. Even within the original five SEZs, not all have led to strong economic growth. But without these zones, China would certainly not be where it is today as an economic power.
Bringing their value chains with them
These zones provide destinations for China's companies when they seek to move overseas. The reality in today's China is that it is an uncompetitive environment for many industries.
The history of economic zones in China points to an important, but often overlooked, part of the BRI. China's policymakers and companies are fostering the development of economic zones along the routes of the BRI. These zones represent the terminals for transportation that occur along the BRI.
By some estimates, to date, there are 80 such zones under development. These zones are called Overseas Economic and Trade Development Zones, or OETDZs, for short. More than 20 have been completed and more than 50 are situated in BRI connected countries.
These zones provide destinations for China's companies when they seek to move overseas. The reality in today's China is that it is an uncompetitive environment for many industries. The strongest reason for many firms to remain in China is to be close to their value chain partners. But when the partners begin to relocate outside of China, soon most or all of their partners will relocate.
Rather than leave this relocation to chance, the BRI with its routes, and the OETDZs, as termini, provide a planned destination for the overseas migration of China's companies. The industrial planning that so characterised the growth of China domestically becomes international via BRI plus OETDZs.
But it is not only Chinese companies that can ride the BRI to arrive at its OETDZ ports.
Is this a bad thing? It is not possible to put a normative statement to this process. Instead, it is better to look at what is happening and what could potentially happen.
What is happening is that companies are venturing further afield. Huajian Group, for instance, which was founded in 1991 in Jiangxi as Huajian Co Ltd, first made a USD$8 million investment in Ethiopia by opening their shoe factory at the Eastern Industrial Zone in Dukem near Addis Ababa. More recently in Jimma Industrial Park in Ethiopia, it is investing $100 million in shoe manufacturing and coffee processing.
But it is not only Chinese companies that can ride the BRI to arrive at its OETDZ ports. Hela Clothing, which provides clothing production for major mid-market brands in Europe and elsewhere, has recently moved some of its production out of Sri Lanka. It now has a 2500-person facility sited in Kenya and a 750-person facility located in Ethiopia.
The co-location provides competitive and learning benefits that could lead to numerous positive outcomes.
When one looks at the BRI and OETDZs in this way, it provides a view of the project as physical investment that facilitates transportation for relocation. But it has the added component of creating specialised zones that perform the same function as they did in China in the 1980s. It provides an area of refuge from weak institutions for foreign investors in countries where foreign direct investment is expected to be low.
In such a way, it provides these countries with a chance to grow their economies through increased levels of foreign direct investment. As well, it exposes leading companies in China to markets in which they have less protection than they would have domestically and potentially co-located with more foreign companies. The co-location provides competitive and learning benefits that could lead to numerous positive outcomes.
Perhaps this view of the BRI and my contention that the third outcome is one that emerges from me viewing the world with rose-coloured glasses. But at least in the future, these glasses stand a good chance of not having a "Made in China" label.
Note:
*First proposed by President Xi Jinping in 2013, the Belt and Road Initiative aims to promote economic growth, peace and development for the peoples of Asia, Europe and Africa. This is envisioned to be achieved through the revival of land and sea links as intricately woven and far-reaching as the flourishing trade days of the old Silk Road. Trade, connectivity, infrastructure-building, financial integration, the movement of people and policy exchange are some of the focus areas detailed in the 2015 action plan.
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