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How will China’s Belt and Road trade plan affect Australia?

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How will China’s Belt and Road trade plan affect Australia? article image

The Chinese Government recently ramped up the rhetoric on its Belt and Road trade corridor initiative – but how will it benefit Australian exporters?

Belt and Road is in effect a plan to place China at the centre of an international trading hub based around six geographic/economic trade routes.

Breathtaking in its scope, this is as much if not more about China demanding homage and respect as a nation and economy of the first rank as it is about an envisioned future of a world dominated by China as the centre of the universe.

The timing to launch such an initiative may never be better with the United States tearing itself to pieces over transgender bathrooms and swamp dweller privileges while the rest of the western world is convulsing and obsessing over illegal Islamic immigration and gender/sexual preference politics – China can go unquestioned and unaccountable.

China was once a great power.

More than 500 years ago at a time when one worker equalled one unit of economic output China was the world’s biggest economy only because of its vast population.

Like any and all fertile, river valleys with multi season crop capacity supporting large concentrated populations the Chinese administrative bureaucracy appeared impressive and sophisticated.

Kow-towing to the Emperor

China was then the middle kingdom surrounded by morally inferior barbarians. The Emperor was the centre of this universe and those granted an audience with the Emperor were required to kneel and bang their forehead on the ground repeatedly as a show of respect and deferential prostration. An exercise known as kow-towing.

As European technology steadily advanced in areas such as ocean going ship building during the mercantile age Chinese economic pre-eminence was gradually eroded until by the time of the early industrial revolution Chinese superiority was a distant memory.  By the 1800’s Britain with a population a tiny fraction that of China possessed a larger economy.

Mongol invasions, civil war and an astonishingly corrupt patrician class desperately trying to maintain their privileges also contributed substantially to Chinese decline.

Chinese children are taught in school and the open sore is endlessly scratched at that the period 1830-1945, generically referred to as the 100 years of humiliation, was an intolerable aberration and China’s place at the apex of all things is a rightful entitlement that must be restored to bring the universe back into harmony.  Even today many Chinese like to believe that Western wealth is not legitimate and was stolen or taken illicitly from the Asia region.  The western industrial revolution or the computer revolution never occurred.

Disrespectful and rapacious westerners

While Chinese propagandists readily admit lack of internal cohesion in China was a factor in such a turn of events it is nonetheless those disrespectful and rapacious westerners (or western influenced) who are to blame and even today they need to be taught how to respect their betters. Putting all else aside when it comes to the sensitivities of respect the Chinese definitely play the long game.

The recent growth of the Chinese economy, particularly since the 1990s was not due to any new or ground breaking economic narrative. Aside from a large very cheap subsistence peasant work force, exchange rate manipulation and short sighted western firms sending millions of western jobs to China it is very hard to identify any clear value proposition China has introduced to the world economy thus far. Global Wealth has been moved around but a proportional increase in new wealth created? It’s hard to see.

Moving the deck chairs

Some point to the global increase in world trade as evidence of Chinas positive contribution but we must keep in mind that goods once manufactured in the west (and thus traded internally) are now manufactured in China and thus are traded externally and therefore measured as international trade. Moving the deckchairs back and forth does not equate to a net gain.

The China proposed Belt and Road initiative is based around six corridors or land bridges emanating from China to six geo-economic regions around the wider Eurasian land mass.  That is, Mongolia/Russia, Eurasia, Central Asia, Pakistan, Bangladesh India, Indo China.

The Chinese maritime trade routes to, for example, Africa elsewhere appear to remain unchanged.

These connections are a mixture of rail/road transport, pipelines for gas & oil with relatively minor reliance of air/sea transport. The central thesis behind all this is the view that if goods transport can be sufficiently reduced in price on a per kilometre and/or “time in transit basis” then a boom in trade will follow. Rather courageously the various Chinese Government commissioned reports and studies assert transport costs rather than tariffs or exchange rate variations is the key if not the only determinant to increasing trade.

Like most grand visions the practical details and interconnecting unavoidable realities are not so much in evidence even as talking points.

What’s in it for Australia?

Let’s assume for the moment that the entire Chinese initiative comes to pass and all those proposed trade corridors are in place. Would Australia benefit and if so how?

Utilising the land bridges China would have easier access to many of the raw materials Australia currently supplies and so we could reasonably suspect with so many new suppliers entering the world stage exports of iron ore and coal for example would decline considerably both in volume and price.

Similarly, food exports particularly the bigger ticket items such as grains could very well face new competitors. Grain growing regions that perennially suffer storage/shipping and spoilage problems may, with access to nearby cheap transport, become viable exporters and they are mostly low wage low cost of living economies who could not only supply bulk grain but may be able to do so at a price Australian farmers would struggle to match.

But we get ahead of ourselves. Is the Chinese Belt and Road initiative even do-able on the balance of probability and at what cost? How long would it take before the first piece of freight was shipped?  What may be the collateral damage not only in the directly affected regions but to world trading flows and geopolitical balances generally?

History of instabilit 

Such a mammoth undertaking just from a civil works perspective would run up bills well into the trillions.  Some of the regions the corridors are to pass through have a history of instability suggesting Chinese soft or influence peddling power would be backed up by Chinese troops on the ground ostensibly to protect assets or workers.

To ensure a return on assets of such a huge investment the Chinese state will require long term monopoly control of many links in the supply, transport and production chain. This will inevitably include purchase or “acquisition” of corridor and agricultural and/or mining land under conditions stridently favourable to Chinese interests.

Governments along the various corridors will have the capacity to disrupt the entire supply line whether due to animus, sick of being pushed around or taxation policies incompatible with Chinese interests.  It is not unreasonable to speculate upon the likelihood only Governments with policies and attitudes approved of in Beijing will be tolerated.

The labour force required would run into the hundreds of thousands with the need for remote housing and feeding which is very expensive. From a cost perspective it is difficult to see that anything other than Chinese convict chain gangs or some approximation of will be used to do the bulk of the labouring work.

Is it possible China is about to enter a phase of mass jaywalking arrests requiring two years on a work site as penalty?

Element of risk

The funds to underwrite the works, the rolling stock and carriages will be borrowed money relying very heavily on low interest rates to ensure an ROI.  Given the long term ROI timeline lenders must surely price in an element of risk or the entire undertaking must be shielded from all market forces and other inconvenient pricing pressures.

It is not impossible to conceive a scenario where prices needed to ensure viability one day may exceed market prices but participation and high user pays structures are forced upon those in and around the corridor. Troops protecting assets can also be employed on other activities.

The Chinese civil works sector is not renowned for their quality work or use of quality materials and like all concentrations of money such as that construction necessitates attracts corrupt skimmers and rent seeker hacks which will be in prominent abundance adding costs.

The overall project costs could easily blow out substantially affecting the underlying economic rationale of the exercise. Moreover, due to low quality construction the cost of ongoing ownership and maintenance could easily outstrip the building cost and have an unforeseen impact on user price schedules.

Variables and uncertainties

Initially at least the raw materials required for construction would be vast and here Australia may benefit handsomely. When all that building is completed however the future for Australian mining and Australian economy generally is less certain.

The variables and hence the uncertainties are many and we must all prognosticate with appropriate caution. Yet by definition this initiative cannot be a market driven exercise or one driven by market forces.  As currently proposed all roads will lead to and from China thus from a geo-economic perspective it is tantamount to a type of monopoly and therefore not ultimately subject to market forces.

How desirable can such a proposition be whether in practice or as an exercise in text book economics?

It is difficult to see on a prima facie basis that Australia will gain any long term advantage or benefit from the Belt and Road in isolation and any effect will more likely be negative than positive.

That is it ultimately may very well bleed wealth away from the Western economies, Australia included, at a faster rate than the overall economic pie increases in size.

David Gray is lead consultant at Digital Information Partners offering specialist services in media and press relations in Australia and internationally. www.diginfo.com.au

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