10 December 2016

China's $4 trillion OBOR will span 65 countries with 70% of the world's population

China’s “One Belt, One Road” (OBOR) initiative is at the center of Asia's infrastructure buildout. Geographically, OBOR could span 65 countries responsible for roughly 70 percent of the world’s population. Economically, it could include Chinese investments approaching $4 trillion.
Asia's infrastructure market is growing by 8 percent annually over the next decade, rising to nearly 60 percent of the global total. All told, the region’s infrastructure needs are estimated to exceed $1 trillion annually.

Behind these big numbers are some big questions. To begin with, how is this mega-initiative manifesting itself on the ground? Are new projects economically viable? Looking further ahead, how might these new connections reshape flows of goods, people, data and ideas? What new economic and political realities might emerge?

There are also early signs of progress on the ground. As of mid-year, 39 railways between China and Europe were operational. Last month, a cargo train completed the first trip from China to Afghanistan.

Russian officials have welcomed China’s efforts in their backyard, even suggesting OBOR could be linked with the Eurasian Economic Union. Additionally, Russia aims to increase connectivity with Azerbaijan, Iran, and India through the North-South Transport Corridor. The route could cut transit costs by 30 percent and time by 40 percent from today’s 40-day maritime journey. It will take a major step forward in the coming months, when Iran and Azerbaijan’s railways are connected for the first time.

Asia is also connecting internally, especially in South and Southeast Asia. Though primarily focused on increasing connectivity within its own borders, India is working to strengthen links with the Association of Southeast Asian Nations (ASEAN). Prime Minister Narendra Modi’s “Act East” policy aims to give India’s landlocked northeast region better access to its southern ports. It also revives the Trilateral Highway, an ambitious plan to connect India, Myanmar, and Thailand by road. Despite delays, India announced last month that it will extend the project to Laos, Cambodia, and Vietnam.

According to a study by the McKinsey Global Institute, countries with more connections to global flows of trade, finance, people, and data grow by up to 40 percent more than less-connected countries. By continuing to drive demand, a more connected and integrated Asia would also benefit the rest of the world.

A study looks at two OBOR projects: Khorgos Gateway on the Kazakh-Chinese border and the Padma Bridge in Bangladesh. The goal is not to pass judgment on OBOR’s overall prospects, which could take years to assess and even longer to fully unfold. But it begins to lay the groundwork for a more comprehensive investigation. In particular, both cases illustrate the significant economic potential of today’s projects as well as the considerable barriers they’ll need to overcome.

The Khorgos Gateway was empty but is now a key part of China’s “One Belt, One Road” initiative. This area is now home to a massive industrial zone and logistics center called Khorgos Gateway. It’s equipped with customs and immigration facilities, cranes for switching containers between different railroad gauges, and dormitories for thousands of workers.

Some have said this spot could become a “New Dubai” if rail transport between Asia and Europe takes off in the coming years. By 2020, they estimate economic activity here will have increased 20-fold, supporting 50,000 jobs. For context, that’s roughly 40 percent of the surrounding district’s current population.

But success of these new overland routes is far from assured. Compared to sea freight, rail cuts the travel time between Asia and Europe in half. However, it’s also 2-5 times more expensive, which is one reason why 90 percent of today’s international trade travels by sea. To be sure, paying more for faster service makes sense for some products. In some cases, the additional transportation cost can be offset by lower inventory costs.

At least three challenges suggest maritime shipping could remain dominant. First, the shipping industry is overcapacity, compelling shipping companies to slash costs and even merge. Second, artic sea lanes are becoming more accessible. Finally, there are trade imbalances between Europe and China that make it difficult to sustain rail operations, underscored by the fact that a significant portion of rail containers return to China empty.

Of course, each of these factors could change in the future. For example, as Asian incomes rise, demand for European exports could increase. For the foreseeable future, however, each presents a significant challenge to the viability of new Asia-Europe overland routes.

Padma Bridge

In Bangladesh, OBOR is capitalizing on previous efforts to improve South Asian connectivity. The site of Bangladesh’s largest development project is captured below. The roads and other features are part of a bridge project that was started in 2011. It is a giant endeavor, one that has required relocating over 70,000 people. According to one estimate, the bridge could boost Bangladesh’s GDP by 1.2 percent.

The bridge is also part of Asian Highway 1.

The positive impact of new hard infrastructure will depend heavily on upgrading the region’s “soft” infrastructure. Imagine for a moment that every piece of Asian Highway 1 is completed. There would still be plenty of barriers to overcome: inefficient customs procedures, laws requiring goods to be unloaded and put on local trucks, and of course, corruption.

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