Economist Brian Easton wonders where New Zealand fits into China’s plans to link better to the world

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

One of the reasons China has benefited from international trade more than India has is its better location in relation to the affluent US market – it’s just across the water. But it faces limitations in its connections to its west, especially to the prosperous European markets.

All its sea connections in that direction have to go through the Straits of Malacca, an international choke point which makes China’s supply lines vulnerable (especially for oil). There are land connections to central Asia but not only is land transport less efficient than shipping, the current ones are not particularly effective (limiting China’s ability to supply arms to Russia).

So it was hardly surprising when, a decade ago, Xi Jiang announced a program which today is called (in English) the ‘Belt and Road Initiative’ (BRI). There are other names – a frequent one is the ‘New Silk Road’, harking back to the trade routes which crossed Eurasia for almost 1700 years until they were replaced by shipping in the fifteenth century.

Exactly what the BRI encompasses is a bit fuzzy. Its land corridors include:

            The China–Central Asia–West Asia Corridor, running from Western China to Turkey;

            The New Eurasian Land Bridge, running from Western China to Western Russia through Kazakhstan;

            A corridor running from Northern China through Mongolia to the Russian Far East.

            The China-Indochina Peninsula economic corridor running from Southern China to Singapore.

            The Trans-Himalayan Multi-dimensional Connectivity Network to Nepal. (It may also improve links between China and India.)

            The China–Pakistan Economic Corridor from Western China toverland to Gwadar Port on the Indian Ocean and thence onward, including to Africa and the Middle East, thereby avoiding the Straits of Malacca. (The corridors will especially promote regional development in China’s west, dispersing industry from the coastal cities.)

The sea corridors are a bit vaguer but include improving port facilities in friendly countries in the Indian Ocean and developing, with numerous other countries, the Arctic sea routes to Europe and the east coast of North America. They are increasingly ice-free in summer as a consequence of global warming. (The latter routes are sometimes called the ‘Ice Silk Road’.)

There is also a proposal for a ‘super grid’ project of six ultrahigh voltage electrical grids across China and the rest of Asia.

I leave you to choose between calling the strategy ‘ambitious’ or ‘megalomanic’. While links have been improved none have been completed. (On the other hand if the Chinese economy seriously stutters – a not unreasonable assumption in current circumstances, but who knows – some may never be completed, given the huge capital investments that the initiatives require.)

How will these changes affect New Zealand? While there are mutterings about incorporating the Pacific into the initiative, one doubts that will be a priority. In which case our closest connection to the BRI is Singapore, almost half a world away. I suppose we may ship to Singapore to distribute in Cambodia, Laos, Malaysia, Thailand and Vietnam via the China-Indochina Peninsula economic corridor, but it is hard to see any other direct gain.

There may be indirect gains. Economics has a well-founded theory that under certain circumstances the removal of a tariff increases economic activity. Transport and other costs of distance are similar to tariffs. The effect of the BRI is to reduce those costs.

The World Bank had a crack at working out the gains. It concluded that the BRI may increase trade flows by 4.1 percent, as well as cutting the cost of global trade by 1.1 percent to 2.2 percent, and grow the GDP of East Asian and Pacific developing countries by an average of 2.6 to 3.9 percent. In my judgement, and as my Globalisation and the Wealth of Nations elaborates, the dynamic gains from trade are likely to be higher, but they take time to come on stream. For example, the impact of refrigeration would have been underestimated by the sort of models economists use.

Not everyone will benefit. While refrigeration meant a major reduction in transport costs for us and benefited British consumers, British sheep farmers suffered as we undercut their markets.

Higher incomes, especially for poorer countries, increase the demand for many of the products we export and that is where there may be the gains to New Zealand from the BRI.

There will be downsides, including environmental damage. Construction in many of the countries involved is frequently associated with corruption, resulting in expensive and poor quality infrastructure. There are already cases of major projects which are so over-budget they cannot service the loans advanced by the Chinese government or its investment banks.

Insidiously this gives China political leverage and even control. It is right to be concerned about this, but it is not new. The major choke points of the Suez Canal and the Panama Canal distorted the politics of their countries as investors and imperial nations tried to control them. I expect China to be no less involved and no more benign than Britain, France and the US have been.

Of course the BRI will extend the political reach of China. There is no way that can be avoided given the route through Pakistan to the Indian Ocean or the Eurasian land bridge through Kazakhstan. But this is really a part of China finding its place in the world.

China’s ambitions in the Central Pacific were revealed in China's Foreign Affairs Minister Wang Yi’s marathon tour across ten Pacific Islands offering a sweeping trade and security deal, intending to tie the region much closer to Beijing. However, the island states showed great caution. That will not be the last they hear from China.

The US response has been the 'Pacific Partnership Strategy' offered to 15 small Pacific Island nations in September at a White House summit. There is no trade deal but as well as the usual platitudes, there are some practical initiatives including over $US800m of aid.

New Zealand (or Australia) was not involved in either great power approach. More importantly, neither was the Pacific Forum, which is a formal collection of Pacific states (including ‘metropolitan’ Australia and New Zealand). Admittedly, the Pacific Forum is struggling at the moment with some internal rivalries, but China and the US ignoring it suggests they may be aiming to knock individual states off one by one. New Zealand’s approach seems to be that of a supporting friend listening to Pacific nations and their needs, including trade, aid and migration. (Responding to climate change is very important to those islands.)

The big US response to our part of the world is the Indo-Pacific Economic Framework adopted by 14 member states including New Zealand. It has four themes:

fair and resilient trade;

supply chain resilience;

infrastructure, clean energy, and decarbonisation;

tax and anti-corruption.

But there will be no free trade agreement; a uniform lowering of tariffs has been specifically ruled out – presumably given the mood of the US Congress. (India hasn’t been much of a trade-deal enthusiast either, although it may be incrementally shifting it position.) There is some scepticism as to whether the US deals amount to much or whether they ever will. In contrast, China’s BRI may change much of the world.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.