China’s belt and road is integrating countries in Asia, Africa and Europe into China’s financial, industrial and infrastructure model into one global value chain

The ultimate purpose of the Belt and Road Initiative is deep economic integration through the development of global value chains. Importantly, the initiative is supposed to abide by market rules. Either geopolitical considerations were never taken into account or everything in the Vision and Actions document was carefully checked and revised to make it read like a business plan.

even in the milder forms of expanding Chinese soft power. Issued in March 2015 with the clunky title “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road,” the paper offers a vision of greater economic integration between mutually complementary economies. Such integration is meant to promote the “orderly and free flow of economic factors, highly efficient allocation of resources and deep integration of markets.”

Global Value Chains

Patterns of international specialization and division of labor are particularly relevant in the age of global value chains. Today, very few products are manufactured in a single country. A country’s manufacturing imports are more likely to be intermediate goods—that is, commodities, components, or semifinished products that a country uses to make its own products. These could be final products or new segments in a global network of producers and suppliers. Global value chains can become so complex that imports can also contain returned value added that originated in the importing country. In China, nearly 7 percent of the total value of imported intermediate goods reflects value added that originated in China. For electronic goods, Chinese intermediate imports contain over 12 percent of returned Chinese domestic value added.

The Belt and Road Initiative is the first example of “transnational” industrial policy. “Formerly, all industrial policy was national,” he said. He has a point, as even the European Union, when it created an ambitious transnational framework of rules and institutions, tended to abandon industrial policy on the grounds that such a policy could not be reproduced at a transnational level.

The image of the original Silk Road is particularly misleading in this context, as indicated by the inclusion of the small code words “belt” and “road” in the names of the project’s two components. The land element is called a belt to pinpoint that its ultimate goal is the creation of a densely integrated economic corridor rather than a transportation network linking two points. The maritime road is meant to adapt sea transportation to new patterns of global trade.

Ernst and Young had a 32 page document looking at how business can leverage the belt and road initiative.

Transportation and communications networks are no doubt a precondition for the development of global value chains. But the crucial element is the set of industrial policy decisions by which countries strive to move into new chains or segments in an already-occupied value chain. To avoid the middle-income trap—a situation in which a country becomes stuck with its previous growth model after attaining a certain level of income—and speed up the process of moving into higher-value segments, China wants its industrial policy to be sufficiently coordinated with those of countries that occupy other segments and chains. In return, China can offer cheap financing and its experience of an economic model that has proved very successful in boosting industrialization and urbanization on an unprecedentedly fast timescale.

Take the case of the steel industry. Hit by falling steel prices, the performance of China’s steel industry has been sharply decreasing. The industry generated a sales revenue of 7.2 trillion yuan ($1.1 trillion) in 2015, down 13.9 percent on the previous year, and a total profit of 97.2 billion yuan ($14.3 billion), down 60 percent. Chinese policymakers are aware that some of the industry will have to move abroad, and they have started looking at Central Asia, with its lower production costs, as a possible destination. As governments and the private sector in the region invest in energy development, transportation infrastructure, and residential construction, the demand for steel products in Central Asia is expected to boom in coming years, but Chinese producers have to compete with Russian, Turkish, and Ukrainian steel enterprises that benefit from easier trade regimes. These competitors would lose that advantage if Chinese companies established steel production units in Central Asian countries, which are rich in mineral resources and have low labor costs. In the integrated framework of the Silk Road Economic Belt, new transportation infrastructure could both boost demand for steel and prepare the ground for China to import steel from Central Asia as it moves into higher-value products and value-chain segments.

Chinese companies have built 46 cooperation zones [industrialization zones] in countries along the routes, while China’s Ministry of Education has inked over 60 deals with those countries, according to Zhao.

In 2015, nearly half of the international students in China came from countries along the routes, Zhao added. Nearly 400,000 foreign students from 202 countries and regions came to study in China in 2015, data showed.

Meanwhile, China was building more railways, highways and ports along the routes while sealing more MOUs with its neighbors and partners.

SOURCES- Carnegie Endowment, China National Development and Reform Commission, China Daily, EY