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Why tensions are inevitable on China’s New Silk Road

by September 3, 2016 General

China today boasts one of the most capable foreign services in the world. I have learned to appreciate its young diplomats as remarkably diligent, perceptive, and acculturated. Yet, even those bright officials struggle with an increasingly pressing challenge: to reconcile China’s promise of mutually beneficial foreign relations with a reality of unequal economic partnerships. China’s New Silk Road, also known as One Belt, One Road, is set to make that problem much worse as it is, in reality, not much more than a guise for a very aggressive export policy that will inevitably spark new tensions.

A careful review of dozens of policy papers recently issued by various government departments affirms the need for an open world market and for China to cement stable economic relations with its partners. But it is impossible to comprehend how this can be squared with some of the other statements.

The general argument of the Chinese government seems to be that the world is in for more trouble, that protectionism looms, and that it has to act more vigorously to preserve the world market as a safety valve for its own congested economy.

Roadblocks and detours aplenty on China’s New Silk Road

The promotion of exports of manufactured goods remains key. For all China’s promises about rebalancing, its economy has become only more imbalanced. Last year, the trade surplus hit a record of US$293 billion. This trade surplus represents as much as 42 per cent of production in the manufacturing sector and the dependency of factories on exports continues to increase. The New Silk Road has to help China siphon off some of this glut.

In one of its notes, the industry ministry vows to defend China’s international market share in labour-intensive manufacturing, given the millions of unskilled workers at home.

One paper calculates the 20,000km of new railways in the framework of the New Silk Road could create demand for as much as 85 million tons of Chinese steel. China also seeks to increase its market share in high-tech areas, like automobiles, planes, and renewable energy. In that regard, the New Silk Road is all about penetrating markets, overcoming possible trade barriers, and supporting national companies to develop better brands and distribution chains.

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A relatively new aspiration is to boost exports of services. Thus far, services have mostly catered to China’s domestic market, but as investment in infrastructure is slowing down, firms in the sectors of construction, railway development, electricity, and telecommunications need to conquer markets overseas. China also seeks to break through in so-called new services, like finance, shipping, and airlines. Even if it already had large companies in shipping, like COSCO, the aim in this cluster is to support traditional freighting with business services: engineering, brokerage, maritime legal services and insurance, and “to compete with today’s leaders of London, Singapore and Hong Kong”.

The government is aware, however, that this push for exports has to coincide with the promotion of certain imports, of tourist services, for instance, and of raw materials. The objective remains to have more imported energy supplied by Chinese firms. The government also wants to secure minerals. It vows to map “the metallogenic belt” along the New Silk Road and highlights the need to control foreign iron ore mines. Japan, for example, covers 50 per cent of its iron imports with equity ores, thus ensuring production by Japanese firms, whereas the equivalent figure is 8 per cent for China.

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Those aspirations will make it impossible for China and its partners to build truly mutually beneficial partnerships. Out of the 34 countries along the New Silk Road, 30 already record a trade deficit. Those countries see their roles increasingly defined as raw material suppliers, which is not very convenient as global commodity prices plummet. As much as 78 per cent of the growth of Chinese imports from Silk Road countries since 2008 consisted of raw materials.

To developing countries that seek to create more manufacturing jobs, the New Silk Road does not necessarily come as a blessing either.

China provides loans for roads, but real investment in manufacturing remains very small. Only five per cent of China’s foreign investments are sunk into the manufacturing sector.

The new imbalances resulting from the New Silk Road will thus come as an even more taxing test to the agility of China’s diplomacy.

Thus far, China has mollified some of its partners with the promise of more gains, but with the gap between promises and reality growing, that may no longer be so easy.

Jonathan Holslag teaches international politics at the Free University Brussels. He is the author of China’s Coming War with Asia