China’s Belt and Road Initiative: International Trade’s Transportation Solution?

Infrastructure projects are often seen as an important vehicle for economic growth. One of the largest ever attempts at such a project, China’s Belt and Road Initiative (BRI), has allotted massive resources to building infrastructure. Costing an estimated one trillion U.S. dollars, the BRI includes major investments in thousands of miles of highways and railways, as well as other sectors, in an effort to connect large swaths of Asia, Africa, and Europe. While BRI’s tangible impacts are already coming into focus, much media coverage and academic research frame BRI as evidence of China’s attempt to expand its sphere of influence. Many analysts also predict a gloomy future for the BRI because of foreign resistance and China’s own domestic economic downturn.

However, a recent study by Hui Lu, Charlene Rohr, Marco Hafner, and Anna Knack from RAND Europe zeros in on one of the project’s originally-stated and most important goals: BRI’s contribution to regional trade growth through facilitation of transport connectivity.

Using data from the World Bank, UNCTAD and CIA World Factbook, the authors conducted a broad analysis of multimodal transport connectivity and infrastructure. Specifically, they measured the quantity and quality of connectivity within and across countries using airport, road, and rail density metrics, alongside maritime and logistics performance indices. They then measured the impact of the BRI on multilateral trade and regional economic development.

Their wide-ranging study presents several key findings. First, the authors identify a positive and statistically-significant association between transport infrastructure and connectivity and bilateral trade. Second, at the proposed level of investment in transport infrastructure in the BRI region, the authors project that total trade volumes could increase not only in the BRI region, but also in areas outside the initiative.

The latter finding is especially important given that, according to the study, the BRI region linking China with Central and South Asia, Gulf Countries, and North Africa, is less dense in terms of transport infrastructure compared with many developed countries. For instance, the density of airports and railways in the BRI region is one-fifth that in the European Union. Similarly, there is significant variation in connectivity performance within the BRI region. Most BRI countries (especially in North Asia) receive relatively low scores (below three) in the World Bank Logistic Performance Index (LPI) based on feedback from private-sector stakeholders. Considering China’s strength in infrastructure construction, the authors suggest that the BRI could decrease logistic obstacles for many participating countries.

The authors used a structural gravity model to quantify the impact of improving transport connectivity and infrastructure on trade and economic development. This model estimates that the BRI region experiences a 7.3 percent increase in trade revenues when transport infrastructure and connectivity are enhanced simultaneously. In addition, the authors found that countries outside of the BRI region may benefit as well; the model indicates that the EU will likely see total trade volumes increase by 2.6 percent. Moreover, the authors highlight that improved connectivity yields larger gains for participants than improved infrastructure density.

Despite the dynamic model developed by the study’s authors, the results up to this point only reveal a correlation, not a causal relationship, between infrastructure enhancement and trade growth. The authors touch little on other potential limits, such as political instability, and their model does not explore the extent to which different sectors may benefit or lose from increased infrastructure and connectivity. Finally, there is an inevitable trade-off when BRI-region countries choose to participate in infrastructure building. For instance, Malaysia has “pushed back” against China’s investment out of concern for becoming overly indebted. With BRI still very much in the early stages and with more detailed route maps still years away, it may be a few generations before the project’s impact on international trade and transportation takes shape.

Article source: Lu, Hui, Charlene Rohr, Marco Hafner, and Anna Knack, “China Belt and Road Initiative: Measuring the impact of improving transportation connectivity on trade in the region,” Santa Monica, CA: RAND Corporation, 2018.

Featured photo: cc/(lamontak590623, photo ID: 838476004, from iStock by Getty Images)