Free Novel Read

Belt and Road Page 10


  In May 2018 a high-level US delegation was sent to Beijing to negotiate the terms of a grand bargain. The draft agreement provided by the American side in advance of the visit—never made public—included a clause mandating that China would immediately “cease providing market-distorting subsidies and other types of government support that can contribute to the creation or maintenance of excess capacity in the industries targeted by the Made in China 2025 industrial plan.” China said “big differences” remained as the US government delegation headed home. “There’s no space for negotiation on China’s development,” said Ruan Zongze, executive vice president at Beijing’s China Institute of International Studies, a think tank affiliated with the Foreign Ministry. “China has to progress, and it’s unstoppable by anyone.”

  The shock waves from this clashing rhetoric were already being felt all over the world. In one of the most extraordinary examples reported at the time, a ship carrying sorghum, loaded with the grain in Texas and bound for Shanghai, suddenly performed a U-turn in the Indian Ocean when China announced a 179 per cent tariff on imports of sorghum. The vessel’s destination was changed to Cartagena, Spain, but according to imaging data, it never docked. On May 18, as a provisional deal between the two trade giants seemed in sight, China scrapped its anti-dumping and anti-subsidy probe into sorghum. The same day, the RB Eden began sailing back across Gibraltar, bound for Singapore.

  At the end of May the US government announced it would move to implement previously threatened tariffs after June 15, with Beijing quickly promising to reciprocate. US commerce secretary Wilbur Ross and vice premier Liu He did not issue a joint statement after they wrapped up two days of discussions in Beijing. The previous round of talks, held in Washington two weeks earlier, ended with only vague promises by Chinese officials to reduce their country’s trade surplus with the US. The focus of the Beijing discussions was exclusively on narrowing the trade deficit, with a particular focus on energy exports.

  As announced, the opening salvoes of the trade war were launched on July 6, with 25 per cent tariffs on $34 billion in Chinese goods being applied at midnight, followed by another $16 billion two weeks later. China retaliated with measures of equal magnitude that took effect as soon as it confirmed the US had indeed fired the first shot. “The Chinese side, having vowed not to fire the first shot, was forced to stage counter-attacks to protect the core national interests and interests of its people,” the Chinese Commerce Ministry said in a statement. “The United States has started the largest trade war in economic history.” Censorship instructions, issued to the media by government authorities and subsequently leaked, were more explicit: “The trade conflict is really a war against China’s rise, to see who has the greater stamina. This is absolutely no time for irresolution or reticence.” The same instructions placed a ban on further use of Made in China 2025: the plan had set off alarms bells in the United States and contributed to turn much of the American foreign policy establishment against China. President Trump raised the stakes, threatening to extend levies to all $500 billion of goods imported from China in a blunt outline of his plans to escalate the fight.

  Just as in May, a ship—this time carrying soybeans—gave a less abstract image of the developments. Peak Pegasus was expected to arrive in Dalian on July 6, the same day that China was to impose its retaliatory tariffs on imports from the US. Since China is twelve hours ahead of Washington, the cargo had to reach Dalian before noon local time to beat the tariffs. Internet users in China offered encouragement and support to the cargo, which had left Seattle on June 8, a month earlier, as it became uncertain whether it would dock and unload its cargo before noon. It did so at 17:30, missing the deadline by just a few hours.

  On September 17, 2018, President Trump announced a second phase of additional tariffs on roughly $200 billion of imports from China, set at a level of 10 per cent until the end of the year but expected to rise to 25 per cent after January 1. The statement from the White House again described the tariffs as a response to practices and policies deemed a grave threat to American economic interests—practices that China showed no willingness to change. Any hopes of an agreement were quickly receding, even as the two economies started to show signs of stress from the ongoing confrontation.

  A trade war is particularly dangerous for China because it risks impairing the very engine of its remarkable economic success in recent decades: China’s centrality in global manufacturing value chains. With value added in China making up only a small percentage of the final price, tariffs can have a crippling impact, making it unprofitable for global companies to locate production stages in China, especially final assemblage, which are far more vulnerable to tariffs. And since one of the most immediate and ineluctable results of a tariffs war is a decline in China’s exports and foreign exchange income, an initiative as ambitious as the Belt and Road will become increasingly hard to finance.18

  * * *

  No doubt China could have access to commodities extracted in developing countries or the technology from developed nations without the Belt and Road, but the process would be subject to the normal operation of market mechanisms. What the Belt and Road does is increase China’s control over the way value chains are organized and grant it the power to reorganize them on better terms. To give the most obvious example, the Chinese economy still has to rely on a steady supply of foreign-made semiconductors, the heartbeat of the internet of things and the industrial factories of the future, a fragility made evident when the giant electronics company ZTE was taken to the brink of extinction after the Trump administration temporarily banned it from buying US-made components such as chips. In a speech two years earlier, Xi Jinping had berated China’s dependence on foreign suppliers for critical components and key technologies.

  The concept of power is central to the global value chain approach. After all, if the value chain is not organized from above, it is just a set of more or less episodic market relations. In reality, we find that value chains operate according to strict parameters, enforced by what the academic literature calls “lead firms,” who undertake the functional integration and coordination of internationally dispersed tasks. Other actors or firms in the chain must follow their guidance, as in the case when large global retailers control the production of agricultural products in the developing world, even when they do not own the farms or the packing facilities. These retailers tend to take ownership of the product only when it arrives at the regional distribution centers in Europe or the United States, but that does not stop them from controlling what happens at earlier points in the chain.

  Lead firms derive their power from a combination of factors that can include their dominance in retail markets, their easy access to capital, their ownership of brand names, and their command and control over critical technologies. These firms are thus able to shape global value chains, control the locations of production and the distribution of value throughout the chain and directly affect the position of other actors along the chain. This is not contradicted by the fact that lead firms often delegate part of the organizing function to key suppliers, who take on the role of orchestrating flows of products, capital, managers and supervisors, and in some cases workers, across diverse production locations across the globe and increasingly shape the geography of the global value chain.

  One of the easiest ways to understand how global value chains denote relations of power that tend to operate outside the sphere of political relations is to note that the opening up of markets and the removal of trade barriers is often immaterial for producers in developing countries, who can export to North America and Western Europe only to the extent that they gain access to the lead firms in global value chains. For them it is less a question of entering Western markets than of entering Western-led value chains.

  Control over the full extension of the value chain multiplies the power that can be exercised at each stage. For example, it is because China now sits on a large portion of the shipping value chain—from buildi
ng a ship all the way until it calls at the port—that it is increasingly able to command better deal terms and wrestle contracts from more established firms. When a French carrier recently placed an order for nine large container ships at Chinese yards—reputedly worth $1.5 billion—it was understood that they picked China over South Korea in large part because the deal included attractive rights to operate piers and containers at some of the large network of ports built and controlled by Chinese companies. It is by leveraging the full power of the value chain, starting from infrastructure, that Chinese shipping yards are moving upwards to more sophisticated vessels and not just simple bulk carriers, which have thus far been the country’s staple. Ports form part of the strategic network that controls supply chains. Control over a port means power over which ships get priority in allocation of berths and port services. In times of conflict, this could include the power to block ships.19

  The United States and Europe have benefited enormously from being home to some of the lead firms in global value chains. Now they face a number of difficult questions. First, many American and European multinationals may see their supply networks erode as China emerges as a rival buyer and producer. For example, China has already replaced France as the importer of choice for timber from Gabon. In time, important countries in European-led value chains may be recruited for Chinese-led rivals. Second, Western companies may find themselves directly competing with China in high-value markets, especially if China can organize its own global networks, and losing important streams of revenue from controlling the standards used worldwide. Finally, the United States and Europe face a third variable, one that is not primarily about the losses they will incur when Chinese companies start to be better represented in high-value segments of production. The principal issue is what set of rules will govern the way these value chains are organized.

  The Chinese model is to conduct this organizing process as much as possible at the political level, through agreements reached directly between national governments. If we take the case of the automobile industry—the best example of an industry radically transformed by the global value chains revolution—the prevalence of joint ventures may indicate a unique developmental model, in which foreign and Chinese automakers cooperate in building highly efficient value chains. Joint ventures are legal partnerships between a domestic firm and a foreign investor to form a new operation in the domestic market and typically involve widespread use of proprietary technologies, intellectual property, and advanced production methods. This model was extremely successful in China, less so elsewhere. To gain a foothold in an overseas market, international automakers generally prefer direct exports, or to set up wholly-owned corporations. The establishment of joint ventures has often been a compromise for the foreign firms, and indicates strong negotiating power on the part of the host country—in this case China—which sees it as a way to force technology transfers. In other words, China deliberately avoided both the Mexican and the Korean models of subordination to large foreign firms or autonomous national development, opting to integrate its automobile industry in global value chains while preserving control over the process. Revealingly, in China enterprises owned by the central government all set up international joint ventures, while national car-makers are all private companies.20

  The Belt and Road takes this strategy one step further. Hu Huaibang, Chairman of the China Development Bank, has argued that the most important goal of the Belt and Road is to help China undergo economic structural reform and upgrade its industries, moving away from a cheap, mass manufacturing model: “On the one hand, we should gradually migrate our low-end manufacturing to other countries and take pressure off industries that suffer from an excess capacity problem. At the same time, we should support industries such as construction engineering, high-speed rail, electricity generation, machinery building and telecommunications to compete abroad.”21 The explicit goal is to support what Chinese decision makers call “international capacity cooperation.” The countries along the Belt and Road have different resource endowments and strong economic complementarities. The key to the success of the initiative is to make use of comparative advantage. Most of the countries along the Belt and Road are in the early stage of industrialization and have insufficient funds, while advanced economies are in the late industrialization stage and specialize in high-end technology. China is the Middle Kingdom. It has entered the middle period of industrialization, but its sheer size and financial clout make it an exceptional case. Financial cooperation under the Belt and Road framework can leverage China’s capital and capital strengths and promote the use of capital to promote “capacity cooperation” and optimize the distribution of global value chains. As Jin Qi, Chairman of the Silk Road Fund, put it, “financial support should be the main driving force for international capacity cooperation.”22

  A document prepared by the National Development and Reform Commission and the China Development Bank—never made public and the subject of wild speculation—gives a clear sense of the scale and ambition of the Belt and Road in Pakistan, arguably the country where the initiative is moving faster. The plan envisages a deep and broad penetration of almost all sectors of Pakistan’s economy by Chinese companies and its wholesale reorganization to fit with Chinese-led value chains. “With a decrease in the workforce and increase in labor costs in China, its manufacturing industry has to handle key problems in transformation and upgrading. However, the demographic dividends of Pakistan provide an important basis for development of the manufacturing and service sectors. Chinese manufacturing enterprises relocate their factories to Pakistan for lower labor costs and greater internationalization. This also promotes the upgrade and reconstruction of the manufacturing industry of Pakistan and creates many employment opportunities for the local people.”23 A key element is the development of new industrial parks, surrounded by the necessary infrastructure and a supporting policy environment. Chinese plans for Pakistan are focused on agriculture and low-tech industry, advancing a pattern of specialization where China can move into higher-value sectors and segments. It is only in agriculture that the plan outlines the establishment of entire value chains in Pakistan, including the provision of seeds and pesticides. The favored steering mechanism is credit, with those companies interested in the agriculture sector being offered free capital and loans from the Chinese government and the China Development Bank.

  Ten key areas for engagement in the agriculture sector are identified along with seventeen specific projects. They include the construction of one NPK fertilizer plant as a starting point “with an annual output of 800,000 tons”. Meat processing plants in Sukkur are planned with annual output of 200,000 tons per year, and two demonstration plants processing 200,000 tons of milk per year. In crops, demonstration projects of more than 6,500 acres will be set up for high yield seeds and irrigation, mostly in Punjab. In transport and storage, the plan aims to build “a nationwide logistics network, and enlarge the warehousing and distribution network between major cities of Pakistan” with a focus on grains, vegetables and fruits. Storage bases will be built in Islamabad and Gwadar in the first phase, then Karachi, Lahore and another in Gwadar in the second phase, and between 2026–2030, Karachi, Lahore and Peshawar will each see another storage base. In 2015, China imported $160 billion worth of agricultural products. Pakistan’s share in these exports was minuscule—less than half a percentage point—despite having a large agrarian base and a shared border with China. The Belt and Road will change this, but if agriculture becomes a central plank of the initiative in Pakistan that cannot but raise concerns about premature deindustrialization.

  The plan also shows interest in the textiles industry, but its focus is in yarn and coarse cloth, which can serve as inputs for the higher-value segments of the garments sector being developed in Xinjiang. It is suggested that some of the Chinese surplus labour force could move to Pakistan, while the establishment of international value chains is described as the model of “introducing foreign capital and
establishing domestic connections as a crossover of West and East.” This seems to be a reference to the West’s model of investing in China as a way to make its value chains more competitive, a model that the Chinese authorities will now attempt to replicate in Pakistan.

  Xinjiang has become one of the most competitive and rapidly developing textile zones in China, even compared with Vietnam and other regions of Southeast Asia. The industry output value is planned to increase from 30 billion yuan in 2014 to 400 billion yuan in 2023. Xinjiang is the nearest region of China to Europe with the shortest and most cost effective transport time: an international freight train through Xinjiang takes only twelve days to reach Germany. The overall equipment performance of the Xinjiang textile industry is relatively high. The equipment of leading enterprises has reached an advanced level, and key equipment such as blowing-carding machinery, combing machines, automatic winders and shuttle-less looms have a higher utilization rate than China’s national average. Thus “China can make the most of the Pakistani market in cheap raw materials to develop the textiles and garments industry and help soak up surplus labor forces in Kashgar to develop the city into an industry cluster area integrating textiles, printing and dyeing, cloth weaving and garment processing.” By 2023, Xinjiang will become the largest cotton textile industry base of China and the most important clothing export base in Western China. The largest city, Urumqi, will turn into the fashion capital of Central Asia.