China’s Belt and Road Initiative Is Changing the World

In 2013, China announced its plan to fund and construct a global transportation and infrastructure network known as the Belt and Road Initiative (“BRI”). Since that time, BRI projects have helped China to become a rival to the United States and European Union on the geo-political scene. They have also allowed Chinese companies to close the gap with their western counterparts in the global construction, engineering, advanced manufacturing, and logistics sectors. Western companies and governments need to take notice or risk being left behind.

What is the Belt and Road Initiative?

China started the BRI to replicate and expand the old Silk Road trading route, and to expand global markets for Chinese goods and China’s global influence. While the name is a bit confusing, the “belt” refers to rail, road, and other land transportation projects, and the “road” refers to sea transportation projects. Despite the confusing name, the scope and pace of BRI projects is simply amazing. The BRI now includes 71 countries and half of the world’s population, and is expected to cost more than $1 Trillion. The projects span much of Asia, Eastern Europe, Africa, and Latin America. Nevertheless, western companies in the construction industry and western governments have not given the BRI the attention it deserves.

How is the BRI helping Chinese Construction Companies Compete?

In a previous post from 2012 on this Blog, we discussed the in-roads Chinese companies were making in the construction of infrastructure projects in the U.S. in the form of pre-fabricated structural steel used in San Francisco’s Bay Bridge re-construction.  Since that post, the BRI projects have allowed China to greatly expand the sophistication and global reach of its construction and engineering companies. Chinese companies (many of which are state owned and/or controlled) receive nearly all of the construction contracts for BRI projects (more than $340 Billion in contracts to date). In 2017 the five construction companies with the largest revenue outside of their home country were Chinese and the top eight Chinese construction companies each had more such revenue than the first U.S. based contractor on this list.

Similarly, the BRI has spurred advancement of China’s domestic advanced manufacturing companies and Chinese companies have narrowed the gap with western companies on perceived quality in these areas (e.g., new massive Chinese designed and manufactured tunnel boring machinery and railroad construction equipment has been used on BRI projects).

The BRI projects are being completed at a break-neck speed and connecting previously isolated and poor parts of the world to the global economy. This is despite the serious safety, quality, and other concerns associated with these projects. The Mombasa-Nairobi railway in Kenya, Africa is a good example. It has been called “the first railway outside China built to Chinese construction standards with Chinese machinery.” Perhaps as a result of these exported standards, per a Chinese engineer working on this project, “On-site accidents are commonplace [and] ‘When they happen, they are almost always severe and often fatal.'”

While such concerns may have slowed down or endangered similar infrastructure projects by western governments or construction companies, they do not seem to have had any such effect on this project.  Instead, this project was deemed a success because it was completed 18 months ahead of schedule and shortened certain rail journeys from 10 hours to 4. It is now seen as the first step of a much larger African rail network to be built through the BRI.

How is the BRI Helping China’s Geo-Political Power?

In 2014, the U.S.A. was viewed significantly more favorability around the world than China, but by 2017 this gap had nearly disappeared. BRI projects likely played a large role in this change. The BRI has also helped China greatly increased its geo-political reach (e.g., China’s first overseas military base was recently established in Djibouti, Africa). It remains to be seen whether these positive effects are sustainable, and serious concerns certainly remain.

Concerns about BRI Indebtedness.

One major concern of the BRI is the effect of the enormous debt being taken on by the countries in which BRI projects are performed, particularly because China often requires public assets to be pledged as collateral for the loans. This gives China incredible leverage over those countries in the event that they cannot repay the loans (e.g., Tajikistan gave up its claim to 447 square miles of disputed territory in exchange for China writing off debt owed to it; Sri Lanka recently gave control over a port constructed through the BRI to a Chinese owned port operator).

Finally, Pakistan is one of the largest recipients of China BRI projects and loans, but is apparently seeking a bailout from the International Monetary Fund of prior IMF loans, leading to concerns that IMF bailout funds would be used to pay back unsustainable loans to China for BRI projects. As the scope of these projects continues to grow, so will China’s influence and leverage over the recipient countries. The long term effect could be quite large.

Conclusion

Largely as a result of BRI projects, over the past five years Chinese construction, engineering and advanced manufacturing companies have closed the gap with their western competitors on perception of quality. With the help of an ever-expanding reach of Chinese geo-political influence and Chinese government-financed projects that appear less concerned with work-place safety or similar issues, this trend will likely continue in the future. While the BRI may fizzle out over time, western companies and governments need to take note of, and take steps to counter, the new Chinese competition or risk being left behind.