Re: Silk Routes versus Sea Lanes

Silk Routes versus Sea Lanes

The Return of Landlubbers

http://www.epw.in/strategic-affairs/silk-routes-versus-sea-lanes.html

 

The Chinese strategy is to build rail and road links over the Eurasian landmass to escape the vice-like grip over maritime trade routes exercised by the United States and its allies. An exploration of the possible consequences, drawing on history, for China, the Western powers, India and the global trade and military architecture.

Atul Bhardwaj (atul.beret@gmail.com) is ICSSR Senior Fellow at the Institute of Chinese Studies, Delhi.

Grapes from Astana can reach Amritsar in just 28 hours by train through Pakistan—a fact recently reinforced by an economist from Tajikistan¹ in his talk about land routes connecting Central Asia to India. A few years ago, the idea itself would have been relegated as impractical to a mind conditioned to think of international trade as synonymous with ships and sea lanes of communication (SLOC). Until, of course, the Chinese proposed their signature idea of "One-Belt-One-Road" (OBOR) which is fast gaining currency.

For long, the Chinese story was devoid of ideas that could develop an emotional rapport with the world. OBOR has injected a new dimension to the Chinese growth narrative. The primary aim of OBOR is to connect China with Europe through Central Asia and Russia. The purpose is to limit the maritime component in the global supply chain and thereby reduce dependence on the international merchant fleet of bulk carriers and tankers.

Beijing understands that making Southeast Asia the world's factory and building international financial infrastructure like the Asian Infrastructure Investment Bank (AIIB) are not adequate to lead the global economy, what is equally important is control over the channels through which business travels.

Rediscovering Land

On 9 December 2014, a cargo train which started its journey from the manufacturing hub of Yiwu (close to Shanghai) reached the Spanish city of Madrid covering about 8,000 miles. The world's longest rail journey passed through China, Kazakhstan, Russia, Belarus, Poland, Germany and France. It took 21 days to complete this maiden journey, less than half the time it takes to travel by sea. According to freight experts (Ian 2014),

sending a 10-tonne 40-foot container from Chengdu, China, to Lodz, Poland, takes 12 to 14 days by train, compared to several days by plane (if you include customs and delivery on each end) and some six weeks or longer by boat. The price tag comes to some $40,000 by air, compared to $10,000 by train, and as low as $5,000 by boat.

As the length of the train increases and more powerful engines are added, time and costs are likely to fall considerably. Several other Chinese manufacturing centres are already connected to the German cities of Hamburg and Duisburg and to Rotterdam in the Netherlands. This time–space compression is ushering in a new phase of globalisation that promises to be more inclusive than the previous ones.

OBOR is not purely land based; it also has a maritime component. The ports and harbours in Indonesia, Africa, Myanmar, Bangladesh, Pakistan, Sri Lanka and possibly India are part of the scheme to shorten sea time that the to-and-fro trade from West Asia and Africa has to traverse to reach China. This ensures that China-bound oil first lands at Gwadar port in Pakistan or at Kyaukphyu port in Myanmar, from where it is carried through tankers, pipelines and rail network to western China, thus opening up new vistas to create wealth for populations all along routes that have remained backward for centuries.

Generally, ocean trade between two ports bypasses many nations along the passage. For example, oil coming from West Asia to China using the conventional SLOCs is largely a bilateral transaction that benefits few littorals en route. OBOR, backed by $140 billion funds, is creating a comprehensive network of ports, railways and roads that would open up new business synergies all along the route.

The question is, why is China diversifying trade routes? Why cannot the Chinese continue to use the well-established SLOCs? If their goods can easily ply on relatively peaceful high seas then why do they want to move them through well-populated national territories? Why are the Chinese increasing their vulnerabilities by increasing the number of stakeholders along the proposed trade routes? One plausible answer is that Chinese trade does not feel safe using American-dominated SLOCs. An economic reason could be the desire to garner a greater share in the global service sector that is currently under American dominance.

Reopening the old silk route is an open defiance of the American "command of the commons." Commanding the commons entails controlling the $375 billion shipping industry and the shipping insurance and reinsurance business, that includes vessel hull, war risk and cargo insurance premiums. This business has been the bedrock of the Western dominance of the world. The Chinese challenge is non-confrontationist, to the extent that it does not involve naval battles to physically dethrone the United States (US) from the command.

This raises an obvious question, if China is turning its back on the oceans then why is it investing in building a blue water navy? The Chinese are building more surface ships than submarines because they see medium navies as a diplomatic force that is used more for advancing flag showing than fighting wars. According to media reports, China plans to have 351 ships by 2020 and every year it is building or launching roughly 60 naval ships. The Chinese are building warships merely as a show of capability much in the same fashion as the US had built a large cruiser in 1925, merely to puncture British naval vanity. Another reason seems to be to induce America to spend more on its navy.

The Chinese also do not seem to want to meddle with the well-protected Anglo–American insurance markets. The Chinese strategy hinges on bringing down the usage of oceans for trade. Once trains and road links become extensive, global trade will not employ 55,000 ships to move cargo. Lower volumes will lead to a sharp fall in the revenue generated from insurance and reinsurance premiums that accrue to the Western world and also have an impact on the derivatives market at the London-based Baltic Exchange. Reduced trade through oceans will automatically lead to decline in the importance of Western navies. This would hit the maritime nations hard. The pain will aggravate when Chinese capital creates more favourable insurance and reinsurance regimes and fragments the market along the new trade routes that it is creating.

Exporting Development Models

Many analysts have compared OBOR investments with the $17 billion Marshall Plan that the US had executed for Western Europe in the aftermath of World War II. However, the two are fundamentally different because the historical context in which the Marshall Plan was conceived is totally at variance with circumstances in which OBOR is germinating. The former was a by-product of war and a superpower's geostrategic game to contain the Soviet footprint in Europe by giving a fillip to Western war-devastated economies. On the other hand, OBOR is promoted by China, which is not yet a superpower and is not using war surpluses to catapult itself to a hegemonic position. The Chinese initiative is more towards creating a multipolar world by breaking the Anglo–Saxon vice-like grip over global trade.

When America was at the stage where China is today, they talked about the need for political reform in the world. Promoting anti-colonialism and cultural nationalism in the 1940s, established America on a moral high ground. The only tangible economic model of development that depression-ravaged America gave to the world was the Tennessee Valley Authority (TVA). TVA, a multipurpose river valley development project, introduced new techniques in flood control and exploitation of vast water resources for electricity generation. It was a mixed economy model that helped "restructure capitalism through Keynesian inspired state-directed planning," (D'Souza 2003: 86). It gave fresh impetus to industrialisation and dams became "symbols of modernisation, national prestige and of human dominance over nature" (Baghel and Nüsser 2010: 233). David E Lilienthal's book TVA: Democracy on the March was used to romanticise the concept and project it as an example of "grass-roots democracy."

In a matter of few years the idea of TVA reached India in the form of the Damodar Valley project. Its Chinese version was called the Yangtze Valley Authority (YVA) under Chiang Kai-shek. However, unlike OBOR, TVA was devoid of capital and all that the idea brought with it was American experts and multinational companies to draw money out from former colonies.

The twin factor that differentiates China's rise from that of the US is the role that the American military and private capital played in influencing the contours of the postcolonial order. America emerged on the global stage after two bloody wars. The entire post-war planned development and industrialisation model that America introduced to the world was designed to cater to the war industry. Therefore, the American military–industrial complex played a massive role in shaping the post-war world order. Currently, the Chinese government has kept its Peoples' Liberation Army and its billionaires, who control 3% of Chinese wealth, on a tight leash.

When Britannica Ruled the Waves

To understand the nuances of the critical changes that China is introducing to the international political economy, one needs to peep into history; the way the British closed traditional land routes and introduced the notion of "landlocked" in transnational exchanges. As Nimmi Kurian argues in India-China Borderlands (2014: 30), the British security establishment created the concept of "buffer zones" on borders that "flew in the face of both economic logic and social reality."

China, a continental power in Asia, was dissuaded from using the Silk Road and forced to open its ports through a series of "Opium Wars" and the invasion of Tibet. China resisted but eventually relented due to domestic strife created by the decline in trade. For the British it was essential to use their navy to make ocean routes more attractive, because since the 18th century "navy and credit" had been the bulwark of their global reach (Kennedy 1981: 46). By the middle of the 19th century, the British lost monopoly over manufacturing with the rise of Germany, the US and Russia. In 1870 the United Kingdom (UK) contained 32% of the world's manufacturing capacity; this share was down to 15% by 1910 (Kennedy 1981: 47).

Undeterred by changed circumstances, the English used their capital to underwrite the ocean trade. They encouraged free trade and earned money by extending services like shipping, insurance, commodity-dealing, banking. By 1914 they had reached a stage where the Lloyds of London provided insurance cover to German merchantmen that were sunk by Royal Navy guns. The fall in international trade in the wake of the Great Depression of 1929 led to a fall in British annual earnings from shipping, commissions, insurance and overseas investments; they fell by some £250 billion (Kennedy: 53).

America is palpably perturbed by the development of the AIIB and the OBOR. These twin Chinese creations are likely to do to America what the two world wars and the Great Depression had done to Britain. These could reduce their share of global service trade, which currently is double that of China (Romei 2014). The reduced shipment of oil from West Asia to America due to the shale gas revolution and the growth in renewable energy avenues coupled with new trade routes will cause a severe dent in American revenues. It is for this reason that America is mobilising its allies to refrain from joining Chinese-led initiatives.

One wonders what America will do to stem the slide. Will America go to war, relying on the money and goodwill of its allies? The UK also entered the World War II on borrowed money—both India and the US extensively lent money and equipment to the UK to fight the War; which it won but Britain was bankrupted. Will India be the American ally in a misadventure that takes on China?

India's Stakes

It is indeed hard to understand the logic behind some analysts who are insisting that border security and settlement with China should take precedence over economic ties. In effect these analysts are suggesting that India should refrain from joining the OBOR initiative. In fact, it would be more relevant for India to first figure out what she stands to gain by sustaining the primacy of sea lanes of communication in global trade. Collectively, India neither has much stake in marine insurance and reinsurance industry nor is it a global shipbuilding hub that is likely to lose business due to opening up of land routes.

Unlike the British military officers, who raised the bogey of border disputes in order to close land routes and direct trade to the oceans, the India of the 21st century has no such commercial strategic objective to meet. Despite proximity to seas and a reasonably strong navy, India does not enjoy much leverage to guide ocean trade markets. Therefore, it is prudent for India to join the unlocking of borders, and seek fresh avenues to do business in an environment that is relatively free of its erstwhile colonial masters and their cohorts. It is in the interest of multipolarity that sea lanes are subjected to some competition by the land lanes.

Note

1 Khojamahmad Umarov, Department of Macroeconomic Research, Institute of Economic Studies of the Ministry of Economy and Trade, Republic of Tajikistan, talk at ICS, Delhi on 22 April 2015.

References

Baghel, R and M Nüsser (2010): "Discussing Large Dams in Asia after the World Commission on Dams: Is a Political Ecology Approach the Way Forward?", Water Alternatives, 3(2): 231–48.

D'Souza, Rohan (2003): "Damming the Mahanadi River: The Emergence of Multi-purpose River Valley Development in India (1943–46)," Indian Economic Social History Review, 40; 81.

Ian, Mount (2014): "Spain to China by Rail: A 21st Century Silk Road Riddled with Obstacles," Fortune, 24 December, available at http://fortune.com/2014/12/24/spain-china-rail-trade/accessed on 10 January 2015.

Kennedy, Paul M (1981): "Strategy versus Finance in Twentieth-Century Great Britain," The International History Review, Vol 3, No 1, January, pp 44–61.

Romei, Valentina (2014): "China and US Battle for Trade Leadership," Financial Times, 10 January, available athttp://blogs.ft.com/ftdata /2014/01/10/china-and-us-battle-for-trade-leadership/, accessed on 12 January 2015.