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Changing Winds in Trade Dynamics

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If the 2008 Global Recession taught the world one thing, it was don’t put all your eggs in one basket. China learned this as its two biggest trade partners, the US and the European Union struggled to regain economic growth. The struggle has continued even after eight years as workers witness businesses expand operations overseas, a rising tide of immigration that could result in more competition for less jobs at home, technology and automation changing the way business is conducted. Workers felt threatened and as a result, Brexit and the US election of Mr. Trump occurred.

As its relationship with its two biggest trade partners change, China has witnessed another move as lower-labor manufacturing shifts to such countries as Vietnam, Laos and Cambodia leaving a void for the largest Asian country.

As the Western world struggles with questions of globalization, China is reviving the historic Silk Road trade route between it and Europe. First announced in 2013 by the Chinese President, the route encompasses two corridors, one overland and the other by sea, connecting China to Central Asia, the Middle East and Europe. The overall area impacted by this initiative covers about 50% of global GDP, some 4 billion people and over 60 countries.

Investing in the Silk Road

silk road freighthub-3The project is a massive undertaking as China’s government leads the way in investing approximately $40 billion in infrastructure across the region. Businesses are encouraged to invest and approximately $15 billion came from the private sector in 2015. To assist in financing the project, China led the rest of the region in creating the Asian Infrastructure Investment Bank (AIIB). In June 2015, 57 countries including France, Great Britain and Germany, signed the charter of the AIIB.

China’s motives behind the Silk Road initiative have been questioned. Some analysts suggest China is looking to diversify its trade markets while other analysts view the initiative as a move towards China establishing itself as a dominant player in world affairs.

Be that as it may, the affected regions are benefiting from much needed infrastructure projects including new roads and railroads, pipelines, ports and airports. In addition, two railroad lines now lead to Germany, one from Zhengzhou to Hamburg and the other from Chongqing to Duisburg.

Logistics & Transportation Providers’ Role

Logistics and transportation providers are certainly benefiting from the initiative. DB Cargo, for example, has signed several agreements with Chinese cities to run its rail system to Germany. CEVA, DHL, UPS, Geodis and other logistics providers have further introduced multi-modal solutions to also take advantage of the Silk Road.

Rising Trade

According to China’s Ministry of Commerce, for the first eight months of 2016, trade between China and the Silk Road countries exceeded $600 billion and represented 26% of China’s total foreign trade volume.

In addition, China’s exports to Pakistan, Russia, Poland, Bangladesh and India increased 14.9%, 14.0%, 11.7%, 9.6% and 7.8% respectively, compared to the same period in 2015. China also continues to import more bulk commodities including iron ore, crude oil, coals and coppers from Silk Road countries.

Among the growing number of businesses utilizing the Silk Road route include BMW. Recently, DB Cargo and the German auto manufacturer signed an agreement in which DB Cargo would transport auto components in containers from Germany to China on the trans-Siberian railroad. The service will include twice a week rail transport with an annual volume 2,500 containers.

Samsung is shifting from sea transport to rail transport from Korea and China to Eastern Europe. The company also plans to take advantage of the trans-Siberian railroad to transport materials and end products.

The Silk Road initiative offers a third option for transport between Asia and Europe. It allows products to be shipped overland to and from cities in China and Europe in nearly a quarter of the time it takes to send them by sea, at a cost that’s upwards of 65% less than shipping by air. DB Cargo, for example, has reduced rail transit time from Germany to China to 17 days from 23 days in 2010 for an overall door-to-door voyage time of less than 20 days.

The Impact

Trade volume between the European Union and China totals more than $600 billion per year and by 2020 it is expected to top the $1 trillion mark. The EU is China’s biggest trading partner with a third of what China produces being shipped to the European Union. Likewise, China is the European Union’s second biggest market for exports.

For countries along the route, the benefits are real with improving economic conditions and the opening of trade doors.

How the Silk Road plan affects the rest of the world remains to be seen. Will we see a similar situation occur between North and South America? Stay tuned.

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