21 October 2016
Nearly 80 percent of the global trade is seaborne. Photo: Xinhua
Nearly 80 percent of the global trade is seaborne. Photo: Xinhua

How transport costs determine global trading routes

The Asian Infrastructure Investment Bank (AIIB) was officially launched in Beijing recently, marking a milestone in China’s One Belt, One Road strategy.

Last summer, Guangdong published an action plan outlining its participation in the One Belt, One Road strategy, focusing on its role in the implementation of the 21st Century Maritime Silk Road.

The emphasis on a marine Silk Road is quite sensible given the southern province’s geographical location. But it should place the same weight on “one belt” as well as on “one road” rather than putting emphasis on one while neglecting the other.

Xi’an, which is in the eastern part of the Silk Road, has demonstrated how transport cost could affect regional development.

It used to be the world’s most populous city during the Tang Dynasty. Under the nation’s canal and land transport system for grain supply, Xi’an became the capital.

But Kaifeng, known as Bianzhou in the past, turned itself into a major north-south grain transport hub, eventually replacing Xi’an as the capital.

As a result, many coastal cities in eastern China have gradually taken over the role of northwestern inland cities as gateways.

Meanwhile, Guangzhou, the starting point of the maritime Silk Road, has become a hub for merchants and the government’s main source of tax revenue.

That’s mainly the result of competitive water transport costs. It’s been reported that seaborne transport can ship as many goods carried by 2,000 camels, while merchants can only take up to 30 camels to cross the desert and move goods to the west.

Gansu and Xinjiang, one of the major gateway cities in the old Silk Road, have been relegated into the background as transport costs surged.

The picture is even more disappointing in Central Asian nations, which have been left behind in the global economic growth.

These central Asian countries and regions, which have poor transport systems, have to develop and strengthen their infrastructure first.

There is strong positive correlation between the volume of bilateral trade and the quality of infrastructure available, according to an analysis by the Asian Development Bank.

As such, if China helps in developing infrastructure in Central Asia, it could help dramatically reduce transport costs and connect these nations to the world’s most active market.

As a result, local goods and services could generate more economic value.

China has been actively participating in railway infrastructure and international transport projects in Kazakhstan, Kyrgyzstan and other Central Asian nations.

Many of these nations are also keen to capture the opportunities provided by China’s fast increasing land containers. They are also working to improve rail connections with Turkey and Iran.

Indeed, there are more competitive land transport routes from Asia to Europe.

Shorter transport routes between China and Europe would give more flexibility to Chinese exporters. They would also attract more Chinese customers for high value-added goods from Europe.

Still, nearly 80 percent of the global trade is seaborne. This system has been developed through several centuries, and it’s very difficult to change situation immediately.

When China has removed all the barriers connecting it to different parts of Asia and Europe, companies would adjust their production systems in accordance with these transport routes.

In fact, some manufacturers have already relocated their factories to Chongqing or some other inland regions in order to reduce transport time and costs.

This article appeared in the Hong Kong Economic Journal on Jan. 18.

Translation by Julie Zhu

[Chinese version 中文版]

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Deputy researcher at China Business Centre of the Hong Kong Polytechnic University

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