Silk Roads: Inspirations and Opportunities

12/12/2014，Istanbul, Turkey

Trade and Investment Cooperation Key to Building Silk Roads

Dr. Zhao Jinping

Senior Fellow, Director-general, Research Department of Foreign Economic Relations, Development Research Center of the State Council (DRC)

The strategic concepts of "jointly building the Silk Road Economic Belt via innovative cooperation" and "jointly building the 21st Century Maritime Silk Road" proposed successively by President Xi Jinping in 2013 catch great attention and active response from the international community. Countries in the Silk Road region have gradually reached a broad consensus on the initiatives and started to take practical actions. The primary goal of building "One Belt and One Road" is to boost the economic development, stability and prosperity of the countries in the region. Promoting trade, investment cooperation is the important means to achieve the goal.

1. Increasingly prominent roles of cross-border trade and investment in boosting economic growth in the Belt and Road countries

Trade and investment show prominent features in this region. First, cross-border trade and investment exhibit faster growth than the global average. According to the World Bank estimates, the annual average growth rate of global trade and cross-border direct investment is 7.8% and 9.7% respectively from 1990 to 2013, while these indicators in the 57 Belt and Road countries reach 13.1% and 16.5% respectively in the same period. Especially in the 2010-2013 period after the international financial crisis, foreign trade and net investment inflow in the Silk Road region have shown annual growth rate of 13.9% and 6.2% respectively, higher than the global average by 4.6 and 3.4 percentage points respectively. (See table 1) The above-global-average-rate growth plays a great role in boosting the recovery of global trade and investment.

Second, the dependence of economic growth of the Silk Road countries on cross-border trade and investment is higher than the global average. It is estimated that the average degree of dependence on foreign trade in the Silk Road countries is 32.6% in 2000, 33.9% in 2010 and 34.5% in 2012 which are higher than the global average of 24.3% in the same period. (See table 2). It shows that cross-border trade plays an essential role in accelerating local economic growth in these countries. Third, the region as a whole maintains strong competitiveness in trade. Based on the regional trade competitiveness index, trade surplus is achieved in this region as a whole in 1990 and the trade competitiveness index is 2.1%. This index rises to 12.5% in 2000, which manifests an expanded margin. Due to the impacts of external economic factors brought by the international financial crisis, the index fall down slightly to 9.5% in 2010 before it remains at about 10% in the following years. The region as a whole maintains a stable trade surplus.

Fourth, the region enjoys strong advantages attractive to foreign investment. Net inflow of foreign direct investment (FDI) represents 1.5% in relation to GDP in the Silk Road region in 1990, which is lower than the global average of 1.8%. A gap still existed between the regional and global FDI-GDP ratios in 2000. However, the regional ratio improves after 2010 and begins to overpass the global average. The ratio of net FDI inflow to GDP reaches 6.3% in 2013, which is not only 1.9 percentage points higher than the global average, but also exhibits an increase by a great margin compared with the ratio in the region in 2000. The increase of net FDI exhibits a prominently strong role in promoting regional economic growth.

Table 1 Comparison of Growth in the Silk Road Region and the World

Period	annual growth rate of GDP（%）			annual growth of trade（%）		annual growth of FDI inflow（%）
	world	SR region		world	SR region	world	SR region
		growth（%）	share in global total（%）
1990-2000	2.8	3.7	17.8	21.0	17.4	6.4	11.3
2000-2010	2.6	6.7	44.3	1.5	18.9	9.0	14.8
2010-2013	2.4	4.7	41.3	2.8	6.2	9.3	13.9
1990-2013	2.7	5.1	33.7	9.7	16.5	7.8	13.1

Note: GDP in US$ constant price in 2005. Trade value and investment in current US$. Data for trade value is as of 2012.

Data source: World Bank

 

Table 2 Comparison of Trade and Foreign Investment Dependence in the Region and the World

Year	trade dependence（%）		trade competitiveness index（%）		net FDI inflow/GDP（%）
	world	SR region	world	SR region	world	SR region
1990	15.7	17.5	-2.0	2.1	1.75	1.48
2000	19.7	32.6	-2.9	12.5	7.96	4.70
2010	23.9	33.9	-0.6	9.5	4.71	6.96
2011	25.8	35.6	-0.5	10.2	5.16	7.07
2012	25.3	34.5	-1.1	10.1	4.23	6.04
2013	4.41	6.30

Note: trade dependence=trade value/GDP, trade competitiveness index=(exports-imports)/trade value. All in current US$.

Data source: World Bank

The growth in trade and investment in the Silk Road region gives impetus to local economic growth in each country and the region as a whole. It also contributes to the world economic growth. The estimates based on the GDP statistics (constant 2005 USD) of the World Bank show that the annual growth rate of the GDP in the region as a whole reaches 5.1% from 1990 to 2013 which is twice the global average. Even in the period of slow recovery between 2010 and 2013 after the international financial crisis, the annual average growth rate in the Silk Road region reaches 4.7%, representing 2.3 percentage points higher than the global average. With the impacts of rapid growth in the region as a whole and the increasing growth of total economic output, the economic growth in Silk Road region makes greater contribution to the global economic growth. Its contribution to the world growth is 41.2% in the period of 2010 to 2013. This translates to the fact that over 40% of the world economic output is achieved in this region. (See table 1)

2. Many difficulties to be overcome to promote trade and investment cooperation in the Belt and Road countries

Countries in the region currently still face some difficulties and problems in promoting regional trade and investment cooperation. First, the economic development in most countries in the region remains at a low level. The market demand in these countries is limited. The statistics of the major 57 countries show that GDP per capita in 35 countries is less than US$10,000 while the world average is US$10,500 in 2013. The population in these countries is 3.95 billion, 55.3% of the world total. But GDP of these countries only accounts for 20% in the world total. GDP per capita is US$3,862 in these 35 countries which is only 76.5% of the regional average and 35.7% of the global average. (See table 3).

Table 3 GDP per capita in Silk Road Countries

groups by GDP per capita	No. of countries	GDP per capita (USD)	total population		GDP
			10,000	share（%）	US$ 100million	share(%）
US$ 20,000 up	10	35470	6426	0.90	22793	3.04
US$10,000-20,000	12	13178	33649	4.72	44342	5.92
US$ 10,000 below	35	3862	394788	55.34	152482	20.36
major SR countries	57	5050	434862	60.96	219617	29.32
world		10500	713333	100.00	749000	100.00

Data source: World Bank

Second, high-level economic integration lags behind in this region. Although there is a large population in the Silk Road region in which countries are closely related in distance and in economy, there lacks an effective cooperation mechanism as well as a multilateral free trade arrangement with wide representativeness where member countries in the region constitute the majority. The reasons for the lack include the huge disparity in economic development level and geopolitical factors. This hinders further and wider regional cooperation.

Third, trade ratio in the region is relatively low. Compared with the regions such as EU, NAFTA and ASEAN where regional integration has made substantive progress, exports and imports between the Belt and Road countries represent a low share in total foreign trade. Depending too much on the external market, the region is subject to the impacts of economic fluctuation from outside the region. Vicious competition may be intensified among the regional economies, and trade benefits may be dampened in the region as a whole.

Fourth, the infrastructure in most areas in the region is below what is actually demanded. Including the border areas in hinterland China and Central Asia, due to small population in large area and low economic development level, there is a huge gap between these areas and those in Europe and other densely populated areas in Asia in terms of transportation and communication.

Fifth, there exist many trade barriers and obstacles. For example, the new Eurasian Continental Bridge passes through several countries where track gauges are different. It is an hassle to switch between tracks of differing gauges. The cooperation mechanism for ports of entry in all countries is not established resulting in inconvenient entry of personnel and cargo and high logistics costs. Facilities at the ports in some countries are backward causing a difficult inflow of goods and services.

Sixth, there still exist the disturbances and negative impacts of non-economic factors. There is still a need to strengthen the strategic mutual trust among the countries in the region. In the context of increasingly complicated and competitive international economic situation, countries along the Silk Road should foster a sense of community of common destiny, remove distrust and misgivings, and share the same goal of boosting cooperation in economy, trade and investment as well as personnel exchanges so as to promote economic prosperity and social stability in this region. All countries in this region should make cooperation and win-win results as the essential need for the betterment of the people.

3. Strengthening policy communication and building infrastructure connectivity as a guarantee for boosting of trade and investment cooperation.

First, related countries should facilitate further communication and dialogue. On the basis of broad consensus, all countries should strengthen mutual policy communication and make an effort to remove the problems and obstacles in trade and investment cooperation. This can help to create a good policy environment for the orderly flow of personnel, finances and goods across the borders, efficient allocation of those resources and market integration.

Second, the countries should strive to strengthen and improve the existing multilateral and bilateral cooperation mechanisms. We should support and welcome the efforts in advancing regular or irregular dialogues, trade and investment treaties among member countries, and the establishment of bilateral or sub-regional free trade zones to promote further cooperation in the region. Many countries in the Silk Road Economic Belt are also members or observers of the Shanghai Cooperation Organization, which exhibits a wide representativeness and cohesion. They can play an effective role in the cooperation in the Belt and Road region. China-ASEAN cooperation mechanism provides an important platform for policy communication in this region, and formulates a substantive integrative cooperation framework. The building of the upgraded version of China-ASEAN Free Trade Area sets a good example and provides good experience for setting up high-level trade and institutionalized investment cooperation mechanism.

Third, we should strengthen the cooperative coordination among major countries and the leading role of these major powers in the region. China, India, Russia and Turkey are the countries of great influence in the region and even in the world. According to the statistics in 2013, the economic output of the four countries accounts for 65.7% of the total in the region. (See table 4) The net FDI inflow and foreign trade value account for 67.9% and over 40% of the regional total respectively. More importantly, these major powers are the major export markets and main sources for the cross-border FDI inflow for other member countries in the region. The development and cooperation of the four countries have great impacts on the development and prospect of the whole region. These countries should handle the economic relations with other countries in a more open manner. They should bear the responsibility of promoting the regional development.

Fourth, related countries should jointly promote the building of infrastructure connectivity. Infrastructure connectivity is the carrier and necessary condition for strengthening cooperation among the countries along the Silk Road. The flow of people, commodities and finances can be achieved only after the roads are built to connect with each other. China and many Asian countries advocate the establishment of Asian Infrastructure Investment Bank and Silk Road Fund. Through contributions from related countries, these institutions are expected to become the important financial support for building infrastructure connectivity in the region.

Table 4 Position of Major Powers in the Region

Year	GDP share of SR region in world total（%）	GDP share of Major powers in SR region total（%）
		China	Russia	India	Turkey	in CRIT
2000	12.9	28.3	6.1	11.2	6.3	51.9
2010	25.0	36.6	9.4	10.6	4.5	61.1
2011	27.0	38.0	9.9	9.8	4.0	61.7
2012	28.3	39.9	9.8	9.0	3.8	62.5
2013	28.5	43.2	9.8	8.8	3.8	65.7

Note: GDP in current US$.

Data source: World Bank

4. China to play more active and effective roles in trade and investment cooperation in the Belt and Road initiative.

Through the efforts of 36 years of reform and opening up, China has become the world second largest economy. China's development is benefited from the benign external environment of economic globalization. It has also made contribution to promoting the world economy. In the long period afterwards, China will continue to solve its own problems through sustainable development and overcome the middle income trap. A benign external environment is of vital importance.

On the other hand, with the rising position in economic performance, China needs to shoulder more responsibilities corresponding with its development in the world economic development and global governance so as to achieve common development along with other countries. It also needs to play more active and effective roles in building "One Belt and One Road", which is a key part of inclusive growth.

China should exploit its own strengths and make a contribution to promoting trade, investment cooperation and infrastructure connectivity in the Belt and Road region. First, it should accelerate the process of developing free trade and investment treaties with countries in South Asia, West Asia, Central Asia and Central and East Europe. China should complete the negotiation over upgrading China-ASEAN Free Trade Area as soon as possible, and advance bilateral and regional economic integration.

Second, we should encourage and support Chinese enterprises to invest directly in neighboring countries and set up production parks jointly with the host countries so as to create a good business environment for the investing enterprises.

Third, we should make greater efforts in establishing cross-border economic cooperation zones in the region so as to provide important platforms for transnational trade and investment cooperation. Fourth, we should partner with other countries in the region to set up financial institutions for development and opening up such as Asian Infrastructure Investment Bank and Silk Road Fund through contributions from participating countries. We should also provide necessary financial support for building infrastructure connectivity via international capital inflow.

Fifth, we should promote imports from Silk Road countries, which not only satisfies domestic demand for production and consumption but also serves as huge markets of goods and services for other countries.

It is estimated, within the next five years, China's accumulative imports will surpass US$ 1 billion. If half of the imports originate from the Belt and Road countries, export opportunities of over US$5 trillion will be created for this region.

Sixth, through coordinated development of east, central and west China, and further cooperation among cities, we should bolster and improve the ability of integrating and operating resource factors so as to create beneficial conditions for building an international Belt and Road thoroughfare.

In order to promote trade and investment cooperation among the Belt and Road countries, communication and dialogues among think-tanks should be conducted in advance. We will, through this meeting, make greater efforts in the areas of joint research, communication and discussions with related countries so as to provide important intellectual support for building the Belt and Road.