There are several risks for countries participating in the OBOR forum. Given the wide range of countries and the sums of money involved, financial institutions will need to be watchful of the range of credit risks present in OBOR countries. The construction companies and other ventures building a presence in countries along OBOR will also need to prepare for potential threats to their operations in these new markets. In addition, political risks may weigh heavier on OBOR efforts than overseas direct investment activities led by private firms. Many OBOR projects are slated to be high-profile construction projects, which means that the deals will be made with the heavy involvement of the destination country’s government. Political changes need to be anticipated as they can change the outcome of a deal. OBOR will be incorporating projects in diverse frontier markets, which will expose participating companies to an array of risks in potentially unfamiliar operating environments. Security threats can include political violence, terrorism, and kidnapping in countries such as Pakistan, Turkey, and Myanmar. Moreover, non-payment and sovereign credit risks can be elevated as many countries receiving Chinese financing already bear elevated debt levels and OBOR can weaken their sovereign credit position further. Undeveloped regulatory systems, structural economic weaknesses and weak judiciaries further elevate the risks to investors. For example, infrastructure projects are multi-year projects. This can affect many phases of the project life cycle. Governments may change half way through constructions, local workforces may need to be managed in countries with strong union representation, or land acquisition may stir opposition from local communities.
China’s banks will mostly support financing for OBOR projects. In March 2015, the Bank of China promised $5bn US in credit to Anhui Conch Cement to support its OBOR endeavors abroad. The company is a state-owned enterprise and the largest cement manufacturer in China. And also in 2015, The Bank of China did state that it would increase its financial support for enterprises implementing the country’s OBOR strategy up to $100bn within the next three years. Nevertheless, this strong policy support may prove a weakness if government planners or private companies fall into a false sense of security that government support will guarantee their success.
One of the primary goals of the OBOR initiative is building major railway lines. However it may not make economic sense, even though rail transport is faster and greener than shipping by sea. According to Turloch Mooney, a senior editor of Global Ports, “The cost of shipping a 20 foot-equivalent unit by rail to Europe still average around five times more than by ocean, and the capacity of trains and rail infrastructure compared with ocean-going vessels mean that, while rail services have the potential to create a significant dent in air cargo volumes, they will most likely never account for more than one to two percent of ocean volumes.” Some experts argue that there is really no need to use trains to increase commerce between Europe and China. Sea cargo transportation is much cheaper, and companies rely on it. Online magazine Quartz reports that more than 19,000 containers can be placed on a single cargo ship, and they only take 30 days from Europe to reach China. Furthermore, Chinese President Xu has stated “the railway is faster than a shipping container, but is also riskier because it goes through a few unstable countries and can be interrupted by extreme weather, terrorist attacks, and politics.” China is trying to justify its domestic overproduction by creating the One Belt, One Road, and framing it as a business strategy that is also beneficial for other nations, but the actual benefit for some trading partners and the long-term global economy is still to be seen.
Any of the factors discussed above could prevent the Belt and Road initiative from achieving its lofty goals and lead China into a financial abyss. It needs to enlist support from all countries in the world to make it a success. To do that, China needs to be transparent about its geopolitical considerations, decision-making processes, and financial arrangements.
The opportunities available to those countries participating in the OBOR initiative have great potential. One region that hopes to be an integral part of this initiative is the UK. The UK-China relationship is one based on shared commitment to free trade and economic openness. The UK was also the first major European country to join the Asian Infrastructure Investment Bank. Its hope is that British business will form partnerships between UK and Chinese companies. Specifically to support infrastructure development of the UK region and collaboration on projects and initiatives in third world countries where UK and Chinese strengths are complimentary. This will create new markets and new supply chains that can change the way goods move across the globe. One of the attractive features to the OBOR initiative is to increase connections between people. The message OBOR is trying to relay is that connectivity is about more than economic and financial and legal integration. It is also about interrelationships between cultures, and the connections that bind communities together. This initiative shows that markets in developing countries along the routes are likely to become more liberal and diverse with the development of OBOR. Trade barriers are expected to be reduced and the investment environment to be improved, which would mean a substantial increase in investment opportunities and the export of both goods and services. The potential for growth in the developing and emerging economies is enormous. Real GDP in developing countries is forecast to rise by 6.7% per annum over the next 15 years with developing countries expected to account for 73% of global nominal exports by 2030. Other advantages for countries participating in OBOR include faster transit times for cargo as reported by DHL Global Forwarding, one of the world’s largest freight companies. As a result, for many multi-national enterprises throughout Asia, a new logistical window is opening that offers a variety of new routes, distribution hubs and supply chain networks. As more multi-national enterprises route their cargo via OBOR, their legacy logistics providers will be compelled to offer end-to-end services across the OBOR network. With all of its opportunities and benefits, there comes risk and challenges ahead as OBOR continues to develop its global initiative.
I think policymakers in countries not a part of OBOR should pay close attention to China’s plan. There is a lesson to be learned and the US for example should focus on cooperating with its neighboring countries to reassert political and economic strength in the Western Hemisphere. Despite upgrades in the past decade, insufficient infrastructure remains a major hurdle in the development of Latin America and the Caribbean. Latin America has fallen significantly behind East Asia in electricity generation due to inefficient technologies leading to high-energy loss. The port systems of the region must also be updated to accommodate shipping technology in a post-Panamax era. Improved infrastructure in the region will not only reduce the time and cost of importing goods from its southern neighbors, but will allow the economy to shift away from East Asian states who are increasingly linked with Chinese interests. I think the United States should leverage its large and efficient capital markets to provide the funding for improving regional infrastructure in the Americas. The US government can open access to low-interest American debt for countries to dedicate towards greater public investment in infrastructure. In addition, providing no-interest or low-interest loans to financial institutions or companies willing to invest in infrastructure projects located in Latin America and the Caribbean will make a greater number of public-private partnerships financially viable. Another option would be to guarantee a portion of infrastructure loans to reduce risk to lenders.
Additionally, greater economic security in the region would increase regional stability. Growing the economic opportunities available to Latin Americans would make illegal immigration and participation in the drug, weapon, and human trafficking less desirable. Particularly in volatile regions like Central America, economic growth can certainly reduce criminal action in the southern neighbors and ensure domestic security.
While the economic opportunity for China and the OBOR countries is self-evident, the United States also has much to gain from participating in it. The Trump administration is deeply committed to the development and upgrade of US domestic infrastructure, but little attention has been paid to the benefits for the US economy offered by infrastructure development abroad. Policymakers should realize that increased prosperity in the developing world would enable more consumers to demand American goods and services. US engineering, construction, and equipment-manufacturing companies like Bechtel, Caterpillar, John Deere, Honeywell, and General Electric could win lucrative contracts, and US defense and cyber security companies could help protect critical infrastructure worldwide. With more energy terminals, pipelines, storage facilities, and free-trade zones constructed around the world, the US energy industry would enjoy more destinations for its oil, gas, and coal. And with approximately 3.9 billion people worldwide not connected to the Internet, American tech companies like Google, Amazon, and Facebook can obtain many new users as more people become connected to the World Wide Web via energy and communication infrastructure. In seeking new growth engines and job-creation opportunities, US policymakers would be absent-minded to ignore the benefits to US businesses offered by the OBOR initiative.
Businesses located in countries that are not a part of OBOR need to identify their priorities. Despite many risks, OBOR presents multinational businesses with significant possibilities. The challenge for the Western companies is to determine OBOR’s potential opportunities and gauge their tolerance to the wide range of risks. Chinese state owned banks generally lack transparency so this presents an opportunity for Western professional services firms, specifically those that specialize in accounting, consulting, banking and insurance to work with local partners and implement good governance and transparency. This could result in making OBOR more attractive to private banks and investors who have mostly stayed away from the OBOR initiative.
In April 2016, President Xi endorsed the Paris Agreement and vowed that China will lead the world in the fight against climate change. Western engineering firms and energy companies can find real opportunities to participate in sustainable projects with Chinese state-owned enterprises and local firms. Global multinational enterprises will have a tremendous opportunity as the OBOR corridors connect economic zones and will have access to labor pools in Central Asia, Southeast Asia and Africa. This will give companies in the global footwear and apparel industry an opportunity to relocate manufacturing centers and other value-adding operations along OBOR as wages and other costs will likely rise in China. They new value chains can indeed provide faster access to key markets in Europe and Asia, given their connectivity to high-speed rail networks. Furthermore, as OBOR’s infrastructure expands, new cities are being developed. Western companies should focus on these new local markets and new consumers to capture market share. Companies such as phone makers and pharmaceutical would have a great opportunity to increase their brand recognition and reputation. And also an opportunity to reengineer their supply chains and perform manufacturing closer to their customers.
It will certainly not be easy for U.S. and other Western business to compete in an environment heavily influenced by Beijing’s central planners and state-owned enterprises. However, the sheer scale and amount of capital, both monetary and human, needed to create the infrastructure of OBOR will likely compel all parties to seek the most optimal partnerships. Western companies will need to adopt a wait-and-see strategy and hope that Washington and Beijing find a way to create a stable working arrangement.