Silk Belts and Roads in the 21st century

21 February 2017

The FIW policy brief by Julia Grübler and Robert Stehrer discusses the evolution of the ancient trading network across Eurasia and its potential for the Austrian economy.

The Chinese ‘One Belt, One Road’ (OBOR) Initiative, presented the first time in 2013 by China’s president Xi Jinping, receives a lot of attention globally. This is not surprising given that it encloses around 40 countries throughout Eurasia. The FIW policy brief [in German] conducted for the Austrian Ministry of Science, Research and the Economy (BMWFW) takes a closer look at Austrian trade relations with countries along the new silk roads and estimates the effect of OBOR investments for the Austrian economy through production networks.

The Chinese rationale for infrastructure investments abroad

Trade policy and geopolitics certainly play a role in the design of the OBOR. Building up closer relations to countries in Central and Southeast Asia can be seen a counter-initiative to mega-regional trade deals, which were – until recently, when US president Trump took office in January 2017 –to shape global trade patterns and excluded China from negotiations.

The focus on infrastructure investments bears both short term as well as medium term advantages for China. The restructuring of the domestic economy and the slowdown of global growth led to excess capacities, e.g. in the construction sector, which can be used for these projects. Infrastructure investments in the transport sector additionally lead to faster, more reliable and cheaper trading routes to the European market. Other considerations include the access to natural resources, such as oil, gas and minerals, but also the regional development of China’s western regions.

Focus of investments in Western Balkan region bears potential for Austrian economy

Since July 2016, 67% of the biggest Greek harbour in Piraeus are owned by the China Ocean Shipping Company. The core of infrastructure investments in Europe is thus expected to be in the Western Balkan region. Projects include investments in railroads, highways, harbours, but also in IT infrastructure and the energy sector. A sparkling example is the high-speed rail connection between Budapest (Hungary) and Belgrade (Serbia), which is already under construction. Linking Belgrade with Piraeus is in the planning.

Considering production networks with the help of input-output tables, projects in Southeastern Europe are expected to increase Austrian exports, corresponding to around 100 million Euros value added, or 0.03% of Austrian GDP. The estimated effect for Austria through trade relations with the Western Balkan states seems modest in size, in particular, as it is expected to materialise over a longer period (as infrastructure investments usually take several years to be realised).

However, the analysis does not include the potential effect of higher incomes of recipient countries of investments, which could lead to higher demand for Austrian goods. Furthermore, improved transport infrastructure along the ‘new silk road’ could help Austria to benefit from its geographical position between the western end of the ‘new silk road’ and Western Europe and its historically strong ties and trade relations with Eastern Europe over the long term.