Originally Published 2017-02-13 05:16:30 Published on Feb 13, 2017
The MSR economic corridor: Character and implications
Regional connectivity initiatives in Asia have received a great boost from China’s ambitious connectivity plan of linking the continents of Asia and Europe through an integrated network of land and sea routes. The network is being referred to as the One Belt One Road (OBOR) and the Maritime Silk Road Initiative (MSR) is a part of this integrated framework. This paper focuses on some of the key issues connected with the evolution of the MSR. These include the conceptualization of the MSR as an economic corridor, implications of the new connectivity framework for regional trade and businesses and the possible impact of the MSR on China-India economic relations. Maritime Regional Economic Corridor Geographically, the MSR connects East Asia and the Chinese coast through the South China Sea, Indian Ocean and the Bay of Bengal to Southeast Asia and South Asia, and further to West Asia and Europe through the Persian Gulf and Mediterranean Sea. The objective of the initiative is to build transport linkages across this vast stretch of maritime terrain through new seaports and their integration with existing (possibly some new) sea-lanes and land routes that are part of the New Silk Road Economic Belt<1>- the land component of the OBOR. The unique aspect of the initiative is not only in the simultaneous integration of land and sea networks, but also the visualization of the networks as economic corridors. The conceptualization of the MSRI as a sea-route corridor by China, as part of the grand OBOR fanning out connectivity frameworks across the land and sea, is not surprising given China’s proclivity in building corridors. What is notable though is the development of MSR as a maritime economic corridor, given that the latter are usually posited for land routes. A corridor like the MSR ning vast terrains and stretching across countries, region and even continents would inevitably cover areas that are disparate in economic conditions, capacities and circumstances. Regions and sub-regions within Asia themselves differ widely in their capacities to trade and quality of infrastructure facilities. In this regard, East Asia and Southeast Asia are far more economically integrated than the Middle East, Central Asia and South Asia. Robust intra- and inter-regional trades for East and Southeast Asia reflect the significant intra-industry trade between countries of these regions and the extensive presence of regional firms in global value chains (GVCs). Such trade and presence of firms in GVCs is much less for firms in other parts of Asia featuring in the MSR. Along with the intensities and abilities to trade, logistic capabilities also vary widely among countries in the MSRI with Europe, East Asia and Southeast Asia leading the other regions and countries by fairly large margins. The inevitable implication of these variations in economic conditions and capacities is the differentiated abilities of regions and countries to exploit the advantages of economic corridors. Countries with larger and more efficient ports and better logistic capacities will surely be relatively better placed to exploit the new facilities of the MSRI. India is likely to be among those that would not be well placed to reap the maximum benefits of new infrastructure, till it is able to upgrade its own capacities. This would be in contrast to more exciting prospects of the MSRI visualized by businesses from China, Southeast Asia and Europe; understandably due to their better capacities. Regional Implications Regional variations in extant economic capacities and conditions across the MSRI geography become particularly distinct if analyzed from vantage points of regional trade architectures. The MSR would have implications for these architectures as business perceptions of regional trade and investment shaped by rules and standards of different regional and bilateral trade agreements (RTAs and FTAs) might alter significantly due to the new connectivity links produced by the MSR. The relationship and complementarity between the MSR and the RTAs and FTAs would also influence various economic relationships in the region. The MSRI’s relationship with regional agreements would depend significantly upon how closely it aims to work with various existing regional forums and frameworks. Enhancing regional cooperation is a stated objective of the MSRI. The initiative notes various existing regional and multilateral mechanisms that can be useful for expanding regional cooperation. These include the Shanghai Cooperation Organization (SCO), ASEAN+1 (China), Asia-Europe Meeting (ASEM), Asia-Cooperation Dialogue (ACD), Asia-Pacific Economic Cooperation (APEC), CAREC, Conference on Interaction and Confidence-Building Measures in Asia (CICA), China-Arab States Cooperation Programme) and the Greater Mekong Sub-Region Economic Cooperation (GMS-EC).<2> It is important to note that all these forums include China. The MSRI vision document avoids mentioning other important non-Chinese regional frameworks such as the South Asian Association for Regional Cooperation (SAARC). This can send counterproductive signals to other countries implying a perceived reluctance on part of China to work with other major non-Chinese regional forums. The impression would colour the MSRI network as largely an effort for fulfilling China’s national interests aimed to be served by working with regional groups that include China. Users of existing RTAs and FTAs would be judging the benefits of MSR in the backdrop of the trade rules institutionalized by these agreements. Indian businesses, for example, would be considering India’s existing FTAs, such as the one with ASEAN, in this regard. The India-ASEAN FTA requires goods to be shipped ‘directly’ between parties to the FTA, i.e. from India, to any of the ten ASEAN countries, and vice-versa, for availing preferential tariffs. Shipments through third country ports under the FTA are allowed only under specific circumstances. It is important for new facilities on the MSR to note this condition along with similar conditions in other regional FTAs. Not all new maritime facilities along the MSR would be trans-shipment hubs, as they would lack the abilities to handle giant containers with large cargoes. The MSR might lose much of its commercial appeal unless it is able to feed into the trade rules architecture of the region and mature in a fashion complementary to these rules. The MSR, and the OBOR, envisage providing seamless linkages to land and maritime cargo. To a very large extent, the MSR’s eventual effectiveness as an economic corridor capable of significantly reducing transport costs would depend on the matching support it obtains from its ‘land’ counterpart. Challenges are particularly significant in this regard as cross-border transport movements of vehicles would require reaching political agreements among various countries. Despite years of discussions, countries within South Asia have not been able to agree on common transit facilities across the region. It is only recently that Bangladesh, Bhutan, India and Nepal (BBIN) have signed a Motor Vehicles Agreement for facilitating movement of vehicles across each other’s territories<3>. A similar transport transit agreement between India and Southeast Asia<4> is essential for ensuring greater pan-regional connectivity across the OBOR and greater effectiveness of the MSR. Back-end land connectivity across neighboring geographies is vital for making the new maritime infrastructure facilities of the MSR efficient and attractive to business. From a business perspective, however, the commercial prospects come up against political hurdles, evident from the difficulties faced in constructing land links through the Northeastern Indian state of Arunachal Pradesh over which China and India have a territorial dispute<5>. These hurdles complicate prospects of exhaustive cross-border transit facilities, not only between India and China, but also between India, Myanmar and Thailand because of security concerns arising from movement of insurgents across porous borders. With security concerns looming large on the decision-making space, multi-country coordination between various national agencies for issuing licenses and permits for transport movements will be difficult to achieve. Economic Implications for India China is currently India’s largest trade partner with a share of 9.5 per cent in its total merchandise trade of US$758 billion in 2014-15.<6> Sino-Indian bilateral trade has grown rapidly from around US$1 billion at the beginning of the century. The fast growth has been accompanied by a conspicuous imbalance with China enjoying a sizeable surplus of around 67 per cent of the total trade. Along with trade, cross-border investments have also been increasing between the two countries, though Chinese inward FDI in India remains much lower than those from other countries. This is in sharp contrast to the high stock of outward Chinese FDI in Asia, reflecting China’s high trade and investment links with the continent, particularly Hong Kong.<7> From the Indian perspective, Chinese FDI is welcome as an effective mean for addressing the large bilateral trade deficit through its role in expanding export-oriented production capacities in India<8>. In terms of the larger macroeconomic policy perspective, Chinese investments are particularly welcome in the signature ‘Make in India’ programme aiming to develop India into a global manufacturing hub. Most Chinese investments in India, up till now, have been focused towards the domestic market and domestic consumers. They are spread across a diverse variety of sectors. Renewable and solar energy has been an important sector attracting Chinese firms, along with real estate<9>. Greater involvement in technological upgradation of railway infrastructure in India has attracted considerable Chinese financial investments and technology<10>. Chinese firms (Xiaomi, Gionee, Lenovo and Motorola<11>) also find India an attractive location for making cheap smartphones for domestic consumers, and also for exporting to third country markets in South Asia and Africa. Some of these firms (e.g. Xiaomi, Oneplus) have tied up with the Taiwanese contract-manufacturing firm Foxconn, which assembles for both Apple and Samsung, to make smartphones in India. With China becoming a net capital exporter and its outward FDI exceeding inward FDI, Chinese FDI to India is expected to increase given India’s large market, bright economic outlook and lower cost of labour-intensive operations. This is where the OBOR and the MSR, initiatives expected to draw considerable Chinese FDI, have implications for India too. Greater Chinese investments in India would induce more trade, as Chinese firms, typically, import extensive parts and components from mainland China and other parts of the Asia-Pacific region for assembling in India, and exporting assembled final products to third country markets from India. The trade-inducing investments can also facilitate greater integration of India in GVCs featuring Chinese producers. The prospect becomes particularly encouraging given China and India’s featuring in the Regional Comprehensive Economic Partnership (RCEP)<12>, whose rules of origin (ROOs) can activate GVCs connecting both countries. Enmeshing with the OBOR, both through the maritime route of the MSR, as well as the land connections of the Silk Road Economic Belt, would facilitate these GVCs. India’s successful integration in the OBOR requires creating new maritime capacities, particularly on its east coast, for plugging into the MSR routes; developing seamless land transits with China, Pakistan, Bangladesh, Bhutan, Nepal and Myanmar; and, building internal infrastructure connecting its seaports on the east and west coast to the hinterland and land borders with other neighbours. Doing these, however involve formidable challenges. As pointed out earlier, several ports from East Asia, Southeast Asia and Europe figure among the busiest ports of the world underpinning the importance of maritime trade between China and Europe<13> – a vital commercial exchange relation that the MSRI aims to consolidate. Most Chinese ports are relatively more efficient than Indian ports with far greater capabilities of handling mega-ships and large cargo and enabling them quick berthing and turnaround time. The situation is different in Indian ports. Major ports on India’s east (e.g Kolkata, Visakhapatnam and Chennai) and west coast (e.g Kochi, Kandla, Mumbai and Jawaharlal Nehru Port Trust (JNPT)) are on the Indo-China trade route. The average travel time for container cargo from China to India’s east coast is 15-20 days and can extend to three weeks for the west coast. If the MSRI is successful in decongesting traffic on the Malacca Strait, shipping time might reduce considerably between China and India. Faster traffic and greater trade would, however, imply more pressure on Indian ports, particularly on the east coast. Better capacities of Indian ports are imperative in this respect. Of particular significance in this regard is the Kolkata port, which features in the official map of the MSR released by China<14>, and is vital in connecting the BCIM to the MSR. The port can be as an important conduit in the flourishing of value chains connecting Chinese and Indian firms. This cannot happen unless the Kolkata port is able to overcome its structural problems arising from it being a riverine port and being subject to heavy silting as well as low depth. It is encouraging to note that modernization efforts in Kolkata port are producing results with the port being awarded ‘Major Port of the Year’ in 2014-15 among major ports<15>. The port needs to develop keeping in mind the long-term objective of developing into a trans-shipment hub in the Bay of Bengal and achieve the efficiency levels of the Colombo port, which happens to be a Sino- Sri Lankan joint venture<16>. The success of GVCs connecting Chinese production facilities located in India to various parts of the economic regions covered by the MSR depend significantly on the ease with which goods can travel from within India to various seaports on both of its coasts. Land connections become particularly important in this regard, particularly road connections within the hinterland of the Kolkata port, along with links connecting various other ports on both coasts. While connections to the Kolkata port across its hinterland have improved significantly in recent years due to the construction of national highways and upgrading of state highways, movement of road transport continues to suffer from delays due to multiple inefficiencies. These include a large number of inter-state check posts affecting traffic and toll plazas across national highways. Indeed, delays faced in road transport, along with delays encountered at major ports due to inefficiencies like higher turnaround times, are major reasons contributing to higher container costs from India compared with China and Singapore.<17>. These costs make it easier to export from China to India, as opposed to the other way round, and are important in explaining the much larger volumes of Chinese exports to India. Unless these operational costs reduce, greater connections to seaports and land borders would still leave exports from India uncompetitive. It is therefore clear that the eventual success of the MSR as an economic corridor will depend significantly upon how its constituent regions and countries, including India, are able to develop their own infrastructure capabilities for taking advantage of the new cross-continental sea route. The challenge is substantive given that it not only involves extensive commitments by national country authorities and agencies, but also considerable political accommodation and agreement. The challenges might limit the initial benefits of the corridor to only those economic actors that are ahead of counterparts in abilities and capacities and might, therefore, end up producing mixed results. This article was originally published in GP-ORF’s ‘Emerging Trans-Regional corridors: South and Southeast Asia'
Selected References: Basu Ray Chaudhary, Anasua, Basu, Pratnashree, and Bhonsale, Mihir (2015), ‘Driving Across the South Asian Borders: The Motor Vehicle Agreement between Bhutan, Bangladesh, India and Nepal’, Occasional Paper, 69, Observer Research Foundation, Delhi, September. ITF (2015), ‘The Impact of Mega-Ships’, International Transport Forum (ITF) –OECD; http://www.internationaltransportforum.org/Pub/pdf/15CSPA_Mega-Ships.pdf Accessed on 2 November 2015 Nataraj, Geethanjali (2015), ‘Why India Should Join China’s New Maritime Silk Road’, The Diplomat, 3 July; http://thediplomat.com/2015/07/why-india-should-join-chinas-new-maritime-silk-road/ Accessed on 2 November 2015 OECD (2005), ‘The Costs and Benefits of Trade Facilitation’, Policy Brief, OECD Observer, October; http://www.oecd.org/trade/facilitation/35459690.pdf Accessed on 2 November, 2015 Palit, Amitendu (2014), The Trans-Pacific Partnership, China and India, Routledge, Oxon and New York. <1> ‘Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road’, Issued by the National Development Reform Commission, Ministry of Foreign Affairs and Ministry of Commerce of the People’s Republic of China with State Council Authorization; 28 March 2015, National Development and Reform Commission (NDRC), PRC at http://en.ndrc.gov.cn/newsrelease/201503/t20150330_669367.html <2> Ibid. <3> ‘Full Text of BBIN Agreement on Motor Vehicles’ at http://nepalforeignaffairs.com/bbin-agreement-on-motor-vehicles-agreement/ <4> ‘India for Greater Transport Connectivity with ASEAN’, The New Indian Express, 25 August 2014 at http://www.newindianexpress.com/nation/India-for-Greater-Transport-Connectivity-with-ASEAN-Sushma/2014/08/25/article2397830.ece <5> ‘China-India fast-track BCIM Corridor Project’, The Hindu, 26 June 2015 at http://www.thehindu.com/news/national/china-india-fasttrack-bcim-economic-corridor-project/article7355496.ece <6> Export Import Data Bank, Department of Commerce, Government of India at http://commerce.nic.in/eidb/iecnttopn.asp <7> Herrero, Alicia Garcia (2015),‘China’s Outward Foreign Direct Investment’, Bruegel, Blog Post, 28 June at http://bruegel.org/2015/06/chinas-outward-foreign-direct-investment/ <8> ‘Investment the Way to Reduce the India-China Trust Deficit’, The Wire, 16 May 2015 at http://thewire.in/2015/05/16/investment-the-way-forward-to-reduce-india-china-trust-deficit-1871/ <9> The Samy Group and Clint Group from China have invested in manufacturing renewable energy and solar power equipment in India, while the real estate group Dalian Wanda plans to expand beyond its current investment in Navi Mumbai in India’s Western state of Maharashtra to industrial townships and real estate projects in other major states of India such as Harayan, Andhra Pradesh, Gujarat and Delhi. <10> ‘China has a lot to offer to Indian Railways: Suresh Prabhu, Railway Minister’, Indian Express, 17 May 2015 at http://indianexpress.com/article/cities/ahmedabad/china-has-a-lot-to-offer-to-indian-railways-suresh-prabhu-railway-minister/ Accessed on 8 November 2015. <11> ‘Chinese Smartphone makers fall in love with PM Modi’s ‘Make in India’, Sify News, 12 October 2015 at http://www.sify.com/news/chinese-smartphone-makers-fall-in-love-with-pm-modis-make-in-india--news-business-pkmqnMiigdehd.html Accessed on 8 November 2015 <12> The Regional Comprehensive Economic Partnership (RCEP) is a mega-Regional Trade Agreement (RTA) being negotiated by ten economies of the ASEAN, Australia, China, India, Japan, New Zealand and South Korea. <13> Asia-North Europe and Asia-Mediterranean were the second and third busiest maritime routes, after Asia-North America, in 2013, according to statistics prepared by the World Shipping Council at http://www.worldshipping.org/about-the-industry/global-trade/trade-routes <14> Xinhua’s map of the New Silk Road outlines its clearest geography till now. New Silk Road Project, 5 October 2015 at http://greatsilkroad.com/new-silk-road/new-silk-road-project/ <15> ‘Kolkata Port Adjudged Major Port of the Year’, The Times of India, 26 August 2015 at http://timesofindia.indiatimes.com/city/kolkata/Kolkata-Port-adjudged-Major-Port-of-the-Year/articleshow/48687327.cms <16> ‘Colombo breaks through as South Asia’s next big trans-shipment port’, Joc.com, 20 October 2015 at http://www.joc.com/port-news/asian-ports/port-colombo/colombo-breaks-through-south-asia’s-next-big-transshipment-port_20151020.html <17> The Associated Chambers of Commerce in India (ASSOCHAM) estimates container costs from India to be double of those in China and thrice of those in Singapore. The ASSOCHAM study estimates the cost of shipping a container from India at around US$1200 compared with US$600 from China and US$400 from Singapore. See ‘WTO pact or not; India has to catch up fast on trade facilitation; costs are prohibitive: ASSOCHAM’, 26 August 2014 at http://assocham.org/newsdetail.php?id=4657.  The ASSOCHAM study vindicates similar conclusions by other agencies (OECD 2005).
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