The rail transport of goods from Europe to China may be much faster than sea transport, but it is also far more expensive.
The demand for reverse transport from Europe to China is virtually nonexistent, and to top things off, many of the containers being shipped to Europe by train are actually empty: the transportation council of the Trans-Siberian Railway insists that trains have a standard length of 71 cars, regardless of how many are needed. This requirement also pushes up transport costs.
It’s not surprising, therefore, that only a tiny proportion (no more than 1–2 percent) of freight traffic is transported by land rather than sea. But bearing in mind that China-EU trade is worth $1 billion a day, it still constitutes an appetizing piece of the logistical pie worth competing for: China’s western provinces and Kazakhstan are successfully developing their transportation infrastructure, and now most freight transit passes through Kazakhstan rather than Siberia and the Far East before reaching European Russia.
Most train shipments from China to Europe actually lose money, and yet their number is growing, while transit tariffs are constantly falling. According to China Railway Corporation, the number of transcontinental trains increased by 30 percent in the first quarter of this year. So why do Chinese companies persist in transporting their goods to Europe by train, instead of opting for far less expensive sea transport?
The main explanation is China’s generous government subsidies for overland transit. After the implementation of the state’s Silk Road Economic Belt initiatives to integrate trade in Eurasia became one of the most important indicators of success for local authorities, all Chinese regions started regularly reporting their successes in establishing or modernizing East-West transportation corridors.
Guided by the need to maintain the appearance of success, local governments are forced to subsidize these money-losing routes. The Wuhan transportation department, for example, transferred 30 million yuan ($4.5 million) from a special compensation fund in the first half of 2015 to cover the losses of a state-run enterprise operating a Wuhan-Xinjiang-Europe container route. The subsidy program is to last for five more years. Similar mechanisms also exist in other Chinese regions, so shipping companies use money-losing train routes, expecting the local authorities to compensate them for it.
This subsidizing by China of unprofitable train routes benefits both Russia and Kazakhstan. If Beijing stops sponsoring overland transit for any reason, the system will not likely be able to sustain itself.
The rationale of China’s regional authorities is clear: they sponsor the New Silk Road to look good in the eyes of the central government. They shower Beijing with evidence of their successes in implementing the program, which include the numbers on rail transit. The central government reacts by making another cash transfer to local budgets (incidentally, the transfer amounts exceed the losses sustained by the shipping companies).
But why is Beijing prepared to prop up demonstrably more expensive overland transit?
First, the global competition between the United States and China is forcing Beijing to minimize possible risks of American pressure on China. The country can hardly challenge American sea dominance in the foreseeable future, so it needs to develop alternative routes for natural resource imports and commercial goods exports that can’t be controlled by the United States.
Second, China needs new projects to sustain its economic expansion rates. The government is hard-pressed to come up with new recipes to overcome economic stagnation other than continuing construction. China has essentially eliminated its housing and road infrastructure deficits and has been creating surplus capacities in these sectors for the past decade. Therefore, it seems quite logical to switch to constructing housing and roads in neighboring countries—preferably ones with higher profits and lower risks.
To accomplish this task, China needs loyal and tractable partners, and it is ready to do whatever it takes to win them over, from handing out commercial loans to molding a new generation of China-friendly local elites—though this may take a long time. Its much smaller and less economically developed neighbors to the west and north are perennially afraid of the “yellow peril,” which is not conducive to cooperation. The China-Kyrgyzstan-Uzbekistan railway, for example, was supposed to become the key link in the transportation corridor from China to Uzbekistan and farther west. Despite twenty years of discussions, nothing has been built as the parties are still arguing about the width of the track and investment formats.
Finally, China would like to develop its peripheral, poorly developed, and potentially separatist Western provinces. Beijing’s plan to revive the ancient trade route means significant investment and subsidies are pumped into the region with no promise of returns in the near future. Towns and even backwater villages in Gansu province, which I visited in May 2016, are literally changing as we speak—in sharp contrast with the Silk Road Economic Belt initiative’s stagnant international projects, which in comparison look like a mere side effect of China’s long-standing Great Western Development Strategy.
The concept of the Silk Road Economic Belt is based on a myth that both China and its neighbors prospered equally in the times of the Great Silk Road. Chinese tourist businesses plaster local Silk Road sites with images of bustling marketplaces and rich foreign merchants. But the real story of the ancient trade route is not quite so rosy: when commerce did prosper (which in fact was impossible most of the time due to constant wars and political instability), it was through trade between the powerful and essentially self-sufficient Chinese Empire and the intermediary towns dependent on China to varying degrees.
The original Silk Road in no way envisioned equal partnership, and apparently this has not changed. The Beijing project has the geostrategic goal of making a cluster of countries in the wide Eurasian space from China to Europe dependent on the Chinese economy and capital.
