COVID-19: Can China offset the long-term Socio-economic impact on China’s Belt Road Initiative?

15 April 2020
COVID-19: Can China offset the long-term Socio-economic impact on China’s Belt Road Initiative?
Cars drive in a traffic jam on a road in Beijing, China, 17 March 2020. Photo: EPA

Daily reports of the economic impact of the Coronavirus are being replaced by regular updates of financial and market meltdowns. City shutdowns and border restrictions are straining supply chains, causing global trade to contract at alarming rates. By trying to balance economic and health priorities there has unfortunately seen a polarisation of world opinion, with blame for the virus being apportioned along nationalistic lines.

What is emerging from the numerous commentaries is a greater focus on the humanitarian cost and this is causing a revaluation of the geopolitical make-up of global markets.

With this review comes a deep questioning of open border policies and the benefits of free trade with open markets. Many now argue that offshoring of manufacturing, particularly to China, has exposed the west unnecessarily to sovereign risk. Increasingly being questioned are consequences associated with participating in China’s state capitalism model espoused in their global corporate governance approach under the banner of the Belt and Road Initiative (BRI).

In a sense, the economic debate around the BRI is more tangible in that it can be measured. It shows the success of the BRI in integrating China’s into global supply chains. As the COVID-19 spreads, you cannot obfuscate the data showing the decline in all sectors of the global economy. Reports highlight the impact on tourism, manufacturing, services and supply chain. The available data corroborates that the economic cost of the reaction to the virus on the global economy as being US$1.1 trillion. Economic indicators supporting this narrative include a decline in industrial activity with companies like Samsung moving manufacturing plants to Vietnam to maintain operational capacity.

With the virus set to wipe approximately 1% from 2019’s total global trade volume (1.7 million teu) as shipping lines withdraw container services, the impact on the supply chain is very real. Consider that 80% of world trade/supply is conducted through ocean freight. Further supply chain constraints have been caused by the decline in Asia to North Europe container shipments by a third. This potentially could reduce container cargo volumes through Chinese ports by 6 million teu in the first quarter of 2020. Exacerbating the situation are the number of airlines reducing or suspending flights in and around China, reducing labour mobility, particularly when it comes to BRI projects. All of this has placed pressure on getting parts to manufacturing plants, reducing capacity and creating the conditions for product shortages like smartphones and motor vehicles.

It is expected that these constraints will lower China’s GDP growth to below 5%, with some suggesting that China will only achieve a 3% growth. This is an important indicator for the global economy as China’s contribution to global GDP is 16%.

However, the human cost is more difficult to quantify. This begins to highlight some of the weaknesses in China’s model of State Capitalism. There does not appear to be enough transparency in the level of infection or deaths associated with the virus. Reports on the level of infection and death are to a large extent, driven by the media narrative intent i.e. anti-China media reports higher levels of contagion. It also raises questions around the efficacy of the development model underpinning the BRI, namely the use of Chinese migrant labour from rural parts to resource manufacturing plants. The convergence of COVID19 and the Lunar New Year resulted in stranded productive labour as cities and transport were shut down to contain the virus.

The human impact highlights the single biggest issue within the China BRI economic model potentially causing irreparable damage to the ambitions of the BRI.  The consequence of the virus has morphed from socio-economic considerations to that of questioning the geopolitical intent of the BRI. Central to the debate is the question of trust. The corporate values incorporated into the BRI formulation spoke of a shared human destiny that would achieve international win-win partnerships. The people to people objectives would deliver these outcomes by helping developing countries leapfrog poverty through economic development that created local employment and participation through mutual consultation, co-building and sharing. Many of the BRI projects were signed up based on these principles.

What does this mean for a country like Myanmar?

COVID-19 has brought China’s intent and claims of a shared human destiny into question, particularly in the SE Asian region. Essentially questions are being raised around the transparency and equality of gains pronounced by the BRI. Trust in the system in the region is at an all-time low. Myanmar needs to be aware of the supply chain disruptions particularly awareness of BRI projects labour, equipment and machinery resourcing out of China. With 133 countries having imposed border entry restrictions, there have been significant delays in BRI projects in the likes of Indonesia, Malaysia and Cambodia. Scrutiny has shifted to a closer look as to the reason for these delays. 

Indonesia serves as a good example of this scrutiny as Sino-Indon relations deteriorate. Indonesia and China Railway International Group’s US$6bn high-speed rail project demonstrates the BRI’s declining trust dividend. Whilst mundane tasks of the project can still be done, the essential elements cannot. The reasons for this are not only that critical equipment, machinery and parts not available but the project employed 100 Chinese citizens in management and key positions. These employees are either quarantined in China or denied entry into the country. Local communities are now asking why there are no locals employed in these positions that would enable progress? Why no local equipment suppliers? The situation has enabled detractors of the BRI to exploit these concerns, using the low local content as proof that China’s BRI is nothing more than a plan to address China’s overcapacity and employment issues. This would make China the chief beneficiary of the BRI, and as the COVID19 virus now highlights, recipient countries, the supplicants.

The Bangladesh Payra Coal Power plant is another project that has stalled as a consequence of the virus. The project employed 2,000 Chinese, many went home for New Year, but only twenty were allowed to return to Bangladesh.

Even when local employment is high, such as found in Cambodia’s Sihanoukville Special Economic Zone, the project is delayed. Despite having 160 businesses and 20,000 local employees engaged in the project, the facility is silent as it relies on supplies out of China to go forward – and these supply lines are broken.

China is trying to offset this negative publicity by re-establishing the Medical Silk Road (MSR). Initially pronounced eight years ago, it has been resurrected under the banner of the BRI, with the BRI rail and road network being showcased as the mechanism by which medical and humanitarian aid is delivered – particularly to BRI participant countries. The BRI infrastructure network enables protection suits, face masks and test kits to be delivered to 54 countries in Africa and Italy and Spain.  However, this is being viewed with scepticism as the West highlights China’s dominance in medical manufactured supplies aided by the BRI, essentially holding others to ransom.  

Despite the socio-economic impacts being severe, China will recover. However, the same cannot be said for the geopolitical fallout that impacts the credibility of the BRI. The virus has created conditions that would allow other nations to destabilise China’s efforts. Organisations like the QUAD - United States, Australia, India, and Japan - can offer alternatives to China, and countries like Myanmar will become increasingly aware of these alternatives. 

The real test for China is whether the soft diplomacy efforts can sell the BRI message of a shared human destiny in an environment where there is increasing cynicism over China’s intent to allow meaningful local community BRI participation.