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The Modern Silk Road: One Way or Another?

The Modern Silk Road: One Way or Another?

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This policy brief advocates for increased rail links between Asia and Europe, passing through the Caucasus and Central Europe.
This policy brief advocates for increased rail links between Asia and Europe, passing through the Caucasus and Central Europe.

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Published by: German Marshall Fund of the United States on Jan 27, 2014
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Black Sea Trust for Regional Cooperation
January 2014
Te Black Sea rust for Regional Cooperation
B-dul Primaverii nr. 50Corp 6 “Casa Mica”Sector 1Bucharest, Romania  +40 21 314 16 28 F +40 21 319 32 74 E BlackSearust@gmus.org
Summary:
The technological developments of the last century made it possible to organize the production processes in international supply chains in a way that different stages of production for a single good take place over multiple locations. Given the over-congestion of the Chinese ports, rail freight emerges as a critical logistical alternate solution to support China’s growing trade with Europe, and also as a tool to bring industrial development to the landlocked countries of Central Asia and the Caucasus. There are three alternative corridors along the Modern Silk Road to connect China to Europe, which should be regarded not as substitutes for but as compliments to each other, as they form a comprehensive network of railways along the Modern Silk Road. In order
to reap the multiple benefts
of the Modern Silk Road, the international community should have a clear road-map to engage all relevant actors, in particular the private sector, in a productive dialogue to set project policy priorities by assessing major bottlenecks and to build institutional capacity.
 The Modern Silk Road: One Way or Another?
by Ussal Sahbaz 
Introduction
Te idea o
reviving 
 historical
land routes that
connect Asia to Europe and realizing the benefits o expanded trade has drawn considerable interest in recent years. A key motivation has been a shif in U.S. oreign policy in Aghanistan, including the Obama administrations economics-ocused approach to address long-standing
security concerns
 and
 political dead-locks in
the Eurasian continent. A central pillar o the administration’s approach has been enhancement o land connectivity,
1
 and multiple scenarios or a Modern Silk Road have emerged since 2010 based on the different strategic priorities that have been voiced by a number o countries and actors. Should these actors desire the Modern Silk Road to be more than a “buzzword,” they would need to take immediate steps, including raising awareness o the benefits o rail reight connectivity or the region and identi-fication o major bottlenecks impeding their operationalization. As important is to produce a road-map that outlines actions key actors, including govern-ments and private sector, can take to advance the process. A previous paper authored by Iulian Chiu in GMF’s
On Wider Europe
 series
2
 on transport corridors linking Europe to China showed that transport corridor
1
Starr, Frederick and Andrew Kuchins (2010).
The Key to Success in Afghanistan: A Modern Silk Road Strategy.
2
On Wider Europe
 series, German Marshall Fund, August.
initiatives are in act an incentive or all en route countries as well as other strategic players involved in the region such as the United States. Tis paper ocuses specifically on railroad corridors. First, in the context o global supply chains, it addresses the importance o rail reight trans-port over the “Modern Silk Road,by ocusing first on logistics chal-lenges related to trade between China and Europe and secondly on possible developmental benefits or countries in Central Asia and in the Caucasus. Te third section explores different alternatives or railway corridors along the Modern Silk Road, with a ocus on routes that pass through the South Caucasus. Lastly, it proposes a
roadmap
 identiying priority
action
 areas.
The Age of Global Production and the Case for Rail Freight Transport along the Modern Silk Road
Te strategic importance o a Modern Silk Road trade route that would link Asia to Europe is tied to the evolu-tion and growth o international supply chains over the last three decades. Until the 1980s, the main driver o globalization was the all in transportation costs and competition amongst nations at the sectoral level (i.e., Swedish cars v Japanese cars). Since the 1980s, rapid technological change, particularly the dramatic developments in communication and
 
Black Sea Trust for Regional Cooperation
2
inormation technologies, have marked the second wave o globalization. echnological developments made it possible to organize the production process in so-called supply chains, where different stages o production o a single good take place across multiple locations (i.e. Swedish cars may contain Japanese components and vice-versa). In the age o global production and interdependence, countries compete to attract different stages o production within the supply chain, and multi-national firms spread out different stages o production to different countries in order to become more efficient.
3
 In its initial phase, diversification o production resulted in firms moving their operations to locations with low-cost labor and access to low-cost maritime transport. Conse-quently, Asia became the global production center, or aptly “Factory Asia,” led by China’s remarkable economic boom. China’s trade grew by an annual average o 25 percent in the past decade – more than twice the growth o world trade — and making China the largest trader in the world in 2013. Chinese exports largely shipped out rom the ports on country’s eastern shore, an area where most o the industrial production took place. However, the eastern ports have become congested over time. According to a World Bank study, China’s demand or container port services is almost twice as high as the available supply 
4
 resulting in significant delays in shipments.Over-congestion in Chinese ports makes rail reight emerge as an important alternative. Railway connections along the Modern Silk Road are already being used by a number o multi-national companies. HP, or example, uses cargo trains to ship its products rom actories in China to Europe. On June 20, 2013, DHL announced that it had begun a weekly express reight train service rom Chengdu, in central China, moving across Kazakhstan, to Poland.
5
 Linking China’s trade to Europe is critical. In spite o weak recovery rom the global financial crisis, Europe is the largest consumer market in the world. In 2012, 17 percent o Chinese exports were destined or the EU (27), making the region Chinas second largest export market, slightly
3
Baldwin, Richard (2011). “Trade and Industrialization after Globalisation’s 2
nd
 Unbun-dling: How Building and Joinin a Supply Chain are Different and Why It Matters.” NBER Working Papers.
4
Abe, Kazutomo and John Wilson (2009). “Weathering the Storm: Investing in Port Infra-structure to Lower Trade Costs in East Asia.” World Bank Policy Research Working Paper.
5
The New York Times
. July 20, 2013. “Hauling New Treasure Along the Silk Road.”
behind the United States. In turn, Europe also has a large concentration o multi-national companies, thereore, is a big investor in supply chains that involve China. In the case o Chinese exports to Europe, rail reight offers a clear advantage over maritime with respect to time. For instance, it takes as long as 35 days to ship a container rom the industrial parts o China to the industrial heartland o Europe. By contrast, a reight train could transport the container in around 15 days. On the other hand, maritime reight rates are cheaper than railroad transport. For example, while transporting a container by train costs in the range o €3,500-5,500, shipping the container would cost €1,500.
6
 However, as the  value o products increase, the proportion o logistics costs in total price begins to all. Given that China has begun to move away rom low-value-added goods to specialize in high-value-added parts in the international supply chains (ast-ashion products, consumer electronics, etc), the relative cost o rail transport is likely to all. Moreover, the shif toward high value products makes China’s capability to respond quickly to changes in demand, and hence aster logistics connections, more critical. While rail reight is increasingly acknowledged as the more practical way to operate supply chains between China and Europe, it is also important to note that it is the more environment-riendly option as well, having a smaller
6
The prices are for 20 TEU containers. Kulaklikaya, Omer (2013). “Modern Ipek Yolu: Orta Asya’nin Kuresel Ekonomiye Acilan Kapisi.” TEPAV Policy Note.
It takes as long as 35 days to ship a container from the industrial parts of China to the industrial heartland of Europe. By contrast, a freight train could transport the container in around 15 days.
 
Black Sea Trust for Regional Cooperation
3
carbon ootprint. Freight carried by rail produces up to 20 percent ewer carbon emissions than i moved by ship. Moreover, surplus emissions can be sold in carbon markets in the uture, thereore lowering the effective logistics cost o rail reight. Te Chinese government has recently made railway connectivity a central eature o its new economic devel-opment strategy. Te strategy ocuses on development o inland connections to address the congestion in China’s eastern regions (i.e. congested ports and rising labor and land costs). Te policy move has resulted in rapid railroad development on China’s western (inland) parts, which now have more than twice as much track per capita as eastern (coastal) parts.
7
A prime example on how a region’s economic uture is tied to railway development can be observed in recent develop-ments taking place in Chinas northwestern Xinjiang prov-ince. Xinjiang, which shares borders with India, Pakistan, Aghanistan, ajikistan, Kyrgyzstan, Kazakhstan, and Russia and was long regarded as the underdeveloped backwater o China, had missed out on the export potential o Chinas economic boom. Since 2006, the 1,904-kilometer double-tracked Xinjiang-Lanzhou Railway has connected Xinjiang to Northwest China and the main Chinese railway network. Te railway corridor also extends to Kazakhstan, making Xinjiang region a hub with high development potential between Central Asia and industrialized parts o China.
Development Opportunities for the Larger Region
Along the Modern Silk Road, in between Europe and China, lies the vast Eurasian landmass, including Central Asia and the Caucasus. Some Central Asian and Caucasian countries, notably Azerbaijan, Kazakhstan, and urkmeni-stan, are resource-rich. All countries in the region lack industrial development due to significant connectivity prob-lems. In the international shipping connectivity index o the United Nations, which measures ease o importing and exporting across the borders as well as port logistics (using the shortest route to the sea or landlocked countries), the Central Asian countries have scored less than hal o that o urkey and a quarter o that o China. Connectivity problems also constrain export development. Te non-oil,
7
Bilgic, Idil Alparslan (2013). “Bir Bolgesel Kalkinma Hikayesi: Bati Cin.” TEPAV Policy Note.
non-gas exports o Central Asia is 20 percent o the total GDP o the region; this ratio is 40 percent and 75 percent in urkey and China, respectively. In the context o the new economic architecture charac-terized by global supply chains, strong railway networks could bring industrial development to Central Asia and the Caucasus. Manuacturers in China and Europe would have the opportunity to diversiy their supply chains by investing in these regions. For instance, the textile industry and other industries that were abandoned afer the collapse o the Soviet Union can be revitalized, as 90 percent o Soviet actories already have railway connections. We suggest a “transport corridor approach” or the devel-opment o railways. Efficient transport corridors ensure seamless integration o different transport modes, such as maritime and railways. Linking missing parts by targeted inrastructure investments, coordinating schedules o services in different transport modes, and acilitating traffic at bottlenecks such as border crossings are essential elements o the corridor approach. As an element o the corridor approach, construction o dry ports along the Modern Silk Road will increase benefits. Dry ports and logistics centers, which handle containers and other cargoes by any mode o transport including rail-ways as well as roads, inland waterways, or airports, provide customs and storage services to clients. Azerbaijan, or instance, has an impressive plan to develop an air-cargo hub to take advantage o its low-cost uel
8
 to fly out high-value
8
Ziyadov, Taleh (2012). “Azerbaijan as a Regional Hub in Central Eurasia.” Azerbaijan Diplomacy Academy.
The textile industry and other industries that were abandoned after the collapse of the Soviet Union can be revitalized, as 90 percent of Soviet factories already have railway connections.

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