By Land or by Sea?
WHY YOU SHOULD CARE
A global economic force is looking to the past to craft its future. Cool.
The story of the little engine that couldn’t starts near Shanghai, in Yiwu, China, continues across Asia and Europe and ends three weeks later in Madrid. It’s the world’s longest rail journey, but its maiden voyage wound up lopsided. As it turns out, Chinese low-cost goodies can fill an outbound train, but Spanish ham and wine can’t reciprocate on the return trip.
We’re talking about the Silk Road, the once magical transcontinental route dating back to the Han dynasty and first traveled in 138 B.C. Closed for more than five centuries, China is hoping to make a truly bold bid to bring it back, and revive one of the oldest bridges between Western and Eastern civilizations. But unless you see it all from China’s perspective, and you can bet a lot of people don’t, you have to wonder the obvious: Why would anyone bother going down that old road?
China, which for now is stuck sending goods to Europe exclusively by sea, views the 4,000-mile route as its best way to improve business and diplomatic relations with a whole other continent. It is still more of a concept — not exactly Confucian, but more like a pragmatic adaptation of Kevin Costner’s line in Field of Dreams: “If you build it, he will come.” The midterm goal is a bilateral investment treaty, and over the long term, a free-trade agreement complemented by people-to-people exchanges that China is pressing for, from tourism to student swaps. But like the test train run to Madrid, the proposal also mirrors the main challenges of overcoming lingering suspicions between China and Europe, not to mention a huge trade deficit.
“The train is a good idea, but the execution hasn’t been good,” says Chencheng Li, CEO of East2West, a Barcelona-based company that specializes in bridging Chinese-European business. More concrete examples than the train are the investments made by the Dalian Wanda Group, one of China’s biggest conglomerates and Li’s client. It bought one of Madrid’s most emblematic buildings and a 20 percent stake in the Atlético de Madrid soccer team, and now intends to build a mega family park, which Spain is all too happy to accept.
Chinese investment in Europe remains tiny, but it’s soaring. In the meantime, bilateral trade has more than doubled over the past decade, to around $525 billion in 2013, and is expected to increase more than 20 percent in the next 10 years, with China potentially replacing the U.S. as the bloc’s top trading partner. The EU’s trade deficit with China this decade climaxed in 2010 at nearly 170 billion euros ($183 million) and has decreased ever since, just not fast enough. The main reason: China refuses to reciprocate Europe’s open doors — especially in its service sector, like banking and telecommunications. Bilateral trade in services is 10 times lower than trade in goods.
Europeans are not used to China having the power. They want the money, but don’t want to give up control.
Chencheng Li, CEO of East2West
Europeans aren’t holding their breath, though. Neither side is in a rush to cede terrain, for essentially three reasons: They have more important things to worry about, their real intentions are lost in translation and, above all else, their relations during Europe’s economic crisis have flip-flopped to give China more muscle, which it has been happy to use to divide and conquer — the Dalian Wanda Group is rescuing some but pissing off others.
“If China can leverage to play countries against each other, it’s a big problem for Europe,” says Agatha Kratz, a Paris-based associate policy fellow for the Asia and China program of the European Council on Foreign Relations. “The problem is that Europe is so open that China doesn’t have much to gain anyway.”
The result is that the Silk Road, minus the charm, is a one-sided affair geared for the long term at best, like the Madrid train. And Europe is on the losing end, because in the meantime, China and the U.S. are negotiating their own trade deals, which European economies like Germany and the U.K. feel risks leaving them behind from the still-lucrative Chinese market.
“As with many of China’s projects, this is more symbolic than practical. In the official discourse, there is an emphasis on Europe, but it means Eastern and Central Europe, and in the long term Western Europe,” says Kratz. China is wasting no time, despite Europe’s mistrust: Its Central Bank announced in February a private-equity $40 billion infrastructure venture, led by state-run enterprises, for the Silk Road. And that’s just to get things going. Over the next decade, highways, railways, pipelines and ports will be built as if it were a game of Risk.
One rail route will cut across China’s neglected wild West and then split two ways: south across Iran and into Turkey and Greece, and also northwest across Kazakhstan, into Russia and on to Europe, where the Madrid rail fits. Another route will go north to Russia using the Trans-Siberian Railway, and throughout the waters of Asia and to the Mediterranean.
Increased trade is a perk for China, but the slippery endgame is to buy as much of Europe’s brainpower that it needs to move beyond being the world’s factory for low-cost goods, a prerequisite to move into the big leagues and realistically compete with its rival — you guessed it — the U.S. Still, it’s not a bad deal for Europe. “China didn’t talk about civilizations before,” Kratz says. “It is slowly developing a soft diplomacy. This is sugarcoating an economically based project.”
The Chinese strategy shouldn’t be underestimated, though, Li contends. She should know: For years she tried to open up markets for Spanish luxury products in Asia, but her clients were simply not prepared. In 2013, picking up on an influx of Chinese investment appetite, she switched strategies to represent Chinese clients wanting to access European markets. “Europe is a hot spot for Chinese now; officials are pushing this,” she says.
It’ll be hard. “Europeans are not used to China having the power. They want the money, but don’t want to give up control,” Li says. So why does her client the Dalian Wanda Group invest there? “There’s money to be made, sure, but that is true of many countries. It might sound unbelievable, but it’s emotional. They really like Spain.”