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Cooperation in Trade and Investment: Key to the Belt and Road Initiative


Editor's Note

To prepare for "The Belt and Road Initiative: Inspirations and Opportunities" seminar to be held in Istanbul, Turkey, Dec 11 - 12, the Development Research Center of the State Council (DRC) has done some preliminary work to appear in a special column of China Economic Times starting Dec 3, so, keep a close eye on this.

Author: Zhao Jinping, director-general, Foreign Economic Relations Dept, DRC

Cooperation in Trade and Investment: Key to the Belt and Road Initiative
Zhao Jinping

Zhao specializes in macro economics, international economy and foreign economic policies and has been the author or co-authors of many works, including Foreign Investment Utilization and China's Economic Growth, To a New Start: Japan's Economic Recovery Road and Sino-Japanese Economic Relations, Trans-Pacific Partnership Agreement Influence and China's Countermeasures, and The Influence of China's Development on the World Economy and articles in People's Daily, Economic Daily, Guangming Daily, China Economic Times, Management World, Intertrade, and Outlook Weekly.

President Xi Jinping's proposal, in 2013, for a Silk Road Economic Belt in Eurasia developed through innovative cooperation and a Maritime Silk Road connecting China with Southeast Asia got a lot of attention and response from the international community, with broad consensus and action by countries in the two areas. The goal of the "One Belt, One Road" initiative is economic development of the economies, regional stability and common prosperity, and increased cooperation in trade and investment are an important way to do this.

I. Cross-border trade and investment of the economies involved play a significant role in economic growth in the following ways:

First, cross-border trade and investment growth is above the global average. World Bank statistics showed that trade and cross-border investment of 65 countries in the two areas grew 13.1 percent in trade and 16.5 percent in investment, annually, on average, in the 1990-2013 period, while globally they were 7.8 percent and 9.7 percent. In 2010-2013, after the financial crisis, annual average growth of foreign trade reached 13.9 percent and foreign capital inflow, 6.2 percent, or 4.6-percentage points and 3.4-percentage points above the world average, in which it did a lot for the recovery of world trade and investment.

Second, economic growth in the two areas has become more dependent on cross-border trade and investment than in the rest of the world, on average. Their dependence on foreign trade reached 32.6 percent, in 2000, then rose to 33.9 percent, in 2010, and 34.5 percent, in 2012, well above the world average of 24.3 percent, demonstrating clearly how significant cross-border trade is.

Third, the two areas are competitive in trade and have advantages, as seen in their foreign trade which, as a whole, had a surplus and a trade competition index of 2.1 percent, in 1990, 12.5 percent, in 2000, then fell to 9.5 percent, in 2010, because of the international financial crisis, but stayed at 10 percent in after the following years. And their ability to attract cross-border investment, gave them a net inflow of foreign direct capital of 1.5 percent of GDP by 2000, lower than the world average of 1.8 percent, but going above the world average after 2010, and reaching 6.3 percent in 2013, or 1.9-percentage points higher than the world average.

The trade and investment increase in the two areas helped economic growth and contributed to global prosperity. Again, World Bank statistics of GDPs ($US at 2005 level) showed an annual average GDP growth in the two areas, in the 1990-2013 period, of 5.1 percent, or twice the world average, and even during the slow global economic recovery from the international financial crisis, in the 2010-2013 period, it was at 4.7 percent, or 2.3-percentage points above the world average. Thanks to the rapid economic growth and economic aggregate expansion, the two area's economic growth contributed to global economic growth, 2010-2013, by 41.2 percent.

II. Cooperation in trade and investment in countries in the two areas still faces a lot of difficulties.

First, most countries in the two areas see a low level of economic development and limited market demand, with statistics from 57 countries showing 35 of them with a per capita GPD below $10,000, in 2013, against a world average of $10,500. Although their aggregate population was 3.95-billion, or 55.3 percent of world's total, their GDP accounted for only 20 percent of the total, with a per capita GDP of $3,862, or 76.5 percent of the two areas' average and 35.7 percent of the world's average.

Second, the two areas' economic integration lags behind because, in spite of their large populations, good locations and conditions for economic relations, the two areas still lack free trade arrangements and an effective way to cooperate, which restricts the move towards greater cooperation.

Third, intra-regional trade in the two areas is low compared with that of the European Union, North American Free Trade Agreement (NAFTA) and Association of Southeast Asian Nations areas which have seen substantial progress in integration. The intra-regional imports and exports in the two areas accounted for a lower portion of total trade. Excess dependence on foreign markets can mean bigger risks from economic fluctuations outside the region and increased competition among economies in the region, leading to a decline in trade income across the areas.

Fourth, there is a big gap between infrastructure supply and demand in most of the two areas. Because of a sparse population and backward economy, infrastructure for traffic and transportation, including along China's border areas and Central Asia, lags far behind the densely inhabited parts of Europe and Asia.

Fifth, there are many trade barriers and other obstacles in the two areas, to cite just one example, the new Eurasian Railway, which passes through many countries with different rail gauges, requires a lot of time and effort in changing the rails. So, cooperation among the different countries needs to be improved to facilitate transportation and cut logistics costs and difficulties in goods and service circulation.

Sixth, countries in the two areas need to increase their trust to reduce the non-economic problems. With the complicated international economic situation and fierce competition, countries in the two areas need a common destiny and community awareness by eliminating doubts and suspicion, setting regional economic, social stability, and prosperity goals through greater connections for mutual benefits.

III. Policy communication and infrastructure connection are important for trade and investment cooperation.

First, the countries involved need dialogue and communications on policies with a common consensus, and need to eliminate barriers to cooperation for a better policy environment, to facilitate productive elements' smooth flow, effective distribution, and market integration.

Second, the two areas need better bilateral and multilateral cooperation, negotiations in a regular way, trade and investment agreements, and free trade zones for greater economic cooperation. Many countries are members and observers of the Shanghai Cooperation Organization and this can play a greater role in cooperation with its broad representation and ability of get people together. Then there is the China-ASEAN connection that has been an important policy site, with a good cooperation framework. The China-ASEAN free trade zone can act as a model and provide experience for high-level trade and investment cooperation.

Third, the two areas need coordination and major countries can play a leading role. China, India, Russia, and Turkey are influential in the areas and even in the rest of the world. Statistics show the economic aggregate of these four accounted for 65.7 percent of the total of the two areas, in 2013, and with a net foreign investment inflow accounting for 67.9 percent and trade volume for 40 percent. More important, these four are major export markets and a source of cross-border direct investment for other members of the two areas. So, their cooperation and development are important for the whole, and they need to deal with economic relationships with other countries in the two areas with a more open attitude while being responsible for regional development.

Fourth, the countries involved need infrastructure connections and communications for country-by-county cooperation. China and many Asian countries have proposed an Asian infrastructure investment bank and Silk Road fund to provide financial support for infrastructure work in the two areas as a kind of joint venture.

IV. China will play a more active role in trade and investment cooperation in the two areas.

China has become the second largest economic power in the world, after 36 years of hard work after the reforms and opening-up began, thanks to economic globalization, and it has contributed to global economic development. In the future, it will continue its development, problem solving, and income trap solutions, so it needs a good external environment. Meanwhile, it will also be more responsible for global economic development and governance as a great power for the common development of other countries. And playing an active role in "One Belt, One Road" initiative is part of its inclusiveness, where it can make full use of its advantages and contribute more to cooperation and infrastructure development, in the following ways:

First, it can speed up the signing of free trade and investment agreements with countries in South, West, and Central Asia, and in Central and Eastern Europe, complete China-ASEAN free trade zone negotiations, and push bilateral and regional economic integration. Second, it can support Chinese enterprises in investment in neighboring countries and in establishing manufacturing parks with host countries for a better business environment. Third, it will build border-area economic cooperation zones for convenient cross-border trade and investment. Fourth, it will work with other countries to support the Asian infrastructure investment bank and Silk Road fund, and bring in international capital to provide the funds for greater connections and communications. Fifth, China will push imports from the two areas to satisfy its production and consumer demand and provide greater goods and services markets for member countries. China is expecting cumulative global imports over the next 5 years to exceed $1 billion, and it could be huge if half of that coming from the two areas. Lastly, the cooperation of China's eastern, central and western regions and its cities, and better resource integration and operations will create favorable conditions for the internationalization of the two areas.

Now, exchanges and dialogue between think tanks are important for trade cooperation among the two areas, so we want to take this opportunity, at the "Belt and Road Initiative: Inspirations and Opportunities" seminar to encourage joint research work, exchanges and discussions among the participating countries to provide intellectual support for the initiative.

Source: China Economic Times

Date: Dec 3, 2014