Deepening of Northeast Asia Economic Integration through the Belt and Road Initiative: A Korean Perspective

Hyung-Gon Jeong

Vice President, Korea Institute for International Economic Policy

This paper proposes ways to deepen Northeast Asia Economic integration through the Belt and Road Initiative (B&R) and other regional initiatives such as, the Korean Eurasian Initiative.

The Chinese Economy: Background for the B&R Initiative

As we all know, the Chinese economy experienced rapid growth for a prolonged period, but a significant shift in its growth pattern occurred during the global financial crisis of 2008. During the six years leading up to 2007 China's GDP grew at an average rate of 11%, with investment equalling 41.5% of GDP. The current account surplus rose during this period, reaching more than 10% of GDP. In the more than six years since the global crisis, however, the external surplus has fallen sharply into the range of 3% of GDP, but the shortfall in demand was made up almost completely by an increase in investment, which has reached more than 50% of GDP in recent years. China's growth has been impressive compared with the rest of the world, but the growth rate has slowed to around 7%, down more than four percentage points from the pre-crisis period. Thus, recently, China has been relying a lot more on investments to grow its economy—significantly more than in the past. China's response to this changing growth dynamic is partly external and partly internal.

China's Intensions

Historical Background

The old Silk Road is one of the main components of the Belt and Road Initiative. The Silk Road was opened during China's Han dynasty and it commercially linked the regions of the ancient world throughout the Song and Ming dynasties (from the 10th through the 17th centuries). The Maritime Silk Road was established during the Ming Dynasty. The term “Silk Road” is representative of the most prosperous and liberal stage in Chinese history. It was also a stage or time when China's influence over the rest of the world was at its peak.

Throughout Chinese history, Chang'an (today, Xi'an), the capital of the Tang dynasty (7th to 10th century) was the most open city—also the largest city in the world. Chang'an city was a cosmopolitan city with a large foreign population. Thus, Chang'an remains a symbol of openness. China, at the time, was a more liberal and open place than other countries in the world. It is not surprising that Xian, with its history of openness and international exchange, became the starting point of the Belt and Road Initiative. At its heart, the Belt and Road Initiative is a plan to help China realize an economic dream that started long ago.

Internal Motivations

The Belt and Road Initiative projects are part of China's internal strategy for a new engine for growth under a “new normal” economy, where the growth rate hovers around or below 7%—the plan is to encourage overseas investment and export. In addition, China's overcapacity in sectors such as iron and steel, cement, and aluminium is believed to be threatening the Chinese economy. China intends to resolve overproduction by expanding investment in infrastructure and by transferring production facilities overseas to countries along the Belt and Road Initiative railway.

In tandem with an economic slowdown, narrowing urban/rural disparity and securing energy supplies are the main concerns for the Chinese economy. To develop markets and promote investment in the underdeveloped regions of China, the B&R Initiative mainly focus on infrastructure building and transportation supply chains in the western regions.

The Belt and Road Initiative includes natural resources projects along the pipelines of the economic corridors. The corridors will open new routes to the Middle East as well as Central Asia. These corridors will provide an alternative route to the Gulf region through a Maritime Silk Road and increase accessibility to Central Asia through the overland pipelines of the Silk Road Economic Belt. This will render the supply of energy more secure and cost-effective.

External Motivations

China is attempting to take the lead in regional economic integration; it is doing so by exercising influence over neighboring countries through financing regional development projects. There is a consensus among observers that China is attempting to create a new order in the international political economy—an international political economy currently dominated by the US through its leading role in the World Trade Organization, World Bank, and International Monetary Fund. The Belt and Road Initiative and the Asian Infrastructure Investment Bank (AIIB) jointly provide a platform for economic cooperation and help to further strengthen the interdependence between China and member countries. This was interpreted as a counter to the US-led Trans-Pacific Partnership Agreement (TPP) and Transatlantic Trade and Investment Partnership (TTIP) pacts.

International Response to the B&R Initiative

From the beginning, the US response to the B&R Initiative has been unfavorable. Washington perceives it as a Chinese strategy to extend geographic influence and leverage over its neighbors, including US allies, through trade and investment practices. A White House statement from October 2015 states, “We can't let countries like China write the rules of the global economy.” The Japanese position is like that of the US. Although key NATO allies such as France, the UK, and Germany have joined China's Asian Infrastructure Investment Bank (AIIB) for example, Japan has not. Korea, on the other hand perceives the B&R Initiative along with the China-Korea FTA as a major opportunity to reinforce interconnectivity with China and other Asian countries.

Major countries in ASEAN including Vietnam, Philippines, and Malaysia also joined the AIIB in 2016. These ASEAN member countries seek to balance relations with China and the United States. India has embraced the AIIB with the hope of receiving development finance to spur its growth. Also, with the second-largest voting share in AIIB, India expects to play a key role in the China-led B&R Initiative and AIIB. Uzbekistan was among the first states to support the idea of the Silk Road Economic Belt. Uzbekistan expect that the B&R Initiative will strengthen mutually beneficial strategic partnerships and attract massive investments to develop national and regional infrastructure. Uzbekistan was the center of the ancient Silk Road, and Uzbeks today are interested in the revival of the Silk Road and in serving as a hub of the Silk Road once again. The B&R Initiative is seen to be in the interest of the entire Eurasian continent.

Deepening Economic Cooperation: The Eurasia Initiative and the B&R Initiative

The Eurasia Initiative is a concept proposed by Korean President Park Geun-hye at the International Conference on Global Cooperation in the Era of Eurasia (18thOctober 2013). The main idea is to create employment and revitalize the economy through regional cooperation among Eurasian countries. It is also hoped that it might help alleviate tensions on the Korean peninsula and build a basis for reunification. The Eurasian Initiative proposes the creation and development of a single and unified system of transport, energy, and trade networks, along with the implementation of economic cooperation and exchanges within the spheres of science, technology, and culture (including interpersonal relationships), as well as efforts to improve inter-Korean relations based on trust. This concept became official around the same time as the roll-out of the Belt and Road Initiative by Chinese President Xi Jinping. The Eurasia Initiative emphasizes an interactive, open, creative, and convergent Eurasia. The vision for the Eurasia Initiative can be summarized as: “One Continent, Creative Continent, Peaceful Continent.”

The key partner countries for economic cooperation in Eurasia are China, Central Asian countries, Russia, Mongolia, and Turkey. They account for 25% of the total population and 19% of the world's trade volume. The Central Asian countries, Russia, and Mongolia are rich in resources but have weak industrial infrastructure. Korea and China, on the other hand, have a developed industry structure and high energy demand. This suggests vast opportunity for regional cooperation in trade investment and technical cooperation. Intra-regional trade structure remains unbalanced due to underdeveloped transportation and logistics networks and insufficient infrastructure in general, as well as uncertainty over investment, and insufficient cooperation. Despite their geographical importance, Central Asia, Mongolia and the People's Republic of Korea are left out of intra-regional trade due to factors such as, underdeveloped infrastructure. According to the World Bank Logistics Performance Index (LPI), five Central Asian countries are ranked 114thto 149th(among 160 countries) in terms of LPI, while Russia ranks 90thand Mongolia is 135th. Specifically, these countries have differing railway system standards which leads to difficulties in interconnection and higher cost of transport and they lag world standards in terms of technology development and management systems.

The Eurasia Initiative emphasizes the importance of interconnectivity among four main areas: transportation and distribution, industry and trade, agriculture and fisheries, energy and resources. The Korean initiative resembles B&R Initiative which emphasizes “five connectivities”: policy communication, financial integration, unimpeded trade, facilities connectivity and people-to-people bonds.

B&R Initiative and Eurasia Initiative: The Need for China-Korea Cooperation

There is need for China-Korea coordination to strengthen economic cooperation in Northeast Asia. The B&R Initiative and the Eurasia Initiative share the common goal of peace and economic development through cooperation in the region. Both China and Korea want political stability on the Korean peninsula and economic prosperity in Asia. All countries share a common interest in the Central Asian region and in the development of China's three northeastern provinces. There is consensus between China and Korea over the desirability of reviving the ancient Silk Road as a major network. Chinese plans such as the“Revitalize the Old Northeast Industrial Bases” plan, the “Changjitu Project, and Hadaqi Industrial Corridor” plan are compatible with the Northeast Asian cooperation plans of Korea.

China-Korea cooperation in implementation of the B&R Initiative and the Eurasia Initiative can propel the integration of Northeast Asia. These two concepts are expected to consolidate a strategic partnership between China and Korea based on a shared interest in creating an engine for economic growth and strengthening economic/diplomatic relations with neighboring countries. From a Korean perspective, the two countries can jointly exercise leadership to promote regional economic integration and the B&R Initiative stability and peace as well as promote bilateral cooperation.

Factors such as common geographical coverage, shared goals (regional peace and stability), and shared interests in specific areas (such as cooperation on transportation and distribution networks and their interaction) will likely lead to a connection between the two concepts. For instance, the Eurasia Initiative includes building a complex distribution network linking Eurasian countries with railways and roads, while the B&R Initiative emphasizes building infrastructure and energy cooperation projects, namely, building natural gas pipelines between China and Central Asia.

The two Initiatives have their respective strengths. The Korean Eurasia initiative is strong in terms of information and communications technology (ICT) and in industries of the future and management know-how of global enterprises. The strengths of the Belt and Road Initiative are overall industrial cooperation including investment in transportation/logistics infrastructure, ample funds and experience in various types of construction, and wide intra-regional networks based on past experiences.

The question is, how can these initiatives contribute positively to Northeast Asian integration? To facilitate Northeast Asian economic integration, hard and soft infrastructure must be built. As mentioned, China's B&R Initiative is perceived as a way to resolve its excess capacity problem. However, there are also questions over how China can contribute to economic integration in Northeast Asia while it pursues such a goal.

The idea that the B&R Initiative will help resolve China's excess capacity problems is unconvincing. If the Asian Infrastructure Investment Bank (AIIB) is very successful, then in five years it could lend $20 billion per year—that is on a scale with the World Bank's International Bank for Reconstruction and Development lending. But just in steel alone, China would need $60 billion per year of extra demand to absorb excess capacity. This figure excludes excess capacity in cement, construction, and heavy machinery. The point is, that the AIIB is much too small to make a dent in China's excess capacity problem.

However, the Belt and Road Initiative is more than just the AIIB. It started with the idea that nearby countries in Central Asia could benefit from more transport infrastructure, some of which China could finance bilaterally. However, the economies of Central Asia are not that large, so the potential for investment is limited. Overland transportation will remain expensive compared with shipments by sea. For that reason, China added the idea of a maritime road—that is the expansion of infrastructure along the sea-going routes from the Chinese coast through Southeast Asia to the Indian Ocean and all the way to Europe. A vast amount of world trade already traverses along this route. This means there is a high probability that the Chinese approach to Asian economic integration will focus on the maritime road first.

Fortunately, the Economic Research Institute for ASEAN and East Asia has developed the “Comprehensive Asian Development Plan 2.0” (CADP) and analyzed production networks, industrial agglomeration, and innovation hubs. Research results indicate that if the CADP and the Maritime Silk Road Initative are combined, there is a high possibility that Northeast Asia will be integrated more effectively and economically than either plan could do on its own. Considering that the B&R Initiative emphasizes policy coordination and strengthening connectivity through infrastructure building by neighboring countries, coordination and harmonization of the B&R Initiative and CADP will contribute greatly to Northeast Asian economic integration. One important point here, however, is that such an initiative and plan should concentrate not only on building hard infrastructure, but also should provide more concrete plans to build soft infrastructures to facilitate economic integration through such means as trade liberalization.

Conclusion

The B&R Initiative seems appropriate for the present political and economic development of China, in line with its thinking regarding international relations. But this strategy comes with several potential risks for the countries involved, including a harsh terrain, long distances to markets, high costs, slow customs clearance procedures, corruption, political instability, and terrorism, and challenges related to China's domestic problems, tensions with its neighbors, and rivalries with other great powers. Nonetheless, it is a worthwhile venture and the successful implementation of the Belt and Road Initiative should be encouraged and welcomed in Northeast Asia. There is much to be done to achieve success.

First, it is important to recognize that the view that the Belt and Road Initiative can be a major solution to China's excess capacity problems is largely misguided. The contributions that these initiatives together make to China's demand are likely to be too small to be macro-economically meaningful. Thus, China should concentrate more on the possibilities of cooperation with neighboring countries to let them join the Belt and Road Initiative and to invite investment from these countries. To this end, China should develop a refined strategy to attract them to projects.

China's initiatives in Asia also are seen in many quarters as a setback for the United States. The US government contributed to this narrative through its efforts to discourage allies from joining the new AIIB. In the end, major American allies, such as the UK, Australia, and Korea, did join the Chinese initiative, and Japan is seriously considering becoming a member. However, this is likely to be just a temporary diplomatic setback for the United States. Many major economies in Asia, such as Australia, Singapore, Malaysia, Korea, and Vietnam, want to be part of both the Chinese initiatives (the AIIB and the B&R Initiative) and US-led initiatives, be it the Trans-Pacific Partnership Agreement (TPP) or another. This is clearly the smart approach. For Vietnam, for instance, a turn to the AIIB could improve infrastructure, while using the TPP framework would allow Hanoi to integrate its economy with the vast and innovative US economy. I argue that these different efforts are in fact complementary. The kind of infrastructure financed through Chinese initiatives represents the ‘hardware' of trade and investment, necessary but not sufficient to deepen integration. The TPP or TPP-type of frameworks, meanwhile, represent the “software” of integration, reducing trade barriers, opening up services for trade and investment, and tackling various regulatory barriers to trade. There is a risk that the competing initiatives of China and the United States will lead to regional blocs and a disintegration of trade, but it is more likely that Sino-American competition will lead to strengthened institutions and deeper integration throughout Asia-Pacific. Thus, it is more likely that the result will be cooperation.

The Comprehensive Asian Development Plan (CADP) can complement the Belt and Road Initiative, based on the CADP's emphasis on soft infrastructure. However, we should also support a China-Japan-Korea Free Trade Agreement and the Regional Comprehensive Economic Partnership, both of which can further strengthen economic cooperation and encourage better and more comprehensive soft infrastructure. With these supporting mechanisms, the B&R Initiative could have an even greater long-term impact on China's neighbors as well as the rest of the world. Although the infrastructure development will help China lessen some structural domestic GDP concerns, the B&R Initiative also has the potential to build stronger ties in the region and provide new leadership opportunities for Beijing. In the future, if regional tensions are wisely managed, this could lead to a more united Asia on international issues and strengthen the region's collective leverage and geopolitical power.