Possible Impact of the Belt and Road Initiative on Foreign Trade in Central Asia

By: Roman Mogilevskii, CASE Fellow

The Belt and Road Initiative (BRI) has been launched by the leadership of the People’s Republic of China in 2013. It is going to cover virtually all countries of Eurasia including five countries of Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan), which are the western neighbors of China. Through the BRI, Chinese government proposes to support very different types of interventions in partner countries including infrastructure development, investments into production capacity, measures in trade facilitation, and human and cultural exchanges, among other things. This may create an opportunity for the landlocked and relatively geographically isolated Central Asian economies to improve their connectivity to China, but also to other parts of the world. Foreign trade of these countries seems to be one of the areas to be affected the most, and it is hoped in Central Asia that the BRI will increase the region’s export capacity. So far, these economies mostly export crude oil, natural gas, metals and some agricultural products, and they import a broad spectrum of manufactured products and services.

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Photo: Reuters, BEIJING, CHINA — MAY 15, 2017: Vietnam’s President Tran Dai Quang, China’s President Xi Jinping, Russia’s President Vladimir Putin (L-R front), Kyrgyzstan’s President Almazbek Atambayev and Kazakhstan’s President Nursultan Nazarbayev (R-L middle) seen ahead of a group photo ceremony at the One Belt, One Road international forum at the Beijing Yanqi Lake International Convention & Exhibition Center.

There could be several channels through which the BRI may influence the foreign trade of Central Asian economies: (i) development of transport infrastructure facilitating trade of these countries with China and/or transit of goods from/to China to/from Europe and West Asia, (ii) development of other infrastructure (electricity, irrigation systems, product quality testing, certification infrastructure, etc.) in order to lower production and export costs, (iii) Chinese FDI into production sectors of the countries of the region, (iv) cooperation in trade policy and trade facilitation in order to reduce trade costs, and (v) macroeconomic effects.

Transport infrastructure and transit. Poor transport connectivity is seen as one of the main impediments for export diversification in Central Asia. For the last 15–20 years the governments of the region, with support of international development organizations and bilateral donors including China, have invested very significant resources into the development of rail and automobile road networks, ports and other transport infrastructure elements. More projects are in the pipeline for BRI’s support. Governments of the region expect these roads to serve not only/not so much domestic transport flows and exports from Central Asia, but also intercontinental shipments in East-West direction allowing Central Asian transport network operators to benefit from the transit traffic. There are several issues with these transit ambitions: competition from other routes (surface route through Russia, sea route via Indian Ocean etc.), product composition of goods in transit, multimodality of routes (e.g. rail-ferry-rail, except for Kazakhstan), different track gauges, and regulatory barriers. This may mean that the expectations of high transit revenues from BRI projects may need to be carefully evaluated.

Other infrastructure investments may increase Central Asian exports to China if these are targeted to support export-oriented FDI from China, for example, improvement of irrigation systems or testing labs serving agricultural projects (or creation of electricity generation capacity to supply energy to a mine or metallurgical plant) aiming to produce goods for Chinese market.

BRI-related FDI projects. Currently, almost all foreign investments in the region go into either extractive sector (oil, gas, metals) or non-tradeable sectors (telecom, finance, retail, real estate). Chinese investments into tradeable sectors are less probable as Central Asian economies seem to lack many important capabilities in this type of production. In addition to that, investments into tradeable sectors may be aimed at import substitution with a high risk of net welfare losses for FDI-receiving countries. Extractive sector investments would, of course, increase export potential of the region, but may not allow achieving the economic diversification which is a long-term goal of all governments in the region.

Trade policy and trade facilitation measures may become the cheapest and most effective way to increase trade between China and Central Asia. However, the parties do not seem to be prepared going very far in liberalization of this trade. The non-preferential Agreement on Trade and Economic Cooperation between China and Eurasian Economic Union[1] (EAEU), which has recently been approved by the government of China and Eurasian Economic Commission (the executive body of EAEU), is an example of what could realistically be achieved in the trade policy area.

Macroeconomic effects associated with BRI interventions include general improvement in total factor productivity due to better infrastructure, Dutch-disease-type effects caused by the inflow of foreign investments, and, in longer-term, foreign debt issues. Even if some of the BRI infrastructure loans are provided on highly concessional terms, this still may become a very serious debt burden, especially for smaller Central Asian economies. For example, the railroad in Kyrgyzstan from Chinese-Kyrgyz border to Kyrgyz-Uzbek border is estimated to cost some US$5 billion or 76% of the Kyrgyz GDP in 2016. This would imply annual payment of the debt principal and interest in the amount of, at least, 2–3% of GDP.

And, of course, all BRI interventions would be associated with increased imports of goods and services from China, so the direction of change of Central Asia net exports to China is ambiguous.

All these possible BRI interventions may produce significant trade creation and trade diversion effects. Trade creation may emerge due to lower transportation costs (especially for trade with China) and other production costs, reduction of regulatory barriers for trade, and general increase in total factor productivity due to infrastructure improvements. Trade diversion may become a result of asymmetric development of transport infrastructure and re-orientation of some trade flows from north-south to east-west direction. It may also be a by-product of re-orientation of Chinese FDI on inputs (equipment, construction materials, components) imported from China rather than from third countries — traditional suppliers to Central Asia.

The Belt and Road Initiative seems to provide unique opportunities for Central Asian countries to develop their infrastructure and production potential and to expand and deepen their trade and economic relations with China. However, all options may need to be carefully analyzed and long-term implications for trade and economic development considered.

[1] Kazakhstan and Kyrgyzstan are EAEU members.

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