China's 'One Belt One Road': The opportunity for shipping

by David Beaves, Senior Partner, Ince & Co Hong Kong, first published in IHS Fairplay, December 2016

China’s ‘One Belt One Road’ policy is set to redefine trade patterns between Asia and Europe, with seismic repercussions for the maritime industry that will unlock commercial opportunities, but also create new legal challenges for the shipping supply chain.

The US$1.2 trillion OBOR project refers to two interlinked concepts: the Silk Road Economic Belt (the ‘Belt’), an overland network connecting China to Europe and the Middle East through Central Asia and Russia, and the 21st Century Maritime Silk Road (the ‘Road’), a maritime route connecting ports in Asia, Africa and the Mediterranean.

China plans to negotiate free-trade agreements with 65 countries. Up to now it has signed 12 and a further nine are under negotiation. Given the scale and ambition of OBOR, it is not surprising that it has been referred to as China’s Marshall Plan. However, OBOR shouldn’t be considered a single project. It comprises many important infrastructure, technological and financial developments. The long-term effect of the Belt and Road initiative will be to forge links between sectors in the global economies, with the net effect of boosting trade volumes.

Such investments are also designed to capture the demand of Asia’s rapidly growing middle class. By 2030 it is estimated that 66% of the global middle class will live in Asia and will represent the bulk of global purchasing power. 

The Maritime Silk Road will have a particularly significant impact on the shipping industry, driven by substantial Chinese investment in maritime infrastructure. The Chinese have loaned considerable sums since OBOR was agreed. 67 overseas loan commitments have been put in place and many are along important sea routes, from Asia to Africa and Europe, reinforcing Beijing’s maritime ambitions.

The purpose of the Maritime Silk Road is to expand and diversify China’s trade routes. This will increase market access to Europe, but the China–Europe maritime corridor is also important for China’s trade with US, with container shipping between China and the US East Coast increasingly making use of the Suez Canal.

China has been investing heavily in port infrastructure in Asia, the Middle East, Africa and Europe. Most of this investment is targeted at equipping terminals to handle larger vessels. We have already seen examples of Chinese investment in strategically chosen ports like Djibouti, Piraeus and Colombo, with expanded facilities and modernised technology to lower handling costs, as well as the development of Kuantan Port and Samalaju Port in Malaysia, and investment in the Port of Gwadar in Pakistan.

Another good example is the ambitious proposal for a canal across the Kra Isthmus in Thailand. This would relieve what China regards as the vulnerability that stems from its reliance on the Malacca Straits for oil imports, shortening shipping routes from Africa and Persian Gulf to China by 1,200km. Although the proposal is currently on hold, it reveals the magnitude of Chinese thinking.

Encompassing 65 countries and 60% of the world’s population, the level of planned OBOR investment will also require a sound legal framework that embraces regulatory requirements, cultural considerations and dispute resolution.

Commercial disputes inevitably follow when shipping activity increases, and it seems clear that OBOR will present legal challenges. For example, the development of multilateral co-ordination on freedom of navigation is essential, as is a framework that can cut across all 36 countries on the Maritime Road. Of course, shipping disputes are often resolved through arbitration or mediation and this also provides these nations with the incentive to develop their own institutional arbitration and mediation mechanisms.

On progress towards this framework, China’s efforts should be recognised. It is no small undertaking and every indication so far is that the Chinese government is well prepared and proactive in its approach and making good on its promises of a ‘choir’ effort towards OBOR.

While the US remains wary, Europe seems increasingly willing to embrace OBOR. China is the EU’s second largest trading partner and there are already Yuan clearing banks in Europe’s major financial centres. The UK, Germany, France and Italy were also founding members of The Asian Infrastructure Investment Bank, established by China to support the building of infrastructure projects in the Asia-Pacific region.

However, although there is a reasonable level of awareness of OBOR, it is far from being properly understood outside of Asia. In particular, the European shipping industry cannot afford to ignore it. Maritime trade moves in both directions, and improved infrastructure along the Maritime Silk Road Asia will also benefit Europe. Understanding how it will affect ship movements and trade patterns will be fundamental to commercial success in the years ahead. We all need to be better informed about OBOR in order to seize the opportunities presented by one of the defining economic initiatives of our time.