Strategic significance of China's "New Silk Road"

One of the key recent policies launched by China is the New Silk Road/One Belt and One Road initiatives announced by President Xi Jinping. This simultaneously combines both economic and diplomatic aspects. But the strategic importance of the New Silk Road policy should not be seen as a short term or specific tactical policy by China. Its significance can be particularly clearly understood in the context of current key trends in the global economy.

Globalization remains the overall trend in the world economy. But it is important to be clear that globalization is not an even or undifferentiated international process. In particular, geographical proximity continues to play a significant role in shaping economies.

Within the overall framework of rising world trade it is striking that the development of international division of labour has now reached a point where the “classic” sized nation state, on a scale which dominated Europe in the 19th and most of the 20th centuries (Germany, U.K., France), and which exists in large parts of Asia (Thailand, Malaysia, Cambodia) is too small by itself to constitute a sufficiently developed economic unit. This trend itself creates globalization. But instead of a fully “equalized” global economy being created, in which geography does not play a significant role, there is an emerging division into “continental scale” economic units which are replacing “national” ones.

To adapt the terminology of a well-known book, Thomas Friedman was therefore exaggerating in declaring that “The World is Flat.” Instead the world is still divided into a number of economic “nexuses” but these are now continental rather than national in size – and are relatively well connected. This global context casts clear light on the One Belt and One Road initiative.

To clarify the original historical starting point of these current economic processes, it is sometimes mistakenly believed that because the United States is not only the world’s largest economy, but also has the highest per capita GDP of any major economy, the decisive factor in U.S. economic supremacy is its superior productivity level. This is easily shown to be numerically false. Measured in Parity Purchasing Powers (PPPs) U.S. per capita GDP is 22 per cent higher than Germany, a significant but not overwhelmingly lead. At current exchange rates, the gap is narrower at 18 per cent. But the U. S. population is 380 per cent of that of Germany.

The fact the United States is a much larger country than Germany therefore plays, and historically played, a much greater role in the United States’ economic superiority compared to Germany than does the United States’ relative advantage in productivity. In political terms the United States is a “nation state” but its size means the United States constitutes a “continental scale” economy.

Seen from this angle, of the historical trend to the creation of “continental scale” economies, the development taking place in the key areas of the world is evident:

• The United States was the world’s first continental scale economy;

• The USSR was the second (ultimately failed) continental scale economy – it remains to be seen how much of the former USSR will be reintegrated in the Eurasian Economic Union vision of Putin;

• China is, as with the United States, in political terms a nation state but also history’s third continental scale economy;

• India is the fourth continental economy,

• If it succeeds in integrating itself fully, the European Union will be the fifth continental economy.

It is also clear that to gain the advantages of international division of labour, international trade, and other factors, the most successful of these “continental economies” have a tendency to integrate themselves with surrounding regions even in cases where political union is not posed. The United States has therefore created very strong economic links with Mexico and Canada, formalized in the North American Free Trade Agreement (NAFTA). The EU has progressively expanded from its original six-member West European nucleus to form an integrated European economic zone including 28 member states and several closely associated ones.

The willingness of smaller economies to create links with these larger continental scale economic hubs in turn reflects the fact that these smaller economies by themselves cannot achieve the scale of production required for the most efficient operation in a modern economy. The “win-win” outcome is therefore that the continental scale economic hub benefits from expanding further its scale of participation in global division of labour, while the smaller economies benefit from their increased links with a larger economy. This “win-win” outcome is what leads to the mutually beneficial closer links between the smaller and larger economies. Isolation from such trends leaves smaller countries unable to benefit from the developing global division of labour, with negative consequences for their own growth.

China’s New Silk Road initiatives therefore should not be seen in isolation but as part of the overall global trend. China has the advantage of being a “continental scale” economy, but for success even this requires economic integration with geographically surrounding economies. In turn these smaller surrounding economies benefit from their relation with China’s continental scale economy. This creates a win-win outcome even when there is no intention in Asia to follow the EU route of political integration – equally there is no move to political integration of Canada or Mexico with the United States. Such economic relations therefore form part of what China’s President Xi Jinping termed “a new model of international relations featuring cooperation and mutual benefit.”

But to sustain these economic links, not only legal initiatives, such as free trade areas and tariff reductions, are required but also the creation of material infrastructure to facilitate trade and growing international division of labour. This is why China’s One Belt and One Road is necessarily accompanied by initiatives such as the Asian Investment Infrastructure Bank (AIIB).

A specific and key strategic issue in this process will be that Asia is unusual in containing not one but two such continental scale economies – China and India. For this reason relations between China and India will play a key role in the 21st century – and it is of particular importance that India has both welcomed China’s initiatives and become a participant in the AIIB.

Such economic realities of the tendency to create “continental scale” economies also explain processes in other parts of the world economy and have clear geopolitical consequences. For example the last period saw notable increases in intra-Latin American trade, with this eroding or replacing the previous entirely dominant bilateral trade between individual Latin American states and the United States – with China also replacing the United States as the largest trade partner for a growing number of Latin America countries. Similarly, although at an early stage, attempts in Africa, strongly supported by China, to lay the infrastructural basis for a more integrated “continental African” economy lead in the same direction.

Countries outside such evident continental scale units therefore face major choices.

• Recurrent political crises in Japan may be understood in significant part as the clash between an orientation to China’s “continental economy,” with which it would be economically rational for Japan to develop the closest possible ties, and Japan’s military and political ties to the U.S. “continental economy.”

• Australia attempts to resolve tensions between its dominant economic relations with China and its military and political ties with the United States.

• The U.K.’s regular political crises in relations with the EU, constitute the contradictory tensions of its relations with the continental scale economies of the United States and EU.

Countries in Southeast Asia, similarly, face important choices between the continental scale economy of China, which forms the economic centre of the Asian region, and non-Asian states – particularly the United States. Some, for example the Philippines, currently attempt to resolve this through subordination to the United States. Others, such as contemporary Indonesia, attempt to balance various trends through a “non-political” stance. Some, such as Thailand, have experienced internal differences on the issue.

China is in the fortunate political position that it faces no such choice. China’s fundamental strategy for national renewal continues to be to build up its own continental economy. But this, in turn, requires building mutually beneficial relations with its surrounding neighbours.

It is clear for these reasons why the New Silk Road/One Belt and One Road is not a short term initiative but of such major strategic significance for both China and its neighbours.

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The original version of this article appeared at China.org.cn. 

John Ross is currently Visiting Professor at Antai College of Economics and Management,Shanghai Jiao Tong University, where he leads research on globalisation and on China and the international financial crisis.
Check out his blog: http://ablog.typepad.com/keytrendsinglobalisation/ , or follow him on twitter @JohnRoss43