Subsidies are boosting rail freight along the New Silk Road, but it’s too soon to say if this expensive investment will pay off in the long run.

When the famous and much vaunted Yiwu-London freight train arrived in Barking, East London, fresh from its maiden voyage across the Eurasian continent, the implication was that the train itself had traveled all the way from China. In fact, the wagons had come from Duisburg, and before that, the containers had made an important stop at a small border village in Eastern Poland.

On my journey East and before crossing the Belarus border, I stopped in this village, Małaszewicze, where I was shown around the local dry port facilities by Krzysztof Szarkowski, an accommodating intermodal manager at DHL Freight. The larger part of EU-China rail freight traffic passes through Małaszewicze, where containers must be transferred between the Soviet-standard 1,520 millimeter gauge tracks and the slightly narrower gauge used throughout most of Europe. This is done by hulking cranes that hover over parallel tracks and pluck containers from one track before setting them down onto adjacent wagons.

There are four intermodal terminals at Małaszewicze, capable of processing 984 containers a day. In recent years, this infrastructure has had to cope with a marked rise in traffic as the number of freight trains traveling between Europe and China has boomed. Since then, the story of the “Europe-China Express” has quickly become one of the more celebrated tales told about the New Silk Road, and the Chinese news agency, Xinhua, still excitedly announces each new rail service between China and Europe.

Fueled by Subsidies

That is largely because the Europe-China rail connection works so well as a metonym for the wider Belt and Road Initiative (BRI). Rail captures the East-West connective essence of the New Silk Road and trains function as an easily recognizable symbol of cross-continental commerce. Rail cars take the place of camels, Sogdian silk merchants become logistics managers, and China’s President Xi Jinping’s mythology of the “Silk Road Spirit” finds convenient historical continuity. But rail freight between China and Europe is representative of the larger Belt and Road in more ways than one: both are ultimately fueled by Chinese public money—the BRI in the form of government-issued loans and rail in the form of subsidies.

In fact, subsidies for the Europe-China connection come from a mixed bag of sources along the route, largely from Chinese cities, and provincial and central governments. They also vary from train to train and are not particularly transparent. Still, most industry experts use words like “substantial,” “significant,” or “huge” to describe them, with some calculating that subsidies cover up to 60 percent of the costs. This issue is frequently picked up by critics who use the subsidies’ existence to argue that “new” rail freight routes to Europe serve a largely propagandistic function and show the relative irrelevance of EU-China rail freight. One think tank even suggested that the subsidies might be considered an “advertising budget” for the BRI.

With “China Railway Express” literally described as a brand by Chinese state development plans, there is little doubt that the subsidies are justified from a political point of view—by local governments competing to host the largest number of routes, and by Beijing, keen to boast about trade along the New Silk Road.

But European governments are not simple co-conspirators in Chinese propaganda—they too have their own agenda. For example, when Yiwu Timex Industrial Investments Co extended their Chongqing-Duisburg route to London for a demonstration service in 2017, it was a British trade minister who boldly exclaimed: “This new rail link with China is another boost for global Britain, following the ancient Silk Road trade route to carry British products around the world.”

Part of the “Go West” Strategy

I was told a similar story in Lodz—a post-industrial city in the heart of Poland that has remodeled itself as a regional logistics hub. According to Tomasz Kaminski, an academic focused on relations with China, cooperation on rail freight with the Chinese city of Chengdu required a “political umbrella” to get it off the ground. Following the collapse of its lifeblood textile industry in the 1990s, Lodz was in desperate need of rebranding. The then Marshal of the Lodzkie region, Witold Stępień, saw cooperation with Chengdu as the perfect opportunity to transform the image of the city and region and played an active part in pushing the partnership. As elsewhere on the New Silk Road, Chinese money helps fuel local political ambitions.

The Lodz-Chengdu example also illustrates the solidly functional core of EU-China rail freight. The logic of a freight train from Yiwu, on China’s eastern seaboard, to an island nation in the North Atlantic is dubious, but Chengdu to Lodz makes sense. Before the BRI was even announced, a Polish logistics company called Hatrans had founded a joint-venture in China with a view to connecting Dell, in Lodz, with its supplier, Foxconn, in western China. Or, as Hatrans told me matter-of-factly, it was “driven by the need to satisfy customers who required fast transportation between Central China and Central Europe for the fraction of the cost of air freight.” Ronald Kleijwegt, mastermind of an even earlier route between Chongqing and Duisburg, tells me that the entire Europe-China rail freight phenomenon was essentially a product of China’s “Go West” strategy—Beijing’s plan to develop poor interior provinces that had missed out on the East’s manufacturing boom.

Uncertain Long-Term Viability

In the short term, subsidies might look like a BRI advertising budget, but throwing money at infrastructure first and waiting for development—the “build it and they will come” approach—is a defining characteristic of Beijing’s thinking on the BRI. In the mid-term, fast freight at subsidized prices helps raise awareness of rail as a viable option for customers. In the long term, subsidized trains might just help facilitate the development of inland Chinese provinces and continental dry ports—a central goal of the BRI.

Also, like many BRI projects, empty trains and the subsidies that enable them have the secondary function of incubating Chinese companies and making them globally competitive. David Smrkorvsky, head of rail at JUSDA (the supply chain management service platform of Foxconn), tells me that several Chinese logistics companies have become highly competitive in Europe due to subsidized trade. He also comments that not a few European companies are “doing unbelievably well for themselves” out of the same subsidies.

The key question is whether EU-China rail freight has a life beyond subsidies. Ronald Kleijwegt tells me that even the Chinese government realizes that one cannot build a long-term structural solution on subsidies. Indeed, the government is ostensibly in the process of phasing them out. David Smrkorvsky of JUSDA is dubious that market costs have been reduced enough to compensate, but Kleijwegt thinks it can be done by further improving the balance of trade between East and West and by forcing through further efficiencies.

The long-term viability of continued growth for the rails is uncertain, and critics are right to question the commercial rationale behind the growth in traffic, but they are wrong to put a purely propagandistic value on the phenomenon. Like the BRI as a whole, Europe-China rail freight was driven by a purely economic logic that was doubled down on by Chinese government spending and political will. Whether this expensive strategy will be successful in driving future development cannot be ruled out, but neither is it guaranteed.
 

Jacob Mardell has embarked on a journey to investigate how China’s Belt and Road Initiative is being implemented on the ground. His travels are taking him all the way from Brussels to Beijing.

With China’s hugely ambitious Belt and Road Initiative (BRI), the Eurasian supercontinent is being rebuilt. To really see how this is having an impact on the ground, I’m following the path of this New Silk Road. The idea is to explore, on a country-by-country basis, the way BRI is being implemented right now.

It’s been a full six years since the inception of this development strategy that spans from Europe all the way to China itself. The BRI, which has been written into the constitution of the Chinese Communist Party (CCP), has emerged as a defining foreign policy concept of the presidency of Xi Jinping.

It has prompted condemnation from Washington and has divided Europe between those countries that officially endorse the initiative, including most recently Italy, and those that see it as an opaque venture launched by a country the European Commission now considers a “systemic rival.” The BRI has also been responsible for countless op-eds accusing Beijing of “debt trap diplomacy,” along with a deluge of articles outlining the strategic motivations behind what is variously described as a $900 billion, $1 trillion, and even $8 trillion initiative.

Local Fabric

And yet, for an initiative so politically important, so vast in scope, and so frequently discussed, there is comparatively little consideration of the physical reality of the BRI and how it translates into action, into roads, bridges, or ports. BRI is a global initiative, but as a program that seeks to forge connectivity through infrastructure, its fabric is inevitably local. That’s why I’m traveling overland from Europe to Asia, investigating the local impact of Chinese-built infrastructure, and considering BRI through the prism of the individual countries.

The idea is to see how the BRI, a concept so large and amorphous, manifests on the ground. While a handful of official policy documents outline the initiative’s scope, these are vast and imprecise, with individual projects left unspecified. Official documents and statements also elaborate on sectors and types of envisaged cooperation, but these range from energy transmission to tourism, essentially covering every sphere of possible human endeavor.

Utopian Character

The clearest picture to emerge from these documents is that of the Belt and Road’s aspirational, almost utopian character. It is about ushering in a new era of common development and enhanced connectivity, and with Chinese help forging a “community of common human destiny.” The ideological element of the BRI is frequently overlooked, but it is ever present and not to be dismissed lightly.

Of course, there are also non-altruistic forces at work behind the BRI. As well as forging a community of common destiny, it is more immediately about dealing with overcapacity and surplus capital at home—throwing a lifeline to the state-owned enterprises that ballooned during the boom years of China’s investment-led growth. Supported by various mechanisms of the Chinese state, many of these companies are also being helped to dominate their respective sectors as global champions.

The success of Chinese companies in dredging, shipping, and the running of ports provides a solid case study of how the BRI works as something like a global industrial policy. In tandem with this effort to support Chinese companies, the BRI is also about the gradual internationalization of the renminbi and the promotion of Chinese industrial, cyber, and legal standards.

Sometimes the BRI also involves a genuine attempt to develop overseas markets and industries with the aim of integrating countries into Beijing’s economic sphere, for example, encouraging Pakistan to help fulfill China’s agricultural needs through the BRI’s flagship China-Pakistan Economic Corridor.

BRI has a political and strategic dimension too, as some projects help Beijing secure access to resources and lines of communication. And, like any development program, it is also about seeking the goodwill of neighbors and projecting a positive international image.

Many Aims, One Slogan

It is, in other words, an economic-cum-foreign policy concept that kills several birds with one slogan. Some observers have pointed out that many of these processes have been in play since the early 2000s.

This is true. The BRI is essentially the merger of these ambitions under a single brand name—one that has a bigger budget and is tied to the identity of a newly powerful China. This new brand comes equipped with a fledgling ideological framework, promoting Chinese development and the “community of common destiny” as an alternative to paternalistic development aid from the West. That BRI is a concept, or Chinese brand, is clear when one considers the official list of 129 BRI countries (130 now, counting Italy). What unites them is not their geography or receipt of Chinese investment, but that they have endorsed the BRI or signed an Memorandum of Understanding with China on the initiative.

Identifying the BRI on the Ground

In the absence of an official list of projects, identifying the BRI on the ground can only be done through the top-down process of considering the policy documents and guiding principles behind the initiative. That is part of the reason the debate about the BRI is dominated by the bird’s eye perspective. Even the process of identifying BRI projects can be controversial. Making the conceptual leap between global the BRI and the local BRI is even harder.

Making this leap is, however, necessary. Without considering the effects of the BRI on a country-by-country basis, it is impossible to assess the merits, dangers, and success of the initiative as a whole.

Although it seeks cooperation with the BRI through its own infrastructure initiatives, Brussels is nervous about China’s growing influence on the Eurasian continent—in Central Asia, in Eastern Partnership countries, in the Balkans, and even within the EU itself. But Brussels cannot hope to compete, or even know if and when it needs to, without understanding what the governments along the Belt and Road want from China and how the BRI is playing out in their respective countries.

Over the next several months, I will be writing dispatches from along the Belt and Road. I’ll be talking to experts and policymakers in BRI countries and visiting projects, seeking to better understand these countries’ relations with China and reporting on the successes, failures, and peculiarities of BRI projects all the way from Brussels to Beijing.