China’s Belt & Road Initiative – Blog #16

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(Image credit: srilankabrief.org)

This is the sixteenth Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (52 pg, 261 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #16 – How China Benefits – Transit Times and Supply Chain Alternatives

SHORTENED TRANSIT TIMES

The enhanced infrastructure of land connections between the Far East of China and Western Europe is expected to reduce transport time between China and Rotterdam to less than 10 days; other links of “Belt and Road” also should also see more rapid goods movement times.

As noted in Blog 4 “Arctic”, the polar routes will also significantly reduce shipping times between China and Western Europe.  These transit time improvements will facilitate Chinese export and import trade, but they obviously can benefit member countries along each Economic Corridor, assuming there is equal opportunity of access.

SUPPLY CHAIN ALTERNATIVES

China, and other “Belt and Road” countries in the network of land corridors and sea lanes and ports, have the potential to shift supply chains much faster in response to rapidly changing market conditions and political uncertainties.  Circumstances stemming from the emerging tariff war between China and the United States and the impacts on the soybean trade present a good example.

SOYBEANS

China is not only the largest importer of U.S. soybeans, it is the world’s largest soybean importer, period.  In 2018, China is expected to account for nearly two-thirds of total global soybean imports.[1]  While China is the largest market for U.S. soybeans by far–in 2016, the U.S. exported 35.85 billion tons of soybeans to China, followed by only 3.64 billion tons to Mexico, 2.58  billion tons to Indonesia, and 2.36 billion tons to Japan[2] – the U.S. is nowhere near the most important source of soybean imports for China.  China gets well over half of its soybean imports from Brazil, even excluding soybean meal and oil.[3]   Imports from the U.S. in 2017 accounted for about one-third of China’s total soybean imports.[4]

China began diversifying its soybean import sources before the 2018 tariff war with the U.S. came into play.  Several factors made imports from Brazil more attractive—lower prices, reliably abundant production, and improved transport connections between Brazilian soybean producers and ports for shipments to China.

The 25% retaliatory tariff will make the price differential between U.S. soybean imports and Brazilian soybean imports (not subject to the tariff and already lower priced than U.S. soybean exports) even more dramatic.  Brazil has considerable capacity for future production increases as it has vast areas of soybean farming-suitable land, but perhaps the most significant factor for future growth expectations for Brazil’s soybean exports to China is the dramatic improvement in land-port connections.  However, much of what already exists in port and rail development represents non-Chinese investment.  Latin American countries are not yet official members of the “Belt and Road Initiative” but China will likely use any infrastructure developed outside the ”Belt and Road” framework that speeds shipments and reduces transport costs.

The proposed freight rail connection between the Brazilian port of Santos on the Atlantic Coast and the Peruvian port of Llo on the Pacific Coast could help greatly further in that regard.[5]  In the near term, enhancement of inland ports on the Tapajos and  Amazon Rivers in the Amazon Basin, developed by agribusiness giants Cargill and Bunge (amid criticism for environmental damage), may expedite shipments north to ports on Brazil’s Atlantic Coast and then through the Panama Canal.[6]  [7]

Because several of the largest soybean-producing countries are in the Americas (besides Brazil, Argentina, Bolivia, Uruguay, Paraguay and Canada are among the top 10[8]), China’s cultivation of Latin American countries in recent years, including discussions about joining “Belt and Road”, and the improved port-producer transportation links, means that China is well-positioned to shift its import focus relatively rapidly to Latin America and away from the U.S.  At the same time, the U.S.’s other soybean importers are mainly in other Asian countries and these have not been major soybean markets for the U.S and so it may be more difficult for the U.S. to find other importers to make up for the loss of Chinese buyers any time soon.

LNG

The “Belt and Road” may also work in the current tariff wars to China’s comparative advantage with LNG (liquefied natural gas).  China is the second-largest importer of LNG in the world and accounted for 15% of U.S. LNG exports in 2017,[9] but it began cutting back on its imports of U.S. LNG before the trade war really kicked in.

China has placed 25% retaliatory tariffs on U.S. LNG exports.  The relative impacts may be muted in the short-term, but in the long-term, the current uncertainties in a volatile market may affect infrastructure investment decisions, like whether to build new pipelines and LNG-handling port facilities, around the world.

The effects of these investment decisions on LNG supply chains may be much more difficult for the U.S. and Western Europe to handle than for China as China has created more options for itself.  The U.S. is counting on the EU to take up the slack in its LNG exports caused by China’s cutbacks but that may be wishful thinking.

Closer and delivered price-competitive alternatives are available to Europe and new export competitors, such as Australia and Papua, New Guinea, who may be happy to help China shift further away from U.S. LNG.[10]  For the last several years, China has used the ‘Belt and Road’ extensively to fund and secure gas explorations, build pipelines from gas fields off-shore and in Siberia and other Arctic Circle areas and Central Asia, build ice-class tankers to carry LNG to Western Europe and port facilities to handle LNG.

The soybean and LNG examples demonstrate the need for exporters and importers to stay aware of how ‘Belt and Road’ policies and actions can affect their lines of business.  There have been and will continue to be major market shifts and changes in port conditions and international shipping.  Survival for many firms will depend on dynamic supply chain adaptation and flexibility.  This is discussed further in upcoming BRI Blogs.

 

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

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BRI Blog next Monday will be:

How China Benefits – Telecommunications, Renminbi

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There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] Saefong, Myra P.  “ U.S. soybeans would be China’s biggest weapon in a trade war .“ Market/Watch.  22 March 2018.  https://www.marketwatch.com/story/us-soybeans-would-be-chinas-biggest-weapon-in-trade-war-2018-03-17/

[2] Statista-The Statistics Portal.  “Major countries of destination for U.S. soybean exports in 2016 (in million metric tons)” https://www.statista.com/statistics/192081/us-soybean-exports-by-major-countries-of-destination/.  Accessed 10 July 2018.

[3] Stratfor. Why China Is Hungry For Brazilian Soy.” Forbes. 10 April 2018.  https://www.forbes.com/sites/stratfor/2018/04/10/why-china-is-hungry-for-brazilian-soy/#136b0d67321d

[4] Reuters  Staff (Gu, Hallie and Josephine Mason).  “China’s June soy imports jump ahead of tariffs on U.S. shipments.”  Reuters.    13 July 2018.   https://www.reuters.com/article/us-china-economy-trade-soybeans/chinas-june-soy-imports-jump-ahead-of-tariffs-on-u-s-shipments-idUSKBN1K30EA

[5] Deorukhkar, et al.,  op. cit. p.6  http://www.iberchina.org/files/2018/OBOR-LatAm_bbva.pdf.

[6] Frayssinet, Fabiana.  “Brazil’s Amazon River Ports Give Rise to Dreams and Nightmares.” Inter-Press Service News Agency.  11 December 2015.  http://www.ipsnews.net/2015/12/brazils-amazon-river-ports-give-rise-to-dreams-and-nightmares/

[7] Stratfor  Op.cit.  https://www.forbes.com/sites/stratfor/2018/04/10/why-china-is-hungry-for-brazilian-soy/#136b0d67321d

[8] Worldatlas.  “10 Countries With Largest Soybean Production”  Last updated 25 April 2017.  https://www.worldatlas.com/articles/world-leaders-in-soya-soybean-production-by-country.html. Accessed 25 July 2018.

[9] Zaretskaya,  Victoria (principal contributor).  “China becomes world’s second-largest LNG importer, behind Japan.  Hydrocarbon Processing.  23 February 2018.   www.hydrocarbonprocessing.com/news/2018/02/china-becomes-world-s-second-largest-lng-importer-behind-japan

[10] Energy Tomorrow Blog/BreakingEnergy.   “Don’t Let U.S. LNG Exports Become Casualty of Tariff Policy.”   15 August 2018.   https://breakingenergy.com/2018/08/15/dont-let-u-s-lng-exports-become-casualty-of-tariff-policy/

 

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© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.