Home Economy and Finance Report by Silk Road Associates and Baker McKenzie: 5 possible scenarios of China and OBOR's future and how it can cost $800 billion

Report by Silk Road Associates and Baker McKenzie: 5 possible scenarios of China and OBOR’s future and how it can cost $800 billion

India stands to gain significantly from the trade war should it play its cards right. China and India have been rivals for long and India could really make significant gains while the Chinese have their backs against the wall.

The hostile geopolitical climate could gravely impact China’s One Belt One Road initiative and could end up costing China a whopping USD $800 billion according to a report published by consultancy Silk Road Associates and law firm Baker McKenzie.

The report published on Wednesday outlines 5 possible scenarios that could unfold in the future depending upon the prevailing geopolitical circumstances. The difference between the projections is stark with the most optimistic forecast, ‘Global Cooperation Model’, predicting an investment of USD $1.32 trillion over the 2020s and the most pessimistic, ‘Uni-polar Model’, pegging investments at USD $560 billion during the same period. If current trends hold, the investment will amount to USD $910 billion.

BRI and Beyond Forecast

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The ‘Global Sustainability Model’ puts more emphasis on climate change and environmental concerns and takes into account the global and local pressures to act on the same and it is speculated that OBOR will be seen as part of the solution. The report says, “If China adopts a policy of even closer alignment between its BRI goals and sustainable initiatives, it is very likely that it will gain access to new streams of multilateral funding for BRI projects. It will also make Chinese engineering and construction companies more competitive globally to win major clean energy and water project bids as part of BRI.” This model pegs investments at USD $1.2 trillion.

The Supply Chain Relocation model which focuses more on the ongoing trade war between the US and China pegs investments at USD $1.06 trillion. The report says, “Ongoing trade tensions between the US and China have led to the partial relocation of manufacturing away from China, including by Chinese companies, to low‐cost countries in Southeast Asia and South Asia. In this scenario, the influx of manufacturing sees renewed interest in BRI infrastructure investments in these countries (private and through state-owned enterprises) to support the production relocation.”

The great variance between the projections reveals the volatile circumstances that the world is currently in. It could be said with relative certainty that the success of OBOR depends significantly upon the extent to which the Chinese government can work with the Trump administration.

The United States under Trump considers China to be an existential threat to the current world order that is based on Western dominance. Donald Trump has demonstrated his willingness to work with the Chinese government provided that they play the game the rules of which has been set by the West.

Meanwhile, the Chinese consider the game to be already rigged in favour of the West. Therefore, they are unwilling to participate in it. China aims at establishing itself as a global hegemony and OBOR is a crucial aspect of its strategy. If the OBOR initiative is successful, it would mean the entire world opening up to China and the country will be able to pursue its trade relations with much greater effectiveness.

There’s a faction within the USA, with former White House Chief Strategist Steve Bannon being its most prominent face, that considers China to be a civilizational enemy of the West which seeks to undermine Western values and ideals. China, on the other hand, doesn’t ever deny that its values are completely different from that of the West. Bannon draws a contrast between the ‘Judeo-Christian West’ and the ‘Confucian Totalitarian State’ of China.

The battle between the USA and China ought to be seen through the prism of the dominant power in the world up against another that wishes to replace it. While the USA is going through a rough path itself domestically, China, too, has its fair share of contradictions as demonstrated by the recent protests in Hong Kong.

China has used rather subversive methods to propel itself to glory. Donald Trump wishes to put an end to it and has imposed tariffs to force China to adopt fair trade practices. It remains to be seen how that pans out. The one area where China has a distinct advantage over the US is its domestic political setup. The absence of Democracy allows China to set long term goals which it could then pursue without domestic interference.

The US doesn’t have that luxury. It can’t even be said with certainty that its current approach to China would extend beyond Donald Trump. US foreign policy with respect to China could turn a full 180 degree in 2020 should Trump lose his reelections bid or in 2024 when he will be forced to leave office anyway. It’s the one strategy that China has been using against the US.

From the Chinese perspective, if they could sustain their economic growth without signing a trade deal until 2020 with the US and they manage to escape without suffering too much damage, a different US President might have a completely different approach. Waiting out the Trump Presidency and hoping for a more favourable US President appears to be China’s current strategy.

The South China Sea is also another probable area of conflict between the two countries. China has built artificial islands in the region which have been turned into military bases.  Not too long ago, a tribunal constituted under Annex VII to the United Nations Convention on the Law of the Sea (the “Convention”) in the arbitration instituted by the Philippines against China rejected China’s claims that it enjoyed historic rights over the South China Sea.

The tribunal also ruled that China had violated international law by causing “irreparable harm” to the marine environment, endangering Philippine ships and interfering with Philippine fishing and oil exploration. China, true to its character, refused to recognize the Court’s authority. The US and other countries such as France and the United Kingdom ahs responded by conducting Freedom of Navigation Operations in the regions.

Most recently, if reports are to be believed, the USA is considering selling High-Mobility Artillery Rocket System (HIMARS), a multiple rocket launcher used by the United States and other nations, to the Philippines. China finds itself at odds with a host of other countries in the region such as Malaysia, Vietnam and Brunei.

The ongoing trade war between the US and China also have long term repercussions for India as well. The US cannot afford to antagonize China and India at the same time. Thus, we have seen the two countries cooperate significantly more since Trump’s election as President. The tensions between the two also give India more leverage with respect to Pakistan which has reduced itself to being China’s vassal state.

The one area where India has failed thus far to capitalize on is the economic front. For instance, Thailand has floated a 50% tax cut for manufacturers looking to flee China and relocate their businesses elsewhere amidst the Sino-American Trade War. Apart from tax breaks, a change in labour rules has also been proposed to attract foreign investment. India hasn’t seen such initiative as yet.

India stands to gain significantly from the trade war should it play its cards right. China and India have been rivals for long and India could really make significant gains while the Chinese have their backs against the wall. The current global political climate is also well suited for geostrategic realignments. It’s an era of chaos and the next few decades could very well determine the future world for decades to come if not centuries.

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