72 THE SILK RAILROAD THE EU-CHINA RAIL CONNEctIONS: BACKGROUND, ActORS, INTERESTS Jakub Jakóbowski, Konrad Popławski, Marcin Kaczmarski NUMBER 72 WARSAW FEBRUARY 2018 THE SILK RAILROAD THE EU-CHINA RAIL CONNEctIONS: BACKGROUND, ActORS, INTERESTS Jakub Jakóbowski, Konrad Popławski, Marcin Kaczmarski © Copyright by Ośrodek Studiów Wschodnich im. Marka Karpia / Centre for Eastern Studies CONTENT EDITOR Adam Eberhardt EDITOR Halina Kowalczyk CO-OPERATION Katarzyna Kazimierska, Anna Łabuszewska TRANSLATION Magdalena Klimowicz CO-OPERATION Nicholas Furnival GRAPHIC DESIGN PARA-BucH PHOTOGRAPH ON COVER Rick Wang, shutterstock.com DTP GroupMedia MAPS AND CHARTS Wojciech Mańkowski PUBLISHER Ośrodek Studiów Wschodnich im. Marka Karpia Centre for Eastern Studies ul. Koszykowa 6a, Warsaw, Poland Phone: + 48 /22/ 525 80 00 Fax: + 48 /22/ 525 80 40 osw.waw.pl ISBN 978-83-65827-19-7 Contents THESES /5 I. CHINA’S GOALS IN DEVELOPING RAIL TRANSPORT BetWeeN CHINA AND the EU /17 1. Chinese provinces as the driving force of cooperation /19 2. China’s central government as the new leader of creating connections with Europe /23 II. RAIL CONNectIONS BetWeeN CHINA AND the EU: the PReseNT shAPE AND the PROSPects /27 1. Main challenges to China-EU rail transport /29 2. Carriage organisation and handling – the need for international cooperation /31 III. The DEVELOPmeNT OF CHINA-EU RAIL TRANSPORT CORRIDORS /34 1. The trans-Siberian corridors (via Russia) /38 1.1. Utilisation to date /40 1.2. Hard infrastructure /41 1.3. Soft infrastructure /42 1.4. Stakeholders /43 1.5. The political context /45 2. The trans-Caspian corridors /48 2.1. Utilisation to date /50 2.2. Hard infrastructure /50 2.3. Soft infrastructure /51 2.4. Stakeholders /51 2.5. The political context /52 3. The southern corridors via Turkey /54 3.1. Utilisation so far /56 3.2. Hard infrastructure /56 3.3. Soft infrastructure /57 3.4. Stakeholders /57 3.5. The political context /58 4. A separate sea-land route – the Balkan corridors /60 4.1. Utilisation to date /62 4.2. Hard infrastructure /63 4.3. Soft infrastructure /64 4.4. Stakeholders /64 4.5. The political context /65 IV. The ecONOMIC POteNTIAL OF the CHINA-EU RAIL CONNectION /67 1. Trade exchange – the strengths and weaknesses of rail transport /68 2. Transport of goods by rail – an added value for EU member states /76 3. Location of logistics centres and distribution of added value within the EU /85 4. The trade balance /90 V. MODELS OF BusINess COOPERATION WIth CHINA BAseD ON RAIL CONNectIONS /93 1. Direct connections between factories operated by global companies /93 2. High value goods /96 3. Products with a short life cycle /97 4. Mail/e-commerce /98 5. The export of foodstuffs /100 THESES The role of rail transport in EU-China trade relations • EU-China rail transports have experienced a hundredfold increase since the beginning of the 2010s. From 2011, when the first regular connections were introduced, 6,637 freight trains were launched in both directions, in- cluding 3,673 in the record-breaking 2017 alone. The value of goods shipped by rail in 2016 can be estimated at US$ 22.9 billion, which constituted about 4% of overall EU-China trade. The estimated value of goods transported by train in 2020 may reach US$ 76.5 billion. More than two thirds of trains are run from China to Europe, reflecting the Chinese general trade surplus with the EU. • Most forecasts assume that rail transport can only cover several per cent of the total volume of goods transported from Asia to Europe and vice versa. In 2017 about 200,000 TEU (twenty-foot container equivalent) were shipped by train from China to Europe, while maritime container flow reached 10 million TEU. For example, rail is not a suitable means of transporting raw materials and unprocessed metals, as well as most industrial products. It is much more favourable to use rail to transport mainly high-value goods and capital-intensive goods. As a consequence, when it comes to the share of goods transported by train in the total transport of goods between China and the EU, the market share expressed in values exceeds the market share expressed in volumes. A rail connection may enable China to gain a com- petitive advantage in logistics over its Asian competitors. It is also an op- portunity for Europe to strengthen its position in China, in particular in the luxury goods and premium food market segments. • The biggest advantage of rail transport is the fact that it is a form of trans- porting goods in the middle of the scale between cheap and slow maritime transport and fast and expensive air freight. The time it takes to transport goods from one terminal to another by air is 5-9 days, by rail 15-19 days and by sea 37-50 days. Compared with maritime transport, rail transport is particularly attractive for places located far from sea ports. In many 02/2018 branches of commerce, the speed of market changes is so fast that compa- nies are ready to pay higher rates for transportation than what they usu- ally pay for sea freight just to gain some time. Rail transport may also prove attractive for goods that have so far been dispatched by air, provided that the slightly longer delivery time is acceptable. OSW STUDIES 5 • It is cost-effective to use rail transport for high value goods. The maritime transport of high value goods entails the need to freeze capital for several weeks and generates high costs for companies, in particular those which use external funding. Another example of rail freight is the transport of goods which need to be delivered quickly. Rail transport can also be used to dispatch goods such as electronic devices for which air transport always seemed too expensive but was the only available option. In the case of these goods a slightly longer delivery time (by several days) is acceptable. More- over, the more frequent use of rail transport will generate new trade flows to transport fresh food which needs to be delivered relatively quickly and the transport cost of which cannot be excessively high due to average-level profit margins. China’s role and motivation in developing the rail connections • The development of rail connections between China and Europe has be- come one of the key elements of the New Silk Road initiative announced by China’s President Xi Jinping in 2013. The development of transport cor- ridors is a component of Beijing’s long-term strategy that promotes trade with Central Asia and the EU and stimulates economic development in China’s inner provinces. It also aims to increase the role of Chinese compa- nies in EU-China trade as a whole along the entire value chain (forwarding, transport, logistics infrastructure) and to facilitate China’s economic ex- pansion in these countries. There are plans to build industrial parks along rail routes to attract Chinese investors. This is expected to translate into increased trade, more frequent interpersonal contacts and boosted tour- ism. Moreover, Beijing began to use rail connections with Europe as a dip- lomatic tool. • The local governments of Chinese provinces and cities have become key actors in the development of rail connections between China and the EU. There are both political and economic reasons behind the provinces’ in- volvement in building rail connections. By filling out the vision presented by Xi Jinping with genuine content and by manifesting active support for 02/2018 Beijing’s plans, local government officials are trying to win political sup- port from the central authorities. Rail connections with Europe are also treated as an important element of local economic development strate- gies. The provinces are playing a major role in supporting specific connec- tions through subsidies which were crucial for the market of rail connec- OSW STUDIES tions with Europe to develop to its present size. At the same time, specific 6 provinces compete with each other mainly for attracting trade flows from other parts of China. • Over the last 2-3 years, China’s central government has been actively in- volved in the process of organising transport under the project known as CR Express. Beijing’s main goal is to guarantee more balanced develop- ment of the transport market. The strategy for the development of rail connections with Europe in 2016-2020 assumes, for example, greater co- ordination in the process of organising transport, facilitation of the pro- cess of expanding China’s logistical infrastructure, as well as Beijing’s increased involvement in relationships with foreign partners along the Belt and Road. In the upcoming years, a consolidation of the connections should be expected alongside a reduction in the number of Chinese cit- ies able to service the connections with Europe. Moreover, the introduc- tion of a unified pricing policy and a reduction of subsidies are among the strategy’s key points. • In the operational aspect, the main institution responsible for the imple- mentation of the strategy adopted by Beijing is the Chinese national rail carrier China Railway. In its form, the Organisation Committee for CR Express, established in 2017, led by China Railway and composed of sev- en biggest local connection operators, resembles a cartel in that it aims to limit competition between transport companies controlled by local govern- ments. In Beijing’s view, this competition is harmful. Main stakeholders • The launch of a specific route requires a wide-ranging consensus among all the states located along this route. Within these states it requires joint action by a number of institutions and companies that are important for the process. Chinese intermodal operators, which coordinate the transport of goods across specific states, are involved in organising a specific train connection.