CPEC and How China Will Dominate World Trade

While the United States seems to be moving toward withdrawing from trade agreements and putting up roadblocks with its current trading partners, China and its partner, Pakistan, are moving in the opposite direction, part of China's plan to further open trade with the globe.  As you will see in this posting, this is just another piece of the puzzle in the growing transition from a unipolar, Western-based trade system to a multipolar trade system with more than one nation or group of nations dominating world trade.

Many of you may not have heard about the Silk Road Economic Belt.  The Silk Road Belt is a modern equivalent to the Silk Road network of trade routes which connected China to the Arab world.  In 2013, China's president, Xi Jinping, proposed the establishment of a network of roads, pipelines, railways, energy and utility corridors that would connect China, Central Asia, Western Asia and parts of South Asia through the One Belt, One Road (OBOR) initiative, also known as the Belt and Road Initiative.  The Silk Road Economic Belt has several main routes:

1.) connecting China to Europe by way of Central Asia.

2.) connecting China to the Persian Gulf.

3.) connecting China to the Mediterranean by way of West Asia.

4.) connecting China to the Indian Ocean by way of South Asia.

In total, more than 60 nations with a combined GDP of $21 trillion (more than that of the United States) have expressed interest in what will become the world's largest platform for economic cooperation.

From the Mercator Institute for China Studies, here is a map showing the proposed economic corridors, land trade routes, pipelines and maritime ports for One Belt, One Road:

     

One of the most important parts of the Silk Road Economic Belt is the overland connection between China and Pakistan, known as the China-Pakistan Economic Corridor (CPEC), a $55 billion project which will connect East Asia with South Asia without using the Strait of Malacca, a routing that will make it more difficult for the United States Navy to interrupt the flow of goods through the Malacca maritime choke point.  This will also provide an overland route for China to connect to the India Ocean and allows for the development of an even more massive trading bloc involving Iran, the Russia-led Eurasian Economic Union and the South Asia Association for Regional Cooperation.  It also allows for connection to Africa's eastern coastline, thus allowing easier access to the entire African continent.

Let's look more closely at the various infrastructure projects that make up CPEC, one of the key components of the Silk Road Economic Belt.  Here are three maps showing the highway network, the railway network and the fibre optic network components:

Here are cost estimates for two key components of CPEC:

1.) Infrastructure:

2.) Energy:

While there have been development issues including security and energy supplies, here is a progress update of some of the components of CPEC:

A great deal of investment involves the development of Pakistans' Gwadar Port located on the Arabian Sea, one of the nation's three deep water ports after Karachi and Qasim.  Construction of the road between Gwadar and Saindak will be the shortest route between Central Asia and the sea and the port at Gwadar offers Afghanistan and the Central Asian Republics access to the sea, particularly for their oil and gas industries.  Here are the cost estimates for improvements at Gwadar, all funded by China:

It is interesting to see that China is also aiding in the development of a hospital and technical/vocational institute in Gwadar, all part of their "winning of the hearts and minds" business plan.

Here is a summary map showing the major CPEC projects:

As you can see, China is making significant inroads into the development of a new China-based trading partnership that will allow it access to global markets without the fear of interference by the world's sole superpower.  By developing the One Belt, One Road initiative, particularly the CPEC component, China is moving in the opposite direction to what appears to be an increasingly isolated United States when it comes to international trade.  Only time will tell what impact the development of a multipolar trade system will have on the now dominant American economy.

Who is the Real Mike Pence on Trade?

Updated November 2018

With Donald Trump making significant moves on U.S. trade, in particular, ending American participation in the Trans-Pacific Partnership, imposing tariffs on goods from just about every key trading partner and now seeing the shuttering of American car manufacturing plants which he claims is due to low tariffs on imported vehicles, it is interesting to look back in time and see what his Vice President, Mike Pence, had to say about international trade before he jumped aboard the "Trump Train". 

Here's a record of Mike Pence's votes on key trade and trade-related issues while he was in Congress:

He voted positively on trade promotion deals with Columbia, Panama, South Korea, Peru, Oman, Chile, Singapore and voted against the 109th Congress House Joint Resolution 27 which would have seen the United States withdraw from the agreement that established the World Trade Organization which, interestingly, was sponsored by Bernard Sanders (VT-I).  He also voted against House Joint Resolution 50 back in the 207th Congress; this bill would have denied an extension of China's normal trade relations with the United States as shown here:

This, in particular, is interesting given his boss's antipathy toward trade with China.

In addition, he voted in favour of House Resolution 3009 aka the Andean Trade Preference Act Extension back in 2002 which granted duty free status to products from Bolivia, Columbia, Ecuador and Peru among other things.

Here is a tweet from Governor Mike Pence back in September 2014 when he recommended the swift adoption of the TransPacific Partnership, the deal that the President just killed:

Is it possible that what was good for Indiana was not good for America?

Given his inconsistencies on trade from his time in the House of Representatives and as the Governor of Indiana to what his boss is now doing, it certainly appears that Mike Pence was willing to sell his soul to get access to the core of Washington, particularly given that Donald Trump has never hidden his trade agenda.

Global Trade - The Central Bankers' Dilemma

Governments around the world try to sell their citizens on the benefits of open global trade.  This led to the creation of the World Trade Organization (WTO) as well as trade deals including the two most recent iterations, the Trans-Pacific Partnership (TPP) led by the United States and its competitor, the Regional Comprehensive Economic Partnership (RCEP) led by China.  While all of these trade deals supposedly provide benefits for the economies of the signing nations, recent global trade data suggests that all is not well on the international trade front. 

In the most recent analysis for the first quarter of 2016 from the WTO, world merchandise trade is looking sickly.  Despite the mammoth efforts of the world's most influential central banks and their zero or negative interest rate policies, world trade as measured by exports dropped 0.8 percent in Q1 2016 with Asia recording the largest decline at -2.7 percent.  World imports declined by 1.5 percent in Q1 2016 with Asia's imports declining by 3.9 percent and South and Central America experiencing a decline of 2.8 percent.  Overall, world trade recorded a 1.1 percent decline in the first quarter of 2016 on a quarter-over-quarter basis and a 1.0 percent decline on a year-over-year basis.

Despite the first quarter weakness, the WTO still expects that global trade will grow by 2.8 percent in 2016, the same level of growth as in 2015 and will actually rise to 3.6 percent in 2017.  To put these numbers into perspective, annual trade growth has averaged 5.0 percent since 1990.  This growth is largely on the backs of growth of both exports and imports in developing and emerging economies as shown on these graphs:

Here is a breakdown of the data for 2015:

1.) Developed Economies 

- import volumes grew by 0.2 percent 

- export volumes grew by 2.6 percent

2.) Developing Economies

- import volumes grew by 4.5 percent

- export volumes grew by 3.3 percent

This is the fourth year in a row that growth in world merchandise trade has remained below the 3 percent level on an annual basis.  On the basis of the projections for 2016, world trade will have grown at roughly the same rate as global GDP for five years, a low level of positive trade growth that is unprecedented given that world trade has historically grown at twice the growth rate of global GDP.

Here is a graphic showing the regional contributions to total annual global trade growth (in percentage points) over the past five years:

Notice that Asia (coloured purple) has been a major contributor to both exports and imports over the period between 2011 and 2014.  This relationship changed markedly in 2015 with Asia being responsible for for only 1 percentage point or 35 percent of global export growth compared to 1.3 percentage points or 44 percent of export growth for Europe.  Interestingly, North America (coloured dark blue) was responsible for almost none of the growth in global exports during 2015.  On the import side of the ledger, Asia was responsible for 0.5 percentage points or 17 percent of global imports while Europe was responsible for 1.5 percentage points or 54 percent, the largest contributor to global import growth in 2015.

Let's take another look at the most recent quarter for which data is currently available.  Here is a table showing the quarter-over-quarter percentage changes in exports and imports for the major economic regions of the world:

In Q1, 2016, the only positive data points are seen in growing exports in South and Central America and in imports in Europe.  

Here is a graphic showing the average of world exports and imports since the third quarter of 2011:

As you can see, since the fourth quarter of 2014, there has been basically no growth in the average of world imports and exports.

To close this posting, let's look at the non-seasonally adjusted value of merchandise trade volume for the first quarter of 2016 and the change in that value on a quarter-over-quarter basis:

Obviously, the trade value of merchandise in the first quarter of 2016 looks particularly unhealthy on a quarter-over-quarter basis.

Given that it is impossible for an economy to grow when both imports and, particularly exports, stop growing or are contracting, this data makes it clear that the global economy is headed into its next recession.   When trade volumes for nearly all major trading regions are contracting as they did in the first quarter of 2016, the writing is on the wall.  Unfortunately, this time out, the globe's central bankers have painted themselves into a policy corner from which there is no easy escape and no easy solution.

Global trade - the central bankers' next dilemma.