How the UK Can Benefit from China’s OBOR Ambitions

April 24, 2017 Posted by China Briefing Reading Time: 6 minutes

Marco Polo famously traveled from Venice to Xi’an, then China’s capital city, with the impact on his hometown felt for centuries. Even today, ancient trade is still revered in this most beautiful of Italian cities: St. Mark’s Basilica still shows frescoes of Oriental merchants that were involved with the repatriation of the holy remains of the revered apostle being removed to Venice.

Today, Chinese goods are taking tentative steps to connect via rail to European destinations. London, Madrid, Moscow, Milan, and Istanbul are among some 15 European cities that are connected to the Chinese One Belt, One Road (OBOR) rail network. Although these services are not yet fixed, and concerns remain over their cost and other logistical problems, the fact is that the connectivity is in place, and it will be improved.

Not all of this is entirely in China’s hands; there is a great deal of land to cover between China and Europe. But what is happening is that the rail network is slowly starting to be developed across the Eurasian land mass. Iran, now looking to come back into the international fold since the lifting of Western sanctions, has been developing rail routes that will link it through to Europe via the Caucasus, and onto European ports in Bulgaria and Romania. Russia has been developing high speed rail that will link Moscow and St. Petersburg’s existing service to Kazan, on the banks of the Volga. The Chinese want to extend that all the way to Beijing.

Once port and rail upgrades are completed between Eastern Europe and Central Asia, and the economic dynamics can be worked out, sustainable rail freight, and potentially passenger services, between Europe and China will become more commonplace. After all, the Trans-Siberian route already exists. If that route were made high-speed, as the Chinese are suggesting, and is further extended from Russia into the European network, it would be feasible to travel by train from London to Beijing in 48 hours.

There are numerous considerations before such an eventuality could take place, not least infrastructure development, security, and diplomatic concerns. However, it could be done. Somewhat uniquely, due to the UK’s position on Brexit, it will shortly be free of having to negotiate agreements with non-EU countries through Brussels. Being free of the EU’s legislation effectively opens the British government up to be free to deal with whom it chooses, regardless of Brussels protocols or preferences.

To that end, the UK could find itself in the driving seat in getting some of the Silk Road and OBOR ambitions directed towards it, rather than Madrid or other European destinations. Addressing this will become a tax issue, and will depend upon two elements:

The nature of future UK-EU trade in import-export, and the dutiable value placed on non-locally sourced exports (such as re-selling Chinese goods onto the EU market);
The nature of any future free trade deal between China and the UK.

In fact, when looking at the capability for British companies to re-sell Chinese goods onto the EU market, there is excellent potential, capable of creating UK employment and advances in technology that would benefit the British economy by some way. While the basic re-sale of Chinese made goods onto the EU from the UK wouldn’t fly (the EU would simply impose a rules of origin import making the procedure worthless), what would work is adding British value. This means that certain Chinese technical goods could be imported to the UK, have British technologies added to them, and the finished, added value product then being presented to export markets worldwide.

If that same process could be extended to trading partners such as India, among others, then the UK could move itself into a world-class center of excellence in terms of adding critical new technologies to basic goods coming in from Asia. In fact, such a scheme would also drive investment from China and India. The UK certainly has the innovative mindset, technological infrastructure, as well as academic and scientific know how.

The question as to what products should feature is a matter for the Chinese and British to discuss and match up. Such partnerships are normal – which was a major point of the now-wasted Trans Pacific Partnership (TPP) agreement the US had envisaged.

The rail network, however, is only one component of the logistics and transportation. The UK already has significant port facilities, yet new routes may be opening up. The north Russian Arctic seaboard is opening up, mainly due to global warming, and both Russian and Chinese investors are flocking in to develop them. For the Chinese, these offer additional access points for Russian energy reserves, yet trade will surely follow. For Russia, these open up its own massive Arctic seaboard to energy exploitation, and trade. I recently described the impact of Opening up Russia’s Arctic Ports, and Britain in fact is no stranger to this coastline, having been partners with the Murmansk-based Russian Navy during World War II. North Russia is not far from the UK, and again, some political willpower can direct the British gaze east, via Russia.

There are further tax issues to consider in doing so. Russia’s equivalent to the EU is the Eurasian Economic Union (EAEU), which provides free trade between Russia and Central Asia. That may seem a long way for Britain; however, it is a market of some 180 million with a per capital GDP of US$13,151 (PPP) which is higher than China. It is also a growing, developing regional economy with a taste for middle class consumer goods. That has attracted countries such as China, India, and Singapore among others to commence free trade negotiations with the EAEU. Those markets lie on the rail route that bought those recent trains from Beijing into London. I discussed British engagement with the EAEU recently.

There is a way for Britain to engage with China’s OBOR, and reinvent itself as a modern day multi-port terminus for the new Silk Road, free from the constraints of Brussels and the EU. The logistics and transportation routes are already being set up, and will only continue to improve. That alone suggests a re-engagement by Britain with Asia is a path well worth following.

If tax based negotiations, focusing on Asian sourced goods and products that British technology can add value to Britain, the entire UK can become a new Silk Road terminus. This would allow the UK to invent and manufacture using Asian commodities and basic goods – a new boom time for “Made in Britain” in partnership with countries such as China, India, and potentially even Russia and beyond. The logistics are happening. The diplomatic and tax treatment efforts need to be worked on.

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