Business

China’s Silk Road Initiative Rejuvenates Local Textile & Clothing Industry, Jeopardises Future Of The Industry In Neighborhood

To revive the silk route that connected ancient China to its trading partners in Western Europe and Central Asia or Middle East, China has come up with an ambitious long term plan to open six corridors that can reach out to various countries in Europe and Asia besides Africa. These six corridors known as the Belt and Road initiative will be completed within a gestation period of 30 years or say by 2049 - the Chinese centenary year for celebration of independence according to experts on global trade.

The story dates back to 2013 when the Chinese president Xi Jinping sowed the seeds that germinated into the present proposal. The Chinese premier wanted to construct the silk-road economic belt. His plan was to revive the overland and maritime trade routes that had connected China and Europe centuries back. According to the Chinese estimate there are 60 countries that fall under the aegis of the Belt and road initiative which includes the land-based ‘Silk Road Economic Belt’ (SREB) and the oceangoing ‘Maritime Silk Road’ (MSR).

The belt and road initiative as of now includes transit routes along six economic corridors and Maritime Silk Road as listed below:

The China-Mongolia-Russia corridor, anchored by the Trans-Siberian railway
The New Eurasian Land Bridge, anchored by a set of railways running from central China (Wuhan, Chongqing and Chengdu) to Europe via Kazakhstan, Russia and Belarus
The China-Central Asia-Western Asia Corridor passing through Central Asia, Iran and Turkey to reach Europe
The China-Pakistan Economic Corridor, which would extend the Karakoram Highway which crosses the mountains between China and Pakistan, and results in a combination of highways and rail links all the way to the port of Gwadar at the south of Pakistan.
The China - Indochina Peninsula Corridor running up to Singapore
The Bangladesh-China-India-Myanmar Corridor
Maritime Silk Road, running from the Chinese Coast over Singapore to the Mediterranean.

These corridors have been planned essentially to counter the economic power exercised by US and its allies. China’s economy is heavily dependent on foreign trade and over 90 percent of its export is executed through the sea route. China is bordered by difficult terrain on its northern, western and southern sides and by the sea in the eastern frontier only (by three seas namely, Yellow sea, East China Sea and the South China Sea). The trade routes emanating from these seas are intercepted by what Chinese strategists call the “First Island Chain.” These are a series of islands controlled mostly by allies of the United States. Needless to say to reach the Chinese waters from the high seas, the cargo must pass through check points controlled by US allies. In short, one of the reasons why China is endorsing the revival of the ancient trade routes is to offset the threat perception posed by the US bloc in the event of adversities by setting up a massive Asian capacity bloc.

The second but prime reason for China’s effort to build the six corridors is absolutely goaded by economic contemplation. China’s eastern coastline which is highly industrialized and powers the country’s mammoth manufacturing capabilities had huge logistic advantages. However, Chinese goods have gradually lost their cost advantage as labor and other input costs have augmented over the years. It’s important to note here that industries in the eastern frontier are dependent on migrated workforce from inner provinces as well. With increased product cost, China has limited options to still survive in the market - either to produce top line quality goods, or to keep the cost under control or to reduce the delivery lead time. At the same time, the country has to save millions of manufacturing job. Thus, to keep the cost under control, factories have to shift to inner or western China, to reduce the supply lead time to Europe and Africa, China must have faster transit routes which can be achieved through belt and road initiative. The rail route to Europe is functional since 2014 and global computer hardware supplier HP is transporting laptops from south western city of Chongqing to German city of Duisburg in just 3 weeks. This has helped the company to reduce the lead time at least by two weeks because maritime route would have taken more than five weeks. So, China can now keep their manufacturing cost moderate by developing industries in the western Chinese townships and the same can be delivered to consumers in Europe, Asia or Africa at a faster pace through the belt and road initiative. Even the factories in the eastern coastline can take advantage and remain afloat through shorter lead time! Thus, business sustainability of the Chinese manufacturing enterprises would improve by few decades.

However, many experts have their doubts whether China will be able to successfully implement these six corridors. They are of the opinion that the project costs would run into trillions of dollars and many government backed banks and financial institutions in China are already under tremendous pressure from bad debts (The China Development Bank and Export-Import Bank of China is setting up special lending schemes for B&R initiatives). As this is a long term project, the failure to repay will not be detected early enough. Moreover, the initiatives does not involve merely setting up of routes. It also involves building up of whole eco-system and services for business along the corridors.

As of now, there are conflicts within several participating countries but China has put up a great show of solidarity at the Belt and Road Summit in mid May 2017. Local tensions brewing in countries like Kazakhstan and India prevented them from joining the summit. India was protesting against setting up of the China Pakistan Economic Corridor (CEPC) through Pakistan Occupied Kashmir (POK) which India claims as rightfully theirs.

Belt & Road Initiative: Impact on Textile and Apparel Business

It is without doubt that Belt and Road initiative would have significant impact on textile and apparel business too like other industry sectors. China’s economic and manufacturing might will leave many existing textile and apparel manufacturers out of business along the economic corridors. Apparel manufacturers in East European and former CIS countries which are thriving because of their moderate cost and faster delivery time to European markets might find themselves out of business overnight as China’s western provinces develop their capability in Textile and Apparel making. Similarly, Turkey’s textile industry would face higher challenges and such would be the scenario even in small to medium size apparel manufacturing units from Italy. The shorter lead time and low cost of Chinese apparels would put up tremendous challenge to Turkish or even made in Italy brands. The implication is that no illegal Chinese workers need to work out of a Chinese factory in Prato, the historical capital of Italy's textile business to cater to the fast fashion stores.

It is not only Eastern Europe or Turkey’s textile industry that would be endangered by the Belt and Roads initiative; countries like Pakistan, India, Bangladesh or Vietnam will also feel the heat. As CEPC moves through Pakistan, export of raw materials (like cotton, cotton yarns and grey fabric) from Pakistan to China would be faster but products which they are exporting to Middle East and Europe would come under direct competition due to the shorter lead time and lower cost. Similarly, Bangladesh and Vietnam will lose out to China where short lead time is of prime concern. On the other hand, China would have access to cheaper cotton fibers from countries like Uzbekistan or some African nations. So, the price competitiveness of China’s textiles and apparels which was eroding gradually, would resurrect. With the belt and Roads initiative, it is envisaged, China would stall the migration of the textile industry to South East Asia and Africa by couple of decades. At the same time, the country has taken a gargantuan bet to save the economy and millions of job.