Analysis of Sustainability of BRI Projects from an Industry Perspective

Abstract

To achieve sustainable development of BRI projects, we think cooperating parties should complement each other at the industry level to bring mutual benefits and unlock the potential for win–win cooperation. In addition, an effective policy design is needed to allow BRI cooperation to improve people’s well-being and enable all stakeholders to benefit from this cooperation. International relations are the largest source of transaction costs in international economic and trade activities. Even if there is potential for win–win cooperation at the industry level, whether such potential can be transformed into sustainable cooperation depends on the extent to which relevant policies can improve international relations to reduce cross-border transaction costs.

There are two core areas from the perspective of win–win cooperation at the industry level, namely “overland bridge countries”, i.e., countries in the zone stretching from Eastern Europe, Central Asia, and West Asia to North Africa, and “maritime bridge countries”, which include Southeast Asia countries. For (1) Primary goods: Traditional energy sources such as oil and natural gas are mainly concentrated in overland bridge countries. Industrial metals and new energy metals are geographically dispersed. (2) Infrastructure construction and heavy industries: maritime bridge countries, which has large population, urbanization rate of 30–60%, and good environmental carrying capacity, has significant growth potential and willingness to develop these industries. (3) Equipment manufacturing: Southeast Asia has strong demand for construction machinery, while West Asia, North Africa, and South America have large market potential for renewable energy equipment such as solar photovoltaics (PV) and wind power. (4) Technological innovation: BRI countries can help provide diversified market demand incentives. (5) Consumer goods: Southeast Asia may be the key target market in terms of trade cooperation in consumer industries such as textiles & apparel, home appliances, and automobiles, followed by South Asia and North Africa. We think opening up China’s tourism and consumer markets to Southeast Asia would enhance China’s attractiveness to Southeast Asian countries.

The significance of policies for the sustainability of BRI projects can be understood from at least two perspectives: One is the building of a distribution mechanism that facilitates the sharing of the benefits of cooperation among different groups, and the other is the reduction of cross-border transaction costs. We think the biggest transnational transaction cost comes from international relations. Managing relations with host countries is the core issue in lowering transnational transaction costs. In the two core areas of industry-level cooperation (i.e., in overland bridge countries and maritime bridge countries), a more comprehensive approach is needed to reduce cross-border transaction costs.

Chinese companies participating in BRI cooperation have both international transaction costs similar to those faced by companies in developed countries when they go global, and high intra-country transaction costs caused by the underdeveloped business environments of BRI countries. Therefore, China can provide stronger policy support to Chinese companies participating in BRI cooperation. In addition to policy-oriented financial support, China may also consider giving more support to chambers of commerce established by overseas Chinese enterprises. China could also provide employment training and guidance on laws, regulations, and labor arbitration so as to enhance the ability of Chinese enterprises to cope with risks.

Author: XIE Chao, LI Tongyue, WU Yunjie, BAI Hao, LI Gen, YAN Xiaochang.

The BRI has enjoyed remarkable success since it was launched in 2013, and the sustainability of BRI projects has received much international attention. President Xi Jinping stressed in November 2021 that the BRI should aim for high standards, sustainability, and people’s well-being.¹ BRI projects have the aims of achieving the concept of “a community with a shared future for mankind” and promoting the sharing of global development achievements. An important factor in enhancing the sustainability of BRI projects lies in win–win cooperation at the industry level, which is premised on the idea that BRI countries complement each other. As of January 2023, 151 countries have signed cooperation documents with China to jointly build the BRI.² If BRI projects were distributed evenly among BRI countries, regions that complement each other more effectively may not realize maximum returns. In addition, regions that do not complement each other as well could suffer from low input–output efficiency, weakening the sustainability of BRI projects.

As Fig. 7.1 shows, the current distribution of BRI projects features both extensive geographical coverage and a clear regional focus. In this chapter, we will look at whether this distribution meets the requirements for complementarity at the industry level. Since requirements for complementarity vary among industries, we will also examine whether the existing distribution meets the needs of major industries. As the analysis in each section of this chapter shows, there is broad room for win–win cooperation between China and BRI countries at the industry level.

Fig. 7.1

Source fDi Markets, CICC Global Institute

Distribution of China’s greenfield investment in BRI countries over 2013–2022.

The key issue is how to turn this potential for win–win cooperation into returns from cooperation. According to the mainstream view on international economics and trade in the past few decades, the best way to realize the benefits of international economic cooperation and global trade is by minimizing policy intervention to promote free trade and investment. However, almost every chapter of this book discusses strengthening policy support. How should we understand this contradiction between popular opinion and industry-based analysis? In other words, what is the role of policy in the construction of BRI projects when there is room for spontaneous win–win cooperation at the industry level? This chapter will address these questions from three perspectives: (1) The industry foundation for win–win BRI cooperation; (2) the role and function of policy in sustainable and win–win cooperation; and (3) reflections and implications.

7.1 The Industry Foundation for Win–Win Cooperation

Some Chinese industries are facing notable supply shortages, while some are seeing oversupply. Meanwhile, BRI countries cover a vast geographical area, and differ in factor endowments and markets. This means that the implications of complementarity vary for different industries. For example, China accounts for a high proportion of global production capacity in low- and medium-tech manufacturing industries such as textiles & apparel, home appliances, lithium-ion batteries (LIB), construction machinery, and solar PV power equipment. China has the world’s largest production capacity in many industries, and accounts for 70–80% of global production capacity for home appliances and alternative energy equipment. While there is no lack of policy support behind this, China’s demographic dividend remains the determining factor. Now that the demographic dividend is fading, production capacity cooperation between China and BRI countries could help improve the return on investments in mature industries. For commodities that are in short supply, capital- or technology-intensive industries (such as autos), and products with regional characteristics such as tourism and agricultural goods, win–win cooperation under the BRI framework would look significantly different from that in industries such as textiles & apparel and home appliances.

From an industrial perspective, BRI countries would also benefit from cooperating with China on multiple levels. This can be understood from the following three perspectives:

• First, economies of scale amid the deglobalization trend. During the era of globalization in the past few decades, both large and small economies have benefited from economies of scale brought by the unification of global markets. Amid the trend of deglobalization, the global unified market faces the risk of contraction. Small economies may be hit harder, while the economies of scale of large economies may become more prominent. As a large economy, China can provide BRI countries with demand-side mega-markets (e.g., importing agricultural products and tourism services from BRI countries) and supply-side economies of scale (e.g., exporting more cost-effective manufactured goods to BRI countries) amid deglobalization.

• Second, the similar stages of development of China and BRI countries. Most BRI countries are developing countries. As the world’s largest developing country, China has enjoyed remarkable achievements through reform and opening-up over the past four decades. Most BRI countries are at a similar stage of economic development as China relative to developed countries. As such, China’s development experience may be a more suitable reference for BRI countries. For example, China could leverage its experience and capabilities to build out infrastructure in BRI countries, boosting their economic growth.

• Third, the complementarity of factor endowments. Many BRI countries have abundant natural resources and young populations, but lack capital, technology, and management expertise. China’s large industrial production capacity could complement the factor endowments of BRI countries through raw material imports and production capacity cooperation.

To analyze the industrial foundation of win–win cooperation under the BRI mechanism, we should both explore what different industries in China are seeking to achieve and take into account what BRI countries need from Chinese industries. We will discuss this in light of the major challenges and risks facing China’s industrial system. As shown in Fig. 7.2, China now faces two major challenges from an industrial perspective: The fading demographic dividend within China, and intensifying international competition outside China.³ These two challenges create three risks at the industry level: The original industrial structure based on the demographic dividend may be unsustainable, and the intensified international competition leads to horizontal decentralization risks and vertical supply risks in industry chains.

Fig. 7.2

Source CICC Global Institute

Framework for sustainability analysis of BRI projects from an industrial perspective.

From the perspective of industry cooperation between China and BRI countries, we see four ways to deal with these risks. On the supply side, efforts could be made to secure safer and more stable trade in commodities and to boost cooperation in production capacity. On the demand side, exploration of new markets for manufactured goods and efforts to open up the Chinese market could increase. Due to varying conditions in industries across global markets, individual industries may have different focuses. Detailed analysis is as follows.

7.1.1 Supply-Side Commodity Trade: Improving Security of Commodity Trade

Against the backdrop of deglobalization, Chinese industries face two types of supply risks, i.e., access to advanced technologies in fields such as semiconductors, and high reliance on imports of natural resources.⁴ At present, China relies heavily on imports of three types of primary products: (1) Traditional sources of energy such as oil and natural gas; (2) industrial metals such as iron ore, copper, and aluminum; and (3) new energy metals such as nickel, cobalt, and lithium. Natural resources are unevenly distributed across BRI countries. Traditional sources of energy such as oil and natural gas are mainly found in Eastern Europe, South Asia, West Asia, and North Africa. The distribution of industrial metals is less concentrated. Russia is rich in mineral resources, with much larger iron ore reserves than other BRI countries. In addition, Russia has the third largest copper reserves among BRI countries, next only to Chile and Peru. Bauxite is mainly distributed in Southeast Asia, West Africa, and Latin America. New energy metals are geographically more dispersed. Southeast Asia, Southern Africa, and South America have much higher reserves of nickel, cobalt, and lithium.

Compared with the natural resources supply constraints, China faces greater supply risk in high-tech sectors. We believe that the fundamental response measure is to build a two-pillar system for mobilizing resources nationwide. That is, coordinating resources from governments, the market, the real economy, and financial sectors to address vertical risks (pillar 1). The key task is to improve “catch-up innovation” capabilities. Horizontal risk should be addressed through efforts in small- and medium-sized enterprises, institution building, and capital markets (pillar 2). The key task is to improve “frontier innovation” capabilities.⁵

However, this does not mean that cooperation with other countries is not important. While the fundamental solution is to improve the ability to innovate, strengthening international cooperation in technological innovation can enable China to better cope with such risks. For example, China is now a global leader in electrification of vehicles and has established a complete electric vehicle value chain with a large production capacity. However, electrification is not the endpoint for the alternative fuel vehicle (AFV) industry.⁶ We believe that intelligent vehicles have brighter prospects, driving strong demand for software and hardware such as high-end chips and AI algorithms. This means that if China cannot eliminate bottlenecks in advanced technologies in a timely manner, its ability to develop electric and intelligent vehicles may face setbacks. In the era of deglobalization, we believe it is advisable to increase scientific and technological cooperation with certain BRI countries that have abundant technological resources and enjoy friendly relations with major countries.

7.1.2 Supply-Side Production Capacity Cooperation: Combining Chinese Capital with Demographic Dividend of BRI Countries

Since China decided to establish a socialist market economy in 1992, the country’s growth model has been similar to that of Japan’s pre-1994 model. Fluctuations in both GDP growth and per-capita GDP growth are highly correlated with fluctuations in incremental working-age population. The labor force drove rapid economic growth over the past three decades, but the annual increase in China’s population aged 20–59 has been slowing since it peaked at 14 mn in 2007. At present, the working-age population has been shrinking, a change not seen since the founding of the People’s Republic of China in 1949.

From the perspective of the three-factor growth model of labor, capital, and technology, there are three main ways to mitigate the adverse impact of slower growth of the size of the working-age population on economic growth.⁷ One way is to cooperate with countries with relatively abundant labor. We think cooperation between Chinese capital and foreign labor in overseas markets is critical for mature industries such as textiles & apparel and home appliances in which China accounts for high proportions of global production capacity. Among BRI countries, countries in Southeast Asia, South Asia, and West Africa have the largest working-age populations. In 2021, BRI countries with working-age populations over 100 mn include Indonesia in Southeast Asia (190 mn), Pakistan (140 mn) and Bangladesh (115 mn) in South Asia, and Nigeria (115 mn) in Western Africa. As for cost of labor, East Africa has the lowest wages, while wages in Southeast Asia are at the lower-middle level.

However, wage data may be of limited reference value due to its low availability and technical issues such as exchange rate calculation. Meanwhile, wages are usually proportional to the average years of schooling, and the educational requirements in different industries also vary. For example, labor-intensive light manufacturing industries such as textiles & apparel and luggage & bag manufacturing have lower educational requirements but are labor intensive. We think Nigeria in West Africa, Indonesia in Southeast Asia, and Pakistan and Bangladesh in South Asia are suitable for developing these industries. However, for industries with higher educational requirements, such as home appliances, automobiles, and consumer electronics, the BRI countries in Eastern Europe and Central Asia may enjoy greater advantages.

Notably, carbon neutrality pledges have become a driving force for China to cooperate on production capacity with BRI countries. For example, Inner Mongolia has stopped approving new projects for calcium carbide, PVC, synthetic ammonia (urea), methanol, ethylene glycol, and caustic soda since 2021, and new projects (if necessary) are required to implement the replacement of production capacity and energy consumption.⁸ In recent decades, a global consensus has developed around the need to achieve carbon neutrality and environment-friendly development. Environmental protection requirements increasingly have to be considered in production capacity cooperation. Countries with laws aimed at achieving carbon neutrality usually have limited environmental carrying capacity. In contrast, countries that have only proposed or discussed carbon neutrality tend to have larger environmental carrying capacity. This latter group includes Indonesia in Southeast Asia, Kazakhstan in Central Asia, and some countries in Africa.

7.1.3 Demand-Side Manufactured Goods Trade: Coping with the Contraction of the Global Market Amid Deglobalization

Competition among large countries poses a challenge to China’s industry chain in terms of not only technology and resource constraints on the supply side but also decentralization on the demand side.⁹ The essence of decentralization is the weakening of the previously closely linked relationship between US demand and Chinese supply. We think this may lead to the contraction of the global market. International division of labor at the industry level can boost efficiency thanks to the unification of the global market in the past few decades. This has allowed individual production links—which were unable to generate economies of scale in the past—to become profitable. In this case, deglobalization threatens the security and stability of the industry chain. In addition, the consequent contraction of the global market could also affect industrial efficiency. More importantly, even without the impact of competition among large economies, the Japanese experience shows that internationalization is the only way a country’s mature industries can achieve sustained growth when its total population starts to fall.¹⁰ In particular, mature consumer goods industries such as textiles & apparel, home appliances, consumer electronics, and automobiles need to go global.

We visited manufacturers in northern Vietnam in March 2023. Most companies said that although nominal wages in Vietnam are 20–30% lower than in central China, overall production costs in Vietnam are not significantly lower after taking into account factors such as labor efficiency and water and electricity costs. These companies are relocating production capacity to Vietnam due to a shift in demand from the US amid trade frictions rather than due to rising labor costs in China. This means that amid deglobalization, rising labor costs may not be the determining factor as to whether the industrial value chain moves out of a country. On the contrary, demand plays a bigger role. To what extent a country can sell products has become more important. For China, we think measures can to be taken to unleash consumption potential. In addition, China needs to explore new markets for manufactured goods to improve the stability of external demand and cushion pressure from the shrinking global market caused by deglobalization.

Compared with advanced economies, BRI countries are generally underdeveloped. However, the highly diversified market demand of BRI countries is conducive to guiding China’s industrial innovation and diversification¹¹ given their large populations, vast area, and varying stages of development. The market potential of BRI countries as a whole also merits attention. According to the World Bank, BRI countries accounted for 47%, 58%, and 22% of the global population, area, and GDP in 2021. More importantly, exports of China’s mature products can help BRI countries develop, which is a concrete manifestation of win–win cooperation between China and BRI countries.

For example, construction of infrastructure projects and exports of construction machinery to BRI countries with insufficient infrastructure could help improve the scale and quality of infrastructure construction in related countries and accelerate their economic growth. Some BRI countries are facing power shortages. Financing support for high-emission projects under the constraint of carbon neutrality pledges has also been significantly reduced, making it increasingly difficult for some BRI countries to solve power supply problems. China enjoys clear advantages in the solar PV and wind power value chains. Exporting products from these industries can help BRI countries strike a balance between environmental protection and economic growth, bridge the gap in power supply during the green transition, and improve economic growth potential and quality of life.

Demand from different BRI countries for Chinese products varies. For daily consumer goods such as textiles & apparel and home appliances, consumer demand from different groups is inelastic. Therefore, population size is an important factor in determining the potential size of textiles & apparel and home appliances markets in each country. Size of GDP is also a reference indicator for textiles & apparel and home appliances industries when choosing destination countries as income is the foundation of consumption. Southeast Asia, South Asia, and West Africa have large populations. The top five BRI countries in terms of population in 2021 were Indonesia, Pakistan, Nigeria, Bangladesh, and Russia. BRI countries in Eastern Europe, Southeast Asia, and West Asia tend to have higher GDPs relative to other BRI countries. The top four BRI countries in terms of 2021 GDP were South Korea, Russia, Indonesia, and Saudi Arabia. In summary, BRI countries in Southeast Asia, South Asia, and Eastern Europe have larger populations and higher GDPs than other BRI countries, and thus they have stronger demand for manufactured goods such as textiles & apparel and home appliances.

For consumer discretionary goods such as automobiles, the market size depends not only on population but also on the stage of development of a country. Countries with higher per-capita GDP usually have saturated markets and limited room for further growth. In contrast, countries with lower per-capita GDP may lack sufficient demand for consumer discretionary items such as vehicles. For example, there is an S-curve relationship between vehicle ownership rate and per-capita GDP. A study shows that vehicle ownership per capita is highly sensitive to per-capita GDP when purchasing power parity-adjusted per-capita GDP is between 3000 and 10,000 international dollars. During this period of development, the unit growth of per-capita GDP can more effectively drive up vehicle ownership.¹² Southeast Asia, West Asia, South Asia, North Africa, and South America have more countries with per-capita GDP of 3000–10,000 international dollars than other BRI regions. Taking into account per-capita GDP and population, BRI countries in Southeast Asia and South Asia may have larger growth potential in the auto market.

Population and GDP are also important for infrastructure construction and related construction machinery. Generally, the potential return on infrastructure investment in a country is closely related to the country’s population size. In countries with larger populations, infrastructure projects are more likely to generate better social and economic benefits. This means that infrastructure demand in countries with larger populations may be stronger. In addition, the urbanization rate also plays an important role in determining demand for infrastructure construction and related construction machinery. A study shows that there is an inverted U-shaped relationship between new infrastructure investment intensity (infrastructure investment/GDP) and urbanization rate.¹³ Analysis based on Chinese data¹⁴ shows that the vertex of the inverted U-shaped relationship corresponds to an urbanization rate of about 47%. This means when the urbanization rate is lower than 47%, the increase in the urbanization rate is accompanied by rising intensity of infrastructure investment. When the urbanization rate is higher than 47%, the increase in urbanization rate is often accompanied by falling intensity of infrastructure investment. We use an urbanization rate of 30–60% as the screening criterion, and believe that BRI countries with large infrastructure construction markets are mainly located in Southeast Asia, Western Africa, South Asia, and Central Asia. Together with the abovementioned GDP and population data of related BRI countries, Southeast Asia, South Asia, and Central Asia have larger demand for infrastructure investment, and the infrastructure and construction machinery markets in these regions may also have substantial growth potential.

The potential market sizes of alternative energy such as solar PV and wind power depend on both natural resources and electricity demand in related countries. In terms of solar energy resources, South America, North Africa, Southern Africa, and West Asia have great potential for solar PV power generation,¹⁵ with the top five BRI countries being Chile, Bolivia, Namibia, Peru, and Yemen. In terms of wind energy resources, South America, North Africa, and West Asia have higher wind energy density, with the top five countries being Chile, New Zealand, Argentina, Croatia, and Austria. In terms of development potential, solar PV power stations are suitable in areas with many hours of sunlight and high solar thermal radiation intensity, while wind power stations are suitable for areas with high wind energy density.

However, development potential is not the same as willingness to develop. Without strong demand for electricity, even if a country has favorable conditions for the development of solar PV and wind power, the large potential is unlikely to be effectively translated into willingness to develop alternative energy sources. Considering the carbon neutrality pledges around the world, countries with strong electricity demand may be more willing to develop clean energy such as solar PV and wind power. BRI countries in Eastern Europe, Southeast Asia, West Asia, North Africa, and South America have higher electricity consumption. Taking into account the above factors, West Asia, North Africa, and South America may have sizable markets for alternative energy such as solar PV and wind power.

7.1.4 Demand-Side Market Opening-Up: Leveraging the Attractiveness of China’s Mega-market to BRI Countries

An important strategy for dealing with the risks of decentralization is strengthening regional cooperation. In addition, frontier innovation capabilities hold the key to making the supply side more attractive to other countries.¹⁶ However, supply-side efforts alone are not enough to strengthen regional cooperation. We think China can also open up wider to the world, which could help increase the willingness of BRI countries to cooperate with China. Historical experience shows that China, Japan, Germany, and South Korea all benefited from external demand during their rapid growth stages. Our market survey in Vietnam also shows that the US serves as a major destination market for Vietnamese products and that the US market plays an important role in helping improve US-Vietnam relations.

Taking into account all factors, we believe that China may consider strengthening the opening-up of tourism and agricultural markets. The COVID-19 pandemic has taken a heavy toll on the tourism industry in various countries. Many countries have strong willingness to attract Chinese tourists as the impact of the pandemic subsides. At present, BRI countries with high Travel and Tourism Development Index (TTDI)¹⁷ ratings are concentrated in Western Europe, Northern Europe, and Southeast Asia. Given that Southeast Asia is relatively less developed, the region is more likely to find tourist inflows from China attractive.

The special agricultural products market is another area in which China could attract BRI countries. Agriculture is of vital importance to a country. To ensure independence and security, most economies protect their agriculture industry to some extent, while hoping other countries open their agricultural markets wider. This dynamic was particularly evident during the Doha Round¹⁸ of trade talks. At the Sixth WTO Ministerial Conference in 2005, the US explicitly opposed the elimination of cotton subsidies, but urged other countries to open their agriculture markets wider. This was a key reason behind the failure to make progress in the Doha Round.¹⁹ Therefore, the opening-up of agricultural markets can effectively facilitate international cooperation.

Of course, the extent of opening-up needs to take the financial conditions of domestic agricultural producers into account. We believe China may open up its fruit market wider to BRI countries as fruit-producing countries need to sell fruit within a short time to avoid rotting. In addition, fruit is unlikely to have a large impact on food security in importing countries. At present, fruit-producing countries that rely heavily on foreign markets are largely located in Southeast Asia, West Asia, and Eastern Europe. We believe that China can further open its fruit markets to BRI countries in these regions.

7.1.5 Key Cooperation Regions in Different Industries: Overland Bridge Countries and Maritime Bridge Countries

From the perspectives of production capacity cooperation, commodity trade, manufactured goods trade, and market opening-up, key regions in which different Chinese industries achieve win–win cooperation may vary. Among them, two regions are of strategic significance: Overland bridge countries and maritime bridge countries. Overland bridge countries (stretching from Eastern Europe, Central Asia, and West Asia to North Africa) are rich in traditional fossil energy such as oil and gas. These countries are of special significance to the economic security of large industrial economies. Industrial metals are geographically dispersed. Russia, South Asia, and South America have large iron ore reserves. South America, Russia, and Central Africa are rich in copper ore. Bauxite is mainly found in Southeast Asia, West Africa, and Latin America. The distribution of metals used for renewable energy such as nickel, cobalt, and lithium is more dispersed, with nickel concentrated in Southeast Asia, cobalt in Central Africa, and lithium in South America.

Maritime bridge countries (mainly Southeast Asia) may be a key region in which Chinese industries such as transportation infrastructure can achieve win–win cooperation. As most Southeast Asian countries have urbanization rates of between 30 and 60% and large populations, we think infrastructure construction in these countries could generate higher economic benefits. Therefore, we believe increased infrastructure investment in maritime bridge countries—especially the Philippines, Thailand, Vietnam, and Indonesia—is an efficient way to improve people’s well-being. In addition, countries with urbanization rates of 30–60% include Pakistan and Bangladesh in South Asia and Kazakhstan in Central Asia. These countries may have high infrastructure demand (see Chap. 8 for a more detailed discussion on infrastructure).

Heavy industries such as steel, cement, chemicals, and glass are highly correlated with infrastructure investment. Maritime bridge countries have strong demand for these industries. We believe the construction of heavy industrial capacity in Southeast Asian countries can satisfy both domestic demand from these countries as well as demand from the wider Southeast Asian market. In addition, considering that most Southeast Asian countries still have high environmental carrying capacity and strong motivation to develop heavy industries, cooperation with Chinese heavy industries could effectively boost local economic growth (see Chap. 10 for a more detailed discussion of heavy industries).

For the equipment manufacturing industry, we believe that China can both implement production capacity cooperation and directly sell products to BRI countries. We note that production capacity cooperation in regions with rich natural resources may encounter the so-called resource curse.²⁰ Regions with weak economic fundamentals such as Southern Africa lack both the inherent requirements for the development of equipment manufacturing industries and the related industry and supply chains. In addition, the equipment manufacturing industry is also labor-intensive, requiring a large number of skilled workers. Given these three conditions, maritime bridge countries may remain important destinations for production capacity cooperation.

More specifically, the equipment manufacturing industry can be roughly divided into two categories. (1) Construction machinery, the demand for which is closely correlated to infrastructure investment. Maritime bridge countries are the key target markets. (2) Solar PV and wind power equipment, which is closely correlated to the distribution of resources and electricity demand. We see large market potential for solar PV and wind power industries in West Asia, North Africa, and South America (see Chap. 11 for a more detailed discussion on the development of equipment manufacturing industries such as construction machinery and new energy under the BRI).

In the technology-intensive high-end manufacturing sector, we believe establishing a two-pillar system for mobilizing resources nationwide is the fundamental way for China to accelerate technological innovation. However, this does not mean that China should adopt a closed-door policy in innovation. On the contrary, if China can cooperate in some high-tech fields with BRI countries that have certain scientific research strengths, then innovation resources and achievements are likely to spread. This could help China better cope with supply chain risks. Overall, BRI countries as a whole do not have obvious advantages in technological innovation resources. We believe that diversified demand and the potential market size of BRI countries merit greater attention for the development of China’s innovative industries (see Chap. 2 for a detailed discussion).

We believe that there is considerable potential for cooperation between China and Southeast Asian countries in the trade of consumer goods such as textiles & apparel, home appliances, and automobiles. The potential for cooperation with BRI countries in South Asia and Eastern Europe in the textiles & apparel and home appliances industries also merit attention. In some consumer sectors, China could open markets wider to strengthen cooperation with BRI countries. From this point of view, maritime bridge countries remain the key target area when China opens up its tourism and fruit markets to the world (see Chap. 12 for a detailed discussion on the automobile sector, and Chap. 13 for a detailed discussion on other consumer sectors).

In summary, the focus of the win–win cooperation between China and BRI countries varies for different industries. Overland bridge countries and maritime bridge countries are the key regions. While overland bridge countries are the core regions for the traditional fossil energy trade, the market potential for consumer discretionary also merits attention. Maritime bridge countries have strong demand for cooperation in infrastructure construction and almost all manufacturing industries.

7.2 The Role of Policy in BRI Project Sustainability

We have discussed the probability and key directions of BRI cooperation from an industrial perspective. This is only the basis for sustainability of cooperation under the BRI. Whether win–win cooperation itself is sustainable remains an issue to be discussed. The above analysis only shows that cooperation can bring win–win results to both sides as a whole, and does not consider differences within individual countries. Each country has groups with different interests, such as government, society, and businesses. Therefore, when examining the impact of economic cooperation between countries on international relations, we should not only consider countries as a whole, but also the structural implications of international cooperation.

We use game theory matrix analysis, as shown in Fig. 7.3, in the context of international cooperation bringing considerable economic benefits to both countries. We see that cooperation may be unsustainable if the benefits of cooperation are not appropriately distributed within a country. In other words, the sustainability of BRI projects depends on whether cooperation can improve the well-being of various groups. Ensuring that different groups within a country share the benefits of BRI cooperation likely requires policy intervention to build a reasonable sharing mechanism.

Fig. 7.3

Source CICC Global Institute

Analysis of international cooperation income matrix from overall and structural perspectives.Footnote

Xie, C. et al. (2022). Chapter 2: International Competition: The Great Illusion or the Great Game? In Two-Pillar National System. CICC Global Institute.

In fact, the role of policy intervention is not only to enable industrial cooperation to improve the well-being of stakeholders, but also to maximize the extent that win–win cooperation potential can be translated into actual benefits. As mentioned above, although priorities for cooperation vary across different industries, we think most Chinese industries have a foundation for spontaneous win–win cooperation with BRI countries. During our market surveys, we have seen that many companies go global on their own initiative, with workshops or industrial parks built before the introduction of the BRI. Some have been recognized as BRI projects after the fact. Since there is a basis for spontaneous win–win cooperation at the industry level, is policy intervention necessary?

For international cooperation, productivity factors such as technology only offer possibilities. It is the good relations between countries that make such possibilities a reality.²² Unlike the economic activities within a country, international trade must overcome transaction costs related to international relations. We note that international relations are frequently the biggest transaction cost in trade activities. In addition to explicit tariff and non-tariff barriers, there are many hidden transaction costs. For example, international relations often affect people’s preference for products and companies from different countries. Therefore, only if cross-border transaction costs are reduced can people and companies in different countries conduct economic activities and achieve win–win cooperation.

For example, the US spent nearly US $50 bn on the Lend-Lease Act during the Second World War, accounting for 36% of US fiscal revenue and about 5% of GDP, and about US $1.3 bn on the post-war Marshall Plan, which accounted for about 8% of US fiscal revenue and 1–2% of GDP over 1948–1951.²³ The US government did not directly benefit from these projects. However, US products, culture, standards, and currency spread throughout the world as a result of these initiatives, and the scope of international economic and trade activities that US people and companies could conduct also expanded. The US also managed to grow its economy.²⁴ The US government indirectly obtained tax revenue by funding seemingly loss-making projects that improved the sustainability of international cooperation.

In international economic and trade activities, the US attaches great importance to financial instruments. It provides guarantees and financing support to foreign investment enterprises through policy financial institutions such as the Export–Import Bank and the Overseas Private Investment Corporation (OPIC) to reduce cross-border transaction costs. However, the US experience may be difficult to replicate. Looking at the Marshall Plan as an example, many countries were hit hard by the Second World War, and the US launched this plan by leveraging its clear advantages over other countries. It focused on European countries with better business environments and lower internal transaction costs than might be seen in many BRI countries today. We think the business environment in many BRI countries needs to be improved, meaning the sustainability of win–win cooperation faces greater challenges. Therefore, we think China can overcome cross-border transaction costs through policy intervention, and by reducing or compensating for additional transaction costs within the host country by providing policy support.

In this regard, the experiences of Germany and Japan in promoting international economic cooperation and global trade after the Second World War may merit greater attention. Compared with the US, the German and Japanese governments provided much stronger support to their enterprises in international economic and trade activities. For example, a system of supporting institutions for overseas investment and cooperation was formed in West Germany, with the Federal Ministry of Economic Cooperation and Energy as the overseeing authority and the Germany Trade and Invest (GTAI), the German Chamber of Commerce and Industry (DIHK), and the German Chambers of Commerce Abroad (AHK) as important pillars.²⁵ Providing services for SMEs to explore overseas markets is a notable feature of German policies. German Centres sponsored by the German government were established in key emerging market countries, bringing together the strengths of the German federal and state governments²⁶ to provide office space for SMEs to develop overseas markets, connect German enterprises with local enterprises via seminars and forums, and provide consulting and information services to help German enterprises go global.²⁷ Although the US has similar information service platforms for SMEs, it does not provide services such as office space for US companies in host countries.

As Japan’s outward direct investment (ODI) mainly targets developing economies, Japan offered stronger policy support for Japanese companies going global than the US or Germany. For example, the Japan Bank for International Cooperation (JBIC) is the Japanese government’s main tool for providing policy support for Japanese companies. Similar to JBIC, the US OPIC and Germany’s KFW also provide policy-based financial support for OFDI. The US is the strictest of the three countries in terms of financing conditions. US policies target only small enterprises, and have restrictions to ensure that the investments do not affect US employment and workers’ rights. Germany’s conditions are looser than those of the US, and all small businesses are eligible. Japan has the loosest conditions, with no special restrictions. Judging from the proportion of OFDI loans issued by policy financial institutions in total OFDI, Germany’s support is nearly seven times that of the US and Japan’s is nearly 20 times that of Germany’s (Fig. 7.4).

Fig. 7.4

Source OECD, Solis, M. (2003). The politics of self–restraint: FDI subsidies and Japanese mercantilism. World Economy, 26(2), 153–180, CICC Global Institute

Institutions providing policy-based financial support for outward foreign direct investment (OFDI) in the US, Japan, and (West) Germany.

As mentioned above, the cross-border transaction costs that Chinese companies need to overcome in order to cooperate with BRI countries include the following: (1) General international transaction costs (e.g., tariffs) that companies in developed countries such as the US, Japan, and Germany face when they go global; and (2) intra-country transaction costs related to the general need for improvement in the business environment of BRI countries, such as legal settlement costs of contractual disputes and country-specific political risks. We think China could provide policy support to companies to help them overcome transaction costs between China and BRI countries and within BRI countries.

In addition to conventional financial support, Chinese companies doing business in BRI countries may need other types of policy support. For example, overcoming information asymmetry in cross-border transactions is a top priority, according to feedback from non-state-owned enterprises doing business overseas to the federations of industry and commerce. In 2019, a total of 40.6% of non-state-owned enterprises hope that relevant Chinese authorities can provide training and services on laws, regulations, and labor arbitration in BRI countries.²⁸ During our visit to Vietnam, Chinese companies said that they need two types of policy support. (1) Overseas Chinese companies established chambers of commerce that played a pivotal role in helping them overcome challenges during the COVID-19 pandemic. These chambers of commerce require more support to enhance the ability of overseas Chinese companies to cope with challenges such as natural disasters. (2) The Chinese companies also wanted more industrial parks to be built, backed by the Chinese government, to enhance their ability to cope with country-specific political risks.

7.3 Reflections and Insights

We believe the sustainability of BRI projects depends on complementary advantages at the industry level to realize the potential for win–win cooperation. In addition, a reasonable policy design is needed to ensure that various stakeholders within a country can share the benefits of international cooperation. In other words, benefiting people’s well-being is an important guarantee for the sustainability of BRI projects. Policy intervention can also play an important role in helping to lower cross-border transaction costs. Specific reflections and implications are as follows.

First, the potential for win–win cooperation at the industry level is the foundation for the sustainability of BRI projects. In terms of production capacity, trade, and market-opening, priorities for cooperation vary for different industries.

• (1) Primary products: Traditional fossil fuels such as oil and gas are concentrated in Eastern Europe, Central Asia, West Asia, and North Africa. Russia, South Asia, and South America have large iron ore reserves. South America, Russia, and Central Africa are rich in copper ores. Bauxites are distributed in Southeast Asia, West Africa, and Latin America. Nickel, cobalt, and lithium are geographically dispersed, with nickel mainly in Southeast Asia, cobalt in Central Africa, and lithium in South America.

• (2) Infrastructure construction and related heavy industries such as steel and chemicals: Regions with large populations, urbanization rates of 30–60%, and high environmental carrying capacity tend to be more willing to develop these industries. This includes Southeast Asia, Pakistan and Bangladesh in South Asia, and Kazakhstan in Central Asia.

• (3) Equipment manufacturing: Both production capacity cooperation and manufactured products trade are needed. Taking into account the resource curse, value chain and supply chain support, and labor endowment, we think Southeast Asia has greater potential for cooperation in construction machinery, and West Asia, North Africa, and South America have stronger demand for the development of the solar PV and wind power equipment industries.

• (4) Technology-intensive high-end manufacturing sectors: The diversified markets of BRI countries may help increase the diversity of innovation in China.

• (5) Consumer sectors: Southeast Asia has significant room for product trade and production capacity cooperation in the textiles & apparel, home appliances, and automobile industries, followed by South Asia and Eastern Europe. Opening up China’s tourism and consumer markets wider to Southeast Asia should help strengthen China’s attractiveness to Southeast Asian countries.

Second, we think close attention can be paid to overland bridge countries and maritime bridge countries to achieve win–win cooperation at the industry level. Maritime bridge countries are mainly composed of Southeast Asian countries. This region is a key corridor for China’s maritime connectivity with other BRI countries. To strengthen regional cooperation to cope with decentralization risks, China can cooperate with Southeast Asian countries. Except for the traditional energy and high-tech manufacturing industries, maritime bridge countries are the main target region for cooperation in almost all manufacturing industries, as well as for new energy metals, tourism, and other service industries, according to our industry-based analysis.

Although most overland bridge countries do not directly border China, these countries are rich in traditional energy sources that are irreplaceable in the short term, and are also a key land corridor between Europe and Africa. We believe Europe and Africa can play an important role in easing the intensity of great power competition. In particular, such competition may affect the safety of traditional maritime corridors. We advise paying attention to both the economic significance of overland bridge countries in traditional energy fields and to their strategic significance from the perspective of great power competition.

Third, we think China can achieve win–win cooperation with BRI countries from an industrial perspective. However, whether the cooperation itself is sustainable depends on policy intervention. The significance of policies for the sustainability of BRI projects can be understood from at least two perspectives. First, a distribution mechanism is needed to facilitate the sharing of benefits of cooperation among different groups within a country. Based on a game theory matrix analysis, in the context of international cooperation bringing considerable economic benefits to both countries, cooperation may be unsustainable if benefits are not appropriately distributed within either country. In other words, the sustainability of BRI projects depends on whether cooperation can improve the well-being of stakeholders. Ensuring that different groups within a country share the benefits of BRI cooperation likely requires policy intervention to build a reasonable sharing mechanism.

On the other hand, we believe the extent that potential for win–win cooperation at the industrial level can be translated into actual benefits of cooperation depends on cross-border transaction costs. The biggest transaction cost in international economic and trade activities is related to international relations, which not only determine explicit transaction costs such as tariffs, non-tariff barriers, and market access restrictions, but also affect implicit transaction costs such as the preferences of local consumers and businesses. Therefore, managing diplomatic relations with host countries is vital in reducing international transaction costs.

When cooperating at the industry level in overland bridge countries and maritime bridge countries, transaction costs occur in both host countries and also in countries with deep influence on these regions. Therefore, a comprehensive approach is needed to reduce cross-border transaction costs in these regions. Moreover, increasing support for small enterprises and creating a policy environment is conducive to the fair participation of all types of enterprises in international competition. As small firms are less able to withstand macro risks, countries such as the US, Japan, and Germany all offer special support to small enterprises going global, including consultation services and policy-based finance.

Chinese companies expanding abroad face international transaction costs similar to those faced by developed countries, and also have high intra-country transaction costs due to the less-developed business environments of BRI countries. Therefore, we believe greater policy support is needed for Chinese firms participating in BRI projects. In addition to learning from the experience of developed countries in providing financial support, more support could be given to Chinese chambers of commerce established by Chinese enterprises abroad. In addition, services such as educational training on the laws and regulations of host countries and local labor arbitration could be provided to reduce information asymmetry.