By Jonathan Hillman,  Director, Reconnecting Asia Project, Centre for Strategic and International Studies

The Dawn of a New Commercial Era?

For over two millennia, technology and politics have shaped trade across the Eurasian supercontinent. The compass and domesticated camels helped the “silk routes” emerge between 200 and 400 CE, and peaceful interactions between the Han and Hellenic empires allowed overland trade to flourish. A major shift occurred in the late fifteenth century, when the invention of large ocean-going vessels and new navigation methods made maritime trade more competitive. Mercantilism and competition among Europe’s colonial powers helped pull commerce to the coastlines. Since then, commerce between Asia and Europe has traveled primarily by sea.

Against this historical backdrop, new railway services between China and Europe have emerged rapidly. Just 10 years ago, regular direct freight services from China to Europe did not exist. Today, they connect roughly 35 Chinese cities with 34 European cities. Rail services are considerably cheaper than air and faster than sea, as Figure 1 illustrates, and could provide a compelling middle option for more goods in the coming years. Rail’s share of cargo by value is already growing, increasing 144 percent during the first half of 2017, as compared to the same period in 2016. A study commissioned by the International Union of Railways estimates that China-Europe rail services could double their share of trade by volume over the next decade….

The main challenge in squaring all these factors is that despite the attention they receive, there is little reliable and centralized information about these new services. Frequency of China-Europe rail services, cargo volume, cargo rates, and other basic information is hard to find, especially compared to maritime and air freight data. Many of these shortcomings stem from the newness of these routes, the complexity inherent in moving goods across many borders, and the resulting disaggregation of data. Data could improve in the coming years, but there are also incentives for obscuring the information. These trains carry not only commercial goods but also political ambitions.

Drawing from interviews with 34 stakeholders, this report contributes to filling that gap in two parts. First, it examines the rise of China-Europe railway services and their drivers. China-Europe rail has grown not only in terms of origins and destinations but also in terms of cargo volume, cargo type, and overall competitiveness. Driving these trends are several political, technical, and technological factors, chief among them subsidies and improvements in logistics processes. Second, it considers these developments within a broader trade context and identifies several challenges to future growth, including trade imbalances, capacity constraints, and the enduring strengths of maritime shipping….

Drivers

A mix of political, economic, and technical factors are driving these new services, the exact balance of which varies from route to route. As mentioned earlier, some services have run only once, entirely for promotional purposes. Others, particularly those further inland, offer a more competitive middle option between maritime and air freight. Overall, however, it is difficult to imagine these routes emerging as rapidly as they have in recent years without China putting its political and financial weight behind them….

China also provides generous subsidies for these routes, making their true economic viability more difficult to assess. According to reports, subsidies can range from $1,000 to $5,000 for each FEU, accounting for up to one-half the total cost.20 One study that examined subsidies in 2014 found an even higher range, up to $7,000 per container.21 The same study estimated that China’s provincial governments collectively spent over $300 million subsidizing China-Europe block trains during 2011 to 2016. That sum is modest when compared to the $113 billion that China plans to spend on its railways in 2018.

To be sure, China is not the only subsidy provider, nor are shipping subsidies the only avenue for state support. The European Union and its members subsidize both railway infrastructure and operations. Some groups support these measures on social grounds, noting that rail is a more environmentally friendly form of transportation. But Europe’s subsidies largely predate the emergence of China-Europe railway routes. In contrast, China’s financial and political support for these routes has coincided with their rise….

Speed Without Scale

This examination of China-Europe railways has provided two views. The first view, considering these services in isolation, is dramatic. From virtually nothing, they have grown rapidly. The network has expanded to link more Chinese and European cities. These services are faster, cheaper, and more frequent. Increasingly, they carry not only more goods but also a greater variety of goods. China’s political and financial support has paved the way.

The second view is more modest. In a broader trade context, the China-Europe railways present a new offering that has not yet grown from niche to mainstream. Future growth is limited by trade imbalances, the comparative value that maritime shipping offers, and infrastructure constraints. None of these challenges is likely to vanish anytime soon. In the meantime, these services will depend on Chinese subsidies, and the risk of delays will rise as they handle more cargo.

An optimistic scenario for China-Europe rail growth does not dramatically alter these two views. If railways double their current share of trade by value, taking on 2.5 percent of China-Europe trade by volume, that would be a major development for those involved in the rail systems. The sheer size of the China-Europe trade relationship, which exchanged some $570 billion in goods in 2016, means that modest gains produce significant sums. Railway manufacturers, owners, operators, logistics firms, and freight forwarders all stand to gain. A set of businesses would benefit from lower inventory costs. Among cities, those located near the routes and inland, further away from the coastlines, are likely to see the most gains.

But these changes do not add up to wide-ranging economic or political impacts. Maritime trade will remain dominant. The vast majority of the geographic space the railways pass through will experience no difference. The railways are not roads. They are not as accessible to the general public, and opportunities to provide services around them are limited. Of course, the public can benefit indirectly from these services, whether through taxes captured by tariffs or through benefits passed to consumers. But the emergence of China-Europe railways does not signal the return of a world in which overland trade dominates. The railways have found speed, but their scale remains limited.

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