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Currency

New rail routes between China and Europe will change trade patterns

ASTANA in Kazakhstan is one of the world’s most remote capitals, surrounded by thousands of kilometres of empty steppe. This summer Astana attempted to launch itself onto the global stage by hosting the World Expo, which closed on September 10th and underwhelmed many attendees. But there are other ways to have an impact. On the city’s north side, away from the Expo’s exhibits, a series of diesel trains, each pulling dozens of containers, roll through the old railway station. Most are heading from China to Europe. Last year over 500,000 tonnes of freight went by train between the two, up from next to nothing before 2013. Airlines and shipping firms are watching things closely.

The trains rumbling through Astana result from a Chinese initiative, in tandem with countries like Kazakhstan, to build a “New Silk Road” through Central Asia. The earlier overland routes were once the conduits for most trade between Europe and China and India; they faded into irrelevance when European ships started circumnavigating the Cape of Good Hope.

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China has long wanted to develop its inland regions and push industry to “go west”, in order to spread economic growth more evenly. Manufacturers have been loth to shift, in part because of the higher cost of moving goods to ports for export. Developing a rail-freight network to Europe—an important part of China’s “One Belt One Road” policy—opens up a new route to market for its poorest areas. The land route through Central Asia is relatively short. A container ship too large for the Suez canal must make a 24,000km journey to reach Europe. Trains travel no more than 11,000km to reach the same destination.

Kazakhstan has spent over 1.1trn tenge ($3.2bn) on upgrading its railway lines and rolling stock since 2011. That includes $250m on the Khorgos Gateway, a dry port at the border with China that lifts containers from Chinese trains onto Kazakh ones to overcome a change in track width (a problem that has stymied previous efforts to build railway routes between Europe and China).

Volumes of freight travelling between China and Europe by rail are rising quickly. Between 2013 and 2016 cargo traffic quintupled in weight. In the first half of this year the value of goods travelling by train rose by 144% compared with the same period in 2016. Western firms have been keen to embrace rail freight because it helps them to lower costs, says Ronald Kleijwegt, an expert on the industry. In the case of high-tech electronics, for example, which consumers like to receive quickly, making them on China’s coast and air-freighting them to Europe is extremely pricey.

How worried should shipping firms and airlines be? Kazakhstan’s national rail company, KTZ, says it will have capacity for 1.7m containers to pass through the country between Europe and China each year by 2020; that is a tenth of the volume currently carried by sea and air between the two. In the longer term, a full modernisation of the existing main three rail routes from China to Europe could produce 3m containers a year in capacity.

But there are reasons to doubt that will happen. For one thing, China plans to stop handing out government subsidies for additional rail-freight capacity from 2020, which will slow the network’s expansion. Sea freight has little to fear in the near term, says Soren Skou, chief executive of Maersk, the world’s biggest container-shipping line. Trains may take away some future growth from ships, he concedes, but not their existing business.

Air cargo is more vulnerable. Last year, 180,000 tonnes of cargo travelled on trains to western Europe from China (the remainder was destined for Russia and eastern Europe). That is a small fraction of the 52m tonnes that came by sea, but a big chunk of the 700,000 tonnes that came by air. Much of that air cargo could switch to rail in future, says Mr Kleijwegt, with one important proviso—that Russia would need to lift the retaliatory sanctions it placed in 2014 on imports of Western food, which stop most foodstuffs from travelling by land between Europe and China. That is unlikely for the time being. But it was only a decade ago that people thought the idea of freight trains between Europe and China was a joke, says Mr Kleijwegt—and no one laughs at that any more.

Source: economist
New rail routes between China and Europe will change trade patterns

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