What could the new Silk Road do for trade?

December 12, 2016 Tradeshift Editorial Team

The grandest of ancient trade routes is set for a revamp. China is increasing publicity around the new Silk Road, which will link the Middle Kingdom to Europe, bypassing more recent shipping routes. The new Silk Road–also known as “One Belt, One Road”–is anticipated to be a major topic of conversation when Xi Jinping, president of China, arrives in Davos in January at the year’s main talkshop for political and business leaders.

The implications for global business are profound. For example, Hyperloop One has signed on with a Russian firm to bring Hyperloop technology to the new Silk Road, which could reduce the shipping time from China to the Mediterranean from days to hours. The last time shipping times were reduced that drastically was the switch from sails to steam.

Beyond quick transit times, global trade is shifting east in other ways, from the symbolism of the new Silk Road–the largest infrastructure project ever–to US abandonment of trade deals. Conversely, China has been pushing a rival Regional Comprehensive Economic Partnership and an even broader Free Trade Area of the Asia-Pacific. As developed Western countries shy away from globalization, China seems set to capitalize on it. In this case, the story is coming full circle.

A dream renewed

The original Silk Road was the world’s foremost trade route, connecting China with the Middle East and Europe. The name derives from the lucrative silk trade which originated in China during the Han dynasty around 200 BCE (silk was produced long before).

Throughout the history of the route, everything from silk and other goods, to languages, religion, and disease moved between the relevant nations. The route was essential to the development not only of China, but also ancient Persia, Europe, and Arabia.

Now, China is in the midst of combining maritime and overland routes to recreate the original route and pioneer new variations.


Why now?

The new Silk Road will initially help to alleviate China’s industrial overcapacity. While it’s been a priority since before the Jinping administration to shift the world’s second-largest economy away from production to services, China still relies far more on the former. This makes logistics a primary driver of economic growth. Boxcars move a lot slower than the terabytes of the services economy so it makes sense to invest in infrastructure.

Another reason for developing the trade route is diplomatic. After all, as Montesquieu said, “When two nations come into contact with one another they either fight or trade. If they fight, both lose; if they trade, both gain.

China, like other major trading nations, understands the more economically intertwined it is with friends and rivals, the more it can push diplomatically. Based on the amount of money invested, China is dead set on success. According to the World Economic Forum, China’s government has already invested $1 trillion into the project in an effort to increase cross-border trade to $2.5 billion.

How should businesses react?

New trade options are a net positive for global business regardless of geography. Removing physical barriers to trade has much the same effect as removing tariff or regulatory barriers. However, as multinationals know, doing business in China comes with its own set of complexities.

For starters, China is in the midst of the largest corporate tax overhaul in a generation. Companies that aren’t compliant open themselves up to legal and financial risk. This isn’t a negative, rather it’s a step in China’s economic maturation and brings it into line with more international tax norms. (Tradeshift has prepared an overview for companies doing business in China, available below).

While the new Silk Road is not complete, the project is speeding along and set to impact any company doing business in Europe or Asia. Not every firm in the mix will succeed, but those that do can be sure of rewards on par with those of the old silk traders.

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