How much will the Belt and Road Initiative reduce trade costs?

The Belt and Road Initiative (BRI) is a development strategy proposed by China to improve cooperation on a trans-continental scale. The range of projects and activities that will be part of the BRI is very wide, including policy coordination, infrastructure, trade and investment, financial and people-to-people exchanges. But a key goal of the Initiative is to boost connectivity and reduce trade costs through new and improved transport infrastructure projects.
 

In our recent work, we make a first attempt to quantify how much the BRI will impact trade costs. We do this in two steps.

• First, we use a combination of geographical data and network algorithms to compute the reduction in shipping times between 1,000 cities in 191 countries in the world. As a starting point, we use the current network of railways and ports across the world and estimate the current shipping times between every pair of cities. From this reference point, we run an “improved scenario”, where the transportation network is enriched with planned infrastructure projects that are linked to the Belt and Road Initiative (Figure 1). Comparing the pre and post-BRI scenarios allows us to quantify the changes in shipping times induced by the new and improved transport infrastructure projects.

• Second, we use estimates of “value of time” to transform reductions in shipping time into reduction in trade costs. Different goods have different value of time. For instance, some goods such as fresh fruits are perishable and are very time sensitive; some inputs as microchips need to be delivered to producers just in time. As such, we need to compute the “value of time” for each pair of countries and each sector. These country pair-sector values of time can be further aggregated to quantify changes in trade costs by country.

Using these methods, we found:

• The Belt and Road Initiative will reduce shipping times for both BRI and for non-BRI economies. The average decrease in shipping time ranges between 1.2 and 2.5 percent across all country pairs in the world. BRI economies experience a decrease in shipment times ranging between 1.7 and 3.2 percent on average. The largest estimated gains are for the trade routes connecting East and South Asia and along the corridors that are part of the BRI. For instance, shipping times among countries in the China-Central Asia-West Asia economic corridor will decline by 12% due to the improved transport infrastructure.
   
• Reduction in shipping times translates to significant reductions in trade costs. Our analysis suggests that implementing all BRI transport infrastructure projects will reduce aggregate trade costs between 1.1 and 2.2 percent for the world. For the BRI economies, the change in trade costs will range between 1.5 and 2.8 percent. As for shipping times, the gains in trade costs vary widely across pairs of countries, with East Asia and Pacific as well as South Asia being the regions with the largest average reductions (Figure 2). Similarly, trade costs will fall more along the corridors.

A finding of our research that is worth stressing is the systemic impact of the BRI:  the initiative can have positive spillovers on non-BRI economies. The reason being that the BRI will reduce shipping times -and ultimately trade costs - not only between BRI countries, but also potentially between country-pairs that are not part of the Initiative. For example, Tanzania’s Bagamoyo port is expected to benefit not only Tanzania but several other countries in the region. As a result, when all BRI transport projects are implemented, our analysis shows that shipping time between Australia and Rwanda is expected to decrease by 0.5 percent. Similarly, the improvement of Djibouti’s port will contribute to a decrease in shipping time between Australia and Ethiopia of 1.2 percent.

This is a first look at the effects of the BRI on shipment times and trade costs and more research is needed. But the new data developed in our work will help researchers better understand the impact of the BRI on growth, trade, foreign investment, and the allocation of economic activity. The data may also be useful to investigate the systemic effects of BRI projects on non-economic variables such as air pollution or biodiversity or on social outcomes, such as the changes in poverty for certain groups in specific geographic locations.