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China's Belt and Road Initiative (BRI) represents one of the largest infrastructure, trade and economic agendas in history, which, against a background of ongoing global subpar growth and escalated trade tensions, demands the utmost attention. Indeed, the positive economic impact that the Initiative can potentially deliver has become a matter of considerable discussion, with a number of studies by the World Bank estimating that it can lead to a 4.1 percent increase in trade flows in 71 participating countries1; cut the costs of global trade by 1.1 percent to 2.2 percent2; and increase the GDP of East Asian and Pacific developing countries by 2.6 to 3.9 percent on average3.

While much of the discussion on the benefits that companies can reap from the Initiative has been focused on infrastructure and other sectors, BRI has indeed the potential of becoming a game-changer for chemical companies.

Key rationales and drivers in China for the BRI

Several key motivators can be cited to explain China's support for the BRI4. The Initiative will boost the nation's economy, helping to bolster its GDP growth, now targeted at 6 to 6.5 percent5 after several decades of double-digit growth rates6. The BRI is poised to strengthen trade and investment flows between China and countries along the "Belt and Road" by increasing and improving infrastructure connectivity, enhancing the financing capacity in these countries, and streamlining administrative procedures at customs. At the same time, the BRI is designed to promote crosscontinental cooperation between China and Eurasian nations7.

Impact on China's chemicals market

In general, the impact of the BRI on the Chinese chemical industry can be measured in three ways.

First, China intends to support the upgrading and relocation of basic chemical manufacturing closer to the BRI route in the nation's western provinces, predominantly located in chemical parks with high production and environmental standards. Second, China can enhance its energy security through closer geopolitical and trading ties with Middle Eastern countries. Third, China can increase its domestic chemical processing capacity to reduce its dependence on imports, further upgrade domestic manufacturing capabilities of higher performance materials, and act as a chief supplier for exports along the Belt and Road or for use in finished goods for export along the route.

Steps to consider for chemical players

In addressing the potential opportunities and risks related to the BRI, global chemical companies can consider the following actions:

  1. Get up to speed on the structure, agenda and potential impact of the BRI, and closely monitor new developments as they occur. Progress in different corridors is proceeding at different rates, but existing infrastructure and resources in some regions are already being used to advance BRI projects.
  2. Develop both immediate and longer-term strategies for involvement with the BRI, whether as a supplier for current projects or involvement in new markets. Service companies or engineering arms of chemicals companies may have opportunities to work in JVs with existing or new Chinese partners.
  3. Put together a dedicated team to raise your company's understanding of the BRI from a commercial, economic and political point of view as new information and projects are announced.
  4. Consider the BRI as another reason to expand into new global markets, especially in Asia.

Footnotes

1 Suprabha Baniya, Nadia Rocha & Michele Ruta, Trade Effects of the New Silk Road: A Gravity Analysis, World Bank Policy Research Working Paper 8694, January 2019.

World Bank gives credit to Belt and Road Construction, People’s Daily, 22 April 2019.

3 François de Soyres, The Growth and Welfare Effects of the Belt and Road Initiative on East Asia Pacific Countries, World Bank Group, October 2018 Number 4.

4 Drivers of the Belt and Road initiative, National Bureau of Asian Research, 2017.

5 China lowers 2019 GDP growth target to 6-6.5 per cent range, South China Morning Post, 5 March 2019.

6 China annual GDP growth rate, Trading Economics. See also: China’s Economic Rise: History, Trends, Challenges, and Implications for the United States, Congressional Research Service.

7 Belt and Road Initiative to bring win-win results: Malaysian official, Xinhua, 16 May 2017.