How ‘Belt’ and ‘Road’ are related economically: modelling and policy implications

ABSTRACT

This paper develops an analytical model allowing one to better understand the relationship between the ‘Belt’ and the ‘Road’ in China’s Belt and Road Initiative (BRI). Firstly, we establish the link between the minimum subsidies received by the rail operators from the Chinese governments and the market conditions in the maritime sector. Then, we characterize the relationship between the new rail and the existing port. We show that the minimum subsidies are influenced by the external shipping demand and the shipping freight rate. Furthermore, the local economy will benefit from the BRI if the firm providing the services via rail can compete with the operator of the maritime routes in the future. Specifically, our analysis shows that competition will improve the service quality by reducing the delay costs, the transportation costs, and the shipping price and time, and that the magnitude of the welfare gain will mainly depend on the shippers’ sensitivity to time and price. The policy and economic implications of separate and joint management of the port and rail facilities are discussed.

KEYWORDS:

• Belt and Road Initiative
• competition between firms
• government subsidy
• joint and separate management
• maritime routes
• rail

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Details on the BRI framework can be found at http://en.ndrc.gov.cn/newsrelease/201503/t20150330669367.html.

2. Chinese ports including Hong Kong are now amongst the largest container ports in the world in terms of traffic flows.

3. Source: https://www.yidaiyilu.gov.cn.

4. The recent study of Kundu and Sheu (2019b) is the exception.

5. Since the first version of our manuscript, new BRI papers using similar approaches have been published. Among others, Liu et al. (2018) and Kundu and Sheu (2019b) used a game-theoretic approach in their analyses. While Liu et al. (2018) explored the impacts of cost-sharing contract on the key decisions for logistics service supply chain with mass customization, Kundu and Sheu (2019b) investigated the effects of the government subsidy on shippers’ mode switching from maritime to rail behavior. They also attempted to find the ideal government subsidy scheme that would induce a switch from the maritime to the rail transportation mode.

6. Refer to Ben-Akiva and Lerman (1985), among others, for the use of discrete choice analysis to model travel demand.

7. Liu et al. (2018) and Kundu and Sheu (2019b) also used a game-theoretic approach in their analyses. While Liu et al. (2018) explored the impacts of cost-sharing contract on the key decisions for logistics service supply chain with mass customization, Kundu and Sheu (2019b) investigated the effects of the government subsidy on shippers’ mode switching from maritime to rail behavior.

8. The original starting point of the sea routes may include Fuzhou, Quanzhou, Guangzhou, Zhanjiang, Haikou and Hanoi.

9. It is noted that the dispersion of cargoes at various facilities may have an implication on the delay costs and on the potential competition between the facility operators. Zhao et al. (2018) identified the best combination of consolidation center locations to improve the operational efficiency of China-Europe freight trains and to promote the usage of the trans-Eurasian railway cargo corridors for the booming China–Europe trade.

10. A lack of yard space to store containers, queues of trucks loading and unloading containers, and an increase in the number of vessels relative to terminal capacity, among others, can contribute to delays at the port.

11. To illustrate, the shipper located at point $x=\frac{1}{3}$ incurs the same transportation cost across facilities when $t_r=\frac{t_b}{2}.$

12. If we assume that the shippers’ preferred departure (or delivery) time is uniformly distributed along the clock, ${\gamma }_h$ equals $\frac{\delta T}{4}$, where $\delta$ corresponds to the schedule delay cost generated at each hour of discrepancy between the preferred and actual time, and $T$ represents the number of available hours.

13. This framework can be easily extended to account for multiple TOCs. This can be considered in the future research.

14. Term $s_b$ represents the subsidies offered to the TOCs in the rail market. The subsidies granted to local transportation companies can be captured by the transportation cost parameter, $t_b$. In present setup, we focus on the government subsidies for the rail TOCs.

15. The second derivative of the profit function with respect to $Q_b$, which is equal to $-\left(t_b+2\gamma /K_b\right)$, satisfies the condition for a maximum.

16. To ensure ${\pi }_b^{\ast }>0$, the quantity $Q_b^{\ast }$ must be large enough, exceeding term $\sqrt{\theta K_b/\left(\frac{t_b}{2}+\frac{{\gamma }_h}{K_b}\right)}.$

17. Note that profit ${\pi }_b^{\ast }$ depends on subsidy $s_b$, while ${\mathrm{\Pi }}_r^{\ast }$ does not because the port sector is assumed to be a mature market.

18. Article available at https://www.chinadaily.com.cn/a/201810/17/WS5bc66b42a310eff303282bc2.html. Besides, the Ministry of Finance of China requires that the level of government subsidies for the China-Europe freight trains should not exceed 50% of the domestic railway costs. It is also required that the subsidy level should be reduced by 10% compared to the level in 2018.

19. The values presented in Table 1 are the most recent data, which are consistent with industry reports, such as Barrow (2018) and Mordor Intelligence (2019). Note that the shipping rates and subsidies have been changing over time, e.g., the values of subsidies are larger in Jiang et al. (2018).

20. Here it is assumed that the maritime TOCs are profit-maximizer firms (e.g., Yuen, Zhang, and Cheung 2013) and the operators compete with each other in quantities (Zhang 2009). To ensure the conditions for equilibrium, we suppose that the players’ strategy space is convex and compact. The second-order conditions are satisfied for all $\rho >0$. It implies that $\frac{\mathrm{\partial }{\pi }_j^2}{{\mathrm{\partial }}^2{Q}_j^{\ast }}<0$, satisfying the quasi-concavity conditions.

21. Source: Forbes, ‘The Hidden Economic Rationale of China-Europe Rail’, 22 March 2018.

22. This assumption is made for comparison purpose, as we consider a TOC monopoly operating at each facility in the BRI context. It particularly allows us to emphasize the contribution of the rail to the regional welfare. The case of multiple ports can be studied under an oligopoly setting. It can be a candidate for future research.

23. We also run some sensitivity analyses to test how the results change when the parameter values vary. We find that our main results hold regardless of the change in parameter values. The results are available upon request.

24. The impacts differ only in terms of magnitude, depending on the chosen value of the parameters.

25. The article is available at https://www.automotivelogistics.media/porsche-on-track-for-southern-china/37884.article.

26. Considering a more general distribution for shippers does not change the main insights of the model.

27. For the port to receive a positive demand, the gross benefit from cargo shipment $V$ needs to be sufficiently large and satisfies the condition $V\ge p_r+\gamma Q_r/K_r-t_r/2+{\bar{p}}_s$.

Additional information

Funding

This work was supported by the Li and Fung Institute for Supply Chain Management and Logistics at the Chinese University of Hong Kong and the National Social Science Foundation of China (18ZDA071).