The document analyzes the Belt and Road initiative from a European perspective. It provides background on what the Belt and Road initiative entails, including infrastructure investment goals. It then draws comparisons between the Belt and Road and the post-World War 2 Marshall Plan that rebuilt Europe. Key similarities discussed include both plans initially focusing on economic reconstruction but later shifting to geopolitical and security goals. The document also empirically analyzes the potential trade impacts of the Belt and Road, finding some European countries may see increased trade while others may see declines. Reduced transportation costs are found to significantly boost international trade.

1. The Belt and Road from the other end:
A European Perspective
Alicia Garcia Herrero, NATIXIS Chief Economist Asia Pacific and Senior Research Fellow at BRUEGEL
April 2016

2. Outline
1) Xi’s Grand Plan: What it is about?
2) Any lessons from a similar Grand Plan for Europe: The Marshall Plan
3) An empirical analysis of trade impact of Belt and Road:
Who is to benefit? What about Europe?
2

3. 3
1. Xi’s Grand Plan: What it is about?
Based on Natixis Research
3

4. 4
Outline of Section 1: Xi’s Grand Plan
1.1 What is it?
1.2 Key drivers
a) Trade as the key reason
b) Infrastructure key to further foster trade
c) New funds/institutions serving the Belt and Road vision
d) RMB internationalization
1.3 How much so far?
4

5. 5
1.1 What is it?
Roadmap of the initiative
5
Source: HKTDC

6. 6
1.1 What is it?
Trade facilitation through infrastructure
• China proposed the Belt and Road (B&R) Initiative to enhance the
connectivity and cooperation among countries in Eurasian area.
• The main target of the initiative is to integrate Central Asia, West Asia,
the Middle East and Europe into a economic zone through building
infrastructure, enhancing regional trade cooperation to increase
international trade within the region.
6
Key figures of B&R countries Value Why is this important?
Total population 4.4 billions 63% of world population
Total GDP USD 2.1 trillion 29% of global economy
Transport and Infrastructure
Investment
USD 5 trillion in the next 5
years
2.5 times the market size in
China

7. 7
7
1.2a Trade as the key reason
Growth flat but in a dual mode
4
5
6
7
8
9
10
11
12
13
14
6.0
6.5
7.0
7.5
8.0
14 15 16
GDP, Retail Sales and Industrial
Produc5on (%YoY)
Real GDP
Retail Sales (rhs)
Industrial ProducBon (rhs)
Source: Bloomberg, Natixis
35
40
45
50
55
60
35
40
45
50
55
60
07 08 09 10 11 12 13 14 15 16
Purchasing Manager Index (PMI)
Caixin (Manufacturing)
Caixin (Services)
Official (Manufacturing)
Sources : Markit, China Federation of Logistics and Purchasing, Natixis

8. 8
8
1.2a Trade as the key reason
…and therefore China starts exporting its overcapacity
0%
2%
4%
6%
8%
10%
12%
14%
16%
65%
70%
75%
80%
85%
90%
95%
100%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Steel Produc5on U5liza5on Rate and Global
Exports Market Share (%)
UBlizaBon Rate (lhs) Global Market Share (rhs)
Source: China Iron and Steel Association, UNCTAD, Bloomberg, Natixis
60%
65%
70%
75%
80%
60%
65%
70%
75%
80%
08 09 10 11 12 13 14
Cement U5liza5on Rate (%)
China World
Source: China Cement Association, Bloomberg, Natixis

9. 9
9
1.2b Infrastructure key to further foster trade

10. 10
1.2b Infrastructure key to further foster trade
The need is for infrastructure is there
0 2 4 6 8
Total
Water and
Sanitation
Transport
Telcom
Energy
8 trillion USD investment is needed to 2020
Source: ADB, Natixis
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
MY CN TH ID IN VN PH PK
Quality of Infrastructure in Asia is below average
(1=lowest, 7=highest)
Score Avg
Source: WEF, Natixis
10

11. 11
1.2c New funds/institutions serving the B&R vision
The AIIB, BRICS Bank and the Silk Road Fund
20
47
50
100
103
129
163
223
331
ERBD
Islam Development Bank
BRICS Development Bank
AIIB
African Development Bank
Inter-American Development
Asian Development Bank
World Bank
European Investment Bank
Source: Stratfor, Natixis
European Bank for
Reconstruction and Development
Asian Infrastructure
Development Bank
11
Capital base of world development bank (USD bn) Silk Road Fund Investment

12. 12
1.2c New fund/institutions serving the B&R vision
…but it’s also about diplomatic battle and sphere of influence
Top 5 shareholders Top 5 by vote share
0 5 10 15 20 25 30 35
Korea
Germany
Russia
India
China
0 10 20 30
Korea
Germany
Russia
India
China
0 5 10 15 20
France
Germany
China
Japan
U.S.
0 5 10 15 20
France
Germany
China
Japan
U.S.
AIIBWorldBank
Source: AIIB, World Bank, Natixis
12

13. 13
1.2d RMB internationalization
13
0
5
10
15
20
25
30
35
40
0
100
200
300
400
500
600
700
800
900
12 13 14 15 16
RMB Trade SeUlement
Trade (RMB bn, lhs)
% of China's total cross
border trade (rhs)
Source: SWIFT, Natixis
0
10
20
30
40
50
0
10
20
30
40
50
11 12 13 14 15 16
Share as interna5onal payment currency
(%)
USD EUR GBP JPY CNY
Source: SWIFT, Bloomberg, Natixis

14. 14
14
Table 1: Top trading partners of Asian countries
Country 2008 Latest
Indonesia Japan China
Malaysia Singapore China
Philippines US Japan
Singapore Malaysia China
Thailand Japan China
Vietnam China China
India US China
Pakistan Saudi Arabia China
Source: Bloomberg, Na1xis
1.2d RMB internationalization
Increasing trade means potential in more RMB settlement

15. 15
15
1.3 How much so far?
0
10
20
30
40
50
60
70
80
Russia Other Asia ASEAN Africa Europe
Belt & Road Investments by Country
(bn USD)
Energy Rail Industrial Park Materials Port Road
Source: Na1xis *Confirmed and highly likely projects included.
Telecom
0%
Road
2%
Port
3%
Materials
5%
Industrial
Park
6%
Rail
41%
Energy
43%
Belt & Road Investments by Industry
Source: Na1xis *Confirmed and highly likely projects included.

16. 16
2. Any lessons from a similar Grand Plan for
Europe: The Marshall Plan
Based on Lessons for China’s Road and Belt Strategy from Europe’s Marshall Plan
by Juan Carlos Martinez Oliva
16

17. 17
A European perspective to the Belt and Road:
The Marshall Plan
17
• For some, unwarranted comparison
• Marshall Plan (1848-1952) perceived as a US geopolitical device to
control Western European nations and containing the Soviet Union.
• Belt and Road not seen as an alliance or coming with any political strings.
• China stresses that Belt and Road is based on “open cooperation”
regardless of the state of their relations with China.
• We move to describing some of the key features of the Marshall
Plan (MP) and how the may compared with Belt and Road.

18. 18
18
• Two years after creation, in 1950, Marshall plan started to shift from
original purpose of Europe’s reconstruction to security and military
cooperation.
• Based on recommendations by the US National Security Council for
military spending to be the number one priority of the US federal
government.
• Can this happen with Belt and Road as China’s military becomes
more powerful and more eager to pursue a similar objective?
2.1 MP: From an economic device to a security one

19. 19
19
• MP was meant to be a jump starter which should activate a self-feeding
virtuous circle, and then evaporate.
• Stimulated by the conditionality imposed by the plan on its beneficiaries,
European countries found themselves forced to coordinate/cooperate and
create their own multilateral institutions.
• Origin of EU
• Belt and Road also meant to be a visionary and long sighted
strategy but China’s pragmatism will make it such that its survival
will depend on its ongoing success. For this, Belt and Road must
be a win-win strategy rather than a zero-sum game.
2.2 MP: Helping activating a self-feeding virtuous circle

20. 20
20
• The European Payments Union enabled the European countries to restore
multilateral trade and currency convertibility in only eight years.
• By forcing the European governments to pursue, and eventually establish,
currency convertibility, the US accomplished the Bretton Woods’ goal to
have an international monetary system fully based on the dollar.
• Belt and Road also has the objective of supporting RMB
internationalization by using RMB for trade and infrastructure
finance
2.3 MP as catalyst for free movement of capital

21. 21
21
• MP told to have contributed to the world polarization which prevailed
during the Cold War era.
• By keeping the Soviet Union and its satellites outside MP, US were able to
concentrate their resources on selected countries, thus easing
management issues, and making the Plan’s action more effective.
• Belt and Road also has a sense of China dominance rather than
inclusivity. For some it is China’s response to China’s exclusion
from TPP
2.4 Challenges brought by MP

22. 22
2.5 All in all
22
• The Europe’s experience with the Marshal Plan indicates that the Belt and
Road could be come more than a device for China to expand its exports of
goods and services (construction of infrastructure).
• It could help China foster the use of its currency/develop a regional
payment system and perhaps even create a security zone as the US did
with Europe.
• Still, such ambitious project can only be successful in a win-win situation
as Belt and Road countries may be in a relatively stronger position to
explore other options than war-torn Europe in 1948.

23. 23
3. The trade aspect of the Belt and Road:
Who is to benefit? Also Europe?
Based on
One Belt One Road and the China-EU Trade
Alicia Garcia-Herrero, Bruegel & NATIXIS
Jianwei Xu, Bruegel & Beijing Normal University
23

24. 24
Outline of Section 3:
Empirical analysis of the impact of B&R on trade
3.1 Trade and transportation costs: Maritime and Railway routes to
be improved
3.2 Empirical exercise
a) Literature
b) Purpose and results
c) Conclusions
24

25. 25
3.1 Trade transportation
Maritime
• Cheap but Slow. Still dominant for China’s trade
Air
• Expensive but quick. Not relevant yet
Road
• Cheap but only applies to short-distance transportation
Rail
• Medium priced
• Suitable for both short-distance and long-distance travel but needs huge
infrastructure investment
25

26. 26
26
3.1 Trade transportation
New maritime routes under the Belt and Road

27. 27
3.1 Trade transportation
And new Railway ones for the Northern Route of the B&R
27

28. 28
Data Source: Eurostat
http://ec.europa.eu/eurostat/statistics-explained/index.php/Freight_transport_statistics_-_modal_split
3.1 Trade transportation
Europe dominated by road transportation
28

29. 29
3.1 Trade transportation
China dominated by maritime one
Maritime,
60.5%
Rail,
0.4%
Road,
17.4%
Air,
21.0%
Other,
0.6%
Maritime Rail Road Air Other
Maritime
57.0%
Rail
0.3%
Road
18.5%
Air
23.7%
Other
0.6%
Maritime Rail Road Air Other
Data Source: Calculated using 2013 China Custom Data by the Authors
Chinese Exports by type of transportation Chinese Imports by type of transportation
29

30. 30
3.2a Transportation Time/Cost as a Trade Barrier
• Hummels et al.(2013, AER) finds that time is a important, but long
ignored, type of trade cost in international trade.
• Each day in transit is equivalent to an advalorem tariff of 0.6% to
2.1%.
• Belt and Road related projects estimated to reduce average
shipping time by 15 days (360 hours): equivalent to a
reduction in tariffs by 10% to 30%!
30

31. 31
VARIABLES w/o. MR term
w/o. controls
w/o. MR term
w/. controls.
w. MR term
w/o. controls
w. MR term
w/. controls.
OLS
Bilateral tariff -0.03** -0.01** -0.03** -0.03***
Ln Rail Distance -0.16* 0.01 -0.23*** -0.13***
Ln Martime Distance -0.64*** -0.39*** -0.38*** -0.28***
Ln Air Distance -0.14 -0.18** -0.30** -0.07
PPML
Bilateral tariff -0.10*** -0.04 -0.17*** -0.18***
Ln Rail Distance -0.38** 0.06 -0.49*** -0.17***
Ln Maritime Distance -0.65*** -0.25 -0.33** -0.21
Ln Air Distance -0.50* -0.58** -0.37* 0.20
, ,
,
ln( ) ln( ) ln( ) '
ln( ' ) °l ln( ' )
ln( ' )
ij i j ij
ij ij
ij ij ij
Trade Y X Tariff
RailC AirC
OceanC controls
b b b b
b b
b b e
+ = + + +
+ +
+ + +
0 1 2 3
41 4 2
4 3 5
1
A 1% reduction in air and rail
transportation cost can lead to 0.1%
to 0.5% increase in international
trade, which is equivalent to 3 to 15
times a similar reduction in tariffs
3.2b Estimation results: trade to be fostered by
reduction in transportation costs
31

32. 32
• We suppose that B&R initiative reduce railway cost by 20%. Most
European countries to win while others to lose in terms of increase in trade
with rest of world
0%
2%
4%
6%
8%
10%
12%
FRA DEU BEL CHE RUS HUN NLD CZE BLR DNK
-4%
-3%
-2%
-1%
0%
AFG PHL ISR QAT NPL OMN JOR AZE PAK GEO
Top 10 Winners Top 10 Losers
3.2b Impact of Belt and Road very heterogeneous: What
about Europe?
32

33. 33
3.2b Impact on Trade: Who Win Trade with China?
0%
5%
10%
15%
20%
25%
30%
35%
40%
BEL NLD FRA DEU CHE RUS CZE HUN SVN BLR
Increase in trade with China
33

34. 34
3.2b Regional impact: Europe as a major winner
More trade generally and also more trade with China
-1%
0%
1%
2%
3%
4%
5%
6%
7%
European Countires Asian
Countries(except
China)
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
China-Asian
Trade
China-EU
Trade
Asian-EU
Trade
Impact on Trade by Region Impact on Inter-regional Trade
34

35. 35
3.2b Interpretation of the Results
• Apparently most European countries will benefit from the B&R initiative.
• There is no gain without a corresponding loss. With better connections to
Europe, some Asian countries is possible to lose their trade with China.
• China’s trade with both the Europe and Asian region is enhanced, though
most benefits still come from the European countries.
35

36. 36
3.2c All in all
• The Belt and Road is really a Grand Plan which will require enormous focus
and leadership from the part of the Chinese authorities.
• Based on the experience of the Marshal Plan, it has the potential to evolve
into other areas, such as security but also relevant support for RMB
internationalization.
• Still, even if the better known objectives of the Belt and Road, namely
fostering trade, the impact looks pretty large and especially positive for
European countries (as a reduction of railway transportation costs).
• Europe has not yet given to much thought about the Belt and Road but it
should certainly start doing so.
36