By Chris Devonshire-Ellis
Marco Polo famously traveled from Venice to Xi’an, then China’s capital city, with the impact on his hometown felt for centuries. Even today, ancient trade is still revered in this most beautiful of Italian cities: St. Mark’s Basilica still shows frescoes of Oriental merchants that were involved with the repatriation of the holy remains of the revered apostle being removed to Venice.
Today, Chinese goods are taking 15,000 trains each year to connect via rail to European destinations. London, Madrid, Moscow, Milan, and Istanbul are among some 60 European cities that are connected to the Chinese Belt & Road network. Covid has proved their cost and logistical benefts, meanng the fact is that the connectivity is in place, and it will be further improved.
Not all of this is entirely in China’s hands; there is a great deal of land to cover between China and Europe. But what is happening is that the rail network is slowly starting to be developed across the Eurasian land mass. Iran, now looking to come back into the international fold since the partial lifting of Western sanctions, has been developing rail routes that link it, via the International North-South Transportation Corridor through to markets from European Ports at Varna and Constanta to the Caucasus, and onto Central Asia and India. European ports in Bulgaria and Romania. Russia has been developing high speed rail that will link Moscow and St. Petersburg’s existing service to Kazan, on the banks of the Volga. The Chinese want to extend that all the way to Beijing.
Once port and rail upgrades are completed between Eastern Europe and Central Asia, and the economic dynamics can be worked out, sustainable rail freight, and potentially passenger services, between Europe and China will become more commonplace. After all, the Trans-Siberian route already exists. If that route were made high-speed, as the Chinese are suggesting, and is further extended from Russia into the European network, it would be feasible to travel by train from London to Beijing in 48 hours. Imagine what that could mean for British exports, and especially time sensitive products such as fish, other consumables, organ donor supplies and fragile medicines.
There are numerous considerations before such an eventuality could take place, not least infrastructure development, security, and diplomatic concerns. However, it could be done. Somewhat uniquely, due to the UK’s position on Brexit, it is now free of having to negotiate agreements with non-EU countries through Brussels. Being free of the EU’s legislation effectively opens the British government up to be free to deal with whom it chooses, regardless of Brussels protocols or preferences.
To that end, the UK could find itself in the driving seat in getting some of the New Silk Road ambitions directed towards it, rather than Madrid or other European destinations. Addressing this will become a tax issue, and will depend upon three elements:
- The nature of future UK-EU trade in import-export, and the dutiable value placed on non-locally sourced exports (such as re-selling Chinese goods onto the EU market);
- The nature of any future free trade arrangements between China and the UK (both have applied to join the CPTPP; meaning a trade agreement may not as far off as popularily imagined)
- Other trade agreements the UK is now exploring, such as with ASEAN, and current arrangements with countries such as Singapore and Vietnam
Adding Value In The UK To Asian Sourced Components
In fact, when looking at the capability for British companies to re-sell Chinese goods onto the EU market, there is excellent potential, capable of creating UK employment and advances in technology that would benefit the British economy by some way. While the basic re-sale of Chinese or Asian made goods onto the EU from the UK wouldn’t fly (the EU would simply impose a rules of origin import making the procedure worthless), what could work is adding British value.
This means that certain Asian technical goods could be imported to the UK, have British technologies added to them, and the finished, added value product then being presented to export markets worldwide.
If that same process could be extended to trading partners such as India, among others, then the UK could move itself into a world-class center of excellence in terms of adding critical new technologies to basic goods coming in from Asia. In fact, such a scheme would also drive investment into Britain from China and India. The UK certainly has the innovative mindset, technological infrastructure, as well as academic and scientific know how.
The question as to what products should feature is a matter for the Chinese and other Asian countries and their British counterparts to discuss and match up.
The rail network, however, is only one component of the logistics and transportation. The UK already has significant port facilities, yet new routes may be opening up. The north Russian Arctic seaboard is opening up, mainly due to global warming, and both Russian and Chinese investors are flocking in to develop them. For the Chinese, these offer additional access points for Russian energy reserves, and trade will surely follow. China is currently negotiating tariff reductions on goods traded with the Eurasian Economic Union (Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia). For Russia, these open up its own massive Arctic seaboard to energy exploitation, and trade. I recently described the impact of Opening up Russia’s Arctic Ports, and Britain in fact is no stranger to this coastline, having been partners with the Murmansk-based Russian Navy during World War II. North Russia is not far from the UK, and again, some political willpower can direct the British gaze east, via Russia. Perspectives change over time, and Russian President Putin has hinted at and made statements about stepping down. When this happens, it will be fast, and a sudden rapproachment could be on the cards. Such eventualities need to be factored in, and Putin displays no signs of wishing to be nationally vilified as is the case with the Belarus President Lukashenko. Putin would prefer a long respectful retirement.
There are tax issues to consider in developing such ties. As mentioned, Russia’s equivalent to the EU is the Eurasian Economic Union (EAEU), which provides free trade between Russia and Central Asia. That may seem a long way for Britain; however, it is a market of some 180 million with a per capital GDP of US$13,151 (PPP) which is higher than China. It is also a growing, developing regional economy with a taste for middle class consumer goods. That has attracted countries such as Singapore and Vietnam to sign free trade deals, while China, India, Egypt, Iran and several ither Asian nations keen to commence free trade with the EAEU. Those markets lie on the rail route that bought those recent trains from Beijing into London. I discussed British engagement with the EAEU recently.
There is a way for Britain to engage with China and Russia, and to reinvent itself as a modern day multi-port terminus for the new Silk Road, free from the constraints of Brussels and the EU. The logistics and transportation routes are already set up, and will only continue to improve. That alone suggests a re-engagement by Britain with Asia is a path well worth following.
If tax based negotiations, focusing on Asian sourced goods and products that British technology can add value to Britain, the entire UK can become a new Silk Road terminus. This would allow the UK to invent and manufacture using Asian commodities and basic goods – a new boom time for “Made in Britain” in partnership with countries such as China, India, the ASEAN nations and potentially even Russia and beyond. The logistics are happening. The diplomatic and tax treatment efforts – and a bit of water under the bridge – are being worked on. The results may prove spectacular.
This article was provided by Chris Devonshire-Ellis. He has 30 years’ experience assisting foreign investors into Asia. For assistance and advisory please contact him at asia@dezshira.com or visit www.dezshira.com
