China’s Belt and Road Initiative: How a Multi-Trillion Dollar Project Could Affect Global Energy Trade Agreements

By Sara Jenkins

 

The Belt and Road Initiative:

In 2013, China’s President, Xi JinPing, announced a plan to invest in various infrastructure projects along the ancient silk road route to connect Asian, African, and European countries while promoting economic stability and growth.[i] That announcement has transformed into what is known as the Belt and Road Initiative (BRI or Initiative). Overall, the BRI consists of two main initiatives: the land-based silk road economic belt and the 21^stcentury maritime silk road.[ii] The silk road economic belt includes six “development corridors,” most of which connect China to other Asian, Indian, and Russian economic markets.[iii] The maritime silk road consists of the “South China Sea, Strait of Malacca, Indian Ocean, Gulf of Bengal, Arabian Sea, Persian Gulf and the Red Sea.”[iv] In 2015, the Chinese government began detailed planning of the massive projects making up this network of desired infrastructure.[v] Cost estimates for the Initiative range from $1 trillion to $8 trillion, as promised investment and exact scope of various projects are difficult to define.[vi] The timeline and size of the BRI is unclear as some projects that were started before 2013 have been added to the initiative and others are planned but lack funding.[vii]

 

Projects for the BRI include railways, pipelines, roads, ports, power plants, and urban centers for the development of energy transport, mining, communication, and tourism sectors.[viii] A total of 118 projects have been listed on the BRI website, with 99 of those projects categorized as a type of energy or transport project.[ix] These projects support BRI’s stated goal of integrating China into the world’s energy system by fostering energy cooperation with those involved in the initiative.[x] China’s National Development and Reform Commission and the National Energy Administration identified six energy cooperation principles to promote the development of resources along the BRI corridor, including openness, being market-oriented, and keeping the supply chain secure.[xi]

 

Some of the Energy Cooperation’s priorities are to facilitate unimpeded trade, encourage energy investment, improve energy production capacity, and expand the scale of energy infrastructure capacity.[xii] China plans on meeting these goals through various partnerships with other countries, cooperation with international organizations, and information sharing with specialized personnel.[xiii] China further emphasized its desire to achieve unimpeded trade by holding a thematic session on trade connectivity in 2017.[xiv] China’s Ministry of Commerce explained that it would “continue to open up its market by implementing a proactive import policy and providing more access for foreign products to enter the Chinese market.”[xv] Subsequently, China expects to implement a multilateral trading system with support from the World Trade Organization.[xvi]

 

Image Source: merics.org

Energy Trade Agreements:

Currently, most of the energy trade system is made up of multilateral, regional, and bilateral agreements.[xvii]Although the World Trade Organization (WTO) has one of the largest multilateral trading systems, the WTO has not had major impacts on international energy trade agreements.[xviii] Generally speaking, the World Trade Organization is involved with energy trade through the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS).[xix] Because energy trade can be defined as both goods and services, both the GATT and the GATS is used to cover different types of energy trade.[xx] The GATT also covers transportation of energy goods through pipelines or other cross-border methods under the “Freedom of Transit” article.[xxi]

 

More specifically, however, most energy trade is done through the use of regional trade agreements (RTAs).[xxii] RTAs are used to form treaties between two or more governments that cover multiple policy areas at the border and behind the border.[xxiii] RTAs have the same legal significance and recognition under international law as the GATT and the GATS, meaning that “WTO rules do not have per se any legal supremacy” over RTAs.[xxiv] The use of RTAs is increasing while the possibility of renegotiating current agreements is in debate.[xxv]

 

BRI’s Possible Effects on Energy Trade Agreements:

Some current RTAs that include specific energy provisions are: the European Union (EU), the Association of Southeast Asian Nations (ASEAN), and the Energy Charter Treaty (ECT).[xxvi] Some notable bilateral trade agreements that involve energy include the recently negotiated US-China deal, and the Partnership and Cooperation Agreement (PCA) between the EU and Russia.[xxvii] The BRI could potentially alter current agreements in place when considering the new trade areas and technological capabilities brought on by BRI investment.

 

For example, the PCA agreement between the EU and Kazakhstan may be altered or enhanced by making allowances for increased infrastructure that will give Europe more access to Kazakhstan’s oil and gas commodities. Oil and gas make up 80% of Kazakhstan’s exports, and the EU is Kazakhstan’s largest trading partner.[xxviii] Two of Kazakhstan’s main apprehensions for re-negotiating their current PCA with the EU are “technical and regulatory aspects related to trade and investment.”[xxix] The BRI’s planned railways leading from Kazakhstan to Europe would provide a technical alternative to transporting Kazakhstan’s oil without going through Russia, and a means for overcoming regulatory barriers for investment in infrastructure. Additionally, increased or re-negotiated bilateral agreements between the EU and other energy-rich nations involved in the BRI, could provide routes for the EU to lessen its dependence on Russian oil. Further, BRI impacted trade regions like ASEAN will have to take into consideration increased energy and transport infrastructure when deciding whether to re-negotiate or revisit agreements. More specifically, planned railroads from Kunming to Singapore may change the trade implications for oil or minerals from country to country in that region.

 

The United States may also be inadvertently impacted by the BRI as increased infrastructure means more competitive oil and gas markets. The recently signed U.S.-China trade deal is expected to result in an increase of energy imports by China from the United States in the amount of $52.4 billion within the next two years.[xxx]However, proposed gas pipelines included in the BRI will provide easy access for China to import Russian gas once pipeline construction is complete. Also, proposed railroads from Iran that will eventually connect to existing railways leading to China could make Iranian oil cheaper for firms in China to import. Although the U.S.-China deal promises increased energy trade, importing oil and gas from the United States is expensive for Chinese firms. U.S. oil imports to China are currently subject to a 5% tariff, while gas imports tariffs are at 25%.[xxxi] More BRI infrastructure leads to more competition in the energy market, meaning future US-China trade deals could see a decrease in Chinese imports of oil and gas.

 

As its investment in the energy sector increases, China may also consider becoming a signatory to some existing regional trade agreements, such as the ECT. Membership in the ECT may be beneficial for China as it provides a way for private investors to file arbitration actions against host countries regarding their investments.[xxxii] In fact, China has been indirectly participating in the ECT by “becoming an observer country” since 2015.[xxxiii]

 

Additionally, free trade agreements are being formed by China that would “rerout[e] supply chains and reflect growing Chinese influence.”[xxxiv] The China-Gulf Cooperation Council Free Trade Agreement is still in negotiations regarding goods and services between China and GCC member states.[xxxv] Potential or existing energy trade agreements involving or impacted by the BRI are different from the numerous investment agreements that China has already signed. Current investment agreements may also influence future trade agreements in areas of BRI projects.[xxxvi] Overall, many different possibilities exist for the alternation of existing regional trade agreements and the creation of new ones to address ongoing and planned BRI projects. Only time will tell on how successful the Initiative will be in shaping regional and bilateral trade agreements in the energy arena.

[i] President Xi Jinping Delivers Important Speech and Proposes to Build a Silk Road Economic Belt with Central Asian Countries, Ministry of Foreign Affairs of the People’s Republic of China (Sept. 7, 2013), https://www.fmprc.gov.cn/mfa_eng/topics_665678/xjpfwzysiesgjtfhshzzfh_665686/t1076334.shtml.

[ii] Belt and Road Initiative, Belt and Road Initiative (last visited April 22, 2020), https://www.beltroad-initiative.com/belt-and-road/.

[iii] Id. The six development corridors are specifically listed as: New Eurasian Land Bridge Economic Corridor (NELBEC); China/Mongolia/Russia Economic Corridor (CMREC); China/Central Asia/West Asia Economic Corridor (CCWAEC); China/Indochina Peninsula Economic Corridor (CICPEC); Bangladesh/China/ India/Myanmar Economic Corridor (BCIMEC); and China/Pakistan Economic Corridor (CPEC).

[iv] Id.

[v] Yiping Huang, Understanding China’s Belt & Road Initiative: Motivation, framework and assessment (China Economic Review, Vol. 40, 2016), https://doi.org/10.1016/j.chieco.2016.07.007.

[vi] Jonathan E. Hillman, How Big is China’s Belt and Road?, Center for Strategic and International Studies (last visited April 21, 2020), https://www.csis.org/analysis/how-big-chinas-belt-and-road.

[vii] Id.

[viii] BRI Projects, Belt and Road Initiative (last visited April 22, 2020), https://www.beltroad-initiative.com/projects/.

[ix] Id.

[x] Vision and Actions on Energy Cooperation in Jointly Building Silk Road Economic Belt and 21^st-Century Maritime Silk Road, Belt and Road Portal, State Information Center (May 16, 2017), https://eng.yidaiyilu.gov.cn/zchj/qwfb/13754.htm.

[xi] Id.

[xii] Id.

[xiii] Id.

[xiv] Initiative on Promoting Unimpeded Trade Cooperation along the Belt and Road, Belt and Road Portal, State Information Center (May 22, 2017), https://eng.yidaiyilu.gov.cn/zchj/qwfb/14216.htm.

[xv] Id.

[xvi] Id.

[xvii] Rafael Leal-Arcas, Costantino Grasso & Juan Alemany Rios, Multilateral, Regional, and Bilateral Energy Trade Governance, Renewable Energy Law and Policy Review 38 (Claeys and Casteels Law Publishing Vol. 6, No. 1, 2015), https://www.jstor.org/stable/24324807.

[xviii] Richards, Timothy J., and Herman, Lawrence, Relationship Between International Trade and Energy, World Trade Organization (last visited April 20, 2020), https://www.wto.org/english/res_e/publications_e/wtr10_richards_herman_e.htm.

[xix] Rafael Leal-Arcas et al., Multilateral, Regional, and Bilateral Energy Trade Governance, at 39.

[xx] Id. at 40.

[xxi] Id. at 44.

[xxii] Id. at 49.

[xxiii] Regional Trade Agreements, The World Bank (April 5, 2018), https://www.worldbank.org/en/topic/regional-integration/brief/regional-trade-agreements.

[xxiv] Rafael Leal-Arcas et al., Multilateral, Regional, and Bilateral Energy Trade Governance, at 51.

[xxv] Regional Trade Agreements, The World Bank.

[xxvi] Rafael Leal-Arcas et al., Multilateral, Regional, and Bilateral Energy Trade Governance, at 50.

[xxvii] Id. at 62.

[xxviii] Id. at 68.

[xxix] Id.

[xxx] Andrew Fawthrop, How will the US-China trade deal affect oil and gas imports and exports? NS Energy (Jan. 16, 2020), https://www.nsenergybusiness.com/features/china-us-trade-deal-tariffs/.

[xxxi] Id.

[xxxii] Wendy Simon-Pearson, Note, One Belt, One Road, One Treaty: China’s Energy Security and the Energy Charter Treaty, 9 Geo. Wash. J. Energy & Envtl. L. 112, 113 (2018).

[xxxiii] Id.

[xxxiv] Business Reporting Desk, China’s Free Trade agreements along the Belt & Road Initiative, Belt and Road News (October 3, 2019), https://www.beltandroad.news/2019/10/03/chinas-free-trade-agreements-along-the-belt-road-initiative/.

[xxxv] Id.

[xxxvi] Id. at 112. For example, the China-Pakistan Economic Corridor pipeline is protected by a Bilateral Investment Treaty between the two countries. Id. at 112. The investment treaty may influence or strengthen relations effecting the China-Pakistan Free Trade Agreement already in place since 2009. See Business Reporting Desk, China’s Free Trade agreements along the Belt & Road Initiative.