National and International Issues

U.S.-China Trade Standoff & Regional Chessboard

The emergence of an economic, political and military juggernaut in the shape of China is rattling the West’s strategic and economic interests and as Pakistan is a central element of China’s approach, linking the maritime and continental components of the Belt and Road Initiative (BRI), the heat is being turned on us. Despite Western maneuverings, the China-Pakistan Economic Corridor (CPEC) is poised to straddle the contiguous land mass and create a direct land bridge from China to the Arabian Sea. This will allow trade as well as access to foster economic development and industrialization in China’s hitherto neglected western provinces. China has made substantial investments in Pakistan focusing on energy and transport infrastructure, including the port of Gwadar in western Pakistan reinforcing the perception that Pakistan is vital to its regional strategy thus drawing ire of the West.
Dependence of Chinese Commerce on Seaborne Trade
The Chinese Communist Party understands that “maritime power” status is essential to realizing its national ambitions. In 2017 China’s imports of liquefied natural gas (LNG) rose by an unanticipated 46%, reflected in 16 operational LNG terminals importing 71 bcm emphasizing that its commerce is reliant on external energy sources. Statistics of 2010 China’s Ocean Development Report valued seaborne commerce at USD 456 billion projecting import of 65% of its oil consumption by 2020, sources of which include Iran and Saudi Arabia. Being trumpeted as the world’s second-largest economy is contingent on its trade through the high seas and both ends of the trade spectrum comprise import of raw materials to enable export and sustain the Chinese economic model besides offsetting dissent through generating high employment. Thus supposedly China’s inexorable quest for Blue Waters continues unabated.
Unabated Trade Wars
A sordid saga of the ongoing trade war surfaced when the U.S. administration alleged that China reneged on earlier commitments to amend its laws in the area of intellectual property rights, trade secrets, forced technology transfers, access to financial services and currency manipulation with the U.S. threatening to raise tariffs on USD 200 billion worth of Chinese goods. The latest tiff appears to have been triggered by seizures in U.S. of fentanyl and its analogues, an opioid painkiller 50 times potent than heroin, responsible for under 29,000   synthetic opioid linked deaths in the U.S. These opioids allegedly entered the U.S. through transit mail. China pledged to expand the list of narcotics subject to state control numbering more than 1,400 known fentanyl analogues manufacturers amidst concerns of the U.S. administration that China skirted controls by synthesizing fresh and deadlier analogues which has not contained this opioid spate. 
Linchpin 
The next dimension of China’s twin maritime and trade push may converge with Pakistan’s legitimate desire to develop Gwadar as a deep-sea port. The simmering resentment towards this game changing strategy proposed by Pakistan may rattle the complacency of western powers hitherto enjoying virtual dominance in the waters lapping Balochistan’s coastal belt and stakes are being raised. The key issue for Pakistan’s policymakers to appreciate is securely clasping the financial lifeline irrespective of the lender whether it is a multilateral funding agency or a bilateral mechanism. The present regime has embarked upon a stabilization program and will have to dig in to absorb the political fallout. It goes without saying that a vibrant and transparent economy in Pakistan would enable it to sustain international pressure and establish, negotiate and secure the future maritime status of Gwadar, balancing divergent maritime interest and any tradeoffs publicly debated would ensure the country exploits the strategic potential of the entire Balochistan coastline and the so far unexploited mineral and fossil deposits in its onshore as well as offshore sedimentary basin.
Flexing Maritime Muscles
Concern in western capitals mounted pursuant to a 2019 report of the U.S. Defense Department revealing that the Chinese navy could possess as many as six aircraft carriers by the year 2035 with four having catapult equipped capability by 2022. In the report there is a slight that Chinese engineers realized the faults in China’s first aircraft carrier Liaoning commissioned after an extensive overhaul of the stripped down ship towed from Ukraine. China’s indigenously constructed aircraft carrier is expected to become combat ready by the end of this year and yet lacks catapult capability, as a ski-jump configuration on the bow does not allow for multi-role aircraft launch, including airborne early warning aircraft. Having a reduced ramp layout also restricts aircraft to a maximum launch weight of 30 tons, limiting China's J-15 fighter weapons load. U.S. carriers deploy steam catapults launching fighters with significantly greater payload. 
Even at this pioneering stage of aircraft carrier development, China possesses extended air defense coverage and the threat perception lies in expected commission by the year 2022 of a Type 002 carrier outfitted with electromagnetic launch catapults allowing for a multi-role capability, lending credence to the theory that China is in pursuit of blue water outreach.  Although the U.S. Navy maintains its superiority over the Chinese Navy with a fleet of 11 nuclear-powered supercarriers, Chinese ambitions are currently restricted to Indo-Pacific region and are less of a drain on revenues thereby its fiscal resources are available to advance and diversify its maritime ambitions. China's strategic planners realize they don't need to exercise global maritime hegemony in the way the U.S. does, nurturing China’s ambitions to remain confined to the protection of strategic and relatively less costlier sea routes encompassing the predominant portion of global trade coming close to the staggering figure of USD 5 trillion. China’s future strategy may include maintaining security of choke points in the Indian Ocean’s seaborne trade in vital energy supplies catering to almost 80% of the world’s energy requirements. Apart from combat operations, its present aircraft carriers with an air wing of 40 fixed and rotary-wing aircraft supported by maritime patrol makes its naval presence visible at catching sensational headlines. Ultimately the Chinese fleet would be complemented by four nuclear-powered supercarriers projected to compete with the USS Nimitz in capability by reaching an air wing up to 100 fixed and rotary-wing aircraft with the potential to alter the strategic calculus of power.  
U.S. Sanctions and Gwadar
The motive behind exempting the Iranian port of Chabahar from sanctions by the U.S. is being attributed to its desire to bolster its ally, India. Although ostensibly the rationale espoused is that the Afghan economy, being a continuous drain on international assistance, requires a trading route through Iran. Despite deployment of relatively successful cyber technology warfare and wanting to extricate itself, the U.S. remains entangled in the Afghan quagmire for more than 18 years. The current set of U.S. sanctions, re-imposed after the U.S. unilaterally withdrew from the Iran nuclear settlement, targets the financial, banking, and oil and gas sector of Iran. The specter of an ambitious lurking China may have unnerved the U.S. which acted in haste and, as a preemptive move, blocked China’s maritime debut through the Port of Chabahar. The U.S. perception appears to be that China may exploit the delay in the development of Chabahar Port. India’s grandiose claims are limited to publicized wheat exports from India to Afghanistan through the port after its inauguration in 2017.
China’s Foray Unnerves
Pakistan stands to gain by dangling the port of Gwadar and at the same time place itself in an envious strategic position emphasizing its role in the competition between China and the U.S. for dominance in Central Asia. From a military perspective it can be utilized as a complementary coastal infrastructure reducing its dependence on the shipping hubs in the Persian Gulf, which as the past shows, renders it vulnerable to aggression. The south western port city of Gwadar despite being far (a 540 km coastal highway exists) from the commercial port of Karachi (120 km east of the Iranian border) may in the future provide unfettered access from the lesser developed western provinces of China to the warm waters of the Arabian Sea.
India has remained deprived of serious investment initiatives in stark contrast to Chinese ventures in Pakistan culminating in the CPEC with conspicuous connectivity plans of China’s BRI with the Gwadar Port in Pakistan. The earnestness on the Chinese side is amply demonstrated by the USD 60 billion allocated by China for CPEC matched by India with a paltry amount of USD 500 million specifically for Chabahar. The U.S. sanctions seem to be hurriedly cobbled together to prevent a Chinese commercial and financial foray into development of these two ports, located within almost 80 km of each other, accessing a swath of 640 km in the Strait of Hormuz. Analysts in the U.S. may be having flashbacks to the era of Soviet occupation of Afghanistan. Besides, it is imperative to keep at bay an adversary like China from hovering near the proven hydrocarbon reserves in Iran and Central Asia which Iran does not have the financial capacity nor proprietary technology to develop. Iran currently relies upon China to purchase one-third of its energy production as well as a significant portion of its international trade.
Regional Diabolical Designs
Afghanistan upped the ante in 2016 when Afghanistan, Iran and India signed agreements that ensured India’s investment in the Chabahar Port project and operation of berths with a capital investment of USD 85 million and annual expenditure of USD 22 million leased for 10 years. India has reportedly channeled USD 2 billion into projects in Afghanistan to gain influence and sponsor terrorism in Pakistan. Iran has designs to link the port by railway up to Mashhad adjoining borders with Afghanistan and Turkmenistan, with aspirations or delusions that a railway project will facilitate Indian trade with Central Asian countries, bypassing Pakistan. 
U.S. Sanctions and How to Make the Most of Them
The U.S. unilaterally withdrew from the Joint Comprehensive Plan of Action  (JCPOA), commonly referred to as the Iran nuclear deal, and announced two deadlines to wind down commercial dealings with Iran. The second deadline expired in November last after which Iran stands barred from dealing in U.S. dollars. The U.S. is poised to regulate Europe’s dealing with Iran and, at the same time, unilaterally granting exceptions to sanctions which is a contradiction in itself.
Capitalizing on EU SPV 
The European Union is developing a mechanism known as a Special Purpose Vehicle (SPV) to facilitate business transactions with Iran. The SPV would operate like an exchange allowing European and Iranian businesses to settle accounts with one another at an EU clearing house, obviating the need for international transactions and conveniently sidestepping U.S. scrutiny as it would operate in euros. The Society for Worldwide Interbank Financial Telecommunication is connected to over 10,000 banks and cross-border transactions, constantly backed by 239 banks from 15 countries, forming a secure electronic service of 26 million financial messages daily, and common standards to facilitate international disbursements. The management comprises 25 of the world’s largest banks including Citigroup. Despite claiming political non-alignment in the past it buckled to U.S. influence, blocking transactions to Cuba and Iran. In a nutshell, the intensity of opposition to Iran is an opportunity presented to Pakistan albeit with a limited time slot.
Powerhouse Gwadar
Chinese state-owned enterprises are now investing a staggering USD 2.3 trillion a year, close to 43% of China’s entire investment in infrastructure, leading to overcapacity and denting China’s productivity leaving it no option except to reach westwards. This is the opportune moment for Pakistan to capitalize. The eastern coast of China is densely populated and houses the industrial and service sector and goods will have to traverse the breadth of China to access the Strait of Hormuz. Gwadar Port is a strategic and ideally located trading hub for providing impetus to China’s inexorable drive for economic expansion. By design or default, Pakistan and China are inextricably linked in development of China’s Belt and Road initiative through the Gwadar Port.
Envisaging a Sustained Role of Gwadar in Silk Belt Initiative
Any international linkage to Gwadar would entail digital customs integration, logistics and interface between broad gauge and narrow gauge rail track. The port city of Gwadar may, in a decade, be in a position to replicate the New Eurasia Land Bridge through which China has transported its goods westwards to Europe including the city of London. If one evaluates logistical complications the average shipping mileage from the coast of China to the West coast of Europe is around 20,000 km with a travelling time of 40 days. If we were to critically review  the total capacity of the rail route from China to Eurasia through the New Eurasia Land Bridge, it is the equivalent, in cargo terms, to 1-4 days of the Port of Shanghai. Furthermore, Shanghai continues to enhance its port capacity as economically speaking sea freight for volume is traditionally superior to land movement. Rail freight through New Eurasia Land Bridge route is five times the price of marine transportation from China to Europe and also lacks the climate control facilities available on the marine route. The rail track gauge width differences result in reloading thereby increasing travel time and enhancing freight costs. Goods going westwards are mostly production goods and household items whereas those returning eastwards are bulk cargo including coal, wood and grains which do not need to be shipped in containers and may sometimes return empty.
Valuable Lessons
Pakistan has the advantage from the valuable lessons that have been learned from the rail route experience of the New Eurasia Land Bridge in the time the rail corridor from China to the port city of Gwadar is established. Along the way Pakistan can build basic infrastructure and improve value-added service sector in order to negotiate from a position of strength and at its own pace without succumbing to momentary financial or political pressure. We must evaluate investors as to whether its domestic debt to GDP ratio is worse than ours as only then will the investors’ investment policy be oriented to its internal job market and outlet for its goods and services, even if it has to subsidize. Generally speaking, concessional loans from the multilateral lending agencies plush with funds to lend on soft terms, if utilized properly, may enable Pakistan to convince domestic and foreign investors to invest on favorable terms and conditions.


The writer is an analyst on Pakistan-China relations.
E-mail: [email protected]
 

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