All Aboard the China-Europe Railway

6,000 Miles Across 13 Countries

According to the European Commission, China and Europe trade over €1 billion a day on average. With more than 61 routes traversing 43 Chinese cities and 41 European cities across 13 countries, new direct rail linkages are connecting the more than 6,000 miles between China and Europe and transforming the way cargo moves on the Eurasian continent. By rail, European trade with China can move more quickly than by sea, and more cheaply than by air. Cargo shipped from Shanghai, China to Hamburg, Germany takes 32 days over 12,000 nautical miles. A freight train will cost more, but can complete the 7650-mile trip over land in just 16 days.

Enthusiasm among freight forwarders and major retailers for the new routes is high. China’s largest internet retailer, JD.com, books entire trains, using them as “mobile warehouses” to service European customers. Nippon Express, Japan’s top international freight forwarder, significantly expanded its cross-border rail services using China-Europe routes. Even U.S.-based service providers are getting involved. Fortune 500 transport and logistics firm C.H. Robinson recently launched China-Europe rail freight service.

But Even the Best Laid Track…

China Railway Corporation reports that China-Europe freight trains have made 1,000 trips in the first three months of this year, a 75 percent increase from the same period in 2017. The Eurasian Development Bank expects container-traffic volume between China and the European Union (EU) to further triple between 2018 and 2020. But steep demand is outpacing the capacity of new routes, putting strain on underdeveloped stations. Trains that are full heading west come back empty or only partially filled. And, at least for now, the railways are not commercially viable without substantial financing from the Chinese government.

Source: The Rise of China-Europe Railways, CSIS Reconnecting Asia

Overloaded at the Borders

Europe-China railways are on track for 4,000 trips this year, but concerns are mounting over whether the infrastructure can handle the increased traffic. Congestion is prevalent on the European side where the rail infrastructure is older. All of the routes travel through countries that have different rail track gauges, necessitating transshipment when the trains cross the borders between China and the Eurasian Economic Union (EAEU) and between EAEU and the EU.

The Poland-Belarus border is an example of a crossing that is struggling to keep up. Poland is processing four to five trains less than their 14-train target. Belarus processes eight trains with 80 to 100 rail cars crossing every day on the China-Europe route, far short of its current plans to process 5,000 container trains a year by 2020.

A One-Way Ticket?

The EU imports almost double the amount it exports to China. More goods are moving westbound to Europe than move eastbound to China. It is not unusual for cargo trains to return east empty or partially filled. Rapid economic growth, rising incomes, and market reforms in China may continue to transform consumption patterns, creating more demand in China for European products. Ultimately, the success of these nascent China-Europe rail routes hinges on broader economic trends. However, the current imbalance threatens the commercial viability of China-Europe routes.

The Engine of Chinese Subsidies

The vast and growing rail system is part of Chinese president Xi Jinping’s signature Belt and Road Initiative. Propelled by a desire to close the price gap between rail and sea freight, the Chinese government is subsidizing the construction and operation of China-Europe routes. Official figures are not publicized, but subsidies are believed to be as high as 60 percent per 40-foot long container, which dramatically and artificially reduce rail rates from around $9,430 to approximately $3,540.

Very little is known about how long, if at all, these rail routes could function without subsidies, and transitioning these routes to operate purely on a commercial basis could significantly disrupt their trade. But the elimination of subsidies seems unlikely to occur any time soon. Once scheduled to conclude by the end of 2017, subsidies are now expected to continue for another two years and potentially much longer.

Full Steam Ahead or Sidetracked?

The health of rail expansion and usage depends on stakeholders’ trust in the reliability and economic viability of these new routes. The tracks have been laid but more work remains. Policymakers and business leaders will need to address the challenges of how to increase the capacity of stations along the China-Europe, make efficient use of eastbound trains, and address the question marks over long-term funding.

 

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