China-Europe Rail: It Beats a Slow Boat | Red Arrow Logistics Transportation and Freight Forwarding

China-Europe Rail: It Beats a Slow Boat

China’s Belt and Road Initiative is one of the most ambitious undertakings in modern history, and of all its myriad projects, the construction of new rail lines to connect China with Europe are among the most visible. Like much of the Belt and Road, the impact of China-Europe rail is fiercely debated, with some observers convinced it will “change trade patterns,” and others skeptical over how heavily the rail network leans on Chinese government subsidies. As is often the case, the reality of China-Europe rail falls somewhere in the middle, but for some shippers, it may still prove to be an option worth exploring.

However one looks at China-Europe rail, there’s no denying that it has grown exponentially over the past decade. As a 2006 report from the American Chamber of Commerce put it, “The current land transport connections between Asia and Europe do exist, but they have no viable share of the commercial market.” At that time, a shipment from Shanghai to Hamburg took 36 days by rail, but now, thanks to the construction of new high-speed lines, the same trip takes only 16 days. As of 2018, rail connects approximately 35 Chinese cities and 34 European cities, with new lines in the planning stages or under construction.

The past two years have seen particularly rapid growth. According to a report by the Center for Strategic & International Studies (CSIS), “during the first half of 2017, [rail] cargo value increased 144 percent compared to the same period in 2016.” At the moment, rail lines cut through three broad swathes of Eurasia: the northern route, through Russia, the middle route, through Kazakhstan, and the still-developing southern route, which skirts the Black Sea through Turkey. As recently as October, a new line was launched, linking Qinghai with Russia.

Despite the newfound viability of rail as an option, trains are still far from posing a threat to the dominance of cargo planes and container ships. While train cargo by volume has skyrocketed, when looked at as a percentage of overall trade, rail still only accounts for 2.1 percent of all cargo value moving between China and Europe. Maritime shipping remains vastly more cost-effective for heavy cargo, with ocean rates hovering at about $3,000 per container, while westbound train rates cost between $6,000 and $8,000. Furthermore, rail will never be able to compete with ocean shipping’s scale: a modern container ship can carry up to 18,000 TEU, while a 41-car train’s capacity is a mere 82 TEU. Air freight also occupies a relatively safe niche for high-value, high-tech cargo that needs to be rushed to market, and China anticipates an airport construction boom in the next decade which will further increase the feasibility of this mode.

The role of government subsidies in keeping rail prices down has also been hotly contested. China characterizes its subsidies as an initial boost to encourage shippers to use the rail lines, while critics call them a crutch that is propping up an otherwise unsustainable enterprise. According to the CSIS, subsidies can amount to several thousand dollars per FEU, up to one-half of the total cost of shipping. Local governments have also gotten in on the subsidies game in an effort to report more train starts to Beijing and support local industries that have grown up around the rail lines. The result of this competition is actually in danger of hurting rail’s prospects, since the bottlenecks are creating long delays that are frustrating to shippers. In response to this inefficient behavior, China’s central government announced on October 17 that it plans to reduce subsidies by 10 percent a year. As one official told China Daily, “It is a good idea to provide subsidies during the early stage of development, but in the end these projects should be operated on market-based principles.”

On the macro level, the prospects for China-Europe rail are uncertain. Will it ever pose a serious threat to air or ocean shipping? Probably not. Will China be able to taper off subsidies as quickly as promised? Also unlikely. But for shippers with operations in inland China, rail still merits consideration as a potential piece of an overall freight strategy, and it’s easier than ever to explore it. When these rail lines began operating, the market was dominated by “block trains:” single shippers such as HP booking an entire train. But in the years since, brokers have begun offering smaller shippers a chance to book freight, including less-than-container loads. 2011 saw the formation of the Eurasian Economic Union, which vastly simplified the customs process for goods traveling across Kazakhstan, Russia, and Belarus. Logistics providers have also grown accustomed to working with local governments and businesses to expedite shipping. Reefer cars are beginning to appear, opening up the possibility of shipping perishable goods. And while infrastructure improvements are still needed, the Chinese government has a powerful incentive to make these rail lines a success. In many ways, they are the prized achievement of the Belt and Road initiative, and there’s nothing like working someone whose reputation is at stake.