Rail subsidies are one of the most controversial topics when it comes to the New Silk Road. This conundrum holds many lessons for freight forwarders working on the New Silk Road. At the time, one of the most attractive aspects of the New Silk Road were the opportunities to avail subsidies, especially while transporting westbound via rail.
After the reduction of rail subsidies was announced back in 2019, there was an uproar in the rail logistics industry anticipating the consequences of this situation. In this article, we follow the topsy turvy trail of the rail subsidies and try to understand the current situation, as the pandemic continues to rage on.
When they emerged
Back in the 90s, it was unimaginable for any Chinese freight forwarder to send cargo to Europe via rail. Either there were taxation issues, or the routes were fragmented, or customs was a hassle. With these many hurdles to dodge, freight forwarders preferred the good old shipping lines or the fast-flying airplanes. However, a decade later, the American company Hewlett Packard approached the local authorities in Chongqing and negotiated an investment deal, allowing them to move their products all the way to Europe, more significantly, Duisburg. Two years later, the Chongqing-Duisburg route became functional.
Before the official announcement of the BRI was made in 2013, the setting up of rail freight connections between China and Europe was primarily done by local businesses. Apart from Chongqing, Wuhan, Chengdu, Yiwu and Xi’an had already established links to Europe with the support of the local authorities. With the inauguration of the BRI, these services came together under one umbrella and received the boost from top-down. The BRI ecosystem now consisted not just of these cities and their rail terminals but also shipping ports on the eastern coast of the country and airports. Moreover, the BRI extended to include countries that wished to increase their trade spheres in China.
With lightning-fast developments taking place, in 2016, China’s National Development and Reform Commission laid out a five-year plan to expand the rail routes going towards Europe. The involvement of political and policy agents created a ground for many influential players.
The danger of a bubble
As the local governments and their cities suddenly appeared on the global economic stage, a feeling of competition grew. The number of freight trains was on a steady rise between Europe and China, and the local authorities mainly situated in the important rail hubs decided to increase their presence. Unfortunately, the way to go about this was not the most lucrative. The local authorities lowered the cost of rail freight services, helping them to compete with ocean freight. Although a ceiling was administered to prevent bad competition, local authorities found other ways to evade this and continued to attract businesses.
The situation was such that traders in Xinjiang, would prefer to truck thousands of kilometres to Xi’an, because of the cheaper rates which was driving the incentive game had a massive boost in the Europe-China trains between 2017-2018. A pressure to perform also forced many rail services to transport empty containers to Europe, and by the end of 2018, a bubble began to form as trade imbalances occurred. In addition to that, the lagging eastbound cargo also added to the trade deficiencies, provoking anxieties of the players operating on the New Silk Road. Though these subsidies brought the traffic and gave a boost to the rail freight industry by making it competitive. In the long run, it was agreed that these heightened subsidies were dangerous and abnormal.
Measures adopted and the current situation
Allegedly, to prevent a negative situation, Chinese authorities decided to reduce up to 30% of subsidies on trains towards Europe, with the aim to phase out the subsidies by 2022. The goal for the Eurasian rail freight is to become self-sufficient, and not depend on the subsidies given by local authorities. However, the fear was that smaller players may not opt for rail freight if the subsidies are removed. Therefore, in August 2020, the Russian government subsidised transit cargo transportation taking place via railway containers. This gave companies in Europe an opportunity to continue remaining competitive and increase time efficiency via the Russian routes. The transit route covers borders at Finland, Belarus, Azerbaijan and Poland.
Apart from the interest from Russian authorities in the New Silk Road, the China-Europe rail yet again gained significant traffic during the Covid-19 pandemic as shipping, and air freight industry suffered losses. China-Europe rail has now created a stronghold for itself. It has emerged as a reliable alternative to air and sea freight. Focusing on LCL consolidation has also solved the problems of empty containers that were faced back in 2019. As of now, it is unsure as to the preference of subsidies. The trend shows that Chinese authorities favour to subsidies round trips, nevertheless in the current economic climate rail freight has manoeuvred through the obstacles and proved its stability. For now, the expectations for China-Europe rail are positively hopeful, yet realistic.