The year 2016 saw significant growth in China’s Belt and Road Initiative, especially in the rail freight sector. According to China’s 13th Five-Year Plan, about 3.5 trillion yuan was invested in the Chinese railway infrastructure between 2016 to 2020. Initially, the subsidies were created as a way to boost the China-EU Rail freight. They were also politically motivated to increase business interactions between Chinese and European business entities.
However, over the last few years, China has been reducing subsidies for rail freight between the two landmasses. As always, there continues to be confusion regarding the topic, and with the monumental changes caused during the pandemic, there is much to re-evaluate. In this article, we revisit the situation of rail subsidies, discussed in our article last year, and learn more about its changing paradigms.
Why Subsidies in the First Place?
The rail freight prices depend on a number of factors, such as value and kind of goods, length of the train, east-west cargo balance, availability of subsidies, etc. If even one of these factors is affected, rail freight prices are also affected. China-EU rail freight also faces a long list of challenges, and one of the most significant ones are present in Europe. Till the train reaches the borders of Europe, it travels up to 1,100 km per day. But as soon as it hits the borders, it travels about 350kms per day. This is generally due to the lack of political will in Europe to develop and match the rail freight investments made by China.
There are two ways in which subsidies are given: first, direct subsidies include financial subsidies from the local authorities that are directly paid out to the operators. Second, indirect subsidies assist local rail companies in reaching specific trade volumes. The creation of rail subsidies promoted various Chinese cities as critical hubs for the Belt and Road Initiative. As the freight traffic increased, many local authorities in China offered more and more subsidies to improve trade between their cities and various European locations and compete with a big industry like ocean freight. Although measures were taken to create ceilings to prevent bad competition, local authorities found means to evade them as they continued to attract business.
Problems with Subsidies
By the end of 2018, a bubble began to form as trade imbalances became evident. It also came to light that many rail services were transporting empty containers. Simultaneously, the subsidies initially created business competitions appeared to be potentially dangerous. To curb the further growth of such a trade bubble, a reduction of subsidies was enforced in 2018, and it was decided that by the end of 2022, subsidies will be completely removed for China-EU rail freight. In 2018, financial support could not be more than 50 % of freight costs; then in 2019, it was determined to be 40%. Following by 30% in the last year. The subsidies will all together be removed by 2022.
Many problems plague subsidies since they can burden public finances. They can also encourage fraud, that is, shipping empty containers to collect subsidies and so on. These measures would ensure that China-EU trade via rail freight can be sustained without relying on financial support. But in 2020, a report published by the International Union of Railways predicted that further subsidy reductions would cause a sharp decrease in volumes along the freight routes. The first to be affected will be Kazakhstan. Therefore, a reduction of subsidies will account for a reduction of volumes, and in turn making it less competitive compared to ocean freight.
Is All Lost?
Since the pandemic, the world of logistics has faced an increasing number of challenges with an apparent container and space shortage witnessed. Ports were being choked, and as always, the alternative rail continued to power through, despite the reductions of subsidies. Nevertheless, during the pandemic, and now as we face its after effects, many have chosen rail freight, especially those transporting electronic goods or automobiles as the better and faster alternative. Though the trade per cent between China and the EU for rail freight is small, it is still significant enough for SMEs to transport through the well-established routes. At the moment, subsidies are at 20% of the total freight cost. Other countries such as Russia have offered subsidies towards cargo that is transported via the Trans-Siberian Route. Other solutions include automation and digitalization of processes, which are currently on the agenda for both European and Chinese parties.
Some of the benefits of reducing subsidies would be to increase competitiveness and forcing operators to improve operations and quality of service as well. Since subsidies mostly affect operators, there is pressure on them to adjust capacity to meet the needs of the cargo owners and at the same time gain benefits. Therefore, reduction of subsidies, as the alarmist predict, will not decimate rail freight, rather push operators and governing bodies to set up better systems and sustain the future of rail freight.