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Factors affecting Chinese rail freight to Europe and back now and in coming years

Three key factors emerge that both help and hinder the growth of China-Europe rail freight - technical, commercial and bureaucratic.

The technical problem that robs Sino-European rail freight of its competitive transit time edge are the two railway gauge changes that must be overcome enroute.

The commercial problem is the development of Asia-Europe ocean shipping, which now deploys mega ships that can offer rates and speeds that come close enough to rail delivery as to erase what slender cost-savings and shortened transit times rail freight can deliver.

The bureaucratic problem arises from disputes between western countries, chiefly the US and the European Union, over the Ukraine and Syria, that result in tit-for-tat restrictions, with Russian rules blocking commodities traversing Russia through which most of the railway passes.

Nonetheless there are high hopes for Sino-European rail freight which has grown spectacularly in the last five years, though much of the growth is illusory because its baseline was very nearly zero to start with.

More positively though, Sino-European rail freight has become the part of President Xi Jinping's Belt and Road signature project, so in some senses it has become "too big to fail".

"Politically, China has used the announcement of new routes as evidence that its Belt and Road is succeeding," writes Jonathan Hillman, director of the Reconnecting Asia Project at the Centre for Strategic and International Studies in Washington, DC.

"For the most part, China’s partners are happy to oblige. Foreign leaders readily promote the routes as symbols of deeper ties, regardless of their economic merits. They understand that this is President Xi’s policy effort and hope that cooperating could open to economic gains," said Mr Hillman.

"China also provides generous subsidies for these routes. According to reports, subsidies can range from US$1,000 to $5,000 for each FEU, accounting for up to one-half the total cost. One study that examined subsidies in 2014 found an even higher range, up to $7,000 per container.

"The same study estimated that China’s provincial governments collectively spent over $300 million subsidising China-Europe block trains during 2011 to 2016," Mr Hillman said.

The technical problem is the switch from the Chinese (standard international 4'8" gauge common to North America and western Europe) to the Russian 4'11" gauge deliberately made different throughout the Russian Empire to obstruct military invasion.

Because of gauge changes, one is at Kaszkhstani border and the other in Poland, much time is lost, counter-intuitively mostly at the European end. It takes 12 days to reach Poland, but 17 days to Germany. “Two days slower than the lead time could be at best, due to efficiency issues along the route,” said DB Schenker’s Greater China chief Christopher Pollard, whose 3PL runs services on 15 regular lines linking China to Europe, most of which terminate in Germany.

 “One of the main congestion hot-spots is in Malaszewicze, Poland. At this border terminal between Russia and the EU, gauges are changed which causes delays due to the lack of infrastructure there.”

Mr Pollard also said the capacity of rail infrastructure had failed to develop at the same pace as freight volumes, with gauge changes in central Asia also causing delays.

 “As China and Europe use different track gauges to Belarus, Russia, Mongolia and Kazakhstan, each train must undergo at least one change of track during its journey, depending on final destination.

 “A lack of cranes to transfer the containers to rail cars with the correct gauge and insufficient storage space can also cause bottlenecks,” Mr Pollard said.

 “But rail offers highly competitive solutions, even to shippers demanding speed, reliability and safety, such as those in electronics, automotive, industrial and consumer goods,” he said.

Backhaul freight destined for China are steadily increasing, too. There were 1,014 eastbound trains during the first six months of 2018, double that of the same period last year, but still less than half the number of westbound services, an imbalance due to the general trade disparity between China and Europe, said Mr Pollard.

 “However, e-commerce is growing significantly in China and we believe that in one to two years, eastbound volumes will pick up,” he said.

Chinese e-commerce giants Alibaba and JD.com have both begun using rail to transport high-value European goods into China.

Mr Pollard said China’s transition to an affluent, middle-class society was boosting demand for high-value products, which in turn has added a “new dimension to providing logistics services in China, as it requires a new set of logistics skills”.

Andre Wheeler, owner of Australia's Wheeler Management Consulting, said the growth of eastbound services would help to reduce China’s subsidy levels for the railways.

 “Eastbound trains are getting busier and it is claimed that the current network could soon function with reduced subsidies of US$1,000 per 40-foot container from the current $4,000,” he said.

Said Hong Kong forwarder Esmond Tam, of FS International: “the delay consumes the advantages of Eurasia train transport and frustrates customers,” he said, adding that the rail option remained attractive to shippers, in peak seasons as it was quicker than sea and cheaper than air.

Part of the bureaucratic problem has been solved with the formation of the Eurasian Economic Union that has simplified the cross-border process in 2011, bringing Kazakhstan, Russia, and Belarus under the same customs umbrella.

The service was a “block train”, meaning that a single shipper, in this case HP, booked the entire train of lap tops and mobile phones. Thus, three corridors between China and Europe emerged, the northern corridor which joins the Trans-Siberian Railway, the middle corridor which runs through Kazakhstan. There has been some action on a southern corridor, a Russia bypass, that goes to Europe via Central Asia, Iran, Georgia, and Turkey, thereby avoiding niggling Russian rules, that today block European food exports.

There are legitimate reasons to be suspicious of post-communist Russia, but there is also a will in the west to maintain hostilities to retain the enormous military and bureaucratic establishment designed to confront a communist menace that is no longer there.

It is ironic that US Democrats, who have far friendlier to communists than Republicans, want to treat Russians like the Reds of yesteryear. Democrat Hillary Clinton, while US Secretary of State, in happier times spoke of a "re-set" of US-Russian relations, but nothing came of it, certainly not as long as anti-Russian sentiment was useful to destroy the presidency of Donald Trump, which became the party's sole policy since in 2016 presidential election.

It is true, the Russians support the Syrian dictatorship of Bashar al-Assad. But to President Trump, President Assad seems no worse than anyone who might credibly replace him. What's more, the Russians are willing to kill ISIS and other like-minded terrorists, who seek to topple Assad. If women and children are killed in the process, as they likely will be, Trump's enemies in the media, universities and bureaucracy, will only have the Russians to blame now that he has pulling 2,000 US troops out of Syria.

There is the Ukraine of course, but that was never a truly independent country despite its seat in the United Nations, but part and parcel of the Soviet Union. When France, England and Turkey fought the 1853-56 Crimea War all thought they were invading Russia, as the Ukraine was no more than a suzerain duchy of the Russian Empire.

Not that fears of Russian irredentism or revanchism are groundless. But however much Russia rues the loss of its satellite states, NATO will likely find the popular support to defend former Soviet Bloc states though not the Ukraine, much less the Crimea. But at least the west must face the possibility that their enormously expensive defence establishments must be given every chance to rust away as tensions ease the west gives them every opportunity to do so.

While the bureaucratic and diplomatic obstacles are the most complex and take the longest time to explain, they may be the least important, and so far only affect backhaul food exports for the moment but may yet affect more if tensions escalate.

Of greater and more immediate importance is making the rail journey more efficient with quicker gauge changes and hoping that today's miniscule backhaul volumes will growth with the help of China's burgeoning e-commerce. And of course getting up speeds and reliabity to deliver goods on time. These are the challenges of the coming year.

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