How «Belt» and «Road» are Related Economically: Modelling and Policy Implications

Abstract

We propose an analytical model to capture the relationship between the «Belt» and the «Road» in China’s Belt and Road Initiative (BRI). We show that the short-term minimum subsidies received by the terminal operator companies (TOCs) of the new railways depend on the market conditions in the existing port sector. Specifically, the subsidies are affected by the external shipping demand, the shipping freight rate, and the number of TOCs at the existing port. The level of subsidy and the shippers’ sensitivity to time and price play a significant role when determining the social benefit from the BRI. Furthermore, the region can further benefit from the construction or improvement of the railways when the rail TOC could compete with the existing port TOCs. The welfare gain arises from the improvement in service quality (decrease in delay costs), reduction in road transport costs, and decrease in shipping price resulting from competition. The policy and economic implications of separate and joint management of the port and rail are discussed.