Examining Illicit Trade Challenges in the Belt and Road Initiative

1. Introduction

1.1. The Belt and Road Initiative: History, motivation and goals

More than 2000 years ago, a network of land trade routes linking Europe and Asia developed, providing a means to facilitate economic, cultural, political and religious exchanges between East and West. The network, comprising over 6 000 kilometres of routes, was referred to as the Silk Road or Silk Routes by historians. This name referred to the importance of the silk trade between the People’s Republic of China (hereafter “China”) and Western economies, though it also supported important two-way trade in many other goods. The network endured until the rise of the Ottoman Empire in the mid-1400s when trade between East and West along the routes was severed.

China has since launched the Belt and Road Initiative (BRI) to “carry on the Silk Road Spirit in the wake of the weak recovery of the global economy and complex international and regional situations” (PRC, 2015[3]). The plan began to take shape in 2013, when Chinese President Xi Jinping introduced the concept during a visit to Kazakhstan. (PRC, 2015[4]) Several actions were taken in 2013 and 2014, including the launching of a port development project in Kazakhstan. In parallel, China and partner countries concluded a Memorandum of Understanding to establish an Asian Infrastructure Investment Bank (AIIB) to help finance infrastructure construction and promote regional interconnectivity and economic integration.1

The main objective of the BRI, as proposed by President Xi Jinping in 2013, was to strengthen China’s global connectivity through infrastructure development. Improved connectivity aims to enhance Chinese export potential, which, following three decades of unparalleled economic growth, faced overcapacity in the manufacturing sector (Holslag, 2017[5]) and (Yu et al., 2020[6]). Initially, it was also meant to support the “Made in China 2025” agenda, which was designed to facilitate China’s shift from labour-intensive products to high-tech manufacturing (Holslag, 2017[5]). The BRI could potentially boost exports from China by: i) lowering trade costs`; ii) helping to diversify export markets, and iii) boosting the import capacities of BRI countries, bolstered by Chinese investment. The BRI initiative also aims to strengthen socio-economic ties, focusing on European, Asian, and African countries (PRC, 2015[3]).

On the trade front, the effort includes the development of both land (referred to as the Silk Road Economic Belt) and maritime (referred to as the 21^st Century Maritime Silk Road) corridors, albeit on a far broader and deeper scale than the original Silk Road. The final action plan describes the scope as follows:

“On land, the Initiative will focus on jointly building a new Eurasian Land Bridge and developing China-Mongolia-Russia, China-Central Asia-West Asia and China-Indochina Peninsula economic corridors by taking advantage of international transport routes, relying on core cities along the Belt and Road and using key economic industrial parks as co-operation platforms. At sea, the Initiative will focus on jointly building smooth, secure and efficient transport routes connecting major sea ports along the Belt and Road. The China-Pakistan Economic Corridor and the Bangladesh-China-India-Myanmar Economic Corridor are closely related to the Belt and Road Initiative and therefore require closer co-operation and greater progress.”

The formal objectives of the BRI are further elaborated in China’s 13^th and 14^th Five-Year Plans, which cover the 2016-2025 period (Box.1.1).

The BRI is integral to China’s five-year plan for informatisation, as outlined in the 14^th Five-Year Plan (Stanford Cyber Policy Center, 2022[7]). The plan emphasises developing a high-quality "Digital Silk Road" by enhancing network infrastructure interconnection and promoting joint construction and sharing of applied infrastructure through international co-operation with BRI partner countries.

The BRI initiative has significant implications for global supply chain management. Improved infrastructure quality may increase the reliability and resilience of existing supply chains and open new trade routes (Thürer et al., 2019[8]).

Overall, the value of BRI-related projects in the China Global Investment Tracker (CGIT), developed by the American Enterprise Institute, is close to USD 1 trillion, making it the largest development programme undertaken by a single country.2

Box 1.1. BRI objectives in China’s 13^th and 14^th Five-Year Plans

BRI objectives in China’s 13^th 5-Year Plan (2016-20)

• Increase trade and investment in the BRI, by, inter alia, improving bilateral and multilateral co-operation mechanisms, focusing on policy communication, infrastructure connectivity, trade facilitation, enhancing capital flows, and people-to-people exchanges.

• Liberalise trade along the Silk Road, by working with countries along BRI routes to establish a network of high-standard free trade zones.

• Enhance financial co-operation in the region to fund infrastructure by, inter alia, i) strengthening co-operation with international organisations, including international financial organisations and institutions, ii) working actively to promote the development of the AIIB and the New Development Bank, iii) putting the Silk Road Fund to effective use, and iv) attracting international capital.

• Gain access to natural resources by, inter alia, i) strengthening international co-operation on energy and resources and production chains and ii) increasing local processing and conversion.

• Strengthen transport infrastructure in the BRI corridors by, inter alia, i) advancing the development of multi-modal transportation that integrates expressways, railways, waterways, and airways, ii) building international logistics thoroughfares, iii) strengthening infrastructure development along major routes and at major ports of entry and iv) working to develop Xinjiang as the core region for the Silk Road Economic Belt and Fujian as the core region for the 21^st Century Maritime Silk Road.

• Deepen cultural exchanges in the region by, inter alia, conducting extensive international co-operation in the areas of education, science, technology, culture, sports, tourism, environmental protection, health care, and traditional Chinese medicine.

BRI objectives in China’s 14^th 5-Year Plan (2021-25)

• Strengthen the linkage of development strategies and policies by, inter alia, i) promoting the alignment of strategies, plans, and mechanisms, ii) strengthening the linking of policies, regulations, and standards, iii) promoting the conclusion of investment protection agreements and agreements that avoid double taxation, iii) strengthening co-operation in customs, tax and regulation matters, iv) strengthening co-operation in the fields of finance, trade, energy, digital information and agriculture, and iv) promoting effective linkage and synergy between the BRI and regional and international development agendas.

• Promote interconnectivity and interoperability of infrastructure by, inter alia, i) strengthening the linkage of land, sea, sky and cyber domains, ii) integrating high-quality, sustainable, risk-resistant, reasonable pricing, and inclusivity and accessibility goals into construction projects, iii) improving the access and quality of China-Europe trains, iv) promoting the formulation of international land transport trade rules, and vi) promoting construction of a BRI spatial information corridor.

• Deepen pragmatic economic, trade, and investment co-operation by, inter alia, i) promoting the optimisation and upgrading of trade and investment co-operation with countries taking part in BRI construction ii) actively developing Silk Road e-commerce, ii) deepening international co-operation on production capacity, iii) expanding third-party market co-operation, iv) building a win-win production chain and supply chain co-operation system, v) expanding two-way trade and investment, vi) adhering to a market orientation vii) following international practices and debt sustainability principles, ix) improving the BRI risk prevention and control and safety assurance systems, and x) strengthening legal frameworks.

• Build a bridge for mutual learning among civilisations by, inter alia, i) deepening humanistic co-operation in the fields of public health, the digital economy, green development, S&T education, and culture and art, ii) strengthening exchanges between parliaments, political parties, and private organisations, iii) intensifying exchanges between women, young people, the disabled and other groups, iv) strengthening exchanges and co-operation in climate change response, maritime co-operation, wildlife protection, and desertification prevention and control and v) co-operating with countries participating in the BRI in healthcare and infectious disease prevention.

Source: PRC (2015[3]), (2015[4]).

The BRI was designed to align with and enhance the growing share of Chinese exports in global trade (Figure 1.1). Between 2001 and 2013, exports rose from close to 4% to 10.5% of the world total. After the BRI launched, they rose to 12.5% of world exports. Following a weakening between 2015 and 2019, in 2021, exports from China reached their highest level of almost 14% of the total world exports.

Figure 1.1. Exports from China as a share of total world exports, 1992-2021

Note: OECD calculations based on World Integrated Trade Solution (WITS) data.

1.2. The Belt and Road Initiative: Scope of investment

1.2.1. Sectoral scope

The BRI covers key connectivity sectors such as transportation, energy, and telecommunications. As can be seen in Figure 1.2, energy projects command the highest share, followed by transport projects.

Figure 1.2. Distribution of BRI projects by sectors, 2013-23

Note: Construction refers to the physical development and building of infrastructure projects. In the context of the Belt and Road Initiative (BRI), construction involves the actual work of creating infrastructure such as roads, bridges, railways, ports, and buildings. These are tangible projects where the primary focus is on the creation or renovation of physical assets. Investment involves the financial resources committed to BRI projects but is broader in scope than just construction: it represents the capital flows, whether through loans, equity stakes, or other financial instruments, aimed at generating returns and fostering economic development in the participating countries.

Source: OECD calculations based on China Global Investment Tracker of the American Enterprise Institute.

In the context of the BRI, this study differentiates between “construction” and “investment” projects. Construction refers to the physical development and building of infrastructure projects, such as roads, bridges, railways, ports, and buildings, focusing on creating or renovating tangible assets. In the context of the Belt and Road Initiative (BRI), investment encompasses not only the financial resources committed to these construction projects, but also the acquisition of existing assets. This broader scope includes capital flows through loans, equity stakes, or other financial instruments to generate returns and foster economic development in participating countries.

1.2.2. Geographical scope

Chinese BRI support is directed first and foremost to countries in close geographical proximity to China or countries located strategically on trading routes to and from China, where the transport infrastructure is underdeveloped. Some recipient countries are unlikely to otherwise get support due, for example, to low financial ratings. As shown in Figure 1.3, East Asia received a quarter of BRI funds. Sub-Saharan Africa and West Asia received nearly 20% of the funds each. However, in the case of those regions, the majority of funds were destined for construction projects. This is the case for Arab Middle East and North African countries (almost 16% of BRI funds). Conversely, most BRI funds destined for Europe and South America, 9.6% and 8.5%, respectively, were related to investment. North America received close to 1% of the funds, which were mostly funnelled to construction projects.

Figure 1.3. Distribution of BRI construction and investment projects between regions, 2013-23

Note: Construction refers to the physical development and building of infrastructure projects. In the context of the Belt and Road Initiative (BRI), construction involves the actual work of creating infrastructure such as roads, bridges, railways, ports, and buildings. These are tangible projects where the primary focus is on the creation or renovation of physical assets. Investment involves the financial resources committed to BRI projects but is broader in scope than just construction: it represents the capital flows, whether through loans, equity stakes, or other financial instruments, aimed at generating returns and fostering economic development in the participating countries.

Source: OECD calculations based on China Global Investment Tracker of American Enterprise Institute data. The American Enterprise Institute database covers investment by Chinese entities in BRI foreign projects, including loans and grants from official sector institutions in China.

Regarding transport and logistics projects (Figure 1.4), the ranking of recipient regions is similar, with one notable exception: the Arab Middle East and North Africa, which is behind Europe. In all regions except East Asia and Europe, the value of construction projects has been higher than that of investment.

Figure 1.4. Distribution of transport and logistics BRI projects between regions, 2013-2023

Note: Construction refers to the physical development and building of infrastructure projects. In the context of the Belt and Road Initiative (BRI), construction involves the actual work of creating infrastructure such as roads, bridges, railways, ports, and buildings. These are tangible projects where the primary focus is on the creation or renovation of physical assets. Investment involves the financial resources committed to BRI projects but is broader in scope than just construction: it represents the capital flows, whether through loans, equity stakes, or other financial instruments, aimed at generating returns and fostering economic development in the participating countries.

Source: OECD calculations based on China Global Investment Tracker of American Enterprise Institute.

The Initiative has expanded over time to include around 151 economies across six regions (Table 1.1). Past and present participants include 17 OECD countries (Table 1.2) with 13 of them EU Members. At present, 17 EU Member countries are part of the BRI (Table 1.3). Most involved economies have signed Memoranda of Understanding with China, while others have entered less formal BRI co-operation agreements (Ghiretti, F., J. Gunter and J. Mardell, 2022[9]).

Table 1.1. Number of economies participating in the BRI with China, by region

Region	Number of economies
East Asia and Pacific	25
Europe and Central Asia	34
Latin America and Carribean	22
Middle East and North Africa	20
South East Asia	6
Sub-Saharan Africa	44
Total	151

Source: https://greenfdc.org/countries-of-the-belt-and-road-initiative-bri/.

Table 1.2. OECD countries participating in the BRI

Austria	Hungary	Poland
Chile	Korea	Portugal
Costa Rica	Latvia	Slovak Republic
Czech Republic	Lithuania	Slovenia
Estonia	Luxembourg	Türkiye
Greece	New Zealand

Source: https://greenfdc.org/countries-of-the-belt-and-road-initiative-bri/.

Table 1.3. EU countries in the BRI

Austria	Hungary	Portugal
Bulgaria	Latvia	Cyprus
Croatia	Lithuania	Romania
Czech Republic	Luxembourg	Slovak Republic
Estonia	Malta	Slovenia
Greece	Poland

Source: See https://greenfdc.org/countries-of-the-belt-and-road-initiative-bri/.

Geographically, as shown in Figure 1.5, Chinese exports developed at different paces depending on region and period. In general, after WTO membership and before the start of BRI, exports to relatively less developed countries increased much more rapidly than exports to the United States and the EU27. As a result, the EU27 and the United States share in Chinese exports was lower in 2013 than in 2001. The BRI helped China to reverse this declining trend in exports to more developed countries. Between 2013 and 2021, the growth of Chinese exports to the EU27 was second only to ASEAN countries. Until 2018, the pace of growth of exports to the United States was on par with that of ASEAN countries. After a brief but substantial decline in 2019, it grew again in 2020 and 2021. In 2021, the United States and the EU27 remained the two biggest export markets for China, and exports to those markets equalled a third of the total value of Chinese exports. Although exports to Latin America and Sub-Saharan Africa were growing rapidly before and after the BRI, since it started from a very low base in 2001, exports to those two regions were equivalent to approximately 10% of Chinese exports. Exports to ASEAN countries have been rising rapidly in relative terms. While in 2001, exports to this group represented 7% of Chinese exports, in 2021, it was almost 15%, only slightly below the value of exports to the EU27 (Figure 1.6).

Figure 1.5. Evolution of exports from China to selected regions and countries before and after the Belt and Road Initiative, 2001-2013 and 2013-2021

Note: OECD calculations based on World Integrated Trade Solution (WITS) data. Value of Chinese export measured in US 2001 dollars (upper panel) and US 2013 dollars (lower panel). Value of export deflated using Inflation, GDP deflator of China sourced from World Bank (indicator NY.GDP.DEFL.KD.ZG).

Figure 1.6. Share of selected regions and countries in total exports from China, 2005-2021

Note: OECD calculations based on World Integrated Trade Solution (WITS) data.

1.3. Scope of the analysis

OECD-EUIPO analysis demonstrates that trade in counterfeit goods is a global and growing threat and that advanced trade infrastructure has been used effectively by counterfeiters to expand their illicit activities. Examples of areas that counterfeiters are exploiting include expanding the use of small parcels to conceal illicit trade more effectively, use of containerised maritime transport to hide bulk shipments of counterfeit goods, use of free trade zones to complicate the tracking of counterfeits and finding ways to use online marketplaces to distribute counterfeits. These areas have been examined in a series of OECD/EUIPO reports in recent years (OECD/EUIPO, 2018[10]) (OECD/EUIPO, 2018[11]) (OECD/EUIPO, 2021[12]) (OECD/EUIPO, 2021[13]). The failure of governments to modify governance frameworks to respond sufficiently to emerging challenges in these areas has aggravated the growing impact of counterfeits on markets. The problem is particularly severe in economies with poor governance and inadequate IP protection. In these cases, investments in logistics and technology are not matched by improvements in institutional quality, creating opportunities that illicit traders can exploit.

This study analyses the scope and potential effects of BRI investment on trade as well as its latest developments and trends; it then explores quantitatively if and how investment that is associated with the BRI could result in higher volumes of trade in counterfeit goods, thereby potentially eroding the benefits of international trade. The study relies on the mechanisms previously identified in OECD-EUIPO studies that affect illicit trade, focusing on data of key identified nodes where trade in counterfeits has raised significant challenges (OECD/EUIPO, 2017[14]) (OECD/EUIPO, 2018[10]) (OECD/EUIPO, 2018[11]) (OECD/EUIPO, 2021[15])

The study examines the potential value of trade in counterfeits and analyses trends in the volume and composition of these goods. It maps the primary trade routes and checks the quantitative relationship of trade in counterfeits with BRI-related investment.

1.4. Data

1.4.1. The China Global Investment Tracker from the American Enterprise Institute

The China Global Investment Tracker is a comprehensive dataset that captures the country's outbound investment and construction activities, documented both individually and collectively and is publicly available. It encompasses 4 300 significant transactions, including those related to the BRI. This dataset features transaction amounts, names of Chinese parent companies, host countries, and the sectors involved, including metals, real estate, agriculture, and technology. The American Enterprise Institute publishes the tracker.

This analysis focuses on investment in transport and logistics associated with the BRI. Investment in these fields in particular facilitates connectivity and trade, creating avenues that counterfeiters might be able to exploit.

1.4.2. Global customs seizures

Information concerning trade in fake goods used in this report is sourced from the OECD-EUIPO database on customs seizures originating from national customs administrations. Specifically, data come from the WCO (World Customs Organisation), the European Commission’s Directorate-General for Taxation and Customs Union (DG TAXUD) and the United States Department of Homeland Security (DHS). The latter submitted seizure data from US Customs and Border Protection (CBP) and the US Immigration and Customs Enforcement (ICE). In each analysed year, the total number of customs seizures of counterfeit and pirated goods worldwide consistently exceeded 130 000. Overall, the unified database on customs seizures of IP-infringing goods includes almost 900 000 seizures.

The study focuses on seizures from countries that have received investment under the BRI. In other words, it refers to the exports of fakes from the 151 economies benefiting from the BRI.

Notes

← 1.  The AIIB was subsequently established in 2016 with 57 founding members (37 regional and 20 nonregional); by the end of 2020, it had 103 members, representing approximately 65% of global GDP (see www.aiib.org/en/about-aiib/index.html). As of 2 April 2024, the bank had approved 260 projects involving 37 member countries. Approved financing amounted to USD 51.19 billion. The financing covered the energy (22%) and transport (17%) sectors, along with multisector projects (15%). Moreover, some 27% of projects were tied to a Crisis Recovery Fund established to support countries in alleviating and mitigating the economic, financial and public health pressures arising from COVID-19.

← 2.  See https://www.aei.org/china-global-investment-tracker/.