China Pakistan Economic Corridor 2.0 and Changing Geo-strategic and Geo-Economic Scenarios in South Asia

The China-Pakistan Economic Corridor (CPEC) has developed many critical infrastructure projects in Pakistan. It has created a smooth transport system across the provinces and solved the country’s energy crisis by developing various energy infrastructures, including the largest solar power project. The CPEC has improved the ease of doing business in Pakistan and prepared the market for attracting foreign direct investment (FDI) across the economic sectors. Several countries, such as China, Saudi Arabia, UAE, Qatar, Turkey, and Russia, have shown interest in and readiness to invest in Pakistan. CPEC has established connectivity across borders and regions. CPEC allows Pakistan to enter Central Asian markets via Kashgar (China). It reduced the distance between China, the Middle East, and African markets. Oman is only 32 km from Gwadar Seaport, where China is developing a special economic zone, and the Iranian border is only 72 km from the Gwadar port. The start of the operations of Gwadar International Airport, as well as the use of Khunjerab Port to export goods from China to Jebel Ali Port (UAE) in less than 10 days, are the early signs of smooth and accelerated trade along the belt and road initiative (BRI). The CPEC and the recent political upheavals in South Asian countries like Afghanistan, Bangladesh, Nepal, Sri Lanka, and Maldives are changing South Asia’s geo-strategic and geo-economic landscape. They are coming out of Indian hegemonic grip and promoting diplomatic relations based on equality, sovereignty, territorial integrity, and mutual respect. CPEC is enabling south Asian countries to diversify their business relations with the central Asian countries and China as lessening dependence on India.

With the end of hostility in Afghanistan and the arrival of Taliban 2.0 to power in Kabul, CPEC has become more geo-strategically and geo-economically important today than before 2021. It helped to connect Western China to Gwadar deep seaport, Pakistan to Uzbekistan, and other Central Asian markets via Afghanistan. The CPEC+1, or North-South connectivity through Afghanistan, is already underway. Road infrastructure is already there, and the rail link between the CPEC and the Central Asian network is being developed. Moreover, rail connectivity from Russia to Pakistan via Iran will also start in March 2025. Dominant textile industries in Bangladesh and Shri Lanka can import cotton from central Asian countries using CPEC infrastructure, which will be cheaper and faster and reduce lead time for the readymade garments industry.

CPEC offers the most cost-effective and shorter distance to the Gwadar deep seaport for Central Asian markets. They can be connected to CPEC via Tirmiz, the southern city of Uzbekistan. The Karakorum highway (KKH) that connects Kashgar to Gwadar is not far from the Tajik border and can be connected via the narrow Wakhan (Afghanistan) corridor. CPEC can cater to Turkmenistan and Uzbekistan’s liquid cargo through pipelines and Kazakhstan and Kyrgyzstan’s dry cargo via road. For landlocked countries, the distance coefficient of the gravity model is 5.5% (every 1% decrease in distance from the port increases the trade by 5.5%, and the CPEC will decrease this distance by 22%). That means there is considerable potential to increase multilateral and bilateral trade and trade-in transit among the South and Central Asian countries.

If good governance prevails, Afghanistan could be an important transit hub for South and Central Asian trade. These regions have had historical, religious, and cultural relationships for centuries. The new trade corridor will likely bring them together to integrate their economies, increase trade exchanges, and re-build socio-cultural ties. Moreover, Central Asian and South Asian economies have complementary resources and activities where further trade relationships can be developed by removing transport bottlenecks and reforming regulatory frameworks. Accelerated visits and negotiations between Pakistan, Afghanistan, and Central Asian countries since the arrival of Taliban 2.0 in Kabul show the early signs of deeper relationships among them. The Western embargo against Russia and Iran, the American Chips Act, and the supply chain de-risking policy will further push these countries to look for alternative routes for their business transactions with the global market. Central Asian countries will have a viable option for their international trade via the Gwadar deep seaport. The Russia-Ukraine conflict will increase the need for alternative routes, and CPEC is likely profit from the new geo-strategic ecosystem.

Pakistan has supported the Taliban during the last forty years of conflict as well as during the glittering victory and control of Kabul in 2021. It is in Pakistan’s interest to have a stable Afghanistan so that it can establish connectivity with the central Asian countries as well as militarily concentrate on Pakistan-India border. Afghanistan can be connected to the western alignment of CPEC from Chaman and the eastern alignment with Peshawar from Jalalabad. CPEC provides the shortest and most cost-effective route for landlocked Afghanistan to China, India, and the Indian Ocean. It is approximately 600 km less than the other nearest port, Chabahar, in Iran under the American embargo. Despite the periodical skirmishes between Afghanistan and Pakistan, it is in their interests to maintain their brotherly relationship between them and enjoy shared prosperity and peaceful co-existence.

CPEC can also make Afghanistan a transit route for energy-rich Central Asia and energy-starved South Asia. Improved geopolitical relations can ensure early completion of CASA 1000, TAPI, and the rail line from Uzbekistan to Peshawar via Mazar-i-Sharif and Kabul (Afghanistan). Uzbekistan, Afghanistan, and Pakistan are very keen to establish this connectivity with the help from the Asian Development Bank (ADB). All these changes can contribute to the accelerated pace of economic exchanges among the regional countries and emerging geo-strategic scenarios. Since the withdrawal of American forces from Afghanistan, China has made inroads, promoted various socio-economic development-related projects, and re-started mining activities. CPEC can significantly help to integrate Afghanistan with Pakistan, China, and beyond. From Pakistan’s point of view, CPEC and a stable Afghanistan will be game-changer in the geostrategic landscape of South Asia.

With the rise of geopolitical competition between China and the USA, the formation of QUAD and the Indo-Pacific economic framework (IPEF) led by the USA put China in a defensive mood, and an alternative supply chain from Malacca Strait became very critical for them. CPEC could become the alternative Chinese supply chain in case of blockade of Malacca Strait. The Malacca Strait is next to the Andaman Islands and seas, and the American and Indian naval forces dominate the Indian Ocean. Both of them are hostile to China. It is noteworthy to mention that 80% of Chinese energy imports pass through the Malacca Strait. A significant share of Chinese exports is also transported through the same route.

China’s strategic agreement with Iran and the promise of investing $400 billion have also enhanced the importance of CPEC. Following this historic agreement, the contract between Iran and India to develop “Chabahar port” fell into jeopardy. India is considered a very close ally of the US and Israel, and both are sworn enemies of Iran. This geopolitical equation is hurting the Chabahar port collaboration between Iran and India. Instead, the CPEC connectivity can be extended to Iran and other Middle Eastern countries. The Ukraine-Russia war disrupted the route to Europe via Russia. China might be interested in focusing on the route through the CPEC and the Islamabad-Tehran-Istanbul (ITI) route to reach European markets. There is already a functional train line from Islamabad to Istanbul via Tehran, and the route can be upgraded to make it more viable by establishing a link from Kashgar (Xinjiang/China) to Istanbul and then to Europe.

CPEC is also redrawing the geostrategic scenarios between China and South Asian countries such as Bangladesh, Pakistan, Maldives and Sri Lanka. Massive Chinese investment in physical infrastructure, energy, agriculture, and industrial activities, as well as strategic military cooperation, is transforming those economies and their geo-political paradigm.

China and Pakistan are now focusing on the second phase of CPEC, which is related to economic upgrading. This strategic partnership is further consolidating the power structure in South Asia. The arrival of Taliban 2.0 in Kabul and eventual joining with the CPEC+1 project, economic support from China, and military support and access to seaports from Pakistan is creating a formidable alliance among them. It is also noteworthy that the Taliban and most Kashmiris have a common ethnic and religious identity. The new geostrategic context will likely put more pressure on India, and India is unlikely to be able to afford a war-like situation with China and Pakistan simultaneously. Moreover, declining trust from the Western allies, economic slowdown, the rise of Hindutva, and religious intolerance are creating enormous challenges both for Indian economic growth and geo-strategic maneuvering capability. Indian design of isolating Pakistan is likely to fail thanks to CPEC and broader Belt and Road Initiatives (BRI).

Pakistan will have increased access to new markets. Relocating and developing labor-intensive as well as value adding industries to Pakistan can be a win-win strategy for China and Pakistan. The current geostrategic context is further increasing the importance of CPEC. South Asia’s geo-strategic scenarios will change if Pakistan can ensure internal political stability and develop various socio-economic projects in collaboration with China. CPEC and other BRI projects could be a game-changer and contribute to long-term stability, accelerated economic integration, and prosperity in South Asia. Indian participation to the BRI could further improve connectivity between China and South Asia. India’s isolation from this grand project is likely to hurt its economic prosperity and increase cross-border tensions.

Despite the considerable potential of the CPEC from geo-strategic and geo-economic points of views, there are several challenges in achieving its desired goals. The real challenge arises from Pakistan’s lack of good governance and political instability. Serious challenges might arise from the shortfall of the CPEC’s promised socio-economic transformations. Will China relocate its labor-intensive low-to-mid-tech industries to Pakistan? Will the enhanced connectivity attract increased FDI to Pakistan? How do the local sectors cope with the enhanced competition from foreign firms? Can Pakistan ensure peace, rule of law, and stability? How can Pakistan position itself vis-à-vis regional and global powers, including China, India, Russia, the USA, and West Asian powers? Thus, the CPEC and Pakistan might face a long list of challenges, and they need to formulate effective strategies to overcome them in the coming years. If these challenges are managed effectively, CPEC will propel Pakistan along with its South Asian neighbors into a prosperous period of growth and drive the countries towards becoming a powerhouse for investment and a vital strategic asset for China.