End of China’s Rail Freight Subsidies and Impact on Stakeholders
Rail freight is a cost-effective alternative to air freight for shipping cargo from China to Europe. Air delivery is expensive for both consignees and shippers while ocean freight transit times are slower, making rail transport a solution that sits in between.
Why Use Rail Freight for Shipments from China
As the borders between Europe and China remain open amidst the pandemic, rail freight is not facing any serious disruptions. There is also a trend of shipping more medical supplies and personal protective equipment by railway instead of by air freight. This is because demand has slowed down in recent months, and we are currently seeing more than 1,000 trains shipping goods from China, compared to about half that number in May 2019.
Benefits of Using Rail Freight
The main benefits are space availability and speed in light of the fact that supply and demand have increased. There are now more rail connections between Europe and China to move goods and compensate for the large number of blank sailings announced by ocean freight operators. Russia has also lifted some transit restrictions, thus allowing railway companies to move a wider selection of goods. This has resulted in transporting larger volumes along the eastbound route than westbound. Prices are also stable due to China’s subsidies on rail freight.
Impact of China’s Subsidies on Pricing
European logistics companies benefit from relatively stable shipping rates, with only slight decreases and increases due to fluctuations in supply and demand. Over the last 3 years, the Chinese government has been gradually scaling down railway subsidies for traffic between Europe and China. In 2018, subsidies accounted for up to 50 percent, in 2019 for up to 40 percent, and in 2020, for up to 30 percent of freight costs. The subsidies are expected to end in 2020. This makes it more urgent for freight forwarders to come up with new financial schemes. It is also possible that higher volumes of trade would compensate for price increases. Additionally, new technologies will aid railway operators in maintaining good value for money. Modernization, automation, and digitalization are already high on the agenda, and consultations between interested parties are expected to intensify.
Should China End Railway Subsidies?
Subsidies have a significant impact on three players – cargo owners, liner companies, and the government itself. The main goal of subsidizing rail freight is to increase competitiveness and maintain regular operations. For liners, this allows adjusting capacity to meet cargo owners’ needs while deriving economic profits at the same time. Cargo owners enjoy greater flexibility in that they consider quality and timeliness of service and freight rates before choosing a route and carrier. As the government and liner companies have vested interest, experts conclude that railway subsidies are indeed necessary, and a subsidy of about 20 percent is the optimal solution for all stakeholders. When subsidies are higher, this results in liner companies lacking incentives to improve operations and level of service.