Time for the EU to offer CEE an alternative to China

Since the establishment of its One Belt One Road Initiative (BRI), China has sought to boost its influence in Central and Eastern Europe in order to gain both a political and an economic foothold in the European Union.

Some regional leaders are pushing for closer ties with Beijing, and 2019 was a productive year for China-EU relations: negotiations on a number of agreements were concluded, including two covering cooperation in the aviation sector. The two parties made also good progress in enhancing the complementarity between the BRI and the EU’s Strategy on Connecting Europe and Asia.

However, China’s growing influence in CEE has met with much scepticism, especially from Poland and the Czech Republic. On the one hand, several businesses believe they are not participating enough in the BRI, while on the other, public opinion sees China more as a rival than a partner.

Prague-Beijing relations come to an end

One diplomatic spat in particular has made headlines in recent weeks: a dispute between Beijing and the Czech capital Prague which began when the city’s liberal mayor Zdenek Hrib approved a sister-city deal with the Taiwanese capital, Taipei.

The Chinese city of Shanghai immediately ended its own sister-city deal with Prague.

“They have wantonly interfered in China’s internal politics and publicly challenged the ‘one China’ principle”, said Shanghai’s city government.

“China should not decide which cities Prague befriends,” responded Taipei’s mayor, Ko Wen-je.

Prague’s approach places it in stark contrast with the line taken by the Czech president, Miloš Zeman, who has long been an advocate of Chinese investment opportunities. Opportunities that have never translated into reality.

“Chinese investment in the Czech Republic has been negligible,” says Martin Hála, director of Czech think-tank Sinopsis. “The scepticism of the Prague city government towards the PRC is a symptom, rather than a cause, of the general disillusionment with the failed policies towards China in the past five years.”

Is China a partner or an enemy?

“The loudest sceptics are in Brussels,” Dušan Proroković, research fellow at the Institute of International Politics and Economics of Belgrade tells Emerging Europe. “For example, Johannes Hahn [the former European Commissioner for European Neighbourhood Policy and Enlargement Negotiations] warned of the role of China in the Western Balkans and the possibility that Beijing will transform the region’s countries into Trojan horses that will one day be members of the EU. I think that the politically impotent EU, which is more concerned with internal affairs and less dedicated to geopolitical goals in a changing world, is frightened of China, which through the Belt and Road project is realising not only an economic but also a geopolitical agenda.”

During his latest visit to the region, US State Secretary Mike Pompeo underlined many times how important it is for the US to get back a foothold in Europe, as the void its departure created was filled by new players like Russia and China.

“In the current European parlance, China is a strategic competitor,” Mr Hála tells Emerging Europe. “Some countries in Europe, like Sweden or the Czech Republic, have had a worse experience with the PRC than others, and public opinion in these countries reflects that. In the Czech Republic, the closer relationship initiated five years ago only brought us scandals, rather than the promised economic benefits.”

However, although there are some governments that might be, to a certain degree, supportive of the BRI but are encountering resistance from the general public, the opposite is also true.

According to the European Union Chamber of Commerce in China, in countries like North Macedonia, Moldova and Armenia, the lack of a strong public debate about the BRI has meant that governments have generally had more leeway when it comes to taking part in China’s connectivity agenda. In Moldova, for instance, the BRI is part of negotiations for a virtually uncontested free-trade agreement with China.

And this, along with issues like the recent hitches in EU accession talks for Albania and North Macedonia, has the potential to create a shift in the geopolitical landscape of the region.

The scope of cooperation is not diminishing

Early in June last year, the Czech Republic’s taxation authority excluded the Chinese IT company Huawei from a public tender procedure to build a tax portal for almost 20 million euros, warning of security threats.

Despite that, Huawei kept investing in the region, announcing in July a plan to invest 700 million euros in Poland as well as the launch of a new Huawei engineer training programme in Hungary.

China is eager to keep good economic relations in Europe.

“As far as China is concerned, our views of Europe have always been positive and constructive,” says Wang Yi, China’s foreign minister. “We see Europe as an important cooperation partner and a priority on our diplomatic agenda. We believe that Europe has an important role in this multi-polar world, and a prosperous and stable Europe is a contributor to the development and progress of humankind.”

And the CEE region is in a plum spot.

“It has been shown time and again that mutually beneficial cooperation between China and CEE countries is a useful supplement to China-EU relations and conducive to balanced development and the integration process in Europe,” adds Mr Yi.

In particular, the Balkans are playing an increasingly important role, especially when it comes to infrastructure projects. Serbia tops the list  for the number of investments from China, now worth 10 billion US dollars.

“First, to the Chinese, all doors are open in Serbia,” says Mr Proroković. “There are no artificial bureaucratic obstacles, no political restrictions on Chinese initiatives. We treat the Chinese equally, as well as investors from Western countries, and this is very important to them, among other things, in the psychological framework. That’s why they come to Serbia gladly. Second, Serbia has a comparative advantage over other CEE countries. We have a free trade agreement with the European Union, Eurasian Union, Turkey, CEFTA countries. This is why we are becoming a logistics hub for some Chinese companies. Third, some of our state-owned companies, with a long and complicated history, could only find Chinese buyers.”

Political relations are also excellent: from even before the BRI was launched China has consistently defended Serbia’s hegemony over Kosovo in all international organisations.

Can Europe play a bigger role?

“We are partners, not rivals,” says Mr Yi. “Over the years, Europe has benefited tremendously from cooperation with China. Between 2001 and 2018, the EU’s exports to China grew by 14.7 per cent on average each year, more than twice the EU’s average export growth, supporting about four million local jobs. Investment of Chinese companies in the EU has also been growing. As of the end of 2017, Chinese companies have set up over 2,900 ventures in EU countries through direct investment, creating 176,000 jobs for the local people.”

However, these numbers are not shared by the European Union Chamber of Commerce in China, which is backing the idea that Europe is not participating enough in the BRI.

In its report, The Road Less Travelled: European Involvement in China’s Belt and Road Initiative, the chamber highlights the peripheral role currently played by European business, as well as the competition-blunting effects that the Beijing-led scheme is having on business worldwide.

“China’s colossal national champions – boosted by state-aid and cheap finance – are securing an unusually large proportion of contracts when compared to multilateral development schemes,” says Joerg Wuttke, president of the European Union Chamber of Commerce in China. “Europe needs to determine how to respond to this export of the China model to shield itself from market distortions and stay competitive in third-country markets.”

The chamber’s suggestion is for the EU to make the Connectivity Strategy a priority in order to create an initiative that both complements the BRI and offers a credible alternative.

At the same time, it also suggests finding realistic ways to allow companies to better compete with those that have already achieved massive scale and that receive state support.

Doing so will not be easy.