By Adéla Denková, Edit Zgut, Karolina Zbytniewska, Lukáš Hendrych and Marián Koreň
Shortened and edited version of the article can be read at EURACTIV.com.
China used the international economic crisis to elbow its way towards strengthening its position on the global market. “16+1” framework – the platform for China-CEE cooperation – was inaugurated in Warsaw in 2012 as a final landmark decision of the subsiding PRC premier Web Jiabao. 16+1 comprises 16 Eastern European countries* including all V4 states and 11 EU member states altogether. Since the current president Xi Jinping's 2013 announcement of flagship Belt and Road Initiative (BRI, also known as the New Silk Road), 16+1 has focused mainly on infrastructure to match this cooperation with the general global strategy of Beijing.
The underlying goal of the BRI, with 16+1 as one of its elements has been to “re-orient the entire economy of Afro-Eurasia toward China as its centre. But the hard economic statistics show that there's not much in BRI for V4 to get excited about. With a GDP per capita of just EUR 7000 in hard currency terms, China is still poorer than all four Visegrad countries, and its modest spending on BRI is diluted among dozens of partners hungry for investment. China invests very little in the region, buys little from the region, and sells little to the region. Europe-bound Chinese freight trains mostly pass right through” – professor Salvatore Babones from the University of Sydney explains EURACTIV.
For the time being, taking that economic reality into account, cooperation with China does not pose any viable alternative for the V4 versus the EU. Even though the conception of divide et impera might have crossed the minds of Beijing’s strategists, it is currently simply implausible. Still, “outside Eastern Europe, 16+1 is so obscure that it doesn't even have an English language Wikipedia page” – as professor Babones notices.
However, if the new EU multiannual financial framework reduces funding possibilities for V4 countries, be it as a result of Brexit and/or reshuffling of financial priorities, “then China’s offer could automatically become more attractive” – Jakub Jakóbowski and Marcin Kaczmarski from the Centre for Eastern Studies (OSW) warn.
The 1B1R is perceived as a vague concept in the Czech Republic. “The New Silk Road is just an umbrella for Chinese activities in Europe, Asia and Africa and does not have any concrete features. It is hard for Czech politicians and businessmen to imagine anything particular under the term,” Ivana Karásková from a Prague-based think tank Association for International Affairs (AMO) told EURACTIV. Karásková says the main aim of the initiative is to export Chinese overproduction overseas. The Indian Ocean is not a safe way and China is looking for other trade routes.
“China is the initiator and driving force of the whole project and we do not know yet how the Czech participation might and should look like. It may turn out that it is a viable project which will open new investment opportunities for Czech companies but it may also turn out to be a chimera,” Czech MEP Jiří Pospíšil (EPP) told EURACTIV.
The Czech Confederation of Industry expects that Czech companies might benefit from projects in manufacturing, energy, environmental technologies, tourism and other fields. So far, there have been 22 approved projects of cooperation between the Czech Republic and China within the BRI framework.
But the actual benefits of the initiative are still arguable. “From the geographical point of view, the New Silk Road will not go through the territory of the Czech Republic, regardless of the efforts of the Czech President Miloš Zeman. It will go through Poland,” Karásková explains.
However, the renewal of historical East-West transport corridors will strengthen trade flows from both sides, MEP Zahradil says. “If we are looking for ways how to diversify our trade portfolio and reduce our dependency on the European market, this may be one of the solutions, although not the only one,” Zahradil told EURACTIV.
He also stresses that Czech Republic was the fourth largest investor in China among the EU countries in 2016, just after Germany, France and the United Kingdom. “Among the main Czech players on the Chinese market there is the energy engineering company Škoda Praha, PPF financial group, engineering company TOS Vandsdorf or the transport engineering companies Škoda Transportation and IKENON Group,” lists Lukáš Martin, director of international relations at the Confederation of Industry.
Nonetheless, the deficit of mutual trade with China has not lowered. “In 2017, it amounted to around €16 billion. That was approximately €1 billion more than in 2016,” Martin said. In his view, it is necessary that Czech government keeps on supporting export to Asia, for example through business visits and attendance at international trade shows. However, entering and succeeding on the Chinese market is tough. Karásková reminds that so far, Czech companies and other exporters have struggled with non-tariff trade barriers and other administrative burdens.
The New Silk Road may not be just a chance for Czech enterprises. Beijing wants to use BRI in order to strengthen its political influence in the Czech Republic and other V4 countries. And the primary way how to do that is through business and investments. “The whole project is more an instrument of Chinese propaganda and reinforcement of Chinese influence in the whole world. If some party is to benefit from the cooperation, it is China and Chinese enterprises,” MEP Pospíšil said.
Growing Chinese influence in the Czech Republic is a topic among Czech stakeholders and NGO´s. They stress that some high-level politicians – with president Zeman as the most striking example – officials and media help Chinese government to expand their power in Europe. “Analyses of Czech media demonstrate that some actors with a significant influence on Czech discourse about China use the same terminology, rhetoric and arguments as the Chinese embassy does,” Karásková told EURACTIV.
“I think there is a lack of wider discussion about the broader impact of Chinese investments on security, especially when investments focus on strategic fields such as airlines, telecommunications, energy industry or manufacturing,” Petr Lang, a program director at the Prague Security Studies Institute comments.
MEP Zahradil points out that BRI has also a more general, geopolitical overlap. Closer cooperation of some countries with China influences the EU and its common policy towards the far East. Also, Chinese activity is a counterbalance for Russian ambitions.
“Strengthening cooperation between China and European countries is a problem for the EU because many EU members prevent an adoption of common position towards China, e. g. in the area of human rights, investments screening or a market economy status,” Karásková said. This is also why the 16+1 format may be seen as problematic by some. Zahradil, however, depreciates Chinese influence on the EU. “I did not notice any common European policy towards China”.
Zahradil advises that EU should use its strength to introduce common antidumping protection. “If there is a need to protect domestic production against dumping competition, it should be done together within the EU, still nothing prevents us from using the 16+1 format also bilaterally,” he adds.
The Orbán government was the first to leave its gates wide open for China in the region as part of its so-called “Eastern Opening” strategy announced in 2012. Its economic goal is to diversify Hungarian export markets geographically, directing at least one-third of Hungarian goods towards the East, mainly towards Asia. Since the democratic transition, successive Hungarian governments have strived to establish Hungary as an "economic bridgehead" for China, but Fidesz has undergone a shift in its approach to China ideologically. The Eastern Opening strategy, which has failed to achieve any significant results so far, has overgrown its trade policy dimension due to the fact that Viktor Orbán views Chinese-like authoritarian politico-economic models as examples to follow, and as valid challengers of Western liberal democracies. Orbán, who regularly depicts the West an ailing, decadent place and who is often grouped together with the openly autocratic Turkish and Russian presidents, said that the “One Belt, One Road initiative is built specifically on accepting each other”.
When joining BRI in 2015 Orbán indicated numerous times that he is completely unmoved by the reigning political system in China. “The old model of globalisation is over, ‘the East has caught up to the West’, and a large part of the world has had enough of being schooled on, for instance, human rights and the market economy by developed nations” – he stressed. And although Hungary plays no special role in Beijing’s regional strategy, his approach is certainly being appreciated in the Chinese capital. Moreover, Beijing surely values political gestures such as Hungary vetoing an EU initiative together with Greece and Croatia in 2016 - the trio blocked a joint resolution on the South China Sea – as well as the fact that Hungary stopped the European Union from signing a declaration standing up for lawyers and human rights activists being tortured in China. It is not negligible either in terms of China’s soft power efforts that a Chinese think thank first started its operation in Hungary or that the most successful market for the Hungarian residency bonds was China.
One aspect of the sides’ asymmetric bilateral relations is that large multinational companies operating in Hungary are responsible for more than 90% of exports from Hungary to China. At the same time, Hungarian small- and medium-sized enterprises (SMEs) have failed to gain positions on the Chinese market, as they are currently not producing goods China might be interested in – said Tamás Matura, a China expert and a professor at Corvinus University in Budapest. An expert working for MTA’s World Economy Research Institute, Ágnes Szunomár added that the export of Hungarian foodstuffs and food industry products to China had expanded considerably in past years, yet they still constitute a miniscule proportion of Hungarian exports to China – even though their performance must be applauded, it remains insignificant on the level of the national economy. While it is a welcome development that multinational companies in Hungary are doing well on the Chinese market, this will not help the Hungarian trade deficit with China. Considering the fact that the decisions on most significant trade agreements are made in the faraway centres of multinational companies, any incumbent Hungarian government will have zero influence on these processes. Matura emphasised that the only reason our trade deficit fell with China some years ago is that smart phone factories were closed and thus Chinese import volume to Hungary fell.
Additionally, the Orbán government has failed to bring any new, meaningful Chinese investments to Hungary in the past eight years. Most of the significant Chine investors in the country (Huawei, ZTE, Lenovo, Orient Solar) arrived before 2010. In the case of Wanhua, the transaction statistically happened in 2011, but the agreement on it had been concluded already in 2009. The Hungarian government celebrates the agreement on the Belgrade-Budapest railway implemented in the frames of the 16+1 accord as a spectacular result, regardless of that fact that it is a project where political considerations came before economic ones. “There is no doubt that the 16+1 initiative will increase Chinese influence in CEE, but it also creates a win-win situation and brings new opportunities to develop the region” – emphasized Péter Medgyessy, a former Hungarian prime minister to Political Capital.
Currently it is hard to see why the gigantic investment planned to be financed by a Chinese loan, backed by the Hungarian state’s guarantee and built by Chinese building contractors would benefit Hungary, especially if one considers the fact that the line does not touch any significant Hungarian cities. Moreover, the Hungarian government did not publish an open tender for the construction of the Hungarian stage of the railway development. Instead it elected to lay down the details of the project’s implementation in a Chinese-Hungarian bilateral agreement, which prompted the EU to launch an investigation. Matura believes that the China 16+1 cooperation in itself poses no threat to the unity of the European Union, but it heightens tensions between Budapest and the EU. “I firmly believe that the main aim of China’s influencing efforts is Western Europe, and not Central and Eastern Europe” – he added. According to Szunomár, China has an increasing economic presence in the region as a result of its infrastructural investments; however, this does not automatically bring about political efforts at expanding the country’s influence. She believes the political considerations are there on the Hungarian side instead, as they suppose China could become a new ally if Hungarian relations with the EU became tense.
Poland decided to take advantage of Beijing’s new Go Global outlook. In order to enhance mutual cooperation and encourage inflow of foreign direct investment to widen the array of financing and investment opportunities provided by the EU, as well as other partners like the US / attractive alternative to EU funds. Strengthened cooperation has started to advance already in 2010 with the Shanghai EXPO and has gradually intensified with promotional campaigns of business exchange with Poland managed by the Polish government, as well as with political visits on the highest level (Bronisław Komorowski, Wen Jiabao, Xi Jinping, Beata Szydło).
Along with other CEE countries China treats Poland not only as a new trade and investment partner in itself but also as a “side door” to richer Western European markets. In cooperation with CEE countries Beijing has pushed forward its claims to access the EU market in order to export production surpluses, which – taking the size of this second biggest world economy (WEF) – translates into drastic trade deficits on the side of relatively small V4 economies, with Poland suffering from the largest trading asymmetry. Simultaneously, Beijing strives also for more of a quality business opening onto Europe using V4’s closeness to the major European business players – introducing its own brands and acquiring European certificates to ensure their better outreach in the Western world.
In terms of infrastructure investment in the EU-11 out of the 16, ”cooperation on infrastructure remains close to zero, despite their intensive political contacts with China,” due to the incompatibility of the Chinese offer with the EU law (assuming state aid and the lack of open tenders), as Jakub Jakóbowski and Marcin Kaczmarski from the Centre for Eastern Studies (OSW) explain.
As V4 countries have been recently perceived by some as rogue democracies, also in Poland itself cooperation with China has been regarded with concern – both as political and economic opportunity but also as a risky business ground and potentially a further distraction from the pro-European political course. Thus, despite intensifying volume of both economic exchange but also of political engagement, Poland has “observed the lessons of Chinese investments elsewhere and taken a more cautious, measured approach”, claims dr. Justyna Szczudlik from the Polish Institute of International Affairs (PISM).
Poland’s PM Mateusz Morawiecki went one step further during the January Davos World Economic Forum openly criticizing Chinese approach claiming it’s rather Beijing that deserves harsh words as regards their trade strategy than Trump’s Washington. “When I see our trade balance with China and 1:12 proportions to Beijing’s advantage, situation which is alike in other Central European states, it makes me think if we don’t push certain issues upside down. The practical possibility of providing services by foreign actors [in China] is extremely difficult”. Indeed, it is difficult, time-consuming and requires huge investment, especially to win over the plethora of the local competition and also already adapted – and geographically much nearer – Australian and New Zealand’s produces. Despite other EU countries encounter similar problems with successful entering the Chinese market, Poland is on the 15th position only in the whole EU as regards the volume of export to China, overtaken also by Hungary and Czech Republic.
Still, China remains “Poland’s largest trading partner in Asia. China is the top third source of Polish imports (after Germany and Russia) accounting for approximately 9% of Poland’s total imports. In 2015, export to China amounted to 1% of Poland’s total exports positioning it on 21st place in Polish exports’ destinations” – as Günter Heiduk and Agnieszka McCaleb show in the paper “Chinese investment in Poland” (2017). Poland’s export to China has been dominated by mining machinery and copper. Also the Polish food industry tries to enter the dynamically growing Chinese market with an example of the diary making its strength in the Chinese e-commerce sector – Jakub Jakóbowski, expert at the Centre for Eastern Studies (OSW) catalogues.
As analysts demonstrate, despite the quick and significant rise in Chinese foreign direct investments (FDIs) in Poland, their volume also remains minor and focuses on construction and machine sectors lacking significant infrastructure projects, in Poland itself, as well as in other V4 countries – despite as mentioned above the 16+1 framework was planned to facilitate such opportunities. The only exception is the flagship Belgrade-Budapest 336 kilometre rail line investment which ended with the EC’s probe versus the Hungarian part of the project and with a final change of cooperation conditions on the Budapest’s side. Still, “according to PAIZ (Polish Investment and Trade Agency) larger Chinese investments are expected in 2 years. The overriding issue is that Chinese firms are mostly interested in M&As [mergers and acquisitions] and infrastructure projects while Polish government wishes to have greenfield investments [creation of companies from scratch] that create jobs for Polish citizens”, according to Heiduk and McCaleb.
All in all, Polish decision-makers consider China a challenging partner and competitor. However, due to its experience in high scale and high quality (at least on the national level) projects as well as its economic prowess, building stronger ties with China is also seen as potentially worthwhile. Clearly, Poland is trying to solve the same "Chinese dilemma" that is faced also by other EU countries.
Slovakia is the country with the least developed relations with China among the V4 states, according to Richard Turcsanyi from Bratislava-based Institute of Asian Studies. Notwithstanding the political orientation, all Slovak cabinets since 1993 have implemented „depoliticized“ foreign policy approach towards China.
But the Chinese-Slovak relations gained new political momentum when Slovak president Andrej Kiska officially received Tibetan spiritual leader Dalai Lama in 2015. This led to strong criticism from both Slovak prime minister Robert Fico and Chinese diplomacy. „Kiska's move has clearly damaged Slovak-Chinese relations. There is nothing mysterious about it“, Slovakia's Prime Minister Robert Fico commented.
It is not clear whether this moment was the main impetus for the Slovak executive to actively correct the relationship with the second largest economy in the world. The fact is that Slovak government has since adopted „The concept of the development of economic relations with China“. This means that Slovakia is the only country in Visegrad group that has adopted its own specific „China strategy“. The Ministry of Economy also presented new Action plan strategy for the future Slovak-Chinese relations.
These two documents provide further insights into the Slovak Cabinet visions of the future relationship with the Asian powerhouse.
These documents show that restoration of relations with Beijing – from the government’s point of view – is seen as a tool to achieve a range of economic goals.
Chinese companies have recently taken an active interest in investment opportunities in Slovakia, said a spokesman for the Slovak Investment and Trade Development Agency Richard Dírer (SARIO). So far, the Asian hegemon has focused in particular on buying shares of mature companies that are already well established.
The Slovak Ministry of Economy stipulates that these are mainly „public projects with guaranteed performance, especially in the field of energy and infrastructure“.
„Over the past years, China has submitted an offer to buy two-thirds of Slovak power plants from Italian company Enel. Last year, Chinese have also shown interest in the biggest Slovak steelmaker owned by US. Steel company“, Lukáš Lipovský, an analyst from Capitalmarkets told EURACTIV.
In fact, the amount of Chinese foreign direct investment in the country remains very low compared to other European countries. „The share of Chinese investment in the overall foreign direct investment (FDI) is less than 1%“, Dírer told EURACTIV, but added that the situation is rather similar to situation in the rest of the Visegrád Gruop.
However, Lipovsky still thinks that Slovakia offers very lucrative landscape for Chinese investments due to its geographical location and thanks to the present stronger economic growth.
Whereas China invested €39 million across the Slovak territory in the 2012, the amount of Chinese investment has declined in the following years. At the end of the 2010, Chinese FDI amounted to EUR 33 million, according to the National Bank of Slovakia.
The Slovak government also seems to be very keen to develop trade relations with the world’s most populous country, as Bratislava considers it a great opportunity. The Slovak ministry of economy admits that flows of goods between the two countries are rather very unbalanced, as the Slovak export remains marginal.
Numbers are clear: In 2016, with no other country in the world Slovakia had more passive trade balance, than with China.
„It is not only desirable but in order to achieve change in the commodity structure of mutual trade it’s also essential to search for the new forms of cooperation... because almost 70 percent of Slovak export to China is related to automotive industry production," government sets out its plan in the document.
The Ministry of Economy notes that the interest of Slovak entrepreneurs to invest in Africa has „increased sharply“. At the same time, however, it admits that „closing the gap in the trade balance can only be achieved with gradual reducing of the imports from China, reducing cost advantages of its producers and with higher level of small and medium-sized businesses activity.“
The government thus singled out as one of its priorities the need to develop BRI. The main goal of Chinese governments initiative is the resurrection of Eurasian economic corridor and thus provides Slovakia with a unique opportunity to become its main gateway.
Slovakia signed the cooperation agreement on BRI with China in 2015, becoming the one of the first among 16+1 format countries. Currently, almost all the trains from China enter Europe via the Polish route. While Slovakia's northern neighbour has its wide-gauge railway cutting the country from the eastern to the western border, the Slovak wide-gauge line terminates in eastern Slovakia. Government therefore wants the second largest city of Košice to became the biggest transit hub in Eastern Europe. „Naturally, these trains should not go back to China empty. We need to think it over“, the Minister for Transport Arpád Ersék commented.
The project captured bigger public attention last year, when the first trial train with containers from Dalian - largest port of the eastern China arrived in Bratislava. On the occasion, Dana Meager, the Slovak Government's Deputy Office for the Silk Road Project, described it as „one of the most important pillars of further development of the national economy“.
However, Richard Turcsanyi warns that the Silk road is not just an economic initiative. He thinks that, first of all, it serves as a tool for expanding Chinese political influence in the Central European region and adds, that „the same can be said about the 16 + 1 initiative“.
„The project, in my view, has no sufficient economic justification that could explain the dynamics we are witnessing“ Turcsanyi told EURACTIV.
Turcsanyi refers to the fact, that the government's conception doesn't pay sufficient attention to the political or security threat associated with opening up to the Chinese economic presence. A number of general references to the issue of respect for human rights can be found in the document but it lacks any mention of the Chinese political system. It also leaves intact the measurement and control of risk arising from Chinese investments to the strategically sensitive companies such as Slovenské elektrárne and steel company US Steel.
„It is necessary to take into account the ownership structure of each company as well as the states’ position in these entities“, Ministry of Economy spokesman Maroš Stano said.
Turcsanyi also stressed that Chinese investments cannot be assessed on the basis of black-and-white thinking nor shouldn’t be „demonized“ just because it is a matter of the principle. „If China, for example, buys US Steel and invests money in modernization of production, then we can say that such investment is likely to be very positive“.
At the same time, he concedes that the rise in investment volume may also lead to reinforced political influence of Beijing in Slovakia. In this respect, the information about Chinese energy and investment group’s (CEFC) plans to buy TV Markiza, one of the largest TV stations in Slovakia, has triggered public concerns. CEFC already acquired fifty percent share in one of the largest financial corporate groups – J&T Finance Group.
But Turcsanyi thinks that political destabilisation or subversion of state power is not in the Chinese interest. „Its main objective is simply to ensure that Slovakia won't raise a critical voice towards Beijing on the international field and to make sure that Slovak politicians won't meet with Dalai Lama again.
* CEE countries partaking in the 16+1 framework: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, Slovenia