BA thesis
Degree: Politicologie
Continuity and Change in Global Capitalism Lecturer: dr. J. Fichtner
Second reader: dr. P. Schleifer Name: Just van den Hoek
Email address: justvandenhoek@hotmail.com Student number: 10982957
Date: 25-06-2018 Word count: 8450
China on the Rise in Central and Eastern Europe: How the EU is Internally Divided
Introduction
China’s impressive development trajectory over the last past decades has not gone unnoticed in both the media and within academic circles. China’s omnipresence is reflected by many contemporary discussions about a wide variety of topics in the realm of International Relations in which China is somehow included. A current hot topic among informed citizens and policymakers worldwide is the so called Belt and Road Initiative (BRI), sometimes also referred to as the One Belt One Road Initiative. The Chinese state-led Initiative comprises a series of infrastructure development projects that aim to promote economic cooperation among a significant number of countries around the globe, as part of China’s growing ambitions at the international stage (Ferdinand 2016; Zeng 2017). Ultimately, The Silk Road and Maritime Silk Road, the two major transport links of which the BRI consists, are designed as vehicles to bring about increased trade between China and Europe. The BRI allegedly serves Chinese interests in various ways. However, the question is to what extent Europe, more specifically the European Union, can also benefit from this Chinese-led project. Even though the BRI might well contribute to the expansion of trade with China in general and enhanced infrastructure and connectivity in especially the peripheral regions of Europe, there are inevitable negative consequences of a shift in Chinese-European relations in which China takes the lead whilst European countries merely follow. One immediate problem is that the EU has been conveniently bypassed throughout the process of designing and implementing the Initiative, since China has intentionally and successfully circumvented direct engagement with the EU (Stanzel 2016). Instead of negotiating with the EU as a whole, China prefers to seek arrangements directly with the member states, most notably the Central and Eastern European (CEE) EU member states (Jakóbowski and Kaczmarski 2017).
This has several political implications, of which the internal division of the EU and the resulting weakened unity of the bloc might be the most salient. In times when the EU is already often
struggling to keep an expanding array of internal crises manageable, indirect involvement from China due to the BRI seems to be further eroding the EU (Gaspers 2018; Kynge and Peel 2017). Exploring the exact ways in which this process manifests itself is highly relevant as it may shed light on the reality behind the harmonious rhetoric of China regarding the Initiative. Therefore, the research question this paper aims to answer is as follows: In what ways is the EU internally divided by Chinese involvement in Central and Eastern European EU member states as a result of the Belt and Road Initiative? In order to answer this question, qualitative methods will be used. A diverse range of academic and media sources will be consulted. These include academic articles, reports by specialised think-tanks, commentaries of EU-China relations observers and media coverage of current developments.
By analysing the materials mentioned a clear picture emerges regarding the manners in which Chinese involvement related to the BRI internally divides the EU. An inherent result of the increased engagement of CEE countries with China is internal competition for Chinese investments which ultimately undermines a collective EU approach towards China (Godement and Vasselier 2017). In addition, the selective Chinese involvement in EU member states leads to an ever greater divide between Eastern and Western member countries of the EU, which already existed separately from the BRI. This is because China uses its economic leverage to influence political actors (Cerulus and Hanke 2017). Again, this results in the complication of maintaining coherence in the policies of the EU directed at China.
In the next section, an overview will be given of what the BRI actually entails and how the Initiative is to be meaningfully interpreted. A brief discussion will be held about how it serves Chinese interests and how it can be understood within the broader foreign policy strategy of China. The section thereafter scrutinizes the reasons why China has been continuously bypassing the EU. It also addresses the complexities for maintaining a cohesive policy towards China that arise from the EU’s institutional framework. Subsequently, an overview of Chinese involvement in CEE EU member states will be given. A crucial aspect of this section is an overview of financial data that can be related to the BRI. Then, the implications of this involvement for the internal division of the EU will be discussed. As will become clear, the dynamics of internal division manifest itself in multiple directions, because Eastern member states are set up against each other but more importantly against their Western counterparts as well. The last section before the conclusion, in which an informed answer to the research question will be formulated, briefly discusses the significance of the recently proposed new 7-year EU budget. This is necessary to take into account because it might not only have detrimental consequences for the relationship between member states, but it also increases the likelihood of growing Chinese involvement in the CEE region in the foreseeable future.
What is the Belt and Road Initiative?
The earliest indication of the existence of plans for the Initiative came in 2013, when Xi Jinping, paramount leader of the Chinese party-state, exposed his views for the establishment of an ‘economic belt’ which ought to link China with Central-Asian countries, Russia, the Middle East and Eastern and Western Europe (Ferdinand 2016: 949-950). This overland rail route was soon referred to as the ‘new Silk Road’, thereby exploiting memories of China’s glorious ancient past. Several routes, which are meant to be operational simultaneously, comprise this Silk Road, so it is essentially not a single route. The fact that China, but also other countries involved in the BRI, will not be
dependent on one or few routes is a particularly convenient reassuring notion for them. Firstly, there is a northern route, which runs from China to Moscow. From there, 2 subsequent routes are to be followed: either up north to the Baltic States or through Belarus to the European mainland. The latter option also figures in the central route, after transports have passed through Kazakhstan. Finally, the southern route also consists of two options. In one, the route goes from Kazakhstan through Turkey into Europe. In the other one, before the route reaches Europe through Turkey, it passes Kyrgyzstan, Uzbekistan, Turkmenistan and Iran (Makocki 2018: 23). A visual representation of the multiple routes comprising the Silk Road is given below.
Table 1: Northern, Central and Southern routes of the Silk Road
In addition, plans were announced for a sea route, the ‘Maritime Silk Road’. This route would link China with South-Asian countries and again with Europe, through the Persian Gulf (Ferdinand 2016: 950). Over the course of the years, the different plans encompassing the Belt and Road have been somewhat modified every now and then, depending on political barriers which eventually have come up or due to new ambitions from the Chinese. The most recent update on what constitutes the BRI came in 2016, when it was emphasized that the triangle between the Black, Baltic and Adriatic Sea would take a central position in the Initiative (Godemont and Vasselier 2017: 67). This area, spanning from the Middle East to Eastern Europe, is of considerable significance because the key transport hubs that are located there are precisely at the intersection of Asia and Europe. It is of vital importance that improved connectivity in this area can guarantee the smooth facilitation of
increased trade. In the ideal situation, this economic goal results in a win-win situation for China, the predominantly underdeveloped countries along the route and industrialized Western Europe. China, to start with, can export in areas where it has built up overcapacity. The desired increase in Chinese exports is encouraged by the fact that the majority of hubs along the Belt and Road Initiative will be fully or at least partly controlled by China (idem: 73). Further, Central-Asian and Middle Eastern countries can finance infrastructure developments in areas where they are most needed and
European countries can strengthen their already powerful position in the global economy by the BRI. These hugely ambitious plans, of which the majority has not been fully implemented yet, are mainly designed for the longer term. From the outset, it has been stressed that the Chinese are not too concerned with instant results. Together with the political difficulties that inevitably will emerge throughout the implementation phase of the Initiative, this explains why the official timescale for the BRI is set at roughly 35 years. The following overview of elements which are involved in the
implementation of the Initiative shows that this is not a conservative estimate. Constructing the Silk and Maritime Silk Road involves not only the enhancement of existing infrastructure, but more importantly also the creation of state-of-the-art transcontinental railway lines, highways, (parts of) ports and cables and pipelines, to name just a few areas where investments are needed (Ferdinand 2016: 950).
Would this all be accomplished, then an approximate 4 billion people would be affected one way or another by the BRI. In economic terms, what now constitutes one third of global GDP will be somehow involved in the Initiative. In other words, the economic potential of the BRI is enormous and can truly have a global impact. To facilitate the necessary financial contributions, the China Development Bank has so far pledged almost 1000 billion dollars. This is only reserved for
investments which take part outside of China (ibid.). Moreover, the Asian Infrastructure Investment Bank and the Silk Road Fund will also contribute significantly. It remains to be seen whether the project will be ever fully operational in the all-encompassing form that is envisioned, but the intended results are undoubtedly mind-blowing.
There are a number of ways in which the BRI is designed to serve Chinese interests. Part of the rationale behind the announcement of the project is related with the country’s expanding economy, apart from the economic goal of increased trade mentioned earlier. Due to its rapid development over the past decades, companies in China have started to look for profitable possibilities to capitalize their large budgets. State-owned enterprises in particular need a way to keep growing. A concomitant goal of making full use of global investment opportunities is that these companies are becoming more competitive in relation to their counterparts worldwide. In fact, all of the economic
interests that China wants to pursue are related to its desired internationalisation of the economy (idem: 950-951). A related way to achieve this is to export its sophisticated infrastructure technology. In this way, more and more actors in the global economy will become aware of what China has to offer in this respect. Another way in which the BRI might serve to bring about greater
internationalisation of the Chinese economy is the gaining of experience with the usage of the renminbi as a truly international currency (ibid.). As China’s economy is already very much on the way to become globally influential this seems nothing but a logical next step.
These economic considerations cannot be separated from the broader logic that underlies the Belt and Road Initiative. Before the foreign policy goals that are incorporated in the BRI are discussed, it is useful to highlight that the Initiative also endeavours to contribute to domestic stability. This is because the underdeveloped Western part of China takes up a central position in the BRI, since all trade routes pass through it. The region is hoping that it will become more prosperous resulting from the projects under the umbrella of the BRI, after it has been neglected for decades. The party-state had always been more interested in the more urbanised East, where opportunities for development were more obvious. Not only does the Western region desperately need investments, it also
continues to be a source of political instability (Makocki 2018: 23). The wide variety of ethnic groups that reside there and some unresolved territorial disputes with neighbouring countries are
frequently worrying the centralised regime in Beijing. It is hoped that some of these problems can be mitigated through the incremental implementation of the Initiative.
With regard to China’s neighbouring countries, the BRI is a way to ensure intensified foreign policy cooperation. Through the facilitation of possibilities for economic growth, the Asian countries are inclined to seek closer alignment with Beijing (Ferdinand 2016: 950-951). In this way, it will become easier for China to pursue its security interests in the region, which are frequently contested. Limiting the risks of military confrontation on the Asian continent is a necessary prerequisite for the
continued expansion of influence on the world stage that China ultimately seeks. The BRI can also be interpreted as an attempt to counterbalance American influence in the Asian sphere, which is a related crucial step to achieve this overarching goal. By devoting more attention to long-lasting relationships with third countries in particularly the region westwards from China, the country might be able to pick up its desired role as a regional leader. This would then in turn somewhat balance the relationship the United States has with countries in (South-) Eastern Asia, which can be illustrated by the recent establishment of the US-led Trans-Pacific Partnership, in which China is not involved (Zeng 2017: 1170). Even though China has proven that it maintains a more assertive foreign policy under Xi Jinping in military terms, this inventive strategy shows that it also values the usage of soft power, through closer economic cooperation.
It follows from the previous discussion about the variety of goals the Belt and Road Initiative intends to help achieving that they are intertwined and cannot exist separate from one another. The
internationalisation of the Chinese economy, domestic stability, the expansion of regional influence and building a front against American dominance are all ways in which China can become more of a global powerhouse. Notwithstanding, the most tangible and immediate result of the BRI, the expansion of trade across Eurasia and its implications for Europe, is the focus of this paper. In the next section, the reasons behind the absence of direct engagement between China and the EU regarding the Initiative will be scrutinized.
The difficult relationship between the EU and China
To understand why the EU as a whole has not been able to participate directly in the Belt and Road Initiative, it is necessary to take mutual disappointments between China and the EU over the course of the last years into account. In general terms, China has been negatively surprised about the EU’s lack of ability to present itself as a reliable and cohesive actor on the world stage (idem: 1163). This relates to the difficulties the EU has recently experienced which prevented it from developing itself as a global actor. In this regard, the concept of the ‘capabilities-expectations gap’, frequently used to describe the EU’s shortcomings in the realm of foreign policy, may be of explanatory value. This concept refers to the discrepancy between the expectations global actors have of the EU and its actual capabilities to live up to those expectations (Smith 2017: 180). A division between the ‘high politics’ of security matters, an area where the EU is still developing, and the ‘low politics’ of economics, where the EU is a key global actor, explains the current situation.
The problems which are referred to are the difficult and harmful trajectory that followed in response to the eurocrisis, the EU’s indecisive stance regarding the military conflict in Ukraine which allowed it to persist and the unsupportive popular opinion towards European integration that came with the growth of power of populist politicians. The endurance of these problems allegedly made China move away from its initial willingness to pursue direct engagement with the EU. More dramatically, it strengthened China in the belief that it could not rely on the EU, especially regarding
macro-economic issues, which are at the core of the BRI (Godement and Vasselier 2017: 65).
China’s view about the EU in general, and the lack of understanding about its organizational structure that is apparent even within high-level policy circles, has not helped either to build support for the direct involvement of the EU in the BRI. Zeng (2016: 1171) notes that it is very uncommon in China to make an adequate distinction between the EU as an organization, European countries and the concept of Europe in general. Even when Chinese policymakers do their best to get a sufficient understanding and are willing to acknowledge the inevitable role the EU possesses, they emphasize that the EU is at best a regional organization composed of sovereign states (Godement and Vasselier 2017: 10). While it cannot be said that they are wrong, this approach indicates a lack of interest in the EU as an entity to engage with.
There have also been considerable disappointments on the part of the EU which continue to prevent the development of more positive economic relations between the EU and China. To date, frictions about imbalances regarding the investment climate in China guide the relationship. Later on in this paper this will be scrutinized more thoroughly but for now it is important to realize that while Europe imposes rather welcoming conditions for international investors, China maintains a policy which prohibits or significantly hampers market access (Hanemann and Huotari 2018a). Despite the advancement to which China’s economy has developed, this lack of reciprocity reflects the fact that the Chinese economy is still very much protected by the party-state. Other constraining factors in the relationship between the EU and China are disagreements concerning the rule of law and human rights (Godement and Vasselier 2017: 14). Also these issues will be addressed in more detail later on. The troubled relationship between the two actors can be illustrated by the fact that there have been very little mutual consultations on a wide range of issues. Positive observers may note that the EU-China 2020 Strategic Agenda for Cooperation was adopted in 2013. In fact, very few resulting action points have actually been implemented (idem: 22). Moreover, the EU-China economic and trade
dialogue, which is supposed to take place annually, did not take place in 2011, 2012 and 2014 (idem: 21). From a Chinese point of view, this seems understandable since it was exactly during this period that the internal problems of the EU referred to earlier were reaching its peak. It may not come as a surprise that despite European attempts to engage with China in the Fund for Strategic Investments, almost no tangible results have followed (idem: 52).
In addition to the sobering reality of current relations between the EU and China on economic issues, the EU’s governance structure is also a hugely important factor to take into account in order to understand the absence of direct engagement between the EU and China regarding the BRI. One immediate problem is that foreign policy, as opposed to trade policy, is not exclusively in the hands of the EU (Zeng 2016: 1171). When it comes to the matters resulting from the BRI, it is hard to make a clear distinction between these two areas. The result is that most matters are regarded as foreign policy, since the member states conveniently retain their sovereignty in most cases in this realm. They resist transferring it to the supranational level, because serious concerns among the member states emerge when their authority on foreign policy, with its inherent focus on security aspects, would have to be shared (Smith 2017: 167).
Notwithstanding this, the EU has been able to develop its foreign policy tools over the years. However, the complexity arising from the variety of instruments embedded in the EU’s institutional arrangements does prevent a smooth functioning of common EU foreign policy. How this complexity plays out in practice is described as such: ‘[…] the implementation of EU foreign policy often requires
various decision-making procedures and authorities, and involves numerous instruments, which invites turf battles or other disputes among EU member states and between EU states and EU organizations’ (idem: 172). The problems associated with EU foreign policy are partly due to the fact
that its development trajectory has been far from linear, as ad hoc decisions have often been made in response to emerging crises (idem: 168). Moreover, decision-making requires unanimity, while finding a consensus among the EU’s member states is problematic due to divergences of their respective interests.
When it comes to member states’ approaches towards China, it seems that several groups with differing interests exist. The most salient dividing line is between Northern European member states and the other member states. For the first group, more often than not the most powerful in Brussels, solving the described frictions about reciprocity issues and market access is generally considered to be the most important priority. For the remaining member states these matters are not as
important, since they are mainly focused on welcoming as much Chinese investments as possible (Godemont and Vasselier 2017: 18). Especially Germany, France and Italy are commonly accused of pursuing their own interests without taking those of the other member states into account (Gaspers 2018). Furthermore, groups of member states may agree on economic policy towards China but may not agree on the way in which China should be approached on other, more political issues
(Godement and Vasselier 2017: 17). This further reduces the likelihood of finding consensus in the EU’s foreign policy towards China.
In sum, the ambiguities that arise from the co-existence of a common EU framework and the sovereignty of member states concerning foreign policy complicates the maintenance of a collective European approach vis-à-vis China. Even when the EU is able to exert its authority solely, coherence is hampered by the highly complex nature of the EU’s institutional arrangements and the divergences
of interests of its member states. The absence of a cohesive approach towards China, taken together with the described mutual disappointments that are rooted in recent years, prevented China from seeking direct engagement with the EU on the Belt and Road Initiative. The exclusion of the EU as a whole paved the way for its internal division, as China preferred to approach the member states directly. Before the focus will be on the ways in which the EU is internally divided, Chinese involvement in the Central and Eastern European (CEE) region will be analysed. The EU’s member states located there have received a lot of Chinese attention in the context of the BRI, as will become clear.
Chinese offers to the CEE region
Extensive Chinese involvement in the CEE region is necessary because the area is of strategic significance within the Belt and Road Initiative. The region is located right between the end of the Maritime Silk Road and just before Western Europe (Kratz 2016: 7). Also the overland routes
constituting the Silk Road pass through the CEE area. The CEE region is indeed envisioned to provide a key link between the Asian countries along the two Roads and the prosperous Western European market. In this way fulfil the CEE countries a vital function in the Initiative. Conveniently for China the region appeals not only due to its strategic location, but also because the area offers a pool of highly qualified yet relatively cheap personnel. Moreover, the investment climate does not impose a lot of restrictions (Stanzel 2016: 1). Both these two characteristics are of the utmost importance due to the very nature of the BRI, as major investments are required for the construction of infrastructure projects.
Chinese attempts to involve the region in the BRI have been warmly welcomed, since it provides an opportunity for Central and Eastern Europe to develop and thereby somewhat catch up with the rest of Europe. The CEE region lags behind in many respects, of which infrastructure is one of the areas where investments are most desperately needed (Gaspers 2017). Another reason why Chinese involvement is supported is because it offers a way to diversify the trade relations of many countries in the region. Currently, the CEE countries are still very much dependent on Russia (Popescu and Secrieru 2018: 117). This explains why China is encouraged to fill this gap.
China has set up the so-called ‘16+1’ platform in 2013 in order to institutionalize the implementation of the BRI in the region (Godement and Vasselier 2017: 64). The name refers to the 16 European countries who are involved apart from China. Of those, 11 are EU member states: Slovenia, Romania, Poland, Slovakia, Hungary, Latvia, Lithuania, Estonia, Bulgaria, the Czech Republic and Croatia. The remaining 5 non-EU members are all countries located at the Balkan. The platform facilitates the discussion of all relevant issues related to the BRI. Delegations from China and the CEE countries meet annually at official 16+1 summits where agreements are negotiated (Stanzel 2016: 1). In
addition, a variety of other small-scale official events where cooperative activities are conducted take place on a more frequent basis (Godement and Vasselier 2017: 66). Day-to-day coordination of the 16+1 framework is facilitated by a secretariat within the Chinese Ministry of Foreign Affairs, where Chinese high-level officials work on the implementation of the BRI in the CEE region. In turn, each of the 16 CEE countries have also appointed officials to work in this secretariat (Kynge and Peel 2017). It seems surprising that China has been so eager to approach the CEE countries, as opposed to its lack of ambition vis-á-vis the EU as a whole. The unequal terms on which the CEE countries are brought on board may help to explain this discrepancy. In fact, despite the harmonious cooperation
that seems to exist within the 16+1 platform, China is the one and only actor that decides whether and, more importantly, how cooperation takes place in the framework. This can be illustrated by the fact that China tries to do everything in its power to suppress any kind of cooperative activities between the CEE countries themselves. For example, alignment in the 16+1 framework between the Visegrad countries, a regional alliance consisting of Hungary, Poland, Slovakia and the Czech Republic since 1991, is to a large extent undermined by China (Godement and Vasselier 2017: 68). The way in which China does this relates to a broader point about the platform. Even though it is officially presented as a framework for multilateral cooperation, and whilst it is obvious that it does indeed fulfil this function, bilateral transactions are as important, if not more (Kynge and Peel 2017). Seeking bilateral cooperation without conforming to the official multilateral character of the platform makes it easier for China to negotiate agreements on its own terms.
In order to get a better understanding of the actual impact of the various agreements resulting from the 16+1 platform, an adequate overview of financial investments made or pledged so far is needed. However, multiple problems arise. First, the lack of transparency surrounding the investments of China in the CEE region is problematic. Concomitantly, the specific type of the financing of infrastructure projects and construction activities, which is the main category of activities taking place in the context of the BRI, varies significantly (Jakóbowski and Kaczmarski 2017). It is not
possible, for example, to merely look at Chinese foreign direct investment (FDI) in the CEE region. FDI is a commonly used measure for financial flows between countries or regions. FDI is meant to capture those investments that have some sort of significant impact on the power structure of companies (Schwartz 2010: 138). Generally, stakes of at least 10 percent in foreign companies are included in this measure.
Whilst this is still a useful measure to consult, Chinese FDI in the CEE region cannot be equated with all investments or types of financing that can be related to the Initiative. In fact, most of these are not captured by the FDI measure. This is because holdings in public bonds, real estate acquisition and lending also form part of the picture (Godement and Vasselier 2017: 38). Moreover, specific portfolio investments, which are defined as stakes with less than 10 percent in companies, can also be traced back to the Initiative (Hanemann and Huotari 2018b). The latter types of investments mentioned, apart from FDI, are much harder to detect.
Second, more often than not it is hard to make a clear distinction between Chinese investments in general and those directly related to the BRI. The following overview is however an attempt to provide some clarity. Before data on the CEE region are given, current financial flows between China and the EU as a whole, measured as FDI, will be discussed. In this way it will be easier to put the situation in the CEE region into perspective, whilst the nature of Chinese FDI flowing into the EU already gives an indication for the CEE region. In 2017, Chinese FDI in the EU, 25 percent of Chinese FDI globally, was almost the highest of all time being €35 billion (Hanemann and Huotari 2018a; 2018b). Only in 2016 was Chinese FDI in the EU larger. Thanks to the intensified efforts related to the BRI, the transport, utilities and infrastructure sector made up almost half of total Chinese FDI in the EU, being estimated at €15.3 billion.
The form that Chinese FDI in the EU takes is almost exclusively that of mergers and acquisitions (M&A’s), representing 94 percent of total FDI (ibid.). When the cited study was published, another €10 billion of pending acquisitions could already be included for the following year, 2018. This means
it can be expected that the amount of M&A’s will be as large as in 2017, if not more. An estimated 68 percent of the M&A’s conducted in 2017were driven by the Chinese state, as opposed to the private sector. The implications of this practice will be discussed later on in more detail, but the large number of state-driven acquisitions are increasingly triggering concerns about the protection of intellectual property rights, which are arguably at stake (Godement and Vasselier 2017: 43). FDI flowing from the EU to China was only €8 billion. This significant difference reflects the reciprocity imbalances as discussed before. The fact that accumulated Chinese FDI in the EU was larger than FDI flowing from the EU into China in two third of all measured sectors further underlines this point (Hanemann and Huotari 2018a).
Chinese FDI in the CEE countries specifically was about €8 billion in 2017, with an uneven
distribution. This means that Chinese investments in the CEE region were concentrated in just a few, bigger countries (Gaspers 2017). Especially Bulgaria, Hungary, Romania, Poland, the Czech Republic and Slovakia received the majority of Chinese FDI (Kratz 2016: 6). The €8 billion invested in the CEE region comes across as rather small in comparison to Chinese FDI in the EU as a whole, especially considering the efforts made in relation to the BRI. However, as noted before, FDI does not capture all investments related to the BRI.
Since the 16+1 platform was established in 2013, about €13 billion has been reserved for
infrastructure development in the CEE region (Gaspers 2018). In addition, China pledged to reserve €10 billion in 2016 for investments in the manufacturing and consumer goods sector. Another €1 billion was added to this reservation in 2017, apart from about €2.5 billion for the construction of infrastructure projects (Gaspers 2017). When these (promises of) investments are added to FDI in the CEE region, a more tangible and substantial indication of Chinese financial involvement emerges. A less visible yet integral type of financing used for infrastructure development projects not included in this overview is lending. It is estimated that most of the projects related to the BRI are financed by Chinese loans. The large extent to which China deploys lending practices can be interpreted as an effective way to circumvent EU rules which obligate the usage of public tenders (Godement and Vasselier 2017: 70).
The strategic importance of the CEE region for China in the context of the Belt and Road Initiative has been underlined by its efforts to institutionalize relations with the countries located there in the 16+1 platform, which serves a tool with which China can pursue its various interests. The CEE countries are hoping that they can benefit as well and even though the exact ways in which China is financially involved in the region remain rather opaque, it is clear that China is indeed willing to contribute significantly for the development of projects related to the BRI in Central and Eastern Europe. In the next section, the implications of this Chinese involvement for the internal division of the EU will be discussed.
Increasing troubles for the EU
There are a number of ways in which it can be argued that the EU has become internally divided as a result of Chinese involvement related to the BRI in the CEE region. First, EU member states
participating in the 16+1 platform are competing with each other for Chinese investments (Stanzel 2016: 2). Ultimately, this undermines a collective EU approach towards China. Second, a dividing line has emerged between ‘16+1’ EU member states and the other member states, as the former group increasingly turns towards China at the expense of the EU. Recent expressions of value-based
opposition to the EU by CEE leaders, while praising cooperative activities with China, seem to illustrate this. Moreover, there are crystal clear examples of events in which Chinese political influence in the CEE countries was tangible, which frustrated the EU on a number of issues. These mechanisms will be discussed in more detail throughout this section.
Even though it might seem implausible that the EU as a whole will be able to come up with a cohesive approach among all its member states towards China regarding economic policy in the foreseeable future, due to internal divergences of interests as discussed before, Chinese involvement in the CEE region further weakens this prospect. This relates to the internal competition among the EU member states involved in the 16+1 platform for Chinese investments that is inherent to the platform itself, since the majority of agreements has not been signed by all partners but were in fact bilateral transactions between China and individual countries (ibid.). The uneven distribution of financial Chinese involvement in the region reflects the vastly different characteristics of the CEE countries. In terms of their population size and market potential, for example, it is obviously not possible to make general statements (idem: 3). Consequently, some countries are more appealing to China than others.
The differing extent to which China has invested in CEE countries illustrates that individual countries try to achieve the best deals for themselves by offering the most lucrative conditions to China. These practices have been described as ‘beggar-thy-neighbour competition’ (Godement and Vasselier: 63) and ‘a race to the bottom’ (Hanemann and Huotari 2018a). The resulting beneficial terms by which China is persuaded to invest explain the country’s eagerness to pursue bilateral agreements, thereby not limiting itself to multilateral commitments in the 16+1 platform. The motives behind the
behaviour of the CEE countries are clear: they attempt to use the platform in order to further develop their countries, specifically in the realm of infrastructure. However, this harms the EU as it undermines a collective approach towards China. As long as the individual CEE countries are only concerned with their own interests, it is not going to be possible to agree on, let alone implement, a coherent EU approach supported by all the member states.
The establishment of the 16+1 platform itself resulted in heightened tensions in Brussels, apart from the way in which competition among ‘16+1’ EU member states weakens the unity of the EU. These tensions were due to the mere fact that 11 of its member states were included without having been included itself. The platform can be viewed as a competitor to the EU in some respects. It allegedly touches upon EU competences, of which the facilitation of financing might be the most clear
example (Kynge and Peel 2017). In other words, the CEE countries can conveniently use the platform for ends that cannot be achieved in the current framework of their cooperation with the EU
(Godement and Vasselier 2017: 69). The EU’s unease about the platform is not only due to its frustrations about having been bypassed, though.
Especially its concerns relating to the future trajectory of alignment between its ‘16+1’ member states and China are well-grounded. This is because the major worrisome implication of increased economic cooperation between the EU member states included in the ‘16+1’ and China for the EU is that Brussels may, be it gradually, lose grip on those member states involved as they become more dependent on China as opposed to the EU. There exists a serious risk that the EU will be bypassed by its ‘16+1’ member states in the future, added to its current exclusion in the platform, as they
connected concern in Brussels is that Chinese involvement in the CEE region will provide the EU member states located there with increased bargaining power vis-à-vis the member states who are not involved (Poggetti and Weidenfeld 2018). These lines of reasoning seem to confirm that a dividing line between the participating EU member states and the remaining member states emerges, due to Chinese involvement in the CEE region. The concerns expressed by the EU are not based on fear and uncertainty. In fact, the current reality in Brussels justifies them.
This can be illustrated by recent expressions of political leaders of CEE countries in which they openly or more implicitly oppose the EU. The Hungarian prime minister Orbán, for example, stated that he views the BRI ‘as a new form of globalization that does not divide the world into teachers and
students but is based on common respect and common advantages’ (Gaspers 2018). This rather
poisonous quote cannot be viewed in isolation from Hungary’s dispute with the EU about the country’s continuous efforts to weaken the rule of law (Bayer and Gray 2018). Viewed from this perspective does Orbán’s statement indicate a genuine willingness to pursue more cooperative relations with China at the expense of the EU. In another quote could does he, although implicitly, partly explain this willingness: ‘The world economy’s centre of gravity is shifting from west to east;
while there is still some denial of this in the western world, that denial does not seem to be reasonable’ (Kynge and Peel 2017).
Along the same lines, though perhaps even more worrisome for the EU, is a quote of Czech president Miloš Zeman from 2016. Not surprisingly, the Czech Republic and Hungary are among the countries which have received most Chinese investments in the CEE region (Kratz 2016: 6). He stated that previous Czech governments were ‘submissive towards the U.S. and the EU’, thereby preventing the development of positive relations Czech-Chinese relations. His comment on the establishment of an agreement between his country and China was that it was ‘an act of national independence’ (Gaspers 2017). Compared to Orbán’s quote, the explicitness of Zeman’s aversion against the EU stands out. Again, such a statement is the first indication of a changing political landscape in Central and Eastern Europe in which not the EU, but China exerts its influence. So far, there have already been several instances in which this influence was tangible. China has been able to generate support among few of its ‘16+1’ partners for what can be considered as issues that are of the utmost strategic
importance for China. The way in which three of these issues were treated by CEE countries, thereby intentionally dividing the EU, will be discussed here. The issues are China’s human rights violations, its dispute concerning the South China Sea and the establishment of an EU investment screening plan.
Accusations made by the international audience that China violates international human rights law are among the most sensitive issues for Beijing. The EU is traditionally one of the toughest critics of this uncomfortable aspect of the Chinese regime, as it has been able to position itself as a commonly recognized global defender of human rights throughout the years (Gaspers 2018). However, this reputation has eroded somewhat, due to CEE countries blocking joint EU statements that condemn China’s actions. This was for example the case in 2017, when Hungary refused to sign an EU
statement criticizing the torture of detained lawyers in China (Cerulus and Hanke 2017). Even though this is just one example, it clearly shows that a ‘16+1’ EU member state, which received significant Chinese financing (in this case Hungary), consciously refuses to support maintaining one of the most cherished characteristics of the EU. It is clear that in this case Hungary chose to prioritise the maintenance of good relations with Beijing instead of with Brussels.
The case of the South China Sea, about which China has a long-lasting territorial dispute, concerns a court ruling by the Permanent Court of Arbitration in the Hague. It was ruled that China violates the sovereign rights of the Philippines by claiming 85 percent of the Sea (Emmott 2016). To date, Beijing has not accepted this judgment. The EU wanted to condemn China’s attitude, stating that it must uphold international maritime law. However, due to resistance from several member states, most notably Hungary, Slovenia and Croatia, the EU was not able to issue a decisive statement. A statement about the importance of maintaining the law in general terms, without any direct reference to China’s attitude, was all that the EU could offer (ibid.). Hungary’s resistance was motivated by the same rationale as discussed in the previous case. Slovenia and Croatia, however, both have an unresolved maritime dispute themselves. It might seem plausible that this, at least partly, motivated their resistance. Still, their participation in the 16+1 platform can be noted as an incentive not to frustrate China on this sensitive topic .
The continuous factor in both of these instances is that ‘16+1’ EU member states, being considerate of the Chinese financial contributions that have come their way, prefer to remain a reliable partner for China, even when this means that they explicitly have to sacrifice their relations with Brussels. The divisive tendencies among EU member states these examples have already brought about are likely to intensify in the future. Some member states have organised themselves in a human rights coalition outside the EU framework in anticipation to this well-grounded expectation and in response to the harmful recent defeats that have occurred (Godement and Vasselier 2017: 25). It follows that the EU was hardly ever more internally divided on this area than is the case now.
Another case in which Chinese political influence on ‘16+1’ participants was noticeable constitutes the difficult process of the establishment of an EU-wide investment screening plan. As noted before, the EU continues to be frustrated about issues of market access in China and reciprocity imbalances. The proposal was initiated in order to reduce such imbalances, although in a different direction than has been hoped for (Rettman 2017). Perhaps a more urgent reason to establish an investment screening mechanism has been the association of security risks with the common Chinese practice of acquiring European companies of strategic significance (Hanemann and Huotari 2018a). Also the violations of intellectual property rights that allegedly result from Chinese M&A activity, in more general terms, are a reason to thoroughly revise the current regulations (Godement and Vasselier 2017: 39). These are also lacking in the sense that only European companies, as opposed to foreign ones, are subject to investment screenings (idem: 38).
Having taken these concerns into account, Germany, France and Italy wanted to provide the EU with more abilities to screen foreign investments and acquisitions . Ultimately, the EU would be able to prevent foreign firms, including state-driven vehicles which are commonly used by China, from acquiring European companies (Cerulus and Hanke 2017). Chinese outbound financial flows related to the BRI would be on top of the priority list to be reviewed by the EU (Maurice 2017). For the ‘16+1’ EU member states, the establishment of such a proposal would mean that they would no longer be able to benefit from Chinese investments in their countries. Therefore, they resisted the proposed terms attached to the plan. Hungary, the Czech Republic and Poland, major beneficiaries of Chinese efforts in the CEE region, were the most vocal critics of the plan (ibid.).
Despite the bigger member states’ efforts, the investment screening plan now merely provides the EU with increased abilities to analyse foreign financial flows. Consequently, this means that the EU
does not have authority to block acquisitions by foreign companies (Cerulus and Hanke 2017). It is not difficult to sympathise with the position of the ‘16+1’ EU member states, given the Chinese offers to upgrade their infrastructure. However, the result is, again, that tensions between the ‘16+1’ EU members and the non-participating EU member states are accumulating due to the uncooperative attitude of the former group.
The reasons behind the resistance of ‘16+1’ participants to EU positions regarding human rights, the South China Sea and the initial investment screening plan are essentially the same. In the first two cases a reluctance to frustrate China, based on the continued desire for its investments, motivates their behaviour. In the remaining case their resistance is shaped by the same concern that
investments would dry up, though as a result of tougher regulations. In any case, the outcome is that the dividing line between those countries involved in the 16+1 platform and those who are not becomes wider. Added to the internal competition of ‘16+1’ members for Chinese investments, this further weakens the prospect of the establishment of a cohesive economic EU approach towards China. In the next section, the significance of the recently proposed new 7-year EU budget will be briefly discussed.
Future outlook
Concerns that the Central and Eastern European EU member states involved in the 16+1 platform will become increasingly financially dependent on China at the expense of the EU have been
strengthened by some of the plans constituting the next 7-year Multiannual Financial Framework (MFF) of the EU. These plans have only been announced recently and are of considerable
importance, as they are a guidance with which the EU’s annual budget is adopted each year. Even though nothing is officially confirmed yet, one of the most salient indications of the new MFF is that the amount of EU funds flowing to CEE countries will become significantly less than is now the case (Karnitschnig 2018). The explanation for these cuts is that the countries concerned have developed economically and are therefore less in need of financial EU contributions.
Another measure associated with the proposed MFF, although officially presented as a separate step, is the so called ‘rule of law proposal’ (ibid.). This proposal is meant to put a halt to practices that undermine the rule of law and democratic institutions. If such tendencies would come about in any EU country, Brussels would be able to suspend its funds to the country involved under the proposed regulations. It is no coincidence that this measure has been proposed for the new MFF, as especially Hungary and Poland are commonly accused of eroding democratic values that can be viewed as integral to the EU (ibid.).
It seems plausible that Chinese financial involvement in the CEE region will increase as a result of the first proposed plan. This is because the gap that is left behind by reduced EU funding will have to be filled. Of course, China will not provide its resources for free. The political influence that comes with its economic engagement is therefore likely to increase as well. Considering the second proposed plan, this situation will probably become even more noticeable in Poland and Hungary. Ultimately, the divisions between ‘16+1’ EU member states and the other member states could be deepened following increased Chinese political influence. Moreover, an expected short-term result from the MFF is that tensions will increase due to frustrations relating to the proposed funding cuts.
Conclusion
The implications of the implementation of the Belt and Road Initiative in Europe are multi-faceted. Expectations that both China and European countries can benefit in economic terms seem justified, given the numerous opportunities the BRI offers. On a more fundamental level, however, it is merely China that can pursue its variety of interests attached to the Initiative. By consciously bypassing the EU in the implementation of the BRI, due to genuine disappointments about the EU’s global
capabilities, China has been able to pursue cooperative activities only with those countries that are perceived as partners necessary to engage with.
The institutionalization of cooperation with these countries, geographically of strategic importance in the Initiative, by means of the 16+1 platform, has been the way in which China could secure that crucial infrastructure developments would be kick-started. Although it is difficult to unravel the exact financial structures with which China is involved in Central and Eastern Europe, the influence it has gained in the region proves that its financial engagement is substantial enough to have a
significant impact on the European political atmosphere. This can be underlined by the explicit support that has been showed for China’s way of doing politics at the expense of support for the EU. China’s ability to build support among the ‘16+1’ members for what it perceives as the most pressing global issues has undermined and divided the EU in various ways. It resulted in unwillingness of those ‘16+1’ countries that have received most Chinese investments to maintain the EU’s critical position on Chinese violations of human rights and international law. Given the fact that the incentives for ‘16+1’ members not to frustrate China will not disappear in the foreseeable future, it seems that the traditionally globally influential moral authority of the EU can no longer be taken for granted. Moreover, the increasing internal division of the EU has been visible at the process surrounding the investment screening plan. Since this attempt to put a halt to foreign acquisitions in general and Chinese investments in particular failed, it is expected that China’s political influence in especially the CEE region will remain strong. Also the expected cuts in EU funding to the region, as stated in
proposals in the EU’s new Multiannual Financial Framework, are likely to result in continued Chinese investments in Central and Eastern Europe.
These mechanisms of internal division between ‘16+1’ EU members and other EU member states, together with the competition among ‘16+1’ participants which is inherent to the platform, undermine the prospect of the establishment of a cohesive economic EU approach towards China. This is because the member states continue to prioritise their own interests at the expense of a collective approach. However, this might not be the case for too long if the majority of EU member states becomes fully aware of the growing political influence of China.
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