Brussels should not fear Beijing's closer ties with Central and Eastern Europe

Pavel Anastasov and Luka Oreskovic urge the speedy completion of an EU-China investment treaty

PUBLISHED : Monday, 05 May, 2014, 6:51pm
UPDATED : Tuesday, 06 May, 2014, 1:48am

In March, Xi Jinping became the first Chinese president to visit the headquarters of the European Union. He sought to move past the trade disputes of 2013 with a view to a potential free-trade agreement. Simultaneously, Beijing has pursued rapprochement with Central and Eastern Europe.

Given existing tensions, this has created concerns that China is using its bilateral relations with these countries to undermine common European positions.

The EU-Chinese relationship is experiencing "growing pains" as economic exchange between the two sides matures. The EU is China's biggest trade partner and an increasingly important investment destination for its "going out" policy, as it tries to rebalance towards internal consumption, improve competitiveness and diversify its currency reserves.

The second-largest trade partner for the sluggishly recovering EU, China is a source of fresh capital and a market with an increasingly affluent middle class.

Yet, last year, a spate of trade disputes strained that relationship. In particular, during anti-dumping investigations into Chinese solar panels, Beijing leveraged its bilateral relationship with Germany, leading Angela Merkel to criticise the European Commission. This raised fears that Beijing would pursue a "divide and conquer" strategy with regard to Europe.

The EU and China launched long-delayed talks for a single bilateral investment treaty in November last year, which China hopes to eventually transform into a free-trade agreement.

However, with the backdrop of internal divisions, the EU has nervously observed China's "charm offensive" in Central and Eastern Europe. In the past two years, Beijing has stepped up its engagement by holding high-level meetings with 16 countries from the region.

At a Warsaw summit in 2012 with these nations, China announced a list of 12 measures designed to deepen co-operation, including a US$10 billion credit line for infrastructure, energy and telecommunications projects.

These political developments reflect growing economic engagement. Trade between China and Central and Eastern Europe has boomed, and is on track to meet Beijing's goal of US$120 billion by 2018. Chinese firms have invested over US$11.7 billion in Central and Eastern Europe since 2010.

Investing in automobiles, telecoms and energy, as in Bulgaria for example, those firms are attracted by better growth prospects, relatively cheap but educated labour, lack of political obstacles and, crucially, access to the large EU market.

Chinese shipping group Cosco has also entered talks with the government of Croatia to explore routing more Chinese trade through the Croatian port of Rijeka on the Adriatic Sea; for several years, China has promoted tourism to Croatia and encouraged its businesses to invest in Croatian ports, railroads and electrical infrastructure. Cash-strapped Central and Eastern European countries are only too happy to welcome fresh Chinese capital.

China's engagement should not be a cause for worry for Brussels. Even if China has stepped up its involvement, the high growth in trade and investment comes from a very low base; Beijing remains far behind the EU, the US and Russia.

Furthermore, given Europe's importance as a trade partner and Chinese hopes for a free-trade agreement, Beijing has no interest to upset Brussels - indeed, China has rebuffed Hungarian Prime Minister Viktor Orban's calls for closer co-operation, because of his strained ties with the EU.

Finally, given the region's diversity in terms of size, level of development, and even EU membership, the annual China-Central and Eastern Europe meetings represent less of a unified regional approach and more of a logistical convenience of having one instead of 16 official visits.

Over the long term, China's presence in Central and Eastern Europe could cause more friction with the EU. Therefore, it is important to successfully complete the EU-China bilateral investment treaty, which would frame the economic relationship at the European, rather than bilateral, level.

Central and Eastern European states should also abide by EU rules when dealing with Chinese investors and support EU attempts to develop a common investment screening mechanism to increase transparency and alleviate security fears. This, in turn, would reduce mistrust of Chinese investment and increase the clarity of rules, making it easier for Chinese companies to improve their competitiveness.

These steps would form the foundation of a sustainable economic relationship between the EU, Central and Eastern Europe, and China, to the benefit of everyone.

Pavel Anastasov is the chief analyst in the cabinet of the president of the Republic of Bulgaria. Luka Oreskovic is an associate fellow at Harvard University and a member of the Economic Affairs Council to the president of the Republic of Croatia