Stratfor explains how China’s Belt and Roads Initiative might reshape Europe

Summary: Monday’s post looked at how China’s Belt and Roads Initiative was spurring growth in the less developed areas of Asia and Africa — and linking those nations more tightly to China. Here Stratfor looks at how the B&R initiative links to Europe, the end of its new Silk Road. China uses the EU’s weakness as an opportunity to deepen its relationship with Eastern Europe. If only America had leadership even half as wise! But we have our self-esteem, secure in the knowledge of our exceptionalism.

“For China, All Roads (and Belts) Lead to Europe”

Stratfor, 17 May 2017.

China’s Belt and Road Initiative encompasses six economic corridors. But in geographic and ideological terms, Europe represents the end of the new Silk Road. Increased connectivity with Europe could offer China a chance to expand its access to new markets, as well as to high-tech and strategic assets, thereby facilitating its domestic industrial reform plans. Despite Beijing’s stated goal of fostering greater integration throughout Eurasia with its Belt and Road scheme, however, its approach on the Continent has so far emphasized bilateral or subregional agreements with states in Central and Eastern Europe, as well as the Mediterranean. The strategy has raised concerns among the European Union’s central powers that Beijing’s influence in the countries could threaten their own, particularly as the bloc’s political and economic rifts widen.

For centuries, trade between Europe and China along the ancient Silk Road fluctuated as each side weathered cycles of prosperity, war and instability — a trend that continues to this day. China is currently in the midst of a decades long economic and social rebalancing to ease its economic and supply chain reliance on its eastern coast. At the same time, it is eager to project power abroad commensurate with its economic and military clout. In Europe, meanwhile, rising nationalist movements and enduring disagreements over economic matters have paralyzed the European Union at a time when the bloc is contending with issues such as Russia’s activities in its borderlands and a new political order emerging in the Middle East. Beijing views the parallel challenges facing China and Europe as an argument to increase cooperation between the two through the Belt and Road Initiative.

Investing in the Future.

China is focused foremost on trade and investment initiatives on the Continent; the two, after all, already have strong trade ties. In Southern Europe, China has set its sights on privatization opportunities, particularly in energy and port infrastructure. Its interests in Western Europe, by contrast, lie primarily in the acquisition of strategic assets, along with research and development. Deals with German companies such as robotics firm KUKA AG, semiconductor equipment maker Aixtron and pharmaceuticals firm Stada, as well as Swiss agribusiness giant Syngenta, provide Beijing a chance to gain technological know-how. Other agreements are designed to help established Chinese brands and distribution channels expand their access to the European market.

Regardless, China’s Belt and Road ventures in developed EU countries largely stop at financing, which the participating states find more appealing than the sorts of massive infrastructure projects Beijing has undertaken elsewhere. These financing agreements, however limited in scope, will enable China to learn the ropes of working with Western institutions and build on its experiences with countries in the region down the line, including with the United Kingdom post-Brexit. The British government recently described Beijing as a “natural partner” in trade and investment, and China could use its good standing with London to lobby for eased regulations on Chinese investment and increased access to global financial markets.

Building Inroads.

That doesn’t mean that China has abandoned its vision for infrastructure connectivity with Europe, though. China relies on maritime shipping to transport the majority of its exports. With that in mind, Beijing has pursued port projects in countries along the Mediterranean to afford it alternatives to Northern European ports such as Rotterdam and Antwerp. Chinese companies have invested in or begun building ports in Italy and Spain. They have also expressed interest in Portugal’s Port of Sines and floated a scheme to link the ports of the Adriatic Sea.

But the Greek port of Piraeus is far and away the most important part of Beijing’s maritime connectivity strategy in Europe. China’s COSCO has operated the port since 2010, when it signed a $4.3 billion, 35-year management lease. As the first major container port in the Mediterranean Sea, Piraeus offers Chinese companies delivery times that are 10 days shorter than routes to Northern European ports. Beijing made subsequent investments to boost the port’s container handling capacity and to build logistic centers there. China’s focus on Piraeus has stoked concern in Germany and the Netherlands that Mediterranean ports could eventually seriously challenge those in Hamburg and Rotterdam. Unlike the Northern European ports, however, full use of Piraeus, where Beijing hopes to expand its exports to Southeast and Central Europe, hinges in large part on China’s development of transportation links across the Balkans.

That’s where rail comes in. To connect Piraeus with Central Europe and beyond, China has proposed a project, now under probe in the European Union, to modernize a 350-kilometer (about 217-mile) stretch of railway between Belgrade and Budapest. (China has also financed road, energy and trade projects throughout the Balkans.) In addition, Beijing has plans to increase traffic on the existing freight railway lines that connect several industrial cities in coastal and interior China with Hamburg, Warsaw and Rotterdam by way of Russia and Central Asia. China hopes that 5,000 freight trains will travel these routes annually by 2020, up from around 1,800 trains in 2016. Compared with sea transport, rail is significantly more expensive, with less capacity, more cumbersome logistics and customs restrictions in certain countries, to say nothing of the sheer distance that overland travel entails. But it offers a much quicker way to send auto parts and consumer electronics produced in inland China by domestic and foreign manufacturing companies, including Hewlett Packard, Foxconn and TCL Corp., to the Continent — and to receive shipments of vehicles, foodstuffs and Scotch whisky in return (even if in lesser quantities).

Progress in Central and Eastern Europe.

Getting the European Union on board with these initiatives hasn’t always been easy for Beijing. Early on, its overtures met with skepticism, and sometimes suspicion, from some EU members. Heavily indebted Southern European countries such as Greece, on the other hand, gladly accepted China’s funding as a complement to the money it receives through its stringent bailout plan. Hungary and Poland, too, campaigned for the Belt and Road, which fit in with their efforts to distance themselves from Brussels. For Warsaw, the influx of Chinese investment that the Belt and Road Initiative promised represented a chance to make progress in its own reindustrialization and infrastructure endeavors. Similarly, Budapest welcomed Beijing’s interest, becoming the first European state to participate in the Belt and Road Initiative in 2015. China’s collaboration with states in Central and Eastern Europe eventually grew to the point that it started a subregional platform, the so-called CEE 16+1, in 2012 for participants in its Belt and Road Initiative projects. The transport infrastructure in Eastern European countries especially pales in comparison with that on the western part of the Continent because of their underperforming economies and budgetary constraints.

Whether Beijing’s signature policy project will help alleviate these problems is unclear, however, since resolving them is less a priority for China than for its partners in Eastern Europe. China’s investment in Eastern Europe has never exceeded 1% of a target country’s gross domestic product, with the exception of Hungary. (Its investment level in the region trails even those of Japan and South Korea.) Furthermore, Beijing prefers mergers and acquisitions, employing its own management teams rather than building local teams from the ground up, undermining host countries’ desires to boost employment and gain experience with high-end technology. China, meanwhile, still receives just a fraction of these countries’ total exports, despite their best efforts to increase their share of the Chinese market. In fact, for Poland, the Czech Republic and Romania, the trade deficit with China has grown over the past three years. And as Beijing keeps pushing domestic-branded vehicles, electronics and machinery onto the European market, the Central and Eastern European states’ domestic industries stand to lose more ground to their Chinese counterparts.

But given Beijing’s eagerness to promote the Belt and Road Initiative in Eastern and Central Europe, some countries in the region could be in a good position to negotiate. China has already compromised with Serbia over the Belgrade-Budapest project, agreeing to build a cheaper, and slower, rail system instead of the high-speed line it wanted. By conceding to Belgrade — which has long aspired to upgrade its transport infrastructure to expedite its EU accession process and draw foreign investment to its cash-strapped economy — Beijing has given the Serbians further incentive to collaborate on future projects.

Confronting the Center.

Beijing’s efforts to galvanize support for the Belt and Road Initiative in Europe’s periphery stand in stark contrast to its lax approach with Germany and France. The countries are the European Union’s core powers, as well as China’s biggest trade partners and top investment destinations in the bloc. But by focusing on Southern, Central and Eastern Europe, Beijing has managed not only to capitalize on the European Union’s weakness to increase its presence on the Continent but also to avoid Brussels’ scrutiny. The European Union is often suspicious of China’s state-owned enterprises and their methods of financing infrastructure projects.

To Berlin and Brussels, however, Beijing appears to be trying to undermine EU trade and investment standards, and perhaps even its policies on China. The European Union wants European companies in China to compete on an even playing field with their Chinese counterparts, and it is worried about Beijing’s practices, including efforts to force foreign firms into joint ventures with local ones. Beijing’s often-nationalist economic policies, moreover, and the growing role of state-owned enterprises in Belt and Road projects have fueled concerns about future competition with China, particularly among countries with advanced technology sectors, such as Germany. At the recent Belt and Road Initiative Forum in Beijing, the German government even announced that it would not sign the Belt and Road communique unless China first guaranteed free and fair trade.

A more fragmented European Union is not in Beijing’s best interest, especially as it works to expand its economic influence westward. But Beijing’s activities on the Continent have created new rifts in the bloc. Member states such as the Czech Republic and Denmark have backed away from criticizing the country for its stance on human rights issues and political dissidence. Other countries, including the Netherlands, have advocated for granting China market economy status. As Beijing tries to deepen its ties with Europe, some nations on the Continent may be forced to choose between their political ideologies and their economic imperatives.

“For China, All Roads (and Belts) Lead to Europe”
is republished with permission of Stratfor.

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To learn more about China’s new Silk Road…

See Tom Miller’s China’s Asian Dream: Empire Building along the New Silk Road. From the publisher …

“Under Xi, China is pursuing an increasingly ambitious foreign policy with the aim of restoring its historical status as the dominant power in Asia. From the Mekong Basin to the Central Asian steppe, the country is wooing its neighbors with promises of new roads, railways, dams, and power grids. Chinese trade and investment presents huge opportunities for China’s neighbors, and its ability to build much-needed infrastructure could assist in the development of some of the world’s poorest countries.

“Yet China’s rise also threatens to reduce its neighbours to the status of exploited vassals. In Vietnam and Myanmar, resentment of Chinese encroachment has already incited anti-Chinese protests, and many countries in the region are seeking to counterbalance its influence by turning to the US and Japan. Combining a concise overview of the situation with on-the-ground reportage from over seven countries, China’s Asian Dream offers a fresh perspective on one of the most important questions of our time: what does China’s rise mean for the future of Asia and of the world?”