Belt and Road in Central and Eastern Europe: a Barometer of Shifting Geopolitics

Key takeaways:

As a Sino-American trade war becomes a reality, China is seeking to further engage the EU, and Germany specifically, by making concessions with regard to the 16+1 Initiative
Chinese presence in Central & Eastern Europe (CEE) is going to be affected by the triangle of China-EU-US relations
The developments around the 16+1 initiative are a good barometer of China-EU relations
China's efforts to improve its compliance with EU regulations, as well as improving the image of the 16+1 initiative, can unlock new business opportunities in the CEE region.

Much has happened in the triangle of China-EU-US relations over the last month, with four significant events occurring within a short space of time. This year's 16+1 China - Central and Eastern Europe (CEE) summit overlapped with the US launching $34 billion of tariffs against China, which officially started the long anticipated trade war on July 6. This prompted Premier Li Keqiang to openly criticize the US in his speech to his CEE counterparts and to promote the idea of closer China-CEE and China-EU cooperation.

Only 10 days later, on July 16, the China-EU Summit overlapped with a Trump-Putin meeting in Helsinki, to which President of the European Council, Donald Tusk remarked:

Today, on the same day as Europe meets China in Beijing, American President Trump and Russian President Putin will talk in Helsinki. We are all aware of the fact that the architecture of the world is changing before our very eyes.

Given the rapid pace of these developments and the fact that "the architecture of the world" does not change overnight, it is important to look for practical, not only rhetorical, moves made by the involved parties.

A good barometer for evolving China-EU relations is the 16+1 framework; both because of its controversy within the EU and its relevance for China’s Belt and Road Initiative (BRI) as Central and Eastern Europe (CEE) has often been described as "the Gateway to Europe".

Between July 6 and 7, China’s Prime Minister Li Keqiang met with his counterparts from the 16 CEE states in Bulgaria's capital, Sofia, for the 7th16+1 China-CEE Summit. The initiative, launched in 2012, is the key vehicle for China's engagement with the region. However, the 16+1 continues to be plagued by a disparity in the expectations held by CEE states (fuelled by hyperbolic pledges from China to invest in the region) and the inadequate outcomes of the 16+1 up to date.

While 16+1 trade volume has continued to grow, a high imbalance remains, and in 2016, Chinese exports to CEE exceeded imports by twelvefold. On the investment front, the results for the 16 CEE countries have been relatively modest. Premier Li claims that Chinese investments in the CEE region amount to $10 billion, but this number includes significant loans accredited by China to some of the CEE states. Investments made in China by all the 16 CEE countries only amounted to a joint value of $1.4 billion.

On top of this, the flagship Belgrade-Budapest railway project continues to make small progress due to the EU Commission's inquiries into the bidding process, that did not meet EU standards. This case reflects a major issue, which is Western Europe's and Brussels' perception of 16+1 as China’s tool for influencing the EU. In this view, China is seen as attempting to push forward its own political agenda within the EU using economic leverage over the CEE member states. Although this accusation is disputable, given the economic leverage China has over the 11 CEE EU member states[1] is not as high as might be expected, the resultant negative perception has been a thorn in the side of the 16+1 initiative.

However, while the 16+1 may have not lived up to its expectations up to now, the shifting geopolitical landscape may yet change this situation and unlock new opportunities for BRI in CEE, "the Gateway to the EU". The future of the 16+1 is likely to reflect a triangle of relationships between China, the EU, and the US. As the Trump administration pushes its protectionist agenda and engages in a trade war with China, while simulatanously calling the EU "a foe" over trade tensions, China has been making attempts to establish a united stance with the EU. The 16+1 platform has been a major concern for the latter and this year's 16+1 Summit shows Chinese is willing to make concessions towards Brussels and Western European capitals (especially Berlin) to alleviate some of their concerns.

China’s attempts in this regard start even before the summit this year. Firstly, the 2018 16+1 Summit took place half a year earlier than usual. There were no new developments since the Budapest Summit (November 2017) that could justify such a change. Also, there were no plans to increase the frequency of meetings back in November 2017. Quite the opposite, there were rumors that Chinese authorities were contemplating switching the annual summit into a biennial model, as not enough progress was being made on annual basis to justify such frequent meetings. The most likely reason for moving the summit earlier was to position it closer to the China-EU Summit, which took place on July 16. Moving the 16+1 Summit to July 6 – only 10 days apart from the China-EU Summit - has been widely interpreted as an attempt to harmonize the two mechanisms and fully include 16+1 in the wider framework of China-EU relations.

Secondly, these signs went beyond just rhetoric, as China made additional efforts to show its EU partners (especially Germany) that it was willing to adjust its approach towards CEE, adhere to EU regulations and to work jointly with the region. For instance, China's Minister of Foreign Affairs, Wang Yi, commented that China is actively considering inviting Germany to participate together with China in a trilateral framework along the lines of 16+1+1. What is more, right after the 16+1 Summit held in Sofia, Premier Li visited Berlin. During the visit he stated that China will welcome more investments from the EU and as proof, a preliminary agreement for the construction of a $10 billion chemical complex that is to be constructed by BASF SE in Guangdong was signed. Interestingly, it is to be the first agreement of its type in which a foreign company will be the sole owner.

Thirdly, during the 16+1 Summit, a Global Partnership and Cooperation Center with headquarters in Sofia was established. According to Premier Li, the Center's main purpose will be to research how to incorporate EU principles in Chinese projects launched in CEE. This is a major development as China's compliance with EU regulations could unlock a number of opportunities for BRI in CEE. This could involve further developing the capacity of the bottleneck of the New Eurasian Landbridge project in Małaszewicze (Belarus-Poland border); a cargo terminal project that enables cargo to move from Russian to European rail gauges. Additionally, a compliant China may pave the way for further cooperation on the major Via Carpathia road project that connects BRI ports or putting the flagship Belgrade-Budapest railway project back on track.

These three points support the view that China-EU relations may significantly improve in the mid-term, giving more space for cooperation on BRI projects. Of course, it is hard to say at this stage whether these developments are symptoms of a strategic shift or whether they turn out to be merely tactical diplomatic moves given the global backdrop. It is likely that a major factor that will decide the outcome will be the actions of the Trump administration, which are hard to predict. Contrary to previous announcements, on July 26 the EU and US agreed to work together towards lowering trade barriers and also to "join forces to protect American and European companies better from unfair global trade practices"- a statement that clearly was supposed to be aimed at China. But whether this agreement will actually be pursued remains to be seen. Any tensions between the EU and US are likely to push China and the EU closer together, and the progress of the 16+1 China-CEE framework is likely to remain a good barometer of that.

[1] 16 CEE countries involve 11 EU Member States and 5 Balkan countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Montenegro, Poland, Romania, Serbia, Slovakia, Slovenia, Macedonia)