Belt and Road Initiative: Developments and Challenges

KRISTIJAN KOTARSKI, PhDAssistant Professor, Faculty of Political Science, University of

Zagreb

16+1 FORUM

BUDAPEST, 6-7th of November 2017

MAJOR CHALLENGES TO DEEPER COOPERATION EMANATING FROM EU-CHINARELATIONS

- 80% of the EU’s public procurement is open to international competition while the figure for China is estimated at only 14% (Godement, 2016)

- China is not a signatory to WTO Agreement on Government Procurement (open, fair and transparent conditions of competition)

- EU has not decided to grant China market-economy status due to China’s economic model of statecapitalism

- EU-China bilateral investment treaty far from serious realization (13 rounds of unsuccessfulnegotiations)

- China’s clear preference for state-led versus market-based decisions with regard to investments andcontracts, politicization of investment decisions

EU’S TRADE PROFILE

CHINA’S TRADE PROFILE

LIBERAL

PROTECTIONIST

CRITICAL SUPPORTIVE

ASSERTIVE INDUSTRIALISTS

EUROPEAN FOLLOWERS

ACCOMODATING MERCANTILISTS

IDEOLOGICAL FREE-TRADERS

CROATIA

ITALY

DENMARK

FRANCE

MAJOR CHALLENGES TO BRI’S SUCCESS IN CEEC EMANATING FROM THEIRSTRUCTURAL FEATURES

- China’s focus on only several countries (95% China’s FDI goes into only 6 countries (Slovakia, CzechRepublic, Hungary, Poland, Bulgaria, Romania)

- Joint proposed financing mechanism to the tune of 10 billions of USD remains vague

- Different rules of engagement for EU and non-EU countries

- Differing priorities and goals (greenfield investments and social safeguards vs. M&A, marketpenetration, technology acquisition and export of excess capacity through infrastructure projects)

- Wariness of unbalanced trade relations

Trade, exports and imports growth (China-CEE)

Source: ECFR

- Fear of Chinese SOEs which might hamper EU-led governance reforms and limit country’s fiscalspace

- In Montenegro, not only did Chinese loans crowd out financing from International FinancialInstitutions (IFIs), but they even limited the country’s fiscal space to such an extent that theyforced the government to scale down its new social welfare project for families with multiplechildren

- In Macedonia China was embroiled in a corruption scandal when leaked tapes suggestedcollusion between local politicians and Chinese state-owned companies and massive inflation ofhighway construction costs

Chinese investments to Europe in billions of EUR

Source: Rhodium group

Chinese investments to Europe in billions of EUR

Source: Rhodium group

Source: Rhodium group

Source: ECFR

Source: Council on Foreign Relations

Source: AIIB, author’s own calculation

CONCLUSION

• Contrary to the AIIB, the Chinese government appears to be looking for followers rather than partners for the ‘Silk Road’ (institution with structures and principles that are similar to those of Western financial institutions are more attractive to potential members)

• BRI, on the other hand, still remains a fluid initiative led and shaped by China

• Europeans have been disappointed by the gap between statements and the reality of the famed Belt and Road Initiative: China talks about investment but in practice mainly lends funds (with interest) for these infrastructure projects

• Need for more transparency, openness, reciprocity and environmental concerns (crediblecommittment from both sides)

• More investment by Chinese private entities in order to garner trust and create cultural capital, unlike the strategy of SOEs spearheading China’s ‘going out strategy’

Source: Croatian National Bank, author’s own calculation

Source: Croatian National Bank, author’s own calculation

Source: Economic Complexity Observatory, author’s own calculation

Source: Economic Complexity Observatory, author’s own calculation