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East Asia Comes to Europe

Mid-May marked the one-year anniversary since the Belt and Road Initiative (BRI), China’s massive foreign policy initiative, held its first official Forum in Beijing. International reception of the initiative has been mixed, with the United States, Europe and Japan in particular expressing concerns about China’s possible ulterior motives, including in Europe. By contrast, there is little discussion of Japanese investments in Europe other than general agreement that more of them would be welcome. The countries in Central and Eastern Europe (CEE) in particular enthusiastically welcome Chinese investments with little consideration about potential hidden economic and political costs, and put comparatively little effort in attracting more Japanese investments.

Without naming the BRI directly, the 2017 U.S. National Security Strategy expressed concern that the initiative could allow China to gain “a strategic foothold in Europe by expanding its unfair trade practices and investing in key industries, sensitive technologies, and infrastructure.” In April, 27 out of the 28 European Union (EU) member states – with the notable exception of Hungary – reportedly signed a document denouncing the BRI as a tool to hamper free trade and offer unfair advantage to Chinese companies. While previously seen as a source of economic benefits, today the EU and many of its member states share growing concerns over both the negative economic consequences (e.g. unwanted technological transfer, lowering standards) and political implications (e.g. European disunity) of Chinese engagement with Europe. In its turn, Japan would like to avoid a repeat of the 2017 International Court of Justice (ICJ) ruling on the South China Sea – in which China used its investments in Hungary and Greece as leverage to weaken the EU statement on the final decision.

Central and Eastern Europe, the Achilles’ Heel of EU Unity?  

Given the model and smaller size of their economies, the EU member states from Central and Eastern Europe (CEE) are more prone to welcome Chinese investments with fewer concerns about ulterior motives. However, their EU membership raises important stakes for the EU as a whole, including its political unity. The specific case studies of Romania and the Czech Republic illustrate how Chinese and Japanese investments play out in these countries. Despite their difference in size, our analysis reveals many similarities between the two countries’ interactions with these international partners – and allowed us to draw a series of provisional conclusions.  

First, despite the media hype surrounding Chinese investments of tens and even hundreds of millions of dollars, these promises have been slow to materialize. Estimates vary, but according to the Financial Times, the Czech Republic and Romania ranked at the top of China’s total CEE infrastructure investments for 2012-2016, after Bosnia, but there is no evidence that the $5.5 billion China promised to Romania and the Czech Republic has materialized in concrete projects. By contrast, Japan has been a constant and reliable presence in the economic landscape of these countries.

Second, existing Chinese and Japanese investments generally concentrate in complementary economic sectors, with no indication of direct competition between the two investors. Whereas Japanese often invest into development of greenfield and brownfield projects which fit into value-chain of their technology corporations, Chinese focus more in mergers and acquisitions (M&As) in different fields and infrastructural development.

Finally, host countries see Brexit as an opportunity for more Japanese investments – although the feeling is not fully reciprocated for now. Indeed, some of our interviews with officials from the region suggest they would welcome more Japanese investments, but are still struggling to convince the famously risk-averse investors to expand operations in these relatively newer markets.

Even though in its early stages, the implementation of the BRI has raised the profile of China in the region even further. The prospect of the BRI implementation presents the U.S., EU and Japan with an opportunity to reconsider their engagement with the region. These three partners share a similar goal to promote economic growth and political reforms that would enhance these countries’ resilience and unity in face of potential illiberal pressures.

The Case of Romania

“I can think of many examples of successful Japanese investments in Romania, but nothing for China right off the top of my head,” a high-ranking Romanian diplomat said during one of our interviews. This statement synthesizes the situation in the country.

In recent years, the Romanian political class and public-opinion have embraced the idea of Chinese investments with great enthusiasm. “China is on a shopping spree in Europe […] and could potentially invest hundreds of billions of Euros in Romania,” one of Romania’s main TV channels said in November 2017. The same article noted that more than 20 “giant” Chinese companies visited Romania to scout possible future business ventures. The delegation showed particular interest in energy projects, despite limited progress over more than 5 years in investments in the 3rd and 4th  reactors of the country’s only nuclear power plant, in Cernavodă. Other still-to-materialize projects in the energy field include the 2012 Sinovel deal to develop a 1.2GW in wind energy and the 2013 Ming Yang decision to invest 500 million Euro (about $588 million) to build a 200MW wind turbine project in 2013 and turn the country into the hub for Chinese wind power turbines in Europe. The few investments that actually materialized are much smaller in scope and nature, including the 40 million Euro invested by the China Tobacco International Europe Company in a factory in Buzău, and the 20 million Euro invested by a Chinese company to build bikes in Hunedoara.

By contrast, Japan’s presence in Romania has garnered less media visibility, but has been more consistent. Japanese investors began operating in Romania in earnest in the early 2000s; as of last year, it was the largest Asian investor in the country. More than 150 Japanese companies created approximately 40,000 jobs on the local market. Investments are concentrated in the automotive sector, but there is growing interest in other sectors, including the IT industry. In addition to business investments, Japan gained a lot of appreciation for its Official Development Assistance (ODA) loans that helped build or modernize important infrastructure projects, such as the shipment terminal in the port of Constanţa, gas and thermal energy products, roads and railroads. After becoming an EU member state in 2007, Romania is no longer eligible for ODA, but it is still finalizing a final loan received under this umbrella for a metro connection between the main train station and the Bucharest-Otopeni international airport.

The Case of the Czech Republic

China became the top foreign policy priority of both the Czech president and Social Democratic coalition government as early as 2012-2013. The goal was to attract Chinese investments and increase Czech exports to the East Asian country. Chinese President Xi Jinping’s visit to Prague in March 2016 included the signature of agreements worth 7.39 billion Euro by 2020. In reality, the total amount of Chinese investment reached cumulative amount of only 23 billion Czech koruna (0.9 billion Euro or $1.1 billion) in 2017.

CEFC China Energy is responsible for the vast majority of investments in the Czech Republic – and all those investments came in the form of M&As. Allegedly one of the biggest Chinese private companies, CEFC has acquired stakes in several Czech companies in different fields, including: 9.9 percent share in J&T Financial Group, 49.9 percent in the biggest private airline Travel Service; majority stakes in the Florentinum office buildings in Prague, the Lobkowicz Group brewery, ŽĎAS mechanical engineering company; and minority stakes in Médea Group and Empresa Media (which owns the Barrandov TV channel where Czech President gives long weekly interviews). CEFC’s Chairman, Ye Jianming, was recently detained in China, and the company was largely taken over by a state-owned mammoth CITIC. Its representatives promptly made a trip to Prague and reassured national political representatives that its operations will continue in the country, but it is unlikely its expansion will incorporate other segments.

Apart from CEFC, there are other investors such as TV producer Changhong, active already since mid-2000s, or Xi’an Shaangu Power which acquired Ekol, a turbine manufacturer.

In contrast to their Chinese counterparts, Japanese companies have a much larger presence in the Czech Republic, but their operations are generally less visible to both the general public and policymakers. In recent years, only Asahi’s acquisition of Pilsner Urquell, the largest and most popular Czech brewery, got some limited media attention.  

All in all, Japan has been active on the Czech market since the 1990s. Around 250 Japanese companies currently operate there, mostly in the automotive industry and its supply chain. A significant proportion of companies have been engaged into greenfield or brownfield investments. Japanese companies employ more almost 50,000 people and, according to investment promotion agency CzechInvest, Japan is the second largest investor in the Czech Republic. The cumulative amount of Japanese investments amounted to 3.6 billion Euro as of 2016. The largest investment is represented by a joint factory of Toyota Motor Corporation and Peugeot Citroën.

Multilateral Engagement

The two actors have separate multilateral formats for political engagement to promote their economic investments.

China actually uses its broad multilateral framework known as the “16+1” as a venue to maximize its bilateral engagement with its partners through sideline meetings. Each member country hosts visible annual summits by rotation, and have leading roles in particular sectors, such as Romania in the case of energy and the Czech Republic on healthcare. Our preliminary findings indicate there have been few concrete results of their leadership. The EU has become increasingly wary of this format and, for the first time in the history of the forum, the European Commission sent an observer to the November 2017 meeting in Budapest. China brushes off the EU’s concerns as unsubstantiated, with the Chinese Ambassador to the EU going to great lengths to stress his country’s support of European unity via op-eds and speeches addressed to European audiences. At the same time, China is reportedly playing with the idea of reducing the frequency of summits from yearly to once every two years.

Japan does not have a similarly holistic or visible approach to the region. Japan’s engagement with the Visegrád Group of countries which encompasses the Czech Republic, Hungary, Poland and Slovakia is the only existing multilateral format of regional. Diplomats in Tokyo privately say they are moderately satisfied with this format known as the “V4+Japan,” although they indicated it is increasingly difficult to raise rule of law concerns relevant to the business investment climate. The rest of the country’s engagement with the CEE countries is by and large bilateral – and, in cases like Romania’s, relatively recent. In this sense, Prime Minister Shinzo Abe’s visit to Bucharest in January 2018, the first of a sitting Japanese Prime Minister in the country’s history, could lead to the consolidation of further ties, and Romania’s support on international issues like the North Korean nuclear threat.

The Brexit Factor

The decision of the second largest economy in the EU to leave the Union following the so-called Brexit referendum in 2016 raises important stakes for the CEE countries. On the one hand, these countries hope to host Japanese companies that may need to relocate from the UK to continental Europe because of Brexit. A participant to an event on the V4+Japan co-hosted by the Japanese Ministry of Foreign Affairs earlier this year noted that the countries in the region are already competing more or less openly to fill that role. For example, following the first visit of a Czech Prime Minister to Tokyo in 12 years, the Czech Ministry of Industry and Trade had a round of negotiations in 2017 with its Japanese counterpart on the possibility of becoming a more important gate for Japanese businesses coming to the EU. Similarly, then-Romanian commerce minister Ilan Laufer said during his visit to Tokyo in September 2017 that his country should also be considered an attractive destination for Japanese investors in light of Brexit.  

On the other hand, the departure of the second net contributor to the EU budget will most likely result in fewer available funds in the new EU budget cycle of 2020-2026, making Chinese investments even more appealing. This may particularly be the case in countries like Romania, which have a poor track record of accessing EU funds. Furthermore, recent statements from French and German officials suggest that access to future funds may become conditional on respect of rule of law and fundamental values – a measure aimed to address the rising tide of populism in Central and Eastern Europe. This proposed measure is not welcomed in the Czech Republic either.

Another indirect benefit of Brexit is that it has enhanced political will to conclude the EU-Japan FTA, known as the Economic Partnership Agreement (EPA). In a 2017 survey by the Japan External Trade Organization (JETRO), 70.4 percent of the Japanese companies operating in the CEE countries indicated that they intend to use the EPA to enhance economic ties and investments between Japan and the region.  

Policy Recommendations

This year marks the 15th anniversary of the EU-China and EU-Japan strategic partnerships, a good landmark for all sides to reassess their relations. This reevaluation should pay special attention to the role the CEE countries and their specific set of challenges, ranging from their comparatively lower economic development, smaller markets, and problems with corruption, inefficiency, and rule of law.

Given the strategic importance of the region, the U.S. should try to become actively engaged in discussions about these relations, or to at least take these developments into close considerations when assessing its own engagement with the region. By coordinating and tailoring their approach carefully, the U.S., EU and Japan could advance their broader strategic goals effectively.

First, they could encourage economic investments in these countries. While their respective wallets may not be as deep as the BRI budget, these three Western partners hold the advantage of operating according to the highest standards. For example, the power of the “Made in Japan” brand is still very strong in the CEE countries, in contrast to more skepticism about the quality of Chinese projects. “Japan has a stellar reputation” in the region, a Romanian diplomat gushed, only to later lament that they are hard to attract.  

Second, they should make sure that the Chinese investments in Europe are in full compliance with free trade rules in general, and EU rules in particular. For example, the adoption of a proposed EU-wide screening mechanism for foreign investments would be a step in the right direction. The three Western partners should also promote their operations in the CEE countries more actively, since the general public and many decision makers are often not aware of their importance. The end result would be greater willingness of national policymakers to accommodate their investment needs, and not fall under the spell of lofty Chinese promises.

Third, they should coordinate efforts to promote rule of law and fundamental values in a region where populism is on the rise. Japan in particular may find it difficult to address these issues at first given its current limited emphasis. Both Japan and the EU have insisted they support a rules-based liberal international order that benefit their economic and political interests – and their credibility stands a strong test in this part of Europe. With China’s genuine commitment to these values still under question, Western partners need to convince that “they are in it for the long run” when it come to their relations with the CEE countries.

Dr. Irina Angelescu was a 2017-2018 Council on Foreign Relations Hitachi Fellow at the Japan Institute of International Affairs (JIIA) in Tokyo, and is currently based in Washington, DC.

Václav Kopecký is Research Fellow at the Association of International Affairs (AMO) in Prague, where he covers Chinese foreign and environmental policy.

The views expressed in this piece are their own.

Source: The Diplomat

 

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