Beijing’s Central and Eastern European Charm Offensive: The Implications of China’s Growing Presence in the New Europe

NavigatiNg UNcertaiNty U.S. - ceNtral eUropeaN relatioNS 2012 Center for european poliCy analysis July 2012 Navigating Uncertainty U.S. - Central European Relations 2012 A project by the Center for European Policy Analysis (CEPA) July 2012 Editors: Dr. Jakub J. Grygiel, Senior Fellow at the Center for European Policy Analysis and the George H. W. Bush Associate Professor of International Relations at the School of Advanced International Studies (SAIS) of The Johns Hopkins University (Washington, DC) Robert Kron, Research Analyst at the Center for European Policy Analysis A. Wess Mitchell, President of the Center for European Policy Analysis Gabriela Paskova, Research Analyst at the Center for European Policy Analysis and Project Manager Center for European Policy Analysis 1225 19th Street, NW Suite 450 Washington, DC 20036 Tel: (202) 551-9200 E-mail: info@cepa.org www.cepa.org © 2012 by the Center for European Policy Analysis, Washington, DC. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the Center for European Policy Analysis, except in the case of brief quotations embodied in news articles, critical articles or reviews. ISBN: 978-0-9839194-2-1  Table of Contents Introduction......................................................................................................................... 5 Jakub J. Grygiel, Robert Kron and A. Wess Mitchell Section I: Evolving Europe How EU Politics Split Central Europe................................................................................... 9 David Král Visegrád Defense Cooperation: A Recipe for Success....................................................... 17 Robert Kron and István Balogh The Anchorless Pivot: Where Central Europe Should Fit in America’s “Pacific Century” ............................................................................................................. 26 A. Wess Mitchell, Peter B. Doran and John R. Lambert Section II: Shifting Neighborhoods Central European Democracy Promotion: From the Post-Soviet Space to the Arab World?...................................................................................................................... 41 Kristina Mikulová Central Europe and the Eastern Partnership in 2012: Our Niche, Their Chance............... 49 Anna Stumpf The “Other” Neighborhood: Turkey in East-Central Europe.............................................. 56 Joshua W. Walker Section III: Changing Global Landscape Beijing’s Central and Eastern European Charm Offensive: The Implications of China’s Growing Presence in the New Europe............................................................................... 64 Simona R. Soare Which Way Forward for EU-Russia Relations: A Central European Perspective................ 74 Dominik P. Jankowski and Paweł Świeżak U.S.-Central European Relations after the “Pivot”............................................................ 82 Elbridge Colby Conclusion......................................................................................................................... 89 Jakub J. Grygiel, Robert Kron and A. Wess Mitchell iii July 2012 Section III: Changing Global Landscape Beijing’s Central and Eastern European Charm Offensive: The Implications of China’s Growing Presence in the New Europe By Simona R. Soare* The rise of China as a geopolitical pole is well documented and frequently analyzed, but the impact Beijing’s growing financial and political clout may have on America’s allies in Central and Eastern Europe are understudied. The region sits at the nexus of long-entrenched Russian interests, U.S. strategic patronage and increasingly, Beijing’s wandering eye. Simona Soare explores how the confluence of these forces might interplay with the strategic foreign policy calculations of Central European capitals. Thus far, while Chinese investment in the region is rising, the U.S.-Central European relationship has acted as a buffer preventing a proportional increase in Chinese political influence. But we cannot assume this model to be indefinitely sustainable, as a restive Moscow becomes increasingly worried about Beijing’s power constraining its own interests in its “near abroad.” As U.S. presence in Central and Eastern Europe begins to wither, China may be positioned to fill the void. Introduction As the international system moves toward multipolar distribution of power and growing presence of rising powers such as China in areas of strategic interest for the United States, a plethora of scholars have began arguing about the inevitable end of America’s long-lasting global prominence.1 The debate is usually associated with a fairly strong quantitative case for China’s comparative power gains following the global financial crisis and the relative U.S. withdrawal from areas of former interest and substantial strategic presence.2 One of these areas is Central Europe (CE), a region comprised * Simona R. Soare is a Ph.D. Candidate at the National School of Political and Administrative Studies (NSPAS) in Bucharest. 1 Christopher Layne, “The (Almost) Triumph of Offshore Balancing,” The National Interest, January 27, 2012 and Aaron L. Friedberg, A Contest for Supremacy: China, America, and the Struggle for Mastery in Asia, New York: W.W. Norton, 2011. 2 Thomas L. Friedman and Michael Mandelbaum, That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back, New York: Farrar, Straus and Giroux, 2011. 64  Beijing’s Central and Eastern European Charm Offensive of the new members of both the European Union (EU) and the North Atlantic Treaty Organization (NATO), which have traditionally had particularly strong strategic ties with Washington. As the United States reduces the number of its troops in Europe, while the much-acclaimed and strategically desired European Ballistic Missile Defense site moves forward at a slower pace than initially anticipated, and American foreign direct investment (FDI) and official development assistance in the CE region drops, China is considered — perhaps not without good reason — a prime suitor to take its place. But is there real cause for concern? What are China’s interests in Central Europe? What are the benefits favoring further Chinese involvement in the region and what are the main obstacles to such a course of action? Are Chinese and Russian interests in Central Europe likely to interplay? What impact would the Chinese-Russian nexus have on regional strategic and political policy calculations? Are there any intervening factors likely to influence this strategic equation? And perhaps most of all, what would heightened Chinese involvement in Central European affairs mean for the U.S.-Central European relationship? Chinese Engagement in Central Europe: The Benefits China is the largest developing economy in the world and is estimated to become the largest source — as well as recipient — of FDI by 2015. In 2010, China ranked fifth on the list of FDI sources in the world, having doubled its nominal FDI outflows from approximately $27 billion in 2007-08 to more than $68 billion in 2010.3 Since the early 2000s, China has also surpassed the United States as the EU’s largest trading partner and source of imports, and it holds the largest bilateral deficit of the Union.4 At first glance, this critical statistic may on the surface indicate that Chinese influence in Europe is on the rise; and many analysts fear that with Europe’s shifting economic prospects, Chinese- European relations will evolve and by virtue of economic necessity will see a significant change of course in the near future. However, the picture is much more complex than that. On one hand, since the mid- 2000s Central and Eastern European countries have been the largest recipients of Chinese FDI in the EU — with the exception of Germany — and investment prospects for the next five years are rising.5 On the other hand, a number of inconsistencies can be found within any analysis of the Chinese financial and commercial impact on the region. First, high quality, reliable and verifiable data is largely missing. There are significant discrepancies between the data reports provided by the target countries and the official 3 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment, Chinese Ministry of Commerce (MOFCOM). Available here: http://bit.ly/QhCrzs. 4 EUROSTAT, European Comission Directorate-General Trade, EU Bilateral Trade and Trade with China, March 21, 2012. Available here: http://bit.ly/NDYPRx. 5 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment. 65 July 2012 Chinese figures, where the latter seem to greatly underestimate the amount of FDI to the region. For instance, in 2010, China’s data accounts for a total of $125 million of FDI to Romania, whereas the Romanian authorities reported a figure of over $385 million.6 Moreover, most analyses claim that Chinese FDI inflows to the region have surpassed those to Africa or Latin America. In reality, however, the figures they present also contain data from the Commonwealth of Independent States (CIS) and Mongolia, which is where most Chinese investment is currently directed. Yet Central Europe along with the CIS and Mongolia receives fewer than three percent of total Chinese FDI; even if, the growth rate of inflows to these countries is highest, with the exception of Asia.7 However, Chinese FDI inflows have followed a trajectory of substantial growth only since 2009; until then, they were rising at a much slower pace as Europe as a whole was exploiting its savings in developing a demand-driven economy and had little use of or need for a massive inflow of Chinese capital. Another reason why Chinese commercial and investment ventures are misrepresented in many available scholarly analyses is that their influence is usually portrayed as being in direct proportion to the monetary amount involved. These analyses emphasize concerns associated not particularly with Central and Eastern Europe, but rather those commonly brought up with regard to the Chinese presence in Africa, Central Asia and Latin America (i.e. the The financial crisis created protection of rogue or authoritarian regimes and unfair competition a financial opportunity business practices). Moreover, for China to increase its Chinese funds are assumed to be attractive to states in Central Europe investments and economic because they are perceived as “easy presence in the European money” with “no political strings attached,” unlike investments from markets. Western donors. Instead, over the course of the last five years, Central European countries’ appetite for Chinese FDI has been steadily rising as a result of two facilitating factors. First, was the financial crisis that heavily affected the United States and Western Europe, the largest economic partners and FDI donors for these countries. This created a financial opportunity for China to increase its investments and economic presence in the European markets, a chance Beijing took by consolidating bilateral economic relations with European 6 The official data for China is taken from the 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment, published by the Chinese Ministry of Commerce (MOFCOM). The official data for Romania is taken from the Romanian Ministry of Public Finance. 7 For more details, please see 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment and 2006 Statistical Bulletin of China’s Outward Foreign Direct Investment, Chinese Ministry of Commerce (MOFCOM). Available here: http://bit.ly/NOVTmb. 66  Beijing’s Central and Eastern European Charm Offensive economic heavyweights such as Germany, France and the United Kingdom (UK), as well as through a peripheral bilateral approach to Central European countries. Second were the adjustments in the EU’s policy toward China, which acknowledged Beijing as a global economic great power. However, in light of Chinese Premier Wen Jiabao’s European tour in March 2012, there is a strong indication that things may be changing in China’s relationship with Central European countries. China has been signaling how important Central Europe is in its overall foreign policy priorities by developing since the early 2000s a regionally-focused policy, all the China has a consolidated, while conducting relations bilaterally with each of the region’s countries. structured and planned This is a consequence of the different approach toward interests China has in each of them. For example, Chinese policy toward Central Europe’s Romania, Hungary and Poland is driven markets and economies. mainly by investment — particularly in transport-related logistics. Beijing is actively seeking access to big infrastructure projects as well as to the fields of agriculture and tourism. China knows these sectors benefit from steady and generous funding at the national and European levels and its entry in this market is increasingly regarded as a strategic economic interest by Beijing. By contrast, in the Czech Republic, Slovenia and Slovakia, China is mainly looking to their exports; as the country slowly switches to a consumer-based economy, its imports will rise and this may benefit some of these countries. Also, Chinese interests in the Sourthern parts of Central Europe, all the way to the Mediterranean, shift once again, emphasizing investments in large port infrastructure projects as well as railways. While the Premier’s European tour does not mark an abrupt change in China’s Central European policy, it does put things into perspective and reveals a consolidated, structured and planned Chinese approach toward the region’s markets and economies. Moreover, this approach takes into account the potential rivalry between regional states over economic ties with China, as well as the structural weaknesses of the European construct, which Beijing bypasses with its bilateral tactics: addressing mutual interests in each relationship and emphasizing the different economic interests in individual countries in the region and the advantages China can bring to the table. Last, but certainly not least, the Premier’s tour revealed a potentially disturbing prospect: China’s growing ability to leverage individual relationships to enhance its agenda-setting capacity in its bilateral relations with the EU and its members individually (a tactic not unlike that employed by Moscow). This is symptomatic of the overall lack of regional 67 July 2012 policy coordination toward Beijing on the part of Central Europe, beyond the limited and sectoral approach at the EU level.8 Chinese Engagement in Central Europe: The Obstacles Economic Constraints Existing analyses are fairly unclear about China’s interest in strengthening its economic, commercial and financial presence in Central Europe. These interests relate primarily to gaining access to new markets and technology. Chinese investments in Romania, Bulgaria, Hungary, Poland and the Czech Republic have several things in common: They are relatively small; they tend to be scattered across a wide array of sectors, ranging from automobiles, to textiles, retail and computers; they are usually developed as joint ventures within local markets; and they are inconsistent and unstable over time. These are all signs that the Chinese government is trying to penetrate the European market, which has proven more resilient — especially given the economic crisis — than Beijing initially estimated. Beijing is on a “charm At the same time, though, these offensive” in Central trends are also indicative of China’s Europe, trying to win over reluctance to take the European and regional markets by storm, as well as regional markets as well of Beijing’s very prudent investment as change regional public policy predicated on the principle of minimal risk-taking on single perceptions about China. investments. This is a peripheral, sectoral and bilateral approach which emphasizes mutual advantages and maximizes the public diplomacy gains China makes off its regional economic presence and investment — however limited it may be at present — indicates that Beijing is on a “charm offensive” in Central Europe, trying to win over regional markets as much as it is trying to change regional public perceptions about China. Yet it seems that while in the early 1990s China overestimated the political cohesion of the EU, in the late 2000s it has underestimated it. European market regulations apply to the new Central European members and limit the potential Chinese FDI inflows to the region, preventing it from skyrocketing. In addition, Chinese FDI inflows in Europe in general and in Central Europe in particular depend on reciprocity, which is a key issue 8 See for instance, François Godement, “Europe’s Relations with China: Lost in Flight?” Transatlantic Academy Paper Series, April 2011, p. 4; and John Fox and François Godement, “A Power Audit of EU-China Relations,” ECFR Policy Report, April 2009, p. 2. 68  Beijing’s Central and Eastern European Charm Offensive of concern at the EU level, especially given the trade deficit the EU is registering. Some analyses are very optimistic that as China shifts to a domestic consumption economic model — as the trends since early 2010 suggest — Europeans will find the Chinese market more accessible than in the past. But this much awaited effect is currently nowhere in sight, which creates a lot of frustration in the EU and especially among low- level economic agents, such as those in Central Europe, as it means the gate to China’s expanding markets is closed. Central European Competition China is the world’s largest source of low-income labor and the largest producer of labor-intensive products and services, which puts it in direct — albeit disproportionate — competition with Central European states that also rely on these comparative advantages for their growth rates. China has therefore developed its “charm offensive” in the region, With China’s potential to where investment is usually established as part of a joint venture enter the European market, so that local markets do not feel Russia risks being sidelined. overwhelmed by Chinese goods, services and funds. The relationship is instead portrayed as one of growing interdependence. However, governments in the CE region remain apprehensive about too strong a Chinese presence in their markets. Poland is by far the most cautious, whereas Romania and Hungary appear the least concerned. Among the CE countries, Romania has traditionally enjoyed the closest strategic relationship with China, but there is still a lot of apprehension to be overcome in bilateral economic relations as well as numerous complaints from Beijing that will need to be dealt with effectively and at a much quicker pace. Moreover, CE countries tend to be competitive over access to Chinese FDI and shares in the growing Chinese market. This explains why they have very different perspectives on China’s potential role in the region. By all accounts, however, China will most likely be an increasingly important part of the Central European landscape in coming years — because it is looking for new markets and technology, but also because both Beijing and the regional capitals are seeking to diversify their economic partnerships. Yet regional countries remain aware of the unbalanced relationship they are entering into: China is increasingly capable of setting the bilateral agenda and able and willing to provide much-needed capital; but Beijing is not willing to allow them equal access to its markets. China-Russia Nexus in Central Europe? One important factor usually overlooked by most analyses dealing with China’s role in Europe — and Central Europe specifically — is Russia. On the surface, the interplay of 69 July 2012 Russian and Chinese interests in the region might appear congruent — rendering the two countries natural allies as they are both generally considered anti-Western and anti-American in particular. This used to be the case in the 1990s, and perhaps even in the very early 2000s, but the reality in Central Europe is no longer the same. Given China’s potential to enter the European market, Russia risks being sidelined. With Vladimir Putin’s return to the presidential seat in May 2012, one may expect a return of the aggressive rhetoric toward Central Europe and a consolidated political presence in the CIS and Central Asia. In such a scenario, Russian and Chinese interests will tend to compete rather than converge. This does not mean that Russian-Chinese bilateral relations will become inimical, but it is unlikely the two countries will become closer strategically. Chinese economic power is already constraining Russia from the Korean Peninsula to Central Asia, the South Caucasus, and Central and Eastern Europe — an economic girdle that Russia cannot escape. Russia is one of the largest recipients of Chinese FDI as a result of China’s strategic need for access to energy resources, which implies that relations between Beijing and Moscow will not be allowed to tense significantly. Increasingly, however, China has been diversifying its energy and raw materials market — looking to Central Asia, Africa and Latin America — which provides it with a certain degree of strategic space from Moscow, and Beijing will not hesitate to take advantage of this should the need arise. It is highly unlikely that such a scenario would emerge over mere market competition in Central Europe, however. Chinese investments are still relatively small compared to Russian ones, which are also better anchored in partnerships with other regional states like Austria and usually do not target sectors intensely courted by Chinese FDI (infrastructure, agriculture and tourism in particular, thus keeping their distance from areas of strategic interest for Russia such as energy and banking). Significant differences and disagreement between Russia and China are more likely to arise in the CIS space — particularly in Central Asia and the South Caucasus — rather than in Central Europe. Chinese investments tend to be concentrated in the CIS countries and this bears bad news for Russian economic influence in the region, specifically because it offers an alternative — with no apparent political strings attached — to Russian political pressure. This is increasingly the case in Kazakhstan, Turkmenistan, Tajikistan and Georgia; and the Republic of Moldova is likely to follow in the not so distant future. If differences between Chinese and Russian policies over their interests in Central and Eastern Europe begin to manifest in the future, the region will only be indirectly affected. With CE countries’ eyes constantly on Moscow’s moves, an aggressive posture on Russia’s part and a perceived tension in its relations with China might gain Beijing a lot of support in the region. This would force the Kremlin to refocus its strategic attention from the East (the Eurasian landmass) to the West (Europe and the Western border), while grappling with rapidly declining economic clout and an increasingly 70  Beijing’s Central and Eastern European Charm Offensive weaker, albeit still substantial army. As competition grows in Asia, Russia seems to be pivoting back to the reliable European markets where it has a well-established strategic dialogue and economic investments. If China acts as an insulator between Russia and the CE countries, this might bring it closer to the region. However, this is a commitment China is neither willing nor ready to make at the moment, or in the foreseeable future for that matter, which severely undercuts the potential strategic impact. At present, and likely in the near to medium term, Russia and China — even if presumably still united in their anti-American, anti-Western drives, and with all the common security concerns they share (the American anti-ballistic missile defense system in Europe, Iran’s nuclear program and Syria among others) — do not have an obvious common interest in Central Europe. The Intervening Variables: Germany and Turkey While there are numerous obstacles in the relationship and interplay of Chinese and Russian interests in Central Europe, there are also two intervening variables with a moderating effect: Germany and Turkey. On one hand, Germany and China are slowly but steadily developing a “special relationship,” based not only on an impressive growth in bilateral trade, but also on the rather similar — neutral — approach the two countries have on strategic issues, especially in Central and Eastern Europe and the CIS. 9 Germany is increasingly believed to be able to leverage its economic weight when it comes to certain matters of common economic and political interest for the EU member states in their relations with China. At the same time there is growing concern that Germany may use this leverage to pursue its national economic interests at the expense of European ones. This heralds good news for some CE countries, such as Poland, which seem to be very sensitive to shifts in Germany’s strategic relationship with China and follow a similar path, benefiting from the good vibe of German-Chinese relations. But it might just as well herald bad news for other regional states, such as Romania, the Czech Republic and Hungary, which are not as attuned to changes in the pace of German/European-Chinese relations. However, this perspective only takes into account one aspect of the German-Chinese relationship and seems to ignore the fact that German foreign policy in relation to China is much more complex than it may appear at first glance. While it is true that bilateral German-Chinese relations are growing closer, it is also true that Germany insists on reciprocity with China at the European policy level, especially with regard to FDI and public procurement. This is one of the main aspects of EU’s China policy adjustments over the last years, and it has been fiercely defended by the Angela Merkel Administration. In many respects, this policy limited Chinese FDI flows into Europe prior 9 Hans Kundnani and Jonas Parello-Plesner, “China and Germany: Why the Emerging Special Relationship Matters for Europe,” ECFR Policy Brief, May 2012. Available here: http://bit.ly/ON9Trp. 71 July 2012 to 2010 and continues to be an obstacle even today when the European — especially Central European — need for an influx of Chinese capital is rapidly growing. At the same time, Germany is also developing a strategic relationship with Russia, which puts it in a position to leverage its political and economic influence in relation to the two actors, and have what, at this point, may be expected to be a moderating effect over the mid- term. Turkey, on the other hand, is an entirely different story. Turkish-Chinese relations are booming economically. Turkey is — and will continue to be — a hub for Chinese exports to Europe, in particular to Central and Eastern Europe, as well as a growing market for Chinese investments in transport and energy infrastructure and tourism. With Ankara and Beijing set on a clear course of strengthening their bilateral relations and trade by 2020, it seems Turkey is likely to play a significant role in China’s policy toward Central Europe. Turkey also enjoys a relatively close strategic relationship with Russia, which could act as a potential moderating factor of any tensions that might arise in Russian- Chinese relations over their interests in Central and Eastern Europe.10 U.S. Strategic Presence in Central Europe: Still the Greatest Obstacle Last, but certainly not least, there is a tendency to underestimate Central Europe’s strategic proximity to Washington and its effect on the region’s relations with China. In general, even as the United States is reducing its force posture in Europe, the CE countries will continue to look mainly to China’s geopolitical Washington as their security guarantor. The strength of NATO and CE’s bilateral strategic presence and impact partnerships with the United States acts in the region will be as an insulator for further rapprochement with Beijing, as China is seen as a growing directly proportional challenge in Washington even if this to the strength and is not necessarily the case in Central Europe. Strategically, it is highly unlikely vitality of U.S.-Central the countries in the region would ever European relations. perceive China as a potential stable security presence. Chinese policy is very inward- focused when it comes to security and thus, it does not address the concerns of Central Europeans. While being a source of profitable investment, with regard to security, China is not a responsible and trustworthy long-term partner. Taken together, these two factors are a very powerful constraint on CE countries’ willingness to engage further with China, and send a strong economic and political message. Specifically, because of Central 10 For a good analysis of Turkish-Chinese relations see Chris Zambelis, “Sino-Turkish Strategic Partnership: Implications of Anatolian Eagle 2010,” China Brief, No.11(1), January 2011. 72  Beijing’s Central and Eastern European Charm Offensive Europeans’ close alignment with Washington, their relationship with China will be strongly dependent on regional perceptions of Chinese-American bilateral relations. It will take more than a diminishing American presence in Europe to change this pattern of strategic behavior. What this ultimately means is that the Chinese geopolitical presence, and impact, in the region will be directly proportional to the strength and vitality of U.S.- Central European relations, regardless of the amount of economic investment that may emanate from Beijing. Conclusion China is not yet a permanent or a strong strategic player in Central Europe.11 Its role remains marginal, although with prospects for slow expansion over the next decade. The interests that drive Chinese economic presence in the region continue to be mainly economic — access to new markets and technology. China’s approach is a soft one, typical of a “charm offensive,” which suggests that Beijing is actively trying to convince states in the region that it is not a threat. Records show that Chinese FDI flows into Central Europe are growing at a much quicker pace than in other parts of the EU or even the world, which leaves room for speculation regarding China’s strategic interest in the region. Surely, it is not a mere coincidence that China is increasing its economic presence in a region that is of strategic import for the most significant new military installation the United States is building on the Old Continent. Beijing is increasingly interested in how regional governments view the global power shifts and how they perceive the relative increase of Chinese power; this too is no coincidence. But all in all, China’s economic presence in the region does not at this point seem to significantly impact the strategic equation for Central Europe, whose close ties with the United States act as a buffer to deeper interactions with Beijing. As the history of geopolitics has taught us, however, rapid and sudden changes of the strategic landscape are not unheard of. One factor that might affect the trend would be a downturn in Russian-Chinese relations, though this is unlikely to pertain to Central Europe, but instead to the CIS. In such a scenario, weakening CE ties with Washington coupled with more aggressive Russian posturing could break the paradigm, and bring about a new “great game” between the globe’s two largest states on the Central and Eastern European stage. 11 For a different perspective see François Godement, “Europe’s Relations with China: Lost in Flight?” 73