ERIK BRATTBERG, ETIENNE SOULA
OCTOBER 19, 2018ARTICLE
Summary: China’s global rise and its Belt and Road Initiative present a challenge to the shared interest of Europe and the United States in maintaining the rules-based international order.
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Since President Xi Jinping in 2013 launched the Belt and Road Initiative (BRI), which aims to facilitate exchanges between China and the broader Eurasian region through new land and maritime links, it has become the country’s signature foreign policy venture. The BRI’s ubiquity in Chinese official discourse and the significant resources poured into related infrastructure projects have grabbed the attention of policymakers worldwide, including in Europe. The BRI presents tremendous opportunities in terms of trade and growth, while also posing deep challenges to European interests when it comes to maintaining an open and rules-based global economic system.
Erik Brattberg is director of the Europe Program and a fellow at the Carnegie Endowment for International Peace in Washington. He is an expert on European politics and security and transatlantic relations.
In September, EU High Representative for Foreign Affairs and Security Policy Federica Mogherini released the EU’s strategy for connecting Europe and Asia, marking a significant step toward a cohesive approach to the BRI. The strategy outlines a plan to improve connectivity with Asia through measures in sectors ranging from transport and energy to the digital economy. This is a welcome step toward codifying the EU’s position in a way that carefully preserves engagement with China while also clarifying its redlines and priorities. However, it remains to be seen whether the EU can add teeth to its new strategy, allocate commensurate resources, communicate it effectively to states in Eurasia, and coordinate with other countries such as the United States.
THE STRATEGIC RELEVANCE OF THE BRI TO EUROPE
Europe is a prime investment destination for the Belt and Road Initiative. Though not all Chinese investments in Europe are strictly BRI-related, Chinese foreign direct investment there has soared from under €1 billion in 2008 to €35 billion in 2016—more than triple the amount of European financing flowing in the opposite direction. And, while the bulk of China’s investments still go to Western Europe, there has been an uptick in BRI-related activities in Central, Eastern, and Southern Europe including the Western Balkans.
Etienne Soula is a Brussels-based analyst and a former research assistant with the Europe Program at the Carnegie Endowment for International Peace.
These regions generally have political and regulatory environments that are more favorable to China than those in Western Europe. Moreover, their infrastructure needs are often substantial and their available financing options more limited. For these reasons, China has, for instance, jumped in to finance a $1.1 billion railway between Budapest and Belgrade to realize its vision of creating a transportation and energy hub for the BRI, though progress has so far been slow.
In those European countries hit the hardest by the euro crisis, China has concluded advantageous deals with cash-strapped governments that have had to privatize national assets, including critical infrastructure. A prime example of this is its investment in the Piraeus port in Greece, which it aims to use as a regional logistics hub and a key point of entry into Europe. Closely linked to the BRI is the 16+1 framework, a platform through which China has sought to engage with Central and Eastern European states outside of the EU framework.
Some of these activities have provided China with a political foothold enabling it to influence EU policies. For example, in June 2017, Greece blocked an EU statement at the UN Human Rights Council criticizing its human rights record, the first time the union failed to make a joint statement at the UN’s top human rights body. In March 2017, Hungary refused to sign a joint letterdenouncing the reported torture of detained lawyers in China, breaking EU consensus. And in July 2016, Hungary and Greece sought to block any direct reference to China in an EU statement about the ruling by the Permanent Court of Arbitration in The Hague that struck down its legal claims in the South China Sea.
In addition, the BRI’s opaque and unaccountable mode of operation when financing and investing in regional infrastructure projects through loans risks exposing already vulnerable economies to potentially unsustainable debt levels and to fiscal instability. A controversial Chinese-built highway project in Montenegro, which has sent the country’s debt soaring, highlights this problem. Other concerns are that China would be able to gain control over strategically important infrastructure such as airports and telecommunications systems that could then be used for cyber espionage or by organized crime, and that BRI projects risk weakening environmental, social, or governance standards and are in fact aimed at diverting global trade flows in a more Sinocentric direction.
THE EU’S RESPONSE TO THE BRI
There are mixed feelings about the Belt and Road Initiative in Europe. The EU is growing more skeptical and apprehensive of China’s intentions and the way that some projects are being carried out. In April, all member states’ ambassadors to Beijing (except for Hungary’s) signed a statement saying that the BRI “runs counter to the EU agenda for liberalizing trade and pushes the balance of power in favor of subsidized Chinese companies.” Nevertheless, maintaining unity remains an exercise fraught with difficulties. Several member states—including first Hungary and more recently Greece—have broken rank and signed bilateral memorandums of understanding with China on BRI cooperation. And while other EU countries such as France, Germany, and to a certain extent the United Kingdom remain, or even grow more, skeptical of the initiative, Italy has gone the other way, with its new government recently stating its intention to be “China’s first G7 partner on belt and road” and promising to sign a cooperation deal by the end of 2018 that would include sectors such as railways, airlines, space, and culture.
The EU has voiced concerns regarding BRI projects on issues such as lack of respect for labor, environment, and human rights standards; insufficient transparency and open procurement; and debt sustainability. At the June 2017 Belt and Road Forum in Beijing, European Commission Vice President Jyrki Katainen acknowledged the opportunities presented by growing interconnectivity while stressing that the EU would only endorse the BRI if China adhered to principles such as openness, interoperability, transparency, and sustainability. This was far from rubber-stamping the initiative and also demonstrated fairly strong EU unity, which reportedly took Chinese leaders by surprise at the time.
Similar concerns have been echoed by some EU member states. For example, during a visit to China in February, French President Emmanuel Macron voiced caution about the BRI, stating that there could be no “one-way” trade road leading to “hegemony, which would transform those that they cross [that is, recipient countries] into vassals.” He called for a new start in EU-Chinese relations based on “balanced rules” to address “legitimate questions” about China in Europe. Other European leaders, such as British Prime Minister Theresa May, have also refused to endorse the BRI while German Chancellor Angela Merkel has warned that China’s “New Silk Road” is not being conducted “in the spirit of free trade” and that it could lead to Chinese influence in the Balkans.
A long-awaited EU-wide policy response to the BRI is beginning to take shape. On October 15, EU foreign ministers endorsed Mogherini’s recently produced EU strategy for connecting Europe and Asia. The fact that the new strategy received unanimous support from European leaders is noteworthy and sends an unmistakable message about the EU’s ambitions and intentions. The timing of the new strategy, just ahead of the annual EU-Asia meeting (ASEM), is no coincidence either. In essence, the strategy seeks to build on and expand existing EU connectivity initiatives by establishing three broad objectives: creating transport links, energy and digital networks, and human connections; offering connectivity partnerships to countries in Asia; and promoting sustainable finance through the use of diverse financial tools.
There is still some uncertainty regarding how much more funding for such connectivity projects the EU will allocate in its next multiannual budget, which will stretch from 2021 to 2027. For instance, the European Fund for Strategic Investments is seeking to invest €500 billion in projects by 2020 while the European External Action Service is expected to guarantee €60 billion toward investments in connectivity over 2021–2027 with the expectation that this will help mobilize additional funding from multilateral development banks and the private financial institutions. Ultimately, the proposed EU budget will need to be approved by the European Council and the European Parliament. Regardless, whatever amount the EU will ultimately allocate will fall way short of the €1.3 trillion a year it estimates is needed for infrastructure investment in Asia.
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In contrast to the BRI, the initiative put forward by the EU seeks to establish a normative framework and rulebook for connectivity projects, with a strong emphasis on sustainability and respect for the rules-based international system. The principled dimension of the project is also apparent from its intention to be comprehensive, to embrace all aspects of development, and to put “people’s interests and rights . . . at the core of any policy.” Another area where the EU seems keen to distance itself from BRI methods is financing. While China is accused of conducting “debt-trap diplomacy” through stringent loan-repayment conditions, Brussels promotes multilateral arrangements that take debt sustainability into account, and resorts to both public and private funding mechanisms. However, in order for the EU to be successful in its normative ambitions, it will need to allocate sufficient funding that can attract private-sector investments, leverage unique European strengths in areas such as the digital sector, and communicate better its new approach to connectivity to states in Eurasia. Moreover, in order to make the strategy more concrete and implementable, the next step is to develop regional-level strategy documents that can allow for fleshing out more details and better differentiating between diverse regions such as Central Asia and Southeast Asia.
The EU’s position on the BRI is also based on engagement with China rather than an attempt to isolate it. From the European perspective, the BRI has the potential to be hugely positive as long as it adheres to EU market rules as well as to international requirements and standards, and also complements EU policies and projects. In a recent speech before the European Parliament, Mogherini stated that “only if we engage together with China, we can make our interests, our goals and our vision on connectivity converge.” While the EU wants to distinguish its approach on connectivity from the BRI’s philosophy, it has also been careful to highlight possible synergies and complementarity. The official reaction from China to the EU’s new initiative has also been mostly positive.
Rather than pursue a zero-sum strategy, the EU initiative seeks to build on existing dialogue with China, notably the 2015 EU-China Connectivity Platform, which aims to ensure that the BRI is an “open platform which adheres to market rules and international norms.” This has already generated cooperation on various projects. A joint statement issued at the end of the EU-China summit in July welcomed the progress made by the platform, a clear sign that channels of communication remain open. However, even if it is not intended to be in direct opposition to China, the new EU connectivity strategy is certainly a response to the BRI and reflects growing concerns in EU circles. This effort comes on top of a separate push to adopt more stringent EU investment-screening legislation that would impose restrictions on Chinese investments in certain critical sectors.
It is good that the EU is trying to forge a common approach toward the BRI and to avoid a repeat of the scramble that accompanied the launch of the Asian Infrastructure Investment Bank in 2015. On that occasion, while several EU countries remained on the sidelines, others—led by Luxembourg and the United Kingdom—rushed to join the bank to ingratiate themselves with the world’s second-largest economy. But whether the EU strategy can help forge a total consensus view among member states on how to approach the BRI is still highly uncertain.
AN AREA FOR ENHANCED TRANSATLANTIC DIALOGUE?
U.S. President Donald Trump’s administration has yet to articulate a coherent strategic response to the Belt and Road Initiative. It is largely viewed through the prism of the latest U.S. National Security Strategy, which defines China as a “strategic competitor” seeking to challenge “American power, influence, and interests, and attempting to erode American security and prosperity.” The document recognizes the challenge the BRI poses to U.S. interests, noting that “China is gaining a strategic foothold in Europe by expanding its unfair trade practices and investing in key industries, sensitive technologies, and infrastructure.”
Secretary of State Mike Pompeo has addressed the need for the United States to be more competitive in the connectivity space in Asia, notably in a recent speech on the economic dimension of the administration’s Indo-Pacific strategy, in which he pledged an additional $155 million toward connectivity projects. A bipartisan effort is also under way in Congress to modernize U.S. development assistanceto help spur more private-sector investments in development projects. As part of this effort, the Overseas Private Investment Corporation (OPIC) and USAID’s Development Credit Authority is to be consolidated into a new $60 billion agency to compete with “predatory Chinese infrastructure financing.”
The emerging EU and U.S. approaches toward the BRI have similarities but also notable differences. Unlike the United States, Europe is directly impacted by the BRI by virtue of being an end destination of Chinese connectivity projects and a major recipient of BRI investments. Another key difference is in terms of strategic perceptions of China. While Europe shares some of the Trump administration’s underlying skepticism about the BRI and harbors specific concerns pertaining to the initiative, it has a more pragmatic view of it and of China in general. With the United States escalating its unilateral tariffs against China and adopting a new hardline foreign policy toward the Chinese regime, Europe’s challenge is rather to convince the Trump administration to focus on the need for norms-based globalization and a level playing field rather than on containment of China.
Overcoming transatlantic differences in perceptions of the BRI and fostering more convergence on policy content and implementation should therefore be a priority for both sides, especially since the long-term strategic impact of the BRI is beginning to be felt across the Eurasian region. For example, exploring potential synergies and overlap between the EU’s emerging connectivity strategy and the United States’ emerging strategy for a “free and open Indo-Pacific,” which emphasizes values and rules-based order, is a promising avenue. This should include not only the European External Action Service, EU member-state foreign ministries, and the U.S. State Department, but also relevant bodies such as the U.S. Treasury Department, USAID, and their European counterparts. Strategic planners on both sides should also enhance dialogue and exchange perspectives on the long-term implications of the BRI.
The United States and Europe could also more consistently partner up to provide credible alternatives to the BRI. This would include doing more together to provide financing for connectivity projects, and to coordinate between international financial institutions, national public investment banks, and multilateral and regional donors. The European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) might also want to take a cue from OPIC, which has signed a trilateral partnership for infrastructure with its Japanese and Australian counterparts. Moreover, while neither the EU nor the United States can compete with China in terms of the sheer scale of infrastructure investments, they may have an edge when it comes to “soft connectivity” projects such as building out digital and telecommunications networks. However, the different approaches they pursue when it comes to promoting connectivity will not always overlap. The overall goal should be to have the EU and the United States rally around common objectives, while leaving each partner free to determine the methods they use.
Transatlantic cooperation on connectivity in Eurasia will allow the West to be a more competitive and attractive partner in the region. It might even incentivize Chinese lenders to become more accountable, open, and transparent. Crucially, this must be complemented with an increase in Western efforts to support political systems that respect the rule of law, so as to shore up these countries’ resilience and their ability to withstand destabilizing Chinese political influence. By providing the expertise needed to analyze Chinese projects in depth and sharing their findings with actors in the region, the EU and the United States can raise awareness about the consequences and the potential downsides of Chinese financial involvement in large-scale infrastructure projects.
Finally, there is significant opportunity for the EU and the United States to work together on creating new global high standards for trade and investments as part of broader transatlantic trade negotiations, which are now back on the agenda following the summit between Trump and EU Commission President Jean-Claude Juncker earlier this year. France also has an opportunity to make sustainability and transparency of connectivity projects a key topic during its upcoming G7 chairmanship and to involve other crucial players such as Australia and India in such discussions.
Ultimately, China’s global rise and its Belt and Road Initiative present a challenge to the shared interest of Europe and the United States in maintaining the rules-based international order. Increased transatlantic cooperation on managing the risks associated with it while also capitalizing on its positive effects is therefore required. This conversation should take place on a regular basis in various formats and has the potential to constitute a proactive and forward-looking agenda at a time when much of the traditional transatlantic relationship is otherwise in flux. In this context, Europe’s new connectivity strategy is a welcome development that will be worth following closely in the next few years.
Etienne Soula is a Brussels-based analyst and a former research assistant with the Europe Program at the Carnegie Endowment for International Peace.