[Analysis] EU-China Agreement on Investment: Impact on the Western Balkans

The European Union shares with the Western Balkans countries a long-term relationship. A partnership that is expected to eventually culminate in the accession of the “Western Balkans 6” to the EU. Meanwhile, the EU seemed to perceive the growing Chinese activism in the Balkans – Europe’s backyard – as a challenge. Therefore, the news of the EU-China Comprehensive Agreement on Investment in December 2020 may come as a surprise. Even more so since, in March 2019, the EU published a strategic outlook paper labelling China a “systemic rival”.

And yet, on December 30, 2020, the EU and China signed a bilateral agreement on investments, after 7-year long negotiations. This raises two questions. Firstly, what prompted the EU to overcome its hesitancy to engage with China? Secondly, is this Agreement potentially good news for the Western Balkans? In order to answer these questions, let’s consider how this threefold-relation started.

The betrothal of the EU and the Western Balkans

Source: Comece.eu

The European Union and the Western Balkans betrothed themselves since the 2003 Thessaloniki Summit. In the declaration, the “Western Balkans 6” were officially recognized as potential candidates for EU accession. The region that had been a pillar of Euro-Atlantic security since the ’50s, and that caused so many headaches in Brussels in the ’90s, was now bound to full membership.

Since then, the European Union has become the primary investor in the Western Balkans. Starting from 2007 the EU has supplied technical and financial support to the region through the Instrument for Pre-accession Assistance. In the 2007-2020 period, the EU has supplied some €23 billion to the region for political and economic reforms.

In February 2020, the EU reiterated its commitment to enlargement through a public announcement of the Commission. And the feeling appears to be mutual, according to an International Republican Institutes’ poll in summer 2020. When asked what would they vote if a referendum to join the European Union were to be held today, a vast majority of interviewees said yes.

But the truth is that European accession comes with strings attached. Candidate-members must show full adherence to EU standards, rules, and values at the institutional, economic, and administrative level. Furthermore, in order to foster governance reform, European financing is heavily conditional. Finally, it may be true that the EU is the leading trade partner for the Western Balkans. In fact, it accounts for almost 70% of the region’s total trade. But the Western Balkans’ share of overall EU trade is only 1.4%.

A third wheel comes into play: China

Chinese Prime Minister Li Keqiang shows the way to then-President of Montenegro Milo Djukanovic. Beijing, 2015. Source: The Diplomat

This is where China came into play, dressed in a suit, shining shoes, and carrying a suitcase full of dollars. And these dollars, in the form of state-to-state loans, do not demand transparency, accountability nor market orientation. It appears clear that China does not intend to play gooseberry. Quite on the contrary, it has its own agenda when it comes to the Western Balkans. An agenda that, as it is widely known, takes primarily the form of the Belt & Road Initiative.

In the past few years, China has invested heavily in the region. The most widely-known example is the 1.3 billion$ investment in the Bar-Boljare Motorway, in Montenegro. But China has also ramped up its foreign direct investments in Serbia. As of 2018, it was the second-largest investor in the country. In Bosnia-Herzegovina, China has granted a 1.1 billion$ loan for two coal plants. The Western Balkans countries, for their part, readily accepted the Chinese generosity. After all, they are developing economies that crave foreign investments.

China: exploiting the Balkans to get to the EU?

But this should not lead to the conclusion that China has an overwhelming interest in the Western Balkans as such. On the contrary, it seems that China’s interest in the Western Balkans relates primarily to its proximity to the EU. It would thus appear that Beijing has individuated in Eastern European countries its bridgehead to Western Europe and its markets.

As expected, Europe did not receive well this perceived intrusion. In her State of the Union speech, the President of the European Commission Ursula von der Leyen included a weighty remark. She affirmed that “the Western Balkans are part of Europe – and not just a stopover on the Silk Road“. An emotional way of saying that the EU is well aware of the Chinese growing competition in the Balkans.

ANALYZING THE EU-CHINA COMPREHENSIVE AGREEMENT ON INVESTMENT

What led to the EU-China Agreement?

EU-China Agreement
Representation of the EU-China trade deficit. Source: European Commission

It appears clear that the EU and China were at loggerheads over the Western Balkans. More generally, the EU had toughened up its stance on China. The reasons for contrast were manifold. A major reason for concern was increasing authoritarianism under Xi Jinping, of course. But under the economic perspective, the perceived asymmetric openness and transparency towards China was even more worrisome.

The suspicion towards China even caused some attrition between the EU Member States. When, in March 2019, Italy signed a Memorandum of Understanding, the Guardian called the deal “controversial”. The US immediately warned Italy against China. Both German Chancellor Merkel and French President Macron confirmed that they would only deal with China through EU institutions.

Yet, the EU-China negotiations – started 7 years ago – gained momentum since 2019, when Macron met Xi Jinping to strengthen ties. Ten meetings were held in 2020 alone. The question is: what was the EU trying to accomplish by abandoning its tough posture towards China? The answers are essentially two.

The strategic reasons behind the EU-China Investment Agreement

First of all, business is business. According to an ISPI analysis, in the first 10 months of 2020, the volume of EU-China exchanges was €477 billion. Two times the GDP of Greece, or equal to that of Argentina. And it has raised by 2.2% in the past year. But the EU trade deficit towards China was €164 billion in 2019. In addition to that, Western investors do not feel treated fairly in the Chinese market. Both issues need to be addressed.

But this does not diminish the relevance of the second, more strategic, explanation. In fact, the EU is also, and above all, a union of values. It can be argued that EU leaders figured that engaging with China is a better way to get a say in its governance, rather than marginalising it. In other words, it’s more likely to get China to commit to EU standards with a carrot than a stick.

The content of the EU-China Comprehensive Agreement on Investment

EU-China Agreement
A screenshot representing Chinese President Xi Jinping, President of the European Council jean Michel and President of the European Commission Von der Leyen. Chancellor Merkel and President Macron were “surprise guests”. Source: PV Magazine

So, what does the EU-China Agreement entail?

First of all, it will allow unprecedented access to the Chinese market for European investors. In particular, quantitative restrictions, equity caps, or joint venture requirements will be eliminated. Executive Vice-President and Commissioner for Trade, Valdis Dombrovskis, tweeted: “This deal will give European businesses a major boost in one of the world’s biggest and fastest growing markets“. This should help rebalance the trade relationship between the EU and China.

Secondly, and possibly most importantly, is the so-called “level playing field” pillar. It measures and guarantees the safeguard of free and fair competition. In fact, under the Agreement’s provisions, China will no longer be able to prohibit access or introduce discriminatory practices. The accord also lays down clear rules on Chinese state-owned enterprises and transparency of subsidies. Furthermore, it prohibits forced technology transfers and other distortive practices.

Thirdly, the Agreement binds the parties into a values-based investment relationship, underpinned by sustainable development principles. This is a great accomplishment, considering how China has discarded environmental issues in the past. Beijing has committed to effectively implement the Paris agreement and to ban forced labour. Plus, it has announced the intention to achieve carbon neutrality by 2060.

The final novelty is that the Agreement includes an enforcement mechanism. Effective implementation of the provisions will be monitored at the level of Executive Vice President of the EU, and Vice Premier of China.

China and the EU’s Quest for the Balkans: Sworn rivals or Designated partners?

EU-China Agreement
Source: Sipri

To be sure, the European Union and China represent two completely different models. The first made the rule of law, human rights and macro-economic stability its core values. The other finds in economic and geopolitical expansion its reason of being but lacks transparency and accountability. But their interests over the Western Balkans do not necessarily have to overlap, nor collide.

First of all, a recent Clingendael report has pointed out that “the Chinese business-first approach, revolving mainly around objectives of economic investment and development, can by no means be compared to the scope, depth, and level of ambition of what the EU seeks to accomplish in the region”. Furthermore, increased connectivity with Europe is one of the core strategic motives of Chinese activism in the Western Balkans. Therefore, it would not be reasonable to think that China would intentionally derail their process of EU integration.

Secondly, the ongoing pandemic crisis is an occasion for Europe to put its China policy on a more open, accountable, and values-based footing. The statement by the European Commission President von der Leyen after the Agreement was signed confirms that this is, in fact, the core idea. She said: “Today‘s agreement is an important landmark in our relationship with China and for our values-based trade agenda. […] It will commit China to ambitious principles on sustainability, transparency, and non-discrimination”.

Standing firm on European values is the only way to achieve more than financial gains from cooperating with China. Getting Beijing “to behave” is the only way to not disrupt the European path of the Balkans.

How does EU-China cooperation impact on the Balkans?

The land-based portion of the Silk Road. Source: Oriental Review

As stated above, China and the EU have radically different interests in the Western Balkans. The EU is seeking fellow democracies to include as full-fledged members of a supranational project. China, instead, is merely committed to the Balkans from an economic perspective. The region, in fact, craves two things that Beijing can easily produce: infrastructural modernization (through the BRI) and foreign capitals.

A more rational division of duties.

Stemming from this realization, the EU and China can agree on limiting their respective role in the Balkans. As noted by an IISS observer: “the European Development Banks […] face a difficult decision. They do not want to lend for projects that they judge unaffordable, but neither do they want Western Balkan governments to finance these projects with Chinese loans.”

The reason for this dilemma what that China would not only impose a heavy financial burden. The Chinese model of investment would also involve anti-competitive procurement, heighten the risk of corruption, and facilitate the transfer of wealth from Europe to China.

But, as stated before, through the Agreement Europe can put in place mechanisms to control Chinese economic practices. The EU could exploit this advantage to oversee the respect of transparency and accountability in its prospective members. Meanwhile, it could focus its energies and resources on giving momentum to the political reforms necessary for accession, especially democracy-wise.

Getting China to respect European values in the Balkans

Apart from fostering corruption, Chinese investment in the Balkans was problematic also from the perspective of sustainable development.

From the environmental point of view, the construction of a BRI-related highway has disrupted the Tara river, Montenegro. An NGO and a UNESCO mission have found that the natural site might be ruined beyond repair.

From the energy perspective, as remarked above, China is financing coal plants in the region. As Western Balkans countries are bound to the Energy Community Treaty, they must reduce their reliance on fossil fuels. An EU-funded report has already defined the coal plants as “unacceptable from a climate point of view“.

Better coordination, and the respect of EU values in the Balkans, is the highroad for avoiding these issues. Once again, the EU-China Agreement comes into relevance. In fact, it creates a working group to follow the implementation of sustainable development-related matters.

  • Did the EU bit more than it can chew with the Comprehensive Agreement on Investment? Or is it a good idea to offer China a carrot rather than a stick?
  • Does the presence of two rival benefactors mean that the Balkans will attract more Foreign Direct Investments?
  • Can China be brought to respect European values, at least when doing business in Europe?

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