Bruno Macaes, a former Europe minister of Portugal and author of a forthcoming book entitles We are all Eurasians Now, says the EU should pay more attention to China’s industrial policies in Central Asia and Eastern Europe.
With the United States retreating on the global trade policy scene in the aftermath of the election of trade-sceptic Donald Trump to the presidency to the world’s most powerful country, all eyes will now be on China. Some EU officials are already watching with a degree of schadenfreude how the flagship US-led Transpacific Partnership is put on hold and China enters the fray in the Asia-Pacific.
Over the week-end (20 November 2016) at the Asia-Pacific Economic Cooperation (APEC) meeting in Peru, China has both announced it would now take the lead on free trade in Asia – and announced it would not be ready to reduce tariffs on sensitive products in the Environmental Goods Agreement it is currently negotiating with mostly Western economies. This could be the prelude to a more dominant, more assertive China on the world trade scene.
Europeans will be tempted to dismiss all this as being a largely US-Asian affair, whilst trying to reap a first-mover advantage for its businesses in the region by concluding its own deal with Japan – under negotiation over the last three years – and moving ahead with ratifying two already concluded trade agreements with Singapore and Vietnam, perhaps already in 2017. EU trade deals with the Philippines and Indonesia are also in the pipeline.
It is too early to say what stronger Chinese presence in East and South East Asia will mean for European trade policy. But there is one area the EU is not looking at closer enough, and this Central Asia and the Eastern flanks of the EU, says Bruno Macaes, a former Europe minister for Portugal currently affiliated with the Carnegie Endowment for International Peace.
Beijing has been deploying an ambitious Silk Road initiative since 2013, with a maritime dimension – the ‘Belt’ – and a Eurasian landmass dimension – the ‘Road’ – , spanning the whole continent. While Europeans see China’s Belt and Road project as mainly involving building transport infrastructure in a deadlocked region, or as a geopolitically-driven but shallow projet, Macaes, who has spent most of 2016 travelling in China and Central Asia, believes the project is as much about trade, investment and industrial policy.
Transnational industrial policy
The Central Asian dimension of the Silk Road initiative is “basically a free trade agreement with a transport infrastructure dimension attached to it”, Macaes explained to Borderlex. “One Chinese expert told me that the Belt and Road Initiative is the first example of “transnational” industrial policy. “Formerly, all industrial policy was national,” he said”, Macaes writes.
Further: “the ultimate purpose of the Belt and Road Initiative is deep economic integration through the development of global value chains”, Macaes explains in a briefing paper published by the Carnegie Endowment. China is currently trying to climb the value-added chain in its industry, and notably its currently flailing steel industry. By investing in Central Asia, it wants its state-supported companies to outsource production of cheaper industrial inputs to its backyard and focus on the higher value added part of industrial production.
Europeans should watch out, Macaes warns. Over time China’s partner countries “will adapt their industrial and trade policies to China’s goals. They will no longer produce to fit our industries, but to fit China”, Macaes told Borderlex over the phone. European industry risks ending up being “in a position when our supply chains will become dysfunctional”.
The Belt and Road initiative draws in more than sixty countries, and Beijing has earmarked close to US $ 1 trillion (ca € 900 million) for the project. This also includes countries on the Eastern flanks of the EU. Since 2012, China has been meeting regularly with Central and Eastern European countries (EU and non EU members), the Baltics and the Balkans in a so-called 16+1 format. The latest meeting took place early November 2016 in Riga, Latvia, and was totally ignored by the Brussels-based media. These countries’ goal is to be able export to China via the transcontinental rail network Beijing has been developing in recent years, and to receive more Chinese investments.
The EU is not paying enough attention, Macaes deplores. “We have been sleeping”, says Macaes. A joint Commission and External Action Service document entitled “Elements for a New EU Strategy on China,” published June 2016, “mentions the Belt and Road only in a couple of brief passages, and then to affirm that “the aim should be to help build sustainable and inter-operable cross-border infrastructure networks in countries and regions between the EU and China”, so Macaes’ report.
The EU should instead step up its presence in Central Asia and clinch investment deals with these countries. Turkmenistan, for instance, lost the Russian gas market after Moscow cut off Turkmen supplies. Now Turkmenistan is fully dependent on exports of gas to China via a recently built China-financed pipeline. Europe needs to get involved more actively, not only in Turkmenistan, but also Azerbaijan, and the rest of Central Asia, Macaes said.
To avoid being side-lined in future Chinese-centred industrial supply chains, Macaes recommends that the EU quickly finalise the current free trade negotiations with Japan and become more demanding on China in requesting reciprocity in market access for its investors. As the EU tries to find a compromise with itself and China on the issue of granting China market economy treatment in its antidumping law, Macaes believes the EU should condition this not on China reducing steel overcapacity but on opening up to European investment.