Is China’s “Win-Win Cooperation” a Loss for Europe?
In January 2020, the European Union Chamber of Commerce in China published an extensive analysis of the limited role of European companies being able to participate in the Belt and Road Initiative (BRI). The results of the survey of its member companies doing business in China–termed The Road Less Travelled: European Involvement in China’s Belt and Road Initiative–is revealing in many respects.
• Transparency and timely access to information for European firms seeking to engage in BRI-related project tenders in China is lacking. The lack of transparent bidding and procurement processes constitute a recurring obstacle to the participation of interested European companies.
• Where the BRI ventures outside China with large-scale infrastructure development projects, the Chinese or local authorities in host countries regularly award the bulk of the public tenders (provided one has taken place) to vertically integrated state-owned enterprises (SOEs).
• Chinese SOEs provide a comprehensive infrastructure project toolkit, ranging from financing to construction materials, services and labor. Moreover, such SOEs are characterized by extensive state-aid provisions and the arrangement of cheap loan financing by Chinese state-owned policy banks. This allows Chinese companies to submit exceptionally low pricing levels during the tender process.
To illustrate the latter observation, consider the following development. In October 2019, the public entity responsible for publicly funded transport projects in Stockholm–Region Stockholm–awarded three public tenders for worker access tunnels to a subsidiary of the China Tunnel Railway Group. The decision by the local Swedish authority has a precedent. In January 2018, the EU-financed Peljesac Bridge project was awarded by the Croatian Road Authority to a consortium of Chinese state-owned enterprises, led by the China Road and Bridge Corporation.
What do these two examples tell us about level playing fields and reciprocity in BRI-related projects? What is becoming increasingly obvious is that European firms seeking access to BRI projects inside and outside China face a variety of rising hurdles. Meanwhile, Chinese state-owned companies are successfully pricing out their European competitors in public tenders, some of which are 85 percent co-financed by EU funding facilities. The combination of low tenders, subsidized SOEs, utilization of EU funds, and a fundamental lack of reciprocity is a winning formula for Chinese companies. According to European International Contractors (EIC), foreign construction companies operating in China are excluded from participating in domestically-financed public tenders in the construction sector.
These restrictions are part and parcel of a wider challenge for European companies engaged in competition with their Chinese peers, namely the openness of the EU’s public procurement market vis-à-vis discriminatory practices upheld by the authorities in Beijing. Despite being a member of the WTO since 2001, China has refused to sign on to the trade organization’s Government Procurement Agreement (GPA). Equally, while the debate over next generation 5G networks and the inclusion of the Chinese telecommunications firm Huawei continues in Europe, China is withholding the issuance of licenses to European providers (e.g., Nokia and Ericsson) of 5G technology in its domestic market.
There are three major opportunities to change these restrictions in the coming months. However, the planned meetings now critically depend on the capacity of the Chinese side and the willingness of the European representatives to meet despite the coronavirus epidemic. In late March, Beijing will host the EU-China Summit, the first direct contact between the political authorities in Beijing and the new European Commission as well as the European Council. A month later, the ninth annual 17+1 summit of heads of states and governments from Central, Eastern, and Southeast European countries will convene in Beijing. Finally, the Chinese president Xi Jinping will travel to Leipzig in September 2020 to attend a summit with the leaders of all 27 EU member states (minus the United Kingdom) organized under Germany’s six-month rotation as president of the Council of the EU.
The discussions with Chinese representatives in Beijing, Leipzig, and Brussels must include a renewed focus on an International Procurement Instrument. The European Commission, the European Council, and the EU Parliament are currently negotiating an EU version of the IPI. The current draft does not (yet) guarantee opening third-country procurement markets–including China–for European companies. While this regulatory deficit persists, the European procurement market remains entirely open for third country bidders. In other words, the rhetoric of “win-win cooperation” sounds like a losing proposition for many European companies. Two suggestions could overcome such deficits.
• The first includes the principle of “positive reciprocity.” In international trade, this principle is based on fairness, i.e., requiring participating (commercial) parties to reciprocate positive actions (by at least one party) in kind. Put otherwise, it requires a “quid pro quo” type of response. However, existing divisions among European institutions, including at the EU level, make the presentation of a more unified approach vis-à-vis China a major collective action challenge. The representatives in Beijing are well aware of this strategic lacuna.
• The second suggestion proposes the introduction of a review mechanism (e.g., in procurement procedures) for market access conditions. If China does not provide reciprocal access in a pre-defined sector, then prior to considering negative sanctions (such as tariffs), a review mechanism accepted by both parties would be set in motion. Such an instrument was introduced in the multilateral nuclear agreement with Iran and was recently activated by the European signatories of the agreement.
Both suggestions underline EU member states’ lack of policy coherence and strategic unity of purpose in their interactions with China. However, the formulation of a comprehensive strategy vis-à-vis China is gradually taking place (e.g. in the field of investment screening.) Its definition is the result of lessons learned in the course of the past decade when engaging with China.
What we can observe is the transformation of ad hoc initiatives vis-à-vis China towards the emergence of a set of strategic priorities and a better understanding of the legal implications of infrastructure project finance with Chinese interlocutors. These developments underscore an acknowledgement of the urgency of capacity building. This is a work in progress for most countries dealing with Chinese counterparts. In short, countries in the EU and those seeking to join the EU (e.g. in the Western Balkans) are in the process of developing agency towards and competence with China.
Jens Bastian is an independent economic analyst in Athens, Greece. His current focus is on China’s investment and lending footprint in Europe, with a particular emphasis on the region of Southeast Europe.