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EU report criticizes China's New Silk Road

Nik Martin
April 18, 2018

European firms could miss out on China's $900 billion infrastructure initiative, warns a leaked report by EU diplomats. It said the New Silk Road trade corridor has the potential to disadvantage and even divide the bloc.

China container port in Shanghai
Image: Reuters/Aly Song

China's plans to create three huge trade corridors between Asia and Europe will likely hurt the European Union's trade interests, EU ambassadors have warned.

In a report leaked to German business daily Handelsblatt,  the diplomats cautioned that the $900 billion (€727 billion) mega infrastructure project "runs counter to the EU agenda for liberalizing trade, and pushes the balance of power in favor of subsidized Chinese companies."

Handelsblatt on Monday said the report contained "unusually biting content," as diplomats detailed their frustration at the lack of opportunities for European firms from the New Silk Road initiative, named after China's ancient trade route.

Report excludes Hungary

The paper was signed by the Beijing ambassadors of 27 of the 28 EU member states — with Hungary being the only exception.

'One Belt One Road' blessing or curse?

New Silk Road — which is also known as the Belt and Road Initiative (BRI) — will enable China to oversee the construction of new roads, ports and pipelines that will run through 65 countries. The initiative is widely seen as helping to cement Beijing's position as a new global superpower.

China has promised the project will benefit all countries along its route, thanks to the greater connectivity it will allow. But its main trading partners are growing increasingly suspicious over Beijing's strategic objectives, amid concerns that Chinese state-owned firms are set to reap most of the benefits.

"(At present) ​European companies have to compete against their Chinese counterparts, who enjoy almost unlimited credit from Chinese state banks," Thomas Eder, a research associate at the Mercator Institute for China Studies in Berlin, told DW.

Read more: Will China's high debt levels spark a financial crisis?

He said, even before plans for the New Silk Road have been finalized, the EU has already witnessed a decline in its share of trade with several developing countries because of large-scale Chinese investment in Asia and Africa.

Backing up the leaked report's findings, Eder predicted that unless there is a major push for China to boost transparency in the procurement process, European access to the BRI would be "only marginal."

He said Beijing has never hidden its ambition for the New Silk Road initiative to expand the presence and profits of Chinese firms abroad, who are encouraged to buy Chinese components and raw materials where possible.

Market access restricted

EU leaders and business executives have longstanding complaints about China's unwillingness to fully open its markets to foreign players. Despite Chinese assurances that reforms will be forthcoming, foreign firms insist they remain at a huge disadvantage when doing business in China or bidding for Chinese funded projects.

Reaffirming the EU's frustration, the leaked ambassadors' report urged EU states to remain united as they pressure Beijing to open up the bidding for key infrastructure projects.

"We shouldn't refuse to cooperate, but we should politely yet firmly state our terms," Handelsblatt cited one high-ranking EU diplomat as saying.

Read more: IMF's Lagarde warns China on 'Silk Road' debt

Damien Tobin, a lecturer in Chinese Business and Management at London's School of Oriental and African Studies (SOAS), believes the EU — which sits at the opposite end of the three trade corridors that make up the New Silk Road — will still benefit hugely from its completion.

He said many of the bloc's biggest companies are also well represented in countries along the trade route, and that Beijing has always been "clear on the areas where it sees benefits from the participation of foreign firms."

'Opportunities exist'

"Chinese companies have developed capabilities in areas such as infrastructure construction, but EU companies retain significant advantages in downstream technologies and financing," Tobin told DW.

Macron travels China's New Silk Road

Reacting to the leaked report, the European Union Chamber of Commerce in China said in a statement it was vital that trade and investment flow equally in both directions, and again called on Beijing to unlock its markets to foreign players.

"The success of the Belt and Road Initiative will largely be predicated on open markets, balanced trade, transparency and reciprocity," it wrote in an email to DW.

"The European Chamber expects to see transparent public procurement processes put in place that will allow European and Chinese companies, and especially private companies, to compete on an even playing field with projects going to the strongest bidders."

"Not doing so would likely result in funds being wasted and projects fail," the statement said.

Read more: Japan commits to China's 'One Belt, One Road' initiative

European unity at risk

Another concern raised in the ambassadors' report was the potential of the New Silk Road initiative to sow division among the EU's 28 member states, many of whom are desperate to attract new Chinese investment to upgrade their crumbling infrastructure.

"China has already succeeded on several occasions in undermining EU cohesion," warned the Mercator Institute's Eder.

He said Hungary's refusal to sign the report was indicative of the benefits it is likely to receive from China's investment in Eastern Europe, which will see railways, motorways and power plants upgraded.

He also cited Hungary and Greece's refusal to sign EU statements critical of China's human rights record, and following the tribunal ruling on the South China Sea dispute.

China is already facing criticism for saddling partner countries in the New Silk Road project with too much debt. Sri Lanka, for example, was forced to offer a 99-year lease on the strategically located and bustling Hambantota Port to pay down debt.

But SOAS' Tobin believes it is not in China's long-term interests or those of its large state-owned enterprises to see the EU's fragile consensus torn apart.

"It is not clear that such (Chinese) investments would benefit from the uncertainty brought about by different rules on investment across different (EU) member states," he said.

Clarity needed

Instead of taking aim solely on Beijing, member states would profit from a more unified position on Chinese inward investment, Tobin suggested.

"(It) would prevent large quantities of perhaps inefficient and speculative investments concentrating in particular regions."

Read more: Australia, US, India, Japan mulling 'infrastructure scheme to rival China'

The EU's External Action Service, which is in charge of foreign affairs for the bloc, refused to comment on the leaked report.

But in an email to DW, it reiterated the European Council's support for the infrastructure initiative "on the basis of China fulfilling its declared aim of making it an open platform which adheres to market rules, EU and international requirements and standards, and complements EU policies and projects, in order to deliver benefits for all parties concerned and in all the countries along the planned routes."

China builds new billion dollar 'Silk Road'