WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

By Peter Havlik

The Chinese economy is poised to overtake the United States before the end of the next decade; in terms of purchasing power parities, it is already now 20% bigger according to the World Bank. The unprecedented four-decade-long catching-up process by China and its geopolitical and geo-economic consequences caught most observers in the West unprepared. In this context, a recent issue of the influential US journal Foreign Affairs is dedicated to the implicit question ‘Who Will Run the World?’. While a Chinese-led world order would be an ‘illiberal one’, a ‘new democratic rules-based’ order is less likely than a world with ‘little order’ according to the opinion expressed by Richard Haass (p. 30). In other words, ‘China is trying to displace, rather than replace’ the United States (ibid., p. 31).

China’s rising foreign investment abroad is a relatively new phenomenon. According to UNCTAD, Chinese outward FDI was meagre (less than USD 20 billion per year on average) ten years ago, but jumped ten times (to nearly USD 200 billion) in 2016. By end-2017, Chinese outward FDI stocks reached USD 1,500 billion, almost matching the cumulated inward FDI (for comparison, in 1995 the inward FDI stocks in China – USD 100 billion – had been more than five times bigger than Chinese outward FDI). The Chinese use of projecting economic power has become obvious at the latest with the ‘One Belt, One Road’ (OBOR) initiative, or ‘Belt and Road Initiative’ (BRI) launched in 2013. This huge, long-term and wide-ranging infrastructure investment project of at least USD 1,000 billion is spreading Chinese influence beyond Eurasia to Africa and Europe by offering credits and other assistance without any usual Western ‘strings’ such as transparency or the respect for human rights attached. In other fields, China is also moving up the manufacturing value chain: in science, in space exploration (landing on the dark side of the moon), cloning human DNA etc., with perhaps more significant global consequences.

Increasing hostility in the US and parts of the EU

The rise of China’s economic power has provoked contradictory reactions in the United States. This has included President Trump’s decision to leave the Trans-Pacific Partnership (TPP) trade agreement negotiated by the Obama administration (which excluded China anyway), launching a trade war by imposing prohibitively high tariffs on selected imports from China. More recently, the US has imposed restrictions on Chinese investments, and bans and warnings on Chinese digital equipment purchases and technology transfer (even issuing an arrest order for Huawei Chief Financial Manager Meng Wanzhou in Canada), accusing China of intellectual property theft and spying.

The European Union joined the US blame and shame campaign against China in December 2018, with Germany (where Huawei European headquarters is located), France and the United Kingdom raising concerns about Chinese advanced digital technology, in particular bidding for advanced 5G telecom licences. According to Bloomberg, Chinese wireless technology is winning in Europe, the Middle East and Africa, with Huawei reaching a 40% market share in 2018, followed by Ericsson with 36%. In the Czech Republic, for example, local cybersecurity experts even called for a boycott of Chinese electronic equipment on the absurd pretext that ‘all Chinese producers are state-controlled’. The Czech National Cyber and Security Information Agency issued a similar warning against using Huawei and ZTE telecom equipment by government agencies, leading to an (un)diplomatic spat between Czech Prime Minister Andrej Babiš and Chinese Ambassador Zhang Jianmin in Prague at the end of December 2018. In what seems to be a concerted anti-Chinese effort, the Polish police detained the local Huawei representative on spying allegations in January 2019.

16+1, BRI and the EU response

Ironically, the above Czech-Chinese dispute adds more fuel to the EU-China rivalry and is of particular importance given the ‘16+1 Framework and Economic Relations between China and the Central and Eastern European Countries’. ‘16+1’ represents the so far most important Chinese investment initiative in Europe, established already in 2012 and actively promoted by Prague and Czech President Miloš Zeman in particular. Despite this, Chinese investments in Central and Eastern Europe are still rather low: the Chinese FDI stock in CESEE has so far reached only 0.2% of the total, according to wiiw’s estimate.

Similarly to the ‘16+1’ initiative, the EU’s reaction to China’s BRI has so far been delayed and rather hesitant: only in September 2018, the European Commission adopted an ‘EU Strategy on Connecting Europe and Asia’ that offers a different approach from that taken by Beijing with its flagship Belt and Road Initiative. The EU approach is founded on sustainable, comprehensive and international rules‑based connectivity. However, compared to the Chinese BRI, the proposed EU Connectivity Strategy not only lacks sufficient resources, but is probably also excessively restrictive owing to insisting on the above-mentioned ‘strings’ and thus less attractive to participating countries – despite numerous recent criticisms of Chinese BRI-related activities in Africa and Asia that lead to a ‘debt trap’.

West must accept China’s inevitable rise

Chinese investments abroad are poised to grow in the future – in line with the rising strength of the Chinese economy – of course unless there is a major disruption in trade flows and a resulting global crisis. At the same time, the above reactions by both the US and the EU to China’s rising power and its display in the economic arena indicate the Western discomfort with the emerging new global order. (In contrast, Russia is changing the pivot from Europe to China as one of the consequences of its conflict with the West.) Western efforts to restrict Chinese investments seem to be either a poorly disguised attempt at containing the rise of China, or part of an emerging paradigm shift towards protectionism by the West itself – as globalisation is perceived by some in Washington and Brussels to no longer serve Western interests. Paraphrasing the famous paper on competitiveness written by Nobel laureate Paul Krugman, these efforts are not only wrong, but could represent a ‘dangerous obsession’.

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