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China’s Trojan Ports

John Lee

As China continues to project its presence, money, and influence into Western Europe, long-forgotten histories are resurfacing by way of analogy to the present challenge. According to one such narrative, Chinese strategy resembles that of the ancient Sea Peoples—a mysterious confederation that attacked territories in the East Mediterranean largely controlled by the Egyptian empire between 1200 and 900 B.C.E. The metaphor is an imperfect one. Not traditionally of the sea, China has long been a continental power, only now attempting to make the difficult transition to a maritime superpower. Its militaries are not making a beeline for Europe. Beijing is promising greater trade and economic cooperation, not threatening war.

A more appropriate metaphor from ancient history, however, can be used to describe Chinese economic activities. Beijing’s offerings resemble the Trojan Horse that the Greeks used to enter and lay waste to the independent city of Troy. This is especially true when it comes to the buying up of European ports.

It is estimated that state-backed Chinese investors state own at least 10 percent of all equity in ports in Europe, with deals inked in Greece, Spain, Italy, France, the Netherlands, and Belgium. This is in addition to a growing investment portfolio of at least 40 ports in North and South America, Africa, the Middle East, Eastern Europe, Central Asia, South and Southeast Asia, Australia and the Pacific.

China’s interest in European ports is defined and driven by the Belt and Road Initiative (BRI). While the BRI has both strategic and economic objectives, there is little prospect of a Chinese-invested port in Europe being turned into a military base for the People’s Liberation Army Navy in the foreseeable future. Neither a 35 percent stake in the Euromax terminal at Rotterdam, a 20 percent stake in the Port of Antwerp (Europe’s two busiest ports), nor even full ownership of Zeebrugge in Belgium is a precursor to Chinese militarism in Europe.

The more immediate concern is that Chinese interests in European ports represent but one component of a much more ambitious strategy—one designed to unfairly tilt the regional and global economic playing field in China’s favor, introduce into Europe commercial processes and standards preferred by China rather than Western liberal democracies, enhance Beijing’s leverage over certain European states to support policies favored by the Chinese Communist Party (CCP), and prevent any intra-EU consensus that might be critical of China’s economic policies and authoritarian values.

Europe – The Final Frontier

The BRI is widely and accurately described as President Xi Jinping’s flagship policy and China’s most ambitious, comprehensive economic strategy since the Deng Xiaoping era. Promoted to the world in economic rather than strategic terms, and formally introduced by Xi in 2013, the BRI encompasses the “Silk Road Economic Belt” through the Eurasian continent and the “21st Century Maritime Silk Road,” which links China with Southeast Asia, Oceania, the Indian Ocean Rim, Africa, and the Mediterranean. With respect to Europe, the plan is to link China with railways that go through Central Asia, Russia, and Eastern Europe and onward to Spain. The Maritime Silk Road extends from China to Southeast Asia, the Indian Ocean, and the east coast of Africa, then through the Suez Canal and into the East Mediterranean Sea.

In the March 2015 white paper entitled “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Road,” the most comprehensive official document yet issued on the BRI, China described its five goals as being policy coordination, facilities connectivity, unimpeded trade, financial integration and people-to-people bonds.

In practice, the BRI has no formal institutional structure or set of guidelines. Unlike the Asian Infrastructure Investment Bank (AIIB), which is a multilateral entity with established rules and processes, BRI terms for countries and individual firms are negotiated directly with either the Chinese government or with state-owned or state-sanctioned firms. Memorandum of Understanding agreements between China and other countries and commercial terms between firms under the BRI banner are not generally available to the public.

Moreover, many projects involving Chinese firms in the 65 or more countries along the BRI are often counted as BRI projects even if that project was not conceived with the BRI in mind, or preceded its formal announcement. Claims that the BRI could be a $4 trillion scheme should be understood with this caveat in mind. In this sense, the BRI is both a hugely ambitious, consequential concept and a significantly inflated one.

Even so, gaining designation as a BRI-designated project can be meaningful. Funding mechanisms for BRI projects have been established, including the AIIB and the $40 billion New Silk Road Fund. Joint ventures with Chinese firms under the BRI banner can open up funding from Chinese financial entities such as the China Development Bank, the New Development Bank, the Export-Import Bank of China, and the China Investment Corporation sovereign wealth fund. Funding from these sources for BRI projects are frequently less restrictive in initial phases of investment and are given on non-commercial terms. Chinese firms can also gain fast-tracked financial and regulatory approvals from domestic authorities when partnering with foreign firms on BRI-designated projects.

In the aforementioned white paper, China tells us its economic aim in funding and building infrastructure along the Eurasian continental belt is threefold: to export excess industrial capacity arising out of the fixed-investment explosion which occurred after the 2008 global financial crisis to overseas markets; to spur development in its impoverished western regions by connecting these regions to economies and markets to the west; and to form physical, digital, and financial networks with new and existing markets in Central Asia and Europe.

The BRI’s so-called Eurasia Land Bridge Corridor concept extends from the east coast of China through to Western Europe. While Europe is at the far edges of the BRI in geographical terms, the former is essential for China. One purpose of the BRI is to bind consumer markets to Chinese exporters through the BRI’s physical, financial, and digital networks, which lead back to China. In nominal terms, the European Union is the largest economy in the world and constitutes about 22 percent of global GDP. Importantly, it is also the second largest consumer market in the world and almost double China’s size by that measure. Although the size of consumer markets in Southeast Asia and India are predicted to grow rapidly, Europe will remain the most important destination for finished goods throughout the BRI in the foreseeable future.

Moreover, Xi Jinping’s “Made in China 2025” policy involves government subsidies and massive investment in research and innovation in sectors that fuse the physical, digital, and biological worlds, such as advanced manufacturing and materials. The aim is to lead in these future-oriented sectors and dominate global exports. For the moment, China cannot achieve this on its own and needs the technology transfers that come from joint ventures with advanced economy firms, especially from Europe. In Beijing’s blueprint, advanced European markets will be major buyers of Chinese exports in these sectors. Without bringing Europe into the Chinese economic orbit through the BRI, “Made in China 2025” cannot succeed.

Why Worry

The European Union is China’s largest trading partner, but China accounted for only 2 percent of total foreign direct investment (FDI) stock by the end of 2015 and 5 percent of the value of recorded projects in 2016, according to Eurostat and Ernst & Young figures. With respect to Chinese investment in European ports, a benign commercial logic is frequently put forward to pacify growing concern.

For example, many shipping companies tend to invest in ports around the world because ports offer far superior margins and better return on investment than the related container and freight business. Chinese companies can also point to significant commercial achievements associated with their European port investments. When China’s COSCO Shipping Corporation took over the Greek container and passenger port of Piraeus in 2008, fewer than 900,000 containers passed through its facilities. In 2016, the figure reached 3.7 million containers. Piraeus has climbed up the world rankings of container ports: from 93rd in 2010, to 44th in 2015, to 38th in 2017.

Chinese firms are promising to achieve similarly impressive commercial outcomes for ports such as Venice. Importantly, China is offering Europe a package deal of benefits under the BRI brand. Chinese-invested ports will eventually be connected to the Maritime Silk Road and have direct networks to freight lines belonging to the Eurasian Land Bridge Economic corridor. This will offer European economies the opportunity to be linked to the entire BRI economic ecosystem, which begins in China and ends at the Mediterranean. The point is that Chinese investments in European ports are explicitly linked to the BRI and all that the Initiative seeks to achieve.

It is a good pitch, but there are reasons to be concerned.

First, the Chinese promises to build and expand the infrastructure around ports are made less attractive by the reality that Chinese projects tend to exclude local and international participation. According to the CSIS Reconnecting Asia database, 89 percent of contractors participating in Chinese-funded projects are Chinese companies. Only 7.6 percent are local companies, with 3.4 percent non-Chinese foreign companies. For projects funded by multilateral development banks, by contrast, 29 percent of contractors are Chinese, 41 percent are local firms, and 30 percent are non-Chinese foreign firms. Port investments and upgrades involve finance, design, construction and servicing, which are all activities Chinese firms provide at lower prices given the domestic advantages and assistance offered to them by Beijing. Understandably, Europeans feel uncomfortable with selling highly valuable assets if the spoils of development of those assets go to Chinese entities.

Second, there is growing discomfort with the close funding arrangements between Chinese firms and government-controlled financial entities. This is at odds with the European Union’s relatively liberal notion of political economy, which depends on there being significant distance between the political and strategic objectives of the government on the one hand, and the objectives of commercial enterprises on the other.

A case in point is COSCO Shipping Corporation, which was given over $26 billion by the China Development Bank to invest in BRI-sanctioned projects in 2017. These firms are given loose lines of credit to advance government policies and not just to maximize their commercial success. Even if one counters with the argument that European countries can dictate the laws and regulations that apply to assets in their sovereignty territories, the suspicion is that such assets can be used to benefit the Chinese economy disproportionately.

For example, investment by the Chinese company COSCO Shipping in, and control of, Piraeus means the Greek port will cooperate with Chinese ports to boost synergies, as evidenced by a June 2017 agreement with Shanghai International Port Group to cooperate in project planning, staff training, and information exchange. As a complement to the Chinese purchase of Piraeus, Chinese banks provided loans to Greek shipping companies to build additional commercial vessels in Chinese shipyards.

Furthermore, it would not be lost on Europeans that China’s “Made in China 2025” blueprint, and its associated industrial policies, are fundamentally mercantilist in nature: They are designed to enhance Chinese self-sufficiency in important strategic sectors and secure Chinese export dominance in the international market for these sectors. BRI networks promise to enhance the flow of goods, services, and information between China and BRI countries. In doing so, they serve to facilitate Chinese economic and industrial dominance. It is telling that China is promoting increased connectivity without undertaking significant domestic measures to remove what the European Union terms “significant market distortions.” These include CCP control over the financial system and policies offering preferential treatment of domestic companies over foreign competitors. Chinese businesses in BRI-related sectors receive land at artificially low prices along with access to cheap energy, preferential access to capital, suppressed borrowing costs, and beneficial pricing for raw materials and commodities.

In terms of access to the Chinese market, it is worth noting that foreign investment in the most important and lucrative sectors of the Chinese economy is heavily restricted and restricted entry is via joint ventures—which leads to the new problem of large scale and state-sponsored intellectual property and trade secret theft. In addition to its still-closed capital account and discriminatory regulatory and antitrust laws, it is extremely difficult for foreign firms to gain permanent and meaningful footholds to thrive in Chinese industrial and consumption sectors, even as China is laying the ground for ever greater access to European markets.

Indeed, Beijing has not made a convincing case that improved networks throughout Eurasia exist to evenly spread the opportunity of globalization and share the spoils of greater economic integration. The BRI and China’s interest in assets such as ports remain China-centric. China is paving the way to sell and buy what it wants, according to economic and strategic policies produced by the CCP.China is paving the way to sell and buy what it wants, according to economic and strategic policies produced by the CCP. When Chinese firms negotiate opaque deals with European ones, the former begin with the largesse and non-commercial advantages that come from state assistance. The exchange is rigged from the start.

Third, Chinese firms must ultimately obey directives from Beijing. The network of ports and other logistical facilities in Europe, Africa, and Asia provides China with a high degree of operational self-reliance and capacity. Control of international supply lines and logistical processes gives a country political leverage if that country is prepared to use these capabilities for political ends. While there are restrictions on European countries and other liberal democracies against using commercial and civilian assets to achieve political ends, no such limitations exist in China. Indeed, it is a crucial part of the CCP’s toolkit to use economic leverage to achieve both economic and non-economic ends.

China’s official Blue Book of Non-Traditional Security (2014-2015), an annual volume produced by state-sanctioned academics and researchers, states that two of the purposes of the BRI are to mitigate American-led geopolitical machinations and ideas, and to promote a new international discourse and order that enhances China’s national power and soft power. Investment in ports and other assets should be considered in the context of the concept of “strategic support states,” which came to prominence amongst Chinese strategists earlier this decade. In a 2015 consensus of 50 Chinese scholars on China’s periphery diplomacy in the Xi Jinping era, cultivating “strategic support states” is achieved through regional cooperation and providing economic and public goods as China expands westward. According to analysis by the Washington, DC research organization C4ADS, one of the principles of cultivating a “strategic support state” is ensuring “China has the ability and resources to guide the actions of the country so that they fit into [China’s] strategic needs.”

There is ample evidence to suggest this is not abstract strategizing by academic thinkers. In Pakistan, enormous Chinese investments, such as in the Port of Gwardar, have given the Pakistani economy an instant economic sugar high. But they have also burdened that country with debt that it cannot repay, and turned Pakistan into a long-term client state of China’s. A similar situation is occurring in Sri Lanka. Unprofitable and debt-heavy projects such as the Hambantota Port has forced Sri Lanka into a $1.1 billion debt-for-equity swap with China, giving the latter long-term control of a military-capable port and considerable leverage over Colombo’s foreign policy. Over the past five years, China has invested over $5 billion in Cambodia, a sum equivalent to about one quarter of the country’s GDP, in return for Phnom Penh pushing China’s interests in organizations such as the Association of Southeast Asian Nations (ASEAN). This includes a 100 percent ownership of the Koh Kong New Port. Like Pakistan and Sri Lanka, Cambodia cannot change course while it is caught in a Chinese-created “debt trap.”

With respect to Europe, it is more difficult to purchase direct influence given that many European countries are better able to access diverse sources of capital, in addition to the presence of robust liberal-democratic institutions which are more difficult to corrupt. Even so, there have been opportunities. Unlike other Western European countries, Greece has openly welcomed Chinese investment, and Prime Minister Alexis Tsipras boasts of China’s investment in the Port of Piraeus as the opening for “China’s gateway into Europe.” In 2017, Greece blocked an EU statement on Chinese human rights violations to the United Nations Human Rights Council, with a Greek official calling it “unconstructive criticism of China.” This marked the first time the European Union has failed to make a statement to the UNHRC.

Another case is Hungary, which is seeking to position itself as Eastern Europe’s “gateway to China,” and is welcoming BRI-linked investment, including for the $3 billion Hungary-Serbia railway project that would connect the Chinese-run Port of Piraeus with the European heartland. Realizing that political obeisance is one pathway to receiving immediate financial largesse, Hungary has emerged as China’s most enthusiastic spokesperson in Eastern Europe. For example, Budapest has strongly argued that the European Union should grant China’s economy “market status.” In 2017, Budapest derailed the EU consensus when it refused to sign a joint letter denouncing the torture of detained lawyers in China. Both Hungary and Greece remain unwilling to criticize Chinese actions in the South China Sea, thereby preventing the European Union from presenting a unified voice on this issue.

The concern here is not Chinese investments in ports per se, but rather China’s tendency to link investment with political demands and expectations. This applies regardless of whether such investment is BRI-designated or not. However, BRI projects have become the sweetener for countries desperately needing an injection of capital and economic activity when it is not pouring in from other sources. For less economically competitive and less commercially attractive European countries like Greece and Hungary, dependence on Chinese capital can be subsequently used to create significant pressure on governments to alter policies that favor Chinese interests.

Fourth, China has used the lure of enormous infrastructure investments, including development of Greek ports, as gateways for economic development into the Balkans to divide and conquer the European Union. The main mechanism is the China-initiated 16+1 grouping, which includes sixteen Central and Eastern European states plus China. Eleven members of this grouping are also EU members.

In late 2016, China announced it had established a $11.1 billion Central and Eastern European (CEE) Fund to finance projects in the group-of-sixteen economies to support the BRI. An ulterior motive is to create an economic investment zone that will decide on investments according to China’s rules and processes rather than the more stringent and transparent EU standards preferred by Western European states such as France and Germany.

Consider the case of Slovenia, which was promised a $1.5 billion financing package for a railway in exchange for a 99-year lease of the Port of Koper. In 2018, and in spite of raised eyebrows by Western EU countries, China and Slovenia signed a memorandum of understanding on cooperation in transport and infrastructure, which focused on integrating sea transport with the development of railways, motorways, and logistics as part of the BRI concept. This includes a cooperative agreement between the Port of Koper and China’s Port of Ningbo-Zhoushan to increase trade between China and the CEE economies.

Although the CCE Fund remains underwhelming due to lack of confirmed funding and agreed projects, it indicates China’s intention to circumvent EU rules and standards, or undermine broad support for them, by getting potentially recalcitrant EU members such as Greece and Hungary on its side. Serbia, a likely future EU member, has accepted large amounts of Chinese capital and in return is supportive of China’s stance on issues such as Taiwan, the South China Sea, and human rights in Tibet and Xinjiang. Once again, and in this context, it is not the investment in port or other facilities per se which is of concern, but China’s use of big spending promises to alter established EU norms and commercial standards for investment.

Not Quite the Sea Peoples, but Beware Chinese Bearing Gifts

China is now applying its well-tested South China Sea approach—gradually asserting de facto control and dominance through incremental actions, each of which will not provoke a robust counter response—in Europe. Similarly, China is using a divide-and-conquer strategy to prevent the European Union from taking a common stance against Beijing, much as it has done by offering largesse to Cambodia and Laos to prevent ASEAN from speaking with one voice.

However, unlike in the South China Sea, Chinese economic and investment policies toward Europe are not militarily threatening, are mostly legal (even if they undermine important commercial rules of the road,) and create some economic benefits for European partners, even if China will be the primary beneficiary. For these reasons, there is a legitimate economic role for Chinese firms, but with conditions.

In crafting a response, the European Union should remember that its leverage is more considerable than China cares to acknowledge. Even as a concept, the BRI would be greatly diminished without full European participation. China requires European cooperation to achieve Xi’s goal of China becoming a “moderately prosperous society” by 2021, when the country celebrates the 100th anniversary of the formation of the CCP, and to become a “fully developed, rich and powerful nation” by 2049, when China celebrates its 100th anniversary as the People’s Republic of China. At the least, EU leaders should demand economic “reciprocity’” in terms of equal access and opportunity with respect to economic interaction with China.

It is essential that the European Union respond to China’s divide-and-conquer approach and put pressure on countries such as Greece and Hungary to agree to a common set of guidelines with respect to screening investments (in ports and other assets) and how foreign-owned assets are run and operated. The contractual and financial terms of any sale or lease of a port must follow a set of guidelines adhered to by all EU states. Negotiations with foreign entities should adhere to the same levels of transparency as occurs between EU states. “Special” deals that include political and other commercially irregular terms must be rejected. Tendering processes must adhere to market-driven and commercial principles with respect to services rendered to third parties and the pricing of those services.

More broadly, all EU member states should take responsibility for protecting European interests, European rules, and international law, and the preservation of a regional and economic system which does not prioritize a China-centric view of globalization and entrench special advantages for China. While the European Union cannot alone alter Beijing’s hierarchical view of the world and its perception of itself at the apex of that order, it can ensure Europe does not unwittingly help advance an alternative Chinese vision of economic globalization. Realization of that latter vision would have political, strategic and normative ramifications which would not be in Europe’s own interest.

Finally, and although not part of Eurasia, the United States should not be a disinterested observer. Chinese port operators are likely obligated to collect and pass on important information to Beijing about the movement of American naval vessels, their maintenance activities and requirements, and may even monitor communications between these ships. The Chinese thus could access important details that could include the combat readiness of the ships, their munition stores, the logistics networks used by these vessels, and even clues with respect to tactics for naval patrols. This should surely concern the U.S. Navy, which regularly calls to ports such as Piraeus in Greece, Zeebruge in Belgium, and Valencia in Spain which are 100 percent, 85 percent, and 51 percent majority-owned by COSCO, respectively.

Ultimately, as the Blue Book of Non-Traditional Security suggests, the BRI is attempting to create an Eurasian and Indo-Pacific region that takes a China-centric view when it comes to economic practices and political norms, and which excludes the United States. Just as its regional strategic and military approach is to weaken existing alliances and ease the United States out of Asia, the BRI seeks to weaken economic links between the liberal democracies on either side of the Atlantic Ocean and to coax Europe toward acquiescence of Chinese standards and approaches. If the United States were to let that happen, it would be losing without even entering the fight.