EU’s Court Of Auditors Complains About China’s Belt & Road MoU Deals & Lack Of Strategic Intelligence – But There Are Solutions

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Op/Ed by Chris Devonshire-Ellis 

The European Court of Auditors have announced that fifteen EU member states have been in breach of EU rules in agreeing bilateral commercial deals with China as part of Beijing’s belt and road initiative.

The auditors examined the scope of Chinese investments into the EU, identifying ‘multiple risks’ of both a political and economic nature, while also drawing attention to how member states have been systematically violating EU rules in bypassing the European Commission before tying up trade deals with China.

On a bilateral basis, China has formed 15 agreements with EU member states as part of its Belt and Road Initiative, with the ECA finding that the EU executive has not been consulted prior to any of the agreements being made, thereby violating a 1974 Council decision that states EU nations must inform the Commission of ‘cooperation agreements’ relating to economic or industrial partnership with third countries.

The lead auditor of the report, Annemie Turtelboom noted how the EU should adopt a more unified approach in its dealing with the world’s second-largest economy. “What we are seeing in our report is divide and rule within the European Union,” she said. “That’s what we are seeing all the time. We need 27 players on one team.”

Another frustration of auditors, Turtelboom said, was the deficit of publicly available information and data on Chinese investments into the EU. “There is no publicly available inventory of official BRI projects, nor is there an inventory on member states contributions to financial institutions involved in the BRI. There is no comprehensive risk analysis, and this leads us towards the question if the EU is driving blind towards China. It certainly appears that we are sailing with no compass, as we found no formalised comprehensive analysis of the risks and opportunities for the EU on China’s investment strategy.”

These are however not new issues, although there are obvious weaknesses within the EU monitoring process. With 15 EU member states out of apparent compliance, the EU Commission itself appears to have been lax over educating its own members over what the rules are. Bringing up an obscure 1974 clause in 2020 isn’t entirely indicative of sound compliance structures.

The 15 EU states that have signed off with the Belt & Road Initiative include Bulgaria, Cyprus, Czech Republic, Estonia, Greece, Hungary, Italy, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovakia, and Slovenia, representing over 50% of the entire bloc membership. It is significant that the majority of these have borders with non-EU members; much of the infrastructure provided under the BRI has been to link the two – the European Union itself not being especially willing to fund projects that do not include EU countries.

All of these non-compliant 15 members participate in the so-called China & Central European Cooperation Forum which also includes non-EU member states Albania, Bosnia & Herzegovina, Croatia, North Macedonia, Montenegro and Serbia.

This brings practical issues to the fore as the European Commission is based in Brussels, and dominated by France and Germany as fully fledged Western democracies. Ten of the errant fifteen EU members who signed off on China’s BRI were part of the Soviet Union bloc until 1992, and most still share borders and extensive connections with Russia and its allies. That means the mentality and culture in both politics and trade is different from that generally envisaged by Brussels.

Understanding China’s Belt & Road MoU With EU Members

Concerning the Belt & Road Initiative MoU that these 15 countries have signed, I commented on this back in 2018 in the article Vassal States? Understanding China’s Belt & Road MoU. I provide a downloadable copy of a redacted MoU document in that article.

An interesting point to note is at the end of the document, where both parties agree that the document is not legally binding. However, this means that while the MoU itself may be seen as purely a cosmetic exercise to “keep China happy” as has been explained to me by more than one diplomat, the inference swings to the implications and potential manner in which certain elements within the MoU could be interpreted by either party, and especially the Chinese. Such interpretations can, in fact, influence the way in which China views statements made within the MoU, and regard these as important in future diplomatic talks. In short, the purpose of these non-legally binding MoU is to influence, rather than direct – a subtlety that may be lost on some of the signatories.

Of particular interest in the MoU are specific clauses, which I identify as follows:

Much of the first part of the clause is jargon, then gets into the trade aspect. The Chinese seem keen on the “win-win” concept, while the “integration of different civilizations” could be used as justification for Sinicization and/or atheism from the Chinese viewpoint.

Clause 2 typically details previously discussed areas of trade cooperation and varies from country to country.

Clause 3 suggests that signatories are of the same mind when it comes to political issues concerning the BRI – and by implication, suggests agreement with China on its political agenda. That will be a concern to the EU.

Interestingly, it also references and attempts to bring into the MoU, other bilateral/multilateral agreements that China itself may not be a signatory too. For example, the MoU signed with certain EU members quote the EU, and with ASEAN members, ASEAN, and so on. This is despite the EU not having a trade agreement with China, and implies that China can count on the support of signatory MoU nations in dealings with trade or regional bodies that China itself is not a signatory to.

Clause 4 expands upon this theme and goes deeper to identify specific areas of cooperation in trade and commerce and commits to utilizing other existing platforms to do so. This implies legitimate acceptance for the MoU by committing signatories to “hanging it” onto other, legally binding agreements. It also includes a reference to “congratulating and supporting” China, putting the signatory in the position of supplicant and China as being the acclaimed party to the MoU. This could imply subservience from the Chinese perspective.

This again quotes existing, and legally binding agreements, such as Bilateral Investment Treaties and other trade agreements that may be in force, and attempts to bind this MoU to them.

Clause 6 typically identifies existing commercial facilities, such as ports, airports, terminals, and other infrastructure that exist, both sovereign-owned and within trade blocs the signatory is party to, seeking to solicit specific approval for Chinese use of these.

Clause 7 encourages the joint development of integrated standards with China, and especially those involved with trade facilitation. It is unilateral in the sense that it only specifies “easier access of Chinese exports” and not those of the signatory party to the MoU. It also includes the promotion of “Innovation Parks” is a new concept, yet it has been included in several (but not all) of the MoUs. This will be to encourage the sharing (with China) of new technologies.

Of interest is the implied support for the Chinese owned Asian Infrastructure Investment Bank over other existing global institutions, such as the World Bank, IMF, and other similar institutions.

Clause 8 implies specific support for Chinese government funded bodies, such as the Confucius Institute, which while not named has already taken up residency in several overseas universities. While the clause itself appears benign, there are matters of concern over Chinese Trojan horses being introduced into national institutions.

Clause 9 deals with sharing of personnel and training, as well as of information, which may loosely be seen to include citizen’s personal, financial, and other data.

Clause 10 seeks again to tie what is a non-legally binding MoU to a specific agreement and commission that is legally binding and already in existence, thus lending the MoU more ability to claim legitimacy. However it is ambiguous in that while it states the MoU is not legally binding, the MoU itself contains five separate references to agreements and existing institutions that are legally binding and/or operational on both a bilateral and multilateral basis.

Clause 11 calls for “friendly consultations” rather than any court or arbitration system in the event of any “differences of interpretation”. This suggests that the recent issue of China setting up Belt and Road arbitration courts in China has been a very recent move, possibly driven by China’s internal judiciary rather than by the foreign ministry.

The MoUs are typically in force for five years, but on a rolling basis, unless one or the other party decides to cancel it.

The MoU appear largely benign; however, they do contain the seeds of what could, in future, be used as diplomatic tools in terms of insisting that agreements have been reached over certain areas. There is also the creeping shadow of suzerainty cropping up in clause 4. The tying of the MoU as a non-binding agreement to agreements and institutions that already exist is a manner in which the MoU could later be seen to have implied legitimacy. Where the MoU does tend to veer towards unilateral preference, those preferences appear to benefit China and its institutions and trade, rather than those of the foreign signatory. It remains unsure how these MoUs will be used in future to influence diplomatic talks; however, the fact they refer to legitimate institutions and are signed off at government representative level does mean they could carry rather more future political influence than initially meets the eye – which is almost certainly the precise point.

The issue over Belt & Road MoU and the EU Court of Auditors flagging the issue up is that most of these will have been signed off by regional politicians who are keen on the China trade aspect with China, promote themselves as knowledgeable but who lack any real practical China experience. Very few, if any, will have lived there for any considerable period of time, and China is rather more complex than a 3-5 year posting can provide.

Consultants are available, however constant claims of lack of budget to refer to useful external resources is a common problem. An experienced hand in interpreting what benign clauses can be inferred to by China should be a prerequisite. It has been remiss that this has not been the case.

EU Auditors Highlight ‘Lack Of Belt & Road Risk Analysis’

The Court of Auditors also makes reference to a lack of “Formalised comprehensive analysis of the risks and opportunities for the EU on China’s investment strategy”. Yet again, the expertise exists. I have touched on this issue in numerous articles:

and have also given specific strategic pointers as to why and where there are opportunities for EU businesses within the Belt & Road Initiative:

The curious aspect to the EU is its Brussels focus when making decisions about China. It listens to lobbyists based in Europe and doesn’t spread its wings out to embrace where the China knowledge really exists – with career professionals who have made it their job to understand and analyze what it means to be dealing with the Chinese mindset, and the nuances that involves. The expertise is out there – and if things have gotten so out of kilter with over 50% of EU member states being out of compliance concerning the EU’s own regulatory issues – that lack of ‘formalised comprehensive analysis’ just makes matters worse. Perhaps it is time someone in Brussels picked up a phone and talked to the professionals on the ground who can assist.

 

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About Us

Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at silkroad@dezshira.com or visit www.dezshira.com

 

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