By Dennis Barton and Paul Taylor
The military conflict in Ukraine continues to destabilise the European economies, not least those in Central and Eastern Europe (CEE). Subordination to US interests means that CEE countries are required to raise their levels of military spending, with the Polish government leading the way, recently earmarking 4.7% of GDP for military spending in its 2025 budget. The severing of energy ties with Russia and closure of Eastern markets is also leading to an increase in production costs and a decline in industrial activity. Industrial output in the EU’s manufacturing powerhouse Germany continues to decline, which will have a negative impact on the CEE economies. Furthermore, with the US’s main strategic geo-political goal being to try and block Chinese economic development, pressure is increasingly being placed upon the countries of CEE to cut their economic ties with China. As this will have a long-lasting negative impact upon these countries’ economic development, some CEE governments are partially resisting US demands.
Chinese Investment in CEE
In 2023, Chinese investment in the European Union dropped to EUR 6.8 BLN, its lowest level since 2010 However, the nature of these investments have significantly changed, with investment in new ‘greenfield’ investments (rather than through mergers and acquisitions) now equalling almost 80% of all Chinese investments in Europe, compared to just 2% in 2017.
With China increasingly promoting green sustainable investments and development, domestically and abroad, the major source of Chinese investments in Europe is in electric vehicles (EV). Hungary has emerged as the favoured destination for Chinese EV investment in Europe, equalling almost EU 3bln in 2023, mainly through the construction of battery plants built by CATL and Huayou Cobalt. In 2023, Hungary received over 44% of Chinese investments in Europe: more than that going to Poland, the Czech Republic, Slovakia, the Baltic States, Bulgaria, Romania and Croatia combined.
Alongside Hungary, China has also strengthened its economic ties to Serbia. Xi Jinping’s visit to Belgrade in June, coinciding with NATO’s bombing of the Chinese Embassy in the city twenty-five years earlier, confirmed Serbia as one of China’s most important European economic partners. China has invested heavily in Serbia as part of the Belt and Road Initiative, for example helping to construct a Budapest-Belgrade line which is due to be extended via North Macedonia to the Greek port of Piraeus.
Neither Hungary nor Serbia are led by left-wing governments that are consciously breaking from the US foreign policy imposed in Eastern Europe. Rather, their decision to accept Chinese investment is driven by their own economic interests. They are heavily criticised in Washington and Brussels for doing this, with the US government claiming they are building an ‘anti-western alliance’ with China and Russia.
China – CEE Trade
In 2023, China stood as the EU’s largest partner for imports of goods (20.5% of all EU imports) and the third largest partner for EU exports (8.8% of EU exports). Total trade for the Visegrad Four [Poland, Czechia, Slovakia and Hungary] countries with China rose from $2.8bln in 2000 (imports $2bln – exports $0.8bln) to $80bln in 2023 (imports $48bln – exports $32bln). An increase as a percentage of overall trade with China from 2.7% to 9.41%.
Nevertheless, political pressures, led by the US, have weakened trade ties between China and Eastern European countries, with the three Baltic States leaving the 17+1 body, which had facilitated trade and investment between China and Eastern Europe. Lithuania has led the diplomatic offensive against China in the region, opening a Trade Representative Office in Taiwan in 2022. Diplomatic relations have also worsened between Czechia and China and, with Czechia, led by its extreme pro-NATO President, Petru, deepening its political, military and cultural ties with Taiwan.
One of the most potentially beneficial China-EU economic projects is the construction of infrastructure integrating the CEE countries into the Belt and Road Initiative. CEE countries, such as Poland, potentially stand as a gateway for the trade of goods and commodities between China and the EU. However, since the start of the war in Ukraine and the imposition of sanctions on Russia, new obstacles have been constructed to the movement of goods transiting through Russia. For example, EU ports and the land crossing through the Russian enclave of Kaliningrad have been closed to the transport of goods to and from Russia.
These restrictions resulted in a sharp fall in the rail transport of goods between China and the EU, with the volume of cargo moving from China to the EU declining by 34% and from the EU to China by 67% in 2023. There has been a shift from the previous New Eurasian Land Bridge (Kazakhstan, Russia and Belarus) to the Trans-Caspian corridor (Baku-Tbillsi-Kars). This includes a Caspian Sea crossing, which is more time consuming and costly. The only direct land route between China and the EU is now through Poland, via Belarus.
Poland
Poland therefore stands as an important communication link between China and the EU and is an important participant in the Belt and Road Initiative. The most important BRI investment in Poland was the development of the rail connection between the cities of Łódż and Chengdu, which significantly reduced the transportation time for goods between the two countries.
Poland, however, remains one of the USA’s leading allies in the regions, with the Polish government and president, crossing bi-partisan divisions, prioritising Poland’s political and military alliance with the USA. However, the economic benefits of Poland’s economic connections with China means it has to maintain relatively good diplomatic relations with China and not follow the more aggressive stance taken by countries such as Czechia and Lithuania.
In June, the Polish President Andrzej Duda visited China, meeting Xi Jinping in Beijing. They discussed opening up Chinese markets to agricultural products and waiving visas for Poles traveling to China for up to 15 days. Despite receiving some criticism in the domestic media, during his visit, Duda said that: “I am very happy that, thanks to the fact that President [Xi] calls me a friend, which is a great honour for me, I can contribute to building [Polish-Chinese] relations together with the president,” and that he “hopes that these relationships will also be built in the future…[and] will always be based on common ideals…[and] on mutual respect”.
Win-win trade and investment
Subordination to the US and its goal of undermining China’s connections with the rest of the world comes with a heavy price tag for CEE.
The US has pressed for the CEE to prioritise trade and investment with Taiwan over China. In an effort to offset the damage of weakening economic and trade ties with China, Taiwan has increased its investments in CEE. However, although Taiwan has unveiled a new USD 200 million Investment Fund for CEE, this pales into insignificance compared to the funds potentially available from China.
Successive US governments have attempted to use proxy conflicts and military interventions to pressurise the CEE countries and others to prioritise subordination to the US ahead of their independent economic development. But this creates huge tensions between countries and within them. The splits in the Visegrad Four and the rise of anti-Nato parties are some of its consequences.
The US increasingly acts as a global parasite, a net appropriator of wealth from the rest of the world. The growth in the number of BRICS countries signals the relative decline of the US. Unlike China’s approach of mutual win-win trade and investment, the US offer is degrees of subordination under the banner of ‘America First’. For CEE to prosper it needs to be able to trade and receive investment freely with other countries including China and Taiwan.
As the most dynamic part of the world economy, which is leading the world in the green transition needed to avoid climate catastrophe, the CEE countries cannot afford to isolate themselves from China.