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The Sino-Hungarian Economic Implications behind the “17+1 Cooperation”: A Threat to the EU?

Updated: Jun 9, 2022

Visit to the People's Commune named Chinese-Hungarian Friendship by the Hungarian Ambassador, 1982 © Szilas/ Public domain/ Wikimedia Commons

The rise of China on the global stage brought the country to unfold a series of endearing projects. The 2013 Belt and Road Initiative (BRI) (一带一路) represents China’s greatest initiative to promote economic and cultural growth in both neighbouring and sub regions, stretching from Asia to Europe (Huang, 2016). The BRI was first devised to reconfigure China’s external sector’s growth abroad, and to cultivate lasting ties with different countries. As declared by the Xi Jinping administration, the nature of the so-called New Silk Road is supportive of cooperative mechanisms, aiming at reaching mutual understandings and benefits among the partners.

Similarly, the “16+1 Cooperation” previously arose in 2012 as a Chinese initiated-platform involving 16 Central-Southern Eastern European countries (CEECs). Thereafter, it extended to 17 members, becoming a field of attraction for both China and the European Union (EU).

Since April 2019, the “17+1 Cooperation” welcomes Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, Slovenia, and Greece. The latter configuration shows the platform’s consistent heterogeneity from the mere territorial to the more economic, demographic, and strategic perspective. For instance, 12 out of the 17 countries are EU Member States (MSs), while the remaining are part of the Western Balkans countries. Moreover, some of them share differences in relation to the Eurozone, and/or are devoted partners of the United States-led North Atlantic Treaty Organization.

In the international relations scenario, the 17+1 mechanism was later assigned the mission of supporting the implementation of the Belt and Road Initiative in Europe, disentangling the same European geographical area. Nevertheless, this comes with some challenges behind the 17+1 and BRI concrete realisation, due to the different interests each country might share either towards China or the European Union. However, Sino-European experts tend now to examine these two projects in a parallel and comparative way. Indeed, it is argued that both initiatives aim at intensifying connectivity and cooperation, winding through areas of policy coordination, trade, facility connection, investment, and people-to-people exchanges.

As far as Hungary is concerned, since Prime Minister (PM) Viktor Orbán came to power in 2010, the country has occupied a prominent position within the Sino-Central-Eastern Europe (CEE) partnership (Szunomár, 2017). In fact, seeking to ease its economic dependence on the West following the 2008 financial crisis, Hungary launched the 2012 “Eastern Opening Policy” (EOP), orientating Hungarian foreign policy eastward. From that moment onwards, China was seen as a primary economic partner, and Hungary showed itself as a longstanding financial, economic, and logistic hub for China in Europe (Butler, 2018). Consequently, Hungary officially joined the former 16+1 Initiative in the same year of EOP, later becoming the first European country to sign the 2015 BRI Memorandum of Understanding with China.

Therefore, China’s engagement in Hungary – and in CEE in general – has raised the attention of the European Union regarding the economic and political implications vis-à-vis China-EU broader relations under both the BRI and the 17+1 Cooperation.

The contemporary – and more sceptical – narrative argues the ongoing China-Hungary relationship is deteriorating the position of Hungary within the EU, putting the latter in a marginal position, especially from the economic perspective. On the contrary, from the very beginning of the 17+1, both Chinese and Hungarian governments have underlined how both countries could mutually profit from the partnership.

For instance, in the celebration of the 70th anniversary of the Sino-Hungarian diplomatic relations in 2019, the China-CEE Institute (Chen and Ugrósdy, 2019) benchmarked extensive information about the many developments the two countries are exposed to under the aegis of the Chinese-led projects. To mention some, not only the Hungarian government positively evaluated the policy coordination field, but also the people-to-people exchanges. In this regard, the Orbán administration cherished the countless diplomatic summits reciprocally played from the early 1990s, which paved the way to more frequent meetings, and the multiple cultural initiatives that have been put forward in recent times (Xu, 2019). However, the perception on the economic outcomes seemed slightly different, given that the 17+1 core purposes centred on unimpeded trade and infrastructure investments.

At a first glance, the trade volume deriving from both the BRI and the 17+1 Cooperation contributed to consolidate a historical record between the two countries. However, despite Hungary’s EOP strategy of boosting economic interactions with China, Hungary’s foreign trade has remained significantly focused on the EU (Lukács and Völgyi, 2018), although China persists as Hungary’s largest trade partner outside the European borders (Xu, 2019, p. 74). In numbers, China’s share in Hungary’s total trade is relatively low in comparison to the EU’s (Lukács, et al., 2018), and Hungary continues to receive over €4bn from the EU per year, while contributing less than €1bn to the EU budget, making it the fourth-largest net recipient of EU funding (Venne, 2022).

Furthermore, the EU is also Hungary’s largest economic partner, with 78% of its exports going to EU MSs, and 71% of its imports coming from within the EU (European Union, 2022). For instance, Germany remains its top trading partner both for imports (24%) and exports (28%) (European Union, 2022), therefore putting Berlin to hold a level of economic and political leverage over Budapest that very few others share (Venne, 2022). As far as China is concerned, only 9% of Hungary's overall imports come from China vis-à-vis 3% of exports going both to the United States and the United Kingdom (European Union, 2022).

Nevertheless, between 2000 and 2016, Hungary’s imports from, and exports to China experienced a steady increase, to the extent that in 2019 China was also targeted as Hungary’s 13th largest export market and 5th largest import market. Although China represents Hungary’s largest Asian trading partner, the latter still retains a large trade deficit with the former, as other CEECs (Lukács, et al., 2018, p. 7).

For what concerns the infrastructure investments, China started pouring billions of dollars into Hungary once the country acceded to the EU in 2004, but more notably from 2013. Although China represents a 2.3% share in the total Hungarian foreign direct investments (FDI) stock, Hungary is the leading destination country for Chinese FDI in the CEE region (Lukács, et al., 2018). Between 2000 and 2017, Chinese FDI in the country amounted to $2.1bn, which now reached the highest level of cumulative Chinese FDI from 2000 to 2020 of all the EU’s CEE countries, (€2.7 bn), followed by Poland (Kratz, Zenglein, and Sebastian, 2021).

For these reasons, Chinese State-Owned Enterprises, or private transnational Chinese companies, invest in several industries such as electronics, motor vehicle, chemicals, telecommunication (e.g.: the 2005 Huawei in Budapest), banking (e.g.: the 2003 Bank of China CEE subsidiary in Budapest; the 2005 CEE headquarters in Budapest to mainly finance Chinese firms’ activities in Hungary), real estate, logistics, and trade. For Hungary, the country generally prefers investing in neighbouring countries. However, it is far keener on investing in China for sectors such as pharmaceuticals, water resource management, agriculture, energy saving, and environmental protection (Lukács, et al., 2018, pp. 11-16).

A recent attempt to foster the economic relations between the two countries has been the reconstruction of the flagship project of the Budapest-Belgrade Railway (BBR) line, between the Hungarian and Serbian capitals, as agreed back in 2013. The modernization of this train line represents an effort of international cooperation in railway capacity, construction, and regional connectivity (Lukács, et al., 2018), under both BRI and 17+1 impetus, although the issue of reciprocity in accessing the Chinese domestic markets vis-à-vis the European one remains a controversial aspect (Tucker and Ádám, 2019).

The project is framed in the China-Europe land-sea express passage, where usually sea shipping is the cheapest but slowest route (Lukács, et al., 2018, p. 16). It aims at providing a rapid freight transport connection of goods produced in China to Budapest, passing from the Greek port of Piraeus through the Balkans, further to the EU markets. In the long term, this will bring a reduction in travel time between the two capitals from the current 8.5 to 3 hours, transforming the Port of Piraeus into a major penetration point for Chinese goods in Europe – and in the opposite direction – whose majority ownership is Chinese. The estimated cost for the project is €3.2bn, of which €1.68 from Hungary. Details argue 15% of this amount will be financed through a Hungarian rail transport company, while the remaining 85% will be financed with a loan from the Export-Import Bank of China (Moisè, 2019). By 2017, both Hungary and Serbia were expected to start the project.

Although the project should have been completed by 2017, it brought years of delay up to late 2021. The delay was due to a preliminary infringement proceeding launched by the European Commission (EC) in 2016, to clarify the details of a previous agreement between China and Hungary. The EC was investigating whether Hungary was complying with EU procurement rules or not. In May 2017, such a deal was modified by the Hungarian Parliament and a new open bidding was announced in November the same year (Lukács, et al., 2018, p. 17). Indeed, the EC main concern is related to a possible corruption procedure exerted by China, since at least 85% of the construction is in the hands of Chinese firms. Richet (2019) adds the construction of this line binds Chinese companies and the State(s) concerned, to comply with the European regulations on public procurement and environmental constraints. However, European authorities argue China tries to circumvent such a normative framework to pursue domestic interests, lacking transparency and willingness to involve the European side the same way Europeans would do if they could easily access the Chinese market. More favourable predictions were foreseen for 2020, however, the project started at the end of 2021, with a possible completion by 2025 (Liersch, 2021). In March 2022, the Hungarian and Serbian representatives – together with other government officials – took the train at the Belgrade railway station and arrived at the station at Novi Sad, where they were warmly welcomed by local residents (Global Times, 2022). This inaugurated the section of the BBR project.

Sceptics about the Chinese presence in the EU territory might evaluate the Sino-Hungarian partnership in positive terms, therefore portraying China’s narrative in the CEE region as an example for China to undermine European integrity by shaping the 17+1 Cooperation to its own preferences.

However, to argue whether this partnership represents an economic threat to the EU or not implies sticking to the concrete outcomes that had been achieved so far. Overall, the latest figures tell Hungary received less Chinese investment last year than what the Hungarian and Chinese governments respectively claimed (Venne, 2022). Indeed, both governments inflated their numbers to create the illusion China was more invested and involved in Hungary than it actually was (Venne, 2022).

China’s offer in the region remains modest after more than nine years (MERICS, 2020), and the related 12 EU Member States respond differently to its dynamics. The sceptical oriented narrative may be reconsidered, as many among these countries now share just a sentiment of disillusion due to the mismatch between the economic promises and ultimate outcomes (MERICS, 2020). Therefore, the cost-benefit analysis illustrates that Hungary, contrary to PM Orbán’s consolidation of partnerships for his “illiberal democracy”, gains little from its relationship with China, and strives to see some of the predicted objectives realised. Some estimates suggest it could take between 130 and 2,400 years before Hungary makes a profit from it (Vörös, 2018). Thus, there are no tangible nor practical economic outcomes that could substantially threaten and/or undermine the EU stability and its relations with both the Chinese and the Hungarian partner. Moreover, the EU market does not seem to assist in a total infringement of its own procedures, keeping the EU Institutions ready to defend their Acquis Communautaire, and China on the path of embracing stronger cooperative investment mechanisms and transparent procedures. It seems, rather, the Sino-Hungarian partnership spurs from a need to reflect a mutual “national-conservative” idea in an ever-changing international arena.

Lucilla De Stefano graduated last year from a Double Master’s degree of Law-International Relations and China, from the China Foreign Affairs University of Beijing, and LUISS Guido Carli University of Rome. Recently completed an internship at the United Nations International Fund for Agricultural Development (IFAD), where she worked in the Human Resources Division. Passionate about China and Chinese culture, she spent my year in Beijing studying and practicing Chinese language, while contributing to the mandate of the Italian Embassy to the People’s Republic of China as a researcher for her dissertation on the inter-relations between the Belt and Road Initiative and Europe. You can find her on LinkedIn.

The opinions expressed here are those of the writers and do not represent the views of European Guanxi.

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