China–EAEU: Correcting Imbalances

Economic relationships between Russia and the EAEU on the one part and China on the other have become strategically important in recent years: Eurasia’s turn eastwards, although late for several decades (as the global economy made it in the 1980s), is reflected nevertheless in the geography of trade and investment ties. China’s share in Russian trade has grown noticeably over the recent three to four months and China has outpaced some European countries in the list of Russia’s main trade partners, having become the unconditional leader in terms of trade turnover.

However, despite seemingly good statistics, the economic relationships between China and some EAEU countries, including Russia, have a number of imbalances, the main of which is the dominance of trade, compared to investment cooperation growth rates. Until recently, the overwhelming part of China’s direct investment in the EAEU was in Kazakhstan, while investment cooperation with Russia was weaker. In addition, China’s investment in the EAEU, and in the first place Kazakhstan, was, to a significant extent, in the primary sector while the EAEU countries’ main need for investment is in the area of processing and high tech.

Negotiations between the EEC and China on a non-preferential trade agreement were aimed in part at remedying these imbalances. The agreement, the negotiation of which started in 2015, does not envision cuts in import duties and focus on lifting non-tariff barriers to trade, as well as greater investment cooperation. It is expected, to a significant extent, to determine the vector of investment cooperation between China and the EAEU in the medium term, in particular by converging the EAEU and the Silk Road Economic Belt (SREB).

Despite the growing flow of direct investment from China to the EAEU countries since 2016 (it should also be factored in that this growth is happening against the “low-base” effect), it would be prematurely to say that the situation has improved radically or that the non-preferential trade agreement would be efficient. In terms of investment, China will pursue its own interests as actively as it does in trade. This is also confirmed by China’s economic diplomacy in implementing the SREB initiative and building bilateral investment cooperation with Central Asian countries.

In this context, the EAEU countries need a strategy to set forth clear rules of the game in economic relationships with China that would meet the national interests of the EAEU countries on the one hand and improve incentives for China for investment cooperation, on the other. In this respect our economic diplomacy would benefit significantly from setting certain conditions for foreign investment, including Chinese one, in particular as concerns environmentally friendly technology, the level of technology transferred to Russian businesses in the course of projects, the selection of priority sectors for foreign investment, and the use of labour and equipment from the EAEU countries.

In addition to setting such conditions, to motivate China to enhance investment cooperation it would be advisable to have a joint strategy of work with Chinese partners in the framework of integration projects promoted by both China and the EAEU. Aside from the key axis of EAEU–SREB, it is necessary to consider joint initiatives within the BRICS: here Russia and the EAEU may benefit from supporting China’s BRICS+ initiative if it helps to strengthen the EAEU positions in regional integration groups on the global scale. Possible cooperation between development institutions (including EDB and the China Development Bank) in preparing and co-financing joint projects may also be considered.

A positive factor is that these priorities are being reflected in part in negotiations on the agreement with China. In particular, two new areas for cooperation between the EAEU and China emerged during discussions in 2017: cooperation in the area of environmental security and enhancing joint work with the countries that plan to enter into a preferential agreement with the EAEU. In the end, the falling behind and imbalances in investment relationships with China reflect the uncertainty of our own priorities in foreign trade. The clearer these priorities are, the greater effect the relationships with a hyper-pragmatic partner such as China should have.