Why Chinese and South Korean Economic Invasion May Prove Dangerous for Central Europe

The South Korean capital Seoul is a vibrant metropolis full of hurried- and worried- looking people which (if it weren’t for signs in the characteristic local alphabet) could be easily mistaken for any American city. South Korea’s current economic miracle has been built literally on the rubble of a devastating war. The Koreans have trained themselves to become goal-oriented and work hard and for long hours. Their only real competitors in the region are the Japanese, with a population twice the South Korea’s size, and the incomparably more numerous Chinese who provide a lucrative market for all kinds of Korean goods from cars through cosmetics to popular music and soap operas.

However, as exports to China have recently begun to slow down, the South Korean leadership has not only focused on growing the domestic consumer market and developing a “creative economy” (as the government refers to the fostering of smaller and medium-sized companies), but has also started looking for new markets and expanding markets that Korean firms penetrated some time ago. For example, Korean Air has acquired a share in Czech Airlines (ČSA), Kia cars are produced in Slovakia, Hyundai cars and Nexen tires are made in the Czech Republic, and it is no secret that the energy company KEPCO has its eye on completing the construction of a Czech nuclear power station at Temelín.

South Korean tourists are expected to visit the Czech Republic in record numbers this year, making use of direct flights, and are likely to surpass the number of visitors from China, who, in turn, can avail themselves of direct flights between Beijing and Prague starting this September. However, unlike South Korea, a country to which post-communist Europe can relate on a more personal level based—among other things—on a similar history and democratic government, the Czech relationship with Chinese investments is more problematic.

This year has seen an unprecedented economic rapprochement between China and the Czech Republic, preceded by friendly political gestures on the Czech side. Czech President Miloš Zeman went as far as to reveal that his external advisers include the president of CEFC, a Shanghai company which in early September announced a series of investments ranging from the air travel firm Travel Service to the Slavia football club. Yapp, a Chinese company manufacturing plastic fuel tanks for Škoda cars, is about to double its production capacity. And it was President Zeman who facilitated the opening of a Bank of China branch in Prague, a subdivision of the bank’s well-established Budapest subsidiary, with an announcement at Prague Castle. In September, Miloš Zeman was the only EU politician to attend the Chinese military parade marking the end of World War II in Asia; he has also spoken admiringly of the Chinese state-run economy in the past. Chinese investments in the Czech Republic thus appear to be a reward for the overtures by the Czech head of state.

Given the political sensitivities, we won’t know how far the Central European politicians are willing to go in welcoming investors from East Asia until the first Chinese attempt to invest in infrastructure projects. The political aspect will undoubtedly play a smaller role in the case of South Koreans and Temelín than, say, in the case of the Chinese who were allowed to bid to become the GSM communication provider for the Polish railways. The Poles have already had a disastrous experience with a Chinese company hired to build the country’s motorways, which were supposed to be completed in time of the 2012 football championship.

At a summit meeting with Central European leaders in Belgrade in December 2014 the Chinese Prime Minister Li Keqiang stressed that his country was interested in investing in infrastructure or nuclear energy. As early as 2012 China announced that it had earmarked 10 billion USD for investment in Central Europe. Nevertheless, we have yet to see a major project proving that the Chinese are serious about investing in infrastructure projects and increasing their influence in Central Europe.

Yet, when it comes to relations with China, Central Europe does not need to rely only on Czech president’s quirks and his closest associates’ interest in China. Poland has actively sought to become a founding member of the Asian Bank for Investment and Infrastructure, a position that would facilitate easier Polish access to major projects in Asia with funding from the Chinese “Silk Road” project, and thus boost further growth.

As their long-term growth strategy has stopped yielding the desired results, the South Koreans and the Chinese have started looking for new markets and new partners all over the world. The disproportion in the size of countries, economies and potential markets aside, at the present time of fast growth the Central European countries have a certain advantage compared with their Asian partners: they have a better starting position in negotiating with potential investors and don’t have to pander to them as much as Miloš Zeman has done to China.

Hungary’s Prime Minister Viktor Orbán failed in a similar attempt bordering on pandering in his policy of “opening to the East.” Not only did he try to open the Chinese market to Hungarian products, he also hoped to attract major Chinese investment and sell a part of the national debt to China. He failed, even though Budapest has enjoyed closer links with China since the 1980s, when the country opened itself to an influx of Chinese business, opened the first Central European subsidiary of the Bank of China, and welcomed a Chinese minority numbering hundreds of thousands.

Nevertheless, Central European producers haven’t been able to resist the lure of the Chinese market which is in some ways less demanding than the Korean one, for instance in terms of quality or competitiveness. However, belatedly and in a roundabout way, Europe could experience what South Korean has been through: for instance, troubles on the Chinese market and the slowdown of the Chinese economy could have an impact on German automotive industry suppliers or Škoda, the largest Czech car producer. China needs to maintain a certain growth rate but its financial market is rather unstable, as we have seen this summer when it seriously disrupted the global economy.

It is the relations with China (and, to a lesser extent, with South Korea) that have exposed an old fault line of the European Union: in order to be an appropriately strong partner, the EU would have to speak with a united voice. However, the Chinese, like the Russians, use the divide and rule approach. Only Beijing’s ambitions are primarily channeled into business, for example in the form of the Central European fund.

The example of Central Europe, South Korea, and China thus demonstrates that the European Union plays a much smaller role in business and economic relations than individual nation states that have cultivated relations with partners who are often much larger in size. Everyone would like to have a slice of the Chinese cake, even if it entails great risks. This policy, based as it is on pragmatic interests, might be good news for businesses and jobs. In terms of a future common EU policy, however—just like the attitude to refugees or Greece—it doesn’t augur well.