The Digital Silk Road

A tighter scrutiny of Chinese investment in sectors sensitive to national security is in order across Central Europe. Even if the race to keep technological knowledge away from the Chinese government cannot be won in any definitive way, there is no reason for a pre-emptive surrender.

The economic rise of China, which lifted half a billion people out of poverty in less than two generations, is nothing short of a miracle. It is now widely understood that the country’s economic take-off is due to the scaling back of state planning in the early 1980s under the chairmanship of Deng Xiaoping. The reforms started on a modest scale in agriculture, when farmers were allowed to sell their surpluses on the open market. Later on, special economic zones allowed for the inflow of foreign direct investment into a previously closed economy. By 2001, China’s opening up allowed it to join the World Trade Organization and gain further access to global markets.

This is a story to be celebrated. Furthermore, it is not a story of the wisdom of Chinese leaders and the effectiveness of the country’s administration—rather, it is one that shows the power of market incentives and individual autonomy. Also, notwithstanding claims made by populist leaders in the West, trade with China has hardly destroyed any jobs on the net, while generating extraordinary consumer benefits.

However, there is one significant blemish: contrary to the hopes harbored by many, the economic integration into the global economy has not changed the fundamental nature of China’s political regime. True, gone are the days of Chairman Mao’s heavy-handed industrial planning. At the same time, the economic and political model that emerged in the country is basically an autocratic one, and relies on political fiat as the main method of economic decision-making. Failed state-owned or state-connected enterprises are never liquidated but merged with others; domestic businesses have access to state-owned land and loans provided by state-run banks, making it very difficult for outsiders to compete on an even playing field; and intellectual property theft is widespread.

The tightening of the regime is obvious

Not only has China not become a market economy, but arguably the crony capitalist model has allowed for a more effective entrenchment of the Chinese Communist Party’s (CCP) monopoly on power, this time under the banner of Chinese nationalism rather than communist ideology, conventionally understood. Especially over the past decade, the signs of the tightening of the regime are obvious—from the ruthless, Orwellian application of new technologies of surveillance and social control, through Internet censorship, to the appalling treatment of the country’s ethnic and religious minorities, most significantly the Uighurs.

Not only has China not become a market economy, but arguably the crony capitalist model has allowed for a more effective entrenchment of the Chinese Communist Party’s monopoly on power, under the banner of Chinese nationalism.

Simultaneously with heightened levels of domestic repression, China has also started to behave more assertively on the international scene. Apart from its militarization of the South China Sea, violating the basic international norm of freedom of navigation, the regime has sought to leverage—not unlike the Kremlin—its ties to ethnic Chinese populations outside of the mainland. Since the times of Mao Tse-tung, the CCP has relied on the policy of “using civil actors to promote political ends.” Those include cultural and educational activities, many under the umbrella of “Confucius Institutes” at Western Universities. More pernicious are the CCP’s attempts to “guide” overseas Chinese in the pursuit of Beijing’s geopolitical influence.

With the exception of the religious group Falungong, pro-Taiwan, Uighur, or Tibetan groups, it is hard to find organizations of overseas Chinese that would operate independent of any “guidance” from Beijing. President Xi Jinping called such efforts CCP’s “magic weapons.” Not even Chinese-language media overseas can escape Beijing’s interest. There are numerous examples of boycotts, withdrawals of advertisement, and other activities that encourage self-censorship even among journalists working for mainstream Western outlets.

There are numerous examples of boycotts, withdrawals of advertisement, and other activities that encourage self-censorship even among journalists working for mainstream Western outlets.

Surveillance systems around the globe

Finally, the Belt and Road initiative seeks to foster investment connections and an infrastructure that would tie a number of countries to Beijing both economically and politically. Although the initiative provides funding for investment that is often only of marginal economic value, it is filling a real void left in Central Asia and Eastern Europe by Western powers. It is also contributing to a path dependency for poorer economies that may not be able to extricate themselves from Chinese influence in the future. Some- times the dependency is real where the debt burdens newly incurred by relatively poor countries within the program are alleviated by the Chinese regime in exchange for further contracts or political concessions.

The “Digital Silk Road,” a subset of the Belt and Road initiative, consists of financing for purchases of Chinese telecommunication equipment, fiber-optic cables, and surveillance systems by governments and the private sector around the globe. In many countries, such purchases prompt understandable fears about importing the intrusive, Orwellian characteristics of the Chinese political system, as well as about the risks of espionage—after all, both Huawei and ZTE have been under close scrutiny in a number of Western countries, including Australia and New Zealand.

In Central Europe, the magnitude of Chinese investment is small— especially when compared to FDI flows from other major Asian economies, such as South Korea and Japan. Yet, such investment has been invariably structured in strategic, highly visible ways (think about Hainan Airlines’ direct connection between Prague and Beijing, three times a week) and accompanied by meticulously organized business fora, conferences and official visits.

Chinese economic presence is shaping the politics in Central Europe

As an illustration, the state-owned Bank of China entered the Czech market in 2015, followed by the Industrial and Commercial Bank of China (ICBC), also in government hands. Much has been written by CEFC, initially, an opaque private entity later taken over by an agency of the Shanghai local government, which invested indirectly in the Czech Republic’s national carrier, Czech Airlines, took over Lobkowicz Breweries, and purchased a majority stake in SK Slavia Prague, a beloved football club. It also entered into J&T Finance Group, a private equity and banking group, and the largest investment group in Slovakia. In Poland, meanwhile, the Chinese have been pushing for an intensification of rail transport links to China under the New Silk Road initiative.

Sometimes the dependency is real where the debt burdens newly incurred by relatively poor countries within the program are alleviated by the Chinese regime in exchange for further contracts or political concessions.

The growing Chinese economic presence is shaping the region’s politics, starting with the Czech President, Miloš Zeman, who famously appointed CEFC’s former chairman, Ye Jianming, as his economic advisor. During President Xi Jinping’s visit to Prague in April 2016, Czech police went out of their way to clear all pro-Tibet demonstrators and symbols out of the Chinese delegation’s sight.

Not only has there been a rise of caution, if not of sycophancy, in the Visegrad countries’ statements about China, Taiwan and Tibet, the rise of China (alongside Russian influence) is tempting Central Europeans to reconsider their basic geopolitical allegiances, to the continuing frustration of Washington. It was reported, for example, that Prime Minister Viktor Orbán had floated the idea of Hungary’s “neutrality”—a charge that the Hungarian government denies.

What should be the response of the West?

There is also a growing multilateral façade for the Chinese project of power projection. Similarly to the World Bank’s (WB) initial role, China has set up a multilateral investment bank, the Asian Infrastructure Investment Bank (AIIB) to provide a new source of financing for infrastructure investment. If the WB’s track record in promoting actual economic development in poorer parts of the world is limited, it is hard to see an organization under CCP’s tutelage equaling or bettering it.

The WB has furthermore accumulated useful technical expertise and is generally seen as a politically neutral, substance-driven organization, reflecting the consensus of the economic profession in the Western world. In contrast, the AIIB faces much more stringent economic constraints—largely because social scientists concur that authoritarianism and crony capitalism does not provide a sustainable path to prosperity.

What should be the response of Western liberal democracies—and, more specifically, of the governments of Central Europe? President Donald Trump famously campaigned on a distinctly anti-Chinese platform and his administration has taken a more muscular posture towards the Asian giant. Unfortunately, Trump’s discontent seems to be limited to the issue of a bilateral trade balance, a metric not seen as meaningful by economists.

Even if there are valid issues that ought to be addressed in US-China trade talks, the US administration’s approach, especially its reliance on tariffs, has been heavy-handed and counterproductive, harming first and foremost American businesses. At the same time, the US response has neglected the importance of cultivating alliances with Asian democracies: the withdrawal from the Transpacific Partnership has ceded ground to Chinese mercantilist interests and Trump’s seeming love affair with North Korea’s dictator Kim Jong-Un leaves Japan uneasy.

Some important common interests

The EU, in contrast, has so far avoided a collision course with Beijing. But that is not so much a result of a strategic calculus but rather of the oblivion that reigns in many European capitals. In the eyes of Europe’s self-styled pragmatists, China is a business partner and a largely responsible prospec- tive stakeholder within the international order. The awakening of the threats posed by the regime, which are oftentimes very subtle, has only been gradual, with the ZTE and Huawei scandals playing a useful catalytic role.

True, it is important that such an awakening does not go overboard, as recent pronouncements, including by Germany’s Minister of Economic Affairs Peter Altmaier, suggest. Western production chains—and indeed global prosperity—rely in significant ways on Chinese manufacturing and any large disruption is bound to produce painful unintended consequences, making everybody poorer.

As Larry Summers notes in his recent article in the Washington Post, unlike during the Cold War when a neat economic and technological line of separation existed between the West and the Soviet bloc, such lines have become blurry in the age of the Internet, economic integration, and large Chinese student populations in the West.

As a result, “keep- ing US knowledge out of Chinese hands for substantial lengths of time is impracticable short of a massive breaking of economic ties.” Furthermore, for all the friction, the West and China share some important common interests—finding a safe way out of the Thucydides’ Trap, avoiding catastrophic climate change, and curbing nuclear proliferation, among others. There is no reason not to engage China effectively on such matters.

The rise of China (alongside Russian influence) is tempting Central Europeans to reconsider their basic geopolitical allegiances, to the continuing frustration of Washington.

Foreign policies guided by deeper moral compass

None of this should entail naïveté, either about China or about the West. Without overestimating their own geopolitical weight, small Central Euro-pean countries would invariably benefit from a more circumspect approach to China. From Prague or Bratislava, China does not appear to be much of a threat. But barring a handful of prescient intellectuals and statesmen with direct knowledge of the nature of the Kremlin’s regime, Vladimir Putin’s Russia did not look dangerous to Westerners for a long time either—until it did. Central Europe, of course, does not have to fear direct Chinese political or military domination. Yet, policymakers in the region have to remember that their part of the world would be the first to suffer if Chinese government drove an effective wedge into Western alliances.

The AIIB faces much more stringent economic constraints—largely because social scientists concur that authoritarianism and crony capitalism do not provide a sustainable path to prosperity.

First and foremost, a tighter scrutiny of Chinese investment in sectors sensitive to national security is in order across the region. Even if the race to keep technological knowledge away from the Chinese government cannot be won in any definitive way, there is no reason for a pre-emptive surrender or for making the regime’s job easier. Second, Central European governments ought to think twice before committing themselves to infrastructure projects that can set them on a path towards dependency on Beijing. Third, both Central Europe and the West at large need to be clear-eyed about the true character of CCP’s regime and about the extent to which it relies on repression. That, of course, cannot be disentangled from a deeper moral compass that should be guiding the foreign policies of liberal democracies. Sadly, that compass has been missing as of late in too many a Western capital, including in those of the Visegrad countries.