Report on Infrastructure and Investment: the One Belt One Road Initiative and the launch of the Asian Infrastructure Investment Bank (AIIB)

European Economic and Social Committee

Brussels, 10 May 2016

14th China-EU Round Table

Report on Infrastructure and Investment: the One Belt One Road Initiative and the launch of the Asian Infrastructure Investment Bank (AIIB)

_____________

Rapporteur: Stefano Palmieri

Expert: Marco Celi

_____________

EN

EESC-2016-02578-00-02-TCD-TRA (EN/IT) 1/12

Summary and conclusions

In the last decade, bilateral relations between the European Union (EU) and the People's Republic of China (PRC) have become a real "strategic partnership" in the areas of trade cooperation, environmental protection, innovation, research, education and international security. In the coming years, cooperation between the two systems will become even stronger and more challenging. If these challenges are to become opportunities using a win-win approach, they must be based on the "reciprocity" principle. The European Economic and Social Committee (EESC) therefore underscores the future key role of cooperation between the civil society representatives of both parties.

The Europe 2020 strategy, the Strategic Investment Plan (Juncker plan), the PRC's 13th five-year plan, the One Belt One Road (OBOR) initiative, the Asian Infrastructure Investment Bank (AIIB) and the EU-PRC Investment Agreement are the legs on which future relations between the EU and the PRC must stand.

The EESC believes that these initiatives must be tackled together so that an integrated framework can be shaped for the challenges and opportunities that both parties should view as priorities with a view to delivering results visible to civil society.

The EESC emphasises that the objectives of the Europe 2020 strategy and the 13th five-year plan are compatible, particularly as regards the EU's smart, sustainable and inclusive growth priorities.

OBOR and the AIIB are strategic factors both in the PRC's reform and the strategic infrastructure programme for the Eurasian region. These initiatives demonstrate the PRC's determination to reinforce its role in global relations and the need to support the introduction of a multipolar financial and currency system able to enhance systemic resilience.

While it considers that both of these initiatives are strategic for the EU, the EESC would point out that the joint strategy needs to be reinforced at EU level, so that the pursuit of specific interests by individual Member States does not result in criticism and obstacles to European economic and social cohesion and relations between the EU and the PRC.

The EESC is aware of the concerns and doubts which have already arisen in Europe regarding OBOR, and points to the need to support every possible step to transform this vision into a more tangible, understandable reality for European civil society.

The EESC would also point out that the absence of a clear and coordinated EU stance on the AIIB has not allowed for the planning and implementation of a common strategy, which would certainly have been useful for harnessing the EU's interests to those of the individual Member States.

The EESC is pleased that the PRC is likely to be entering the European Fund for Strategic Investments (EFSI) and highlights the advantages for civil society.

The EESC considers that the direct participation of Member States in the AIIB and the entry of the PRC into the EFSI provide an opportunity to uphold principles which are crucial to civil society: compliance with EU standards in public procurement, environmental protection, human rights, and labour and social protection.

Civil society must therefore be assured that it will be able to monitor, assess and implement action planned in connection with OBOR and the EFSI using an appropriate set of economic, social and environmental indicators at national, regional and local level.

The negotiation process, which in the next few years should produce the potential investment agreement between the EU and China, must guarantee optimum transparency regarding the documents on the table. Throughout this process, the civil society organisations of both parties must be directly involved (the EESCs EU-China Round Table can play a key role here), promoting cross-sector dialogue and guaranteeing broader social partner involvement[footnoteRef:2]. Social dialogue and collective bargaining, which are part of the EU's social acquis, must be promoted as best practice. [2: EESC, Role for sustainable development and civil society involvement in stand-alone EU investment agreements with third countries. REX/410, Brussels, 19 March 2015.]

The EESC believes that the bilateral investment agreement must include a specific chapter on sustainable development based on environmental protection, combating climate change, the promotion of decent work, health and safety in the workplace, and all the issues covered by the ILO's fundamental conventions and key environmental conventions[footnoteRef:3]. [3: EESC, REX/410. Op.cit.]

With regard to the strategic role to be played by labour in the EU's strategic investment plan and the OBOR initiative, the EESC reiterates that it is ready and willing to organise a conference on labour rights in the EU and China, with the European Parliament, the European Commission, the European External Action Service and universities[footnoteRef:4]. [4: During the 13th EU-China Round Table in Chengdu, the EESC presented the Report on Human Rights drawn up by Mr Janson, which proposed organising the conference back in November 2014.]

The EESC believes that the main economic actors (such as small and medium-sized enterprises and social enterprises), social actors (such as trade unions and NGOs) and civil society actors (such as consumer associations) in the EU and the PRC must be guaranteed continuous support to ensure that they are in the driving seat of economically, socially and environmentally sustainable development in the EU and the PRC.

Fresh prospects for relations between the European Union and the People's Republic of China

2015 marked the 40th anniversary of diplomatic relations between the EU and the PRC. Today, following the implementation of the EU-China strategic partnership[footnoteRef:5] and the EU-China 2020 Strategic Agenda for Cooperation[footnoteRef:6] and thanks to the long-term cooperation between civil society representatives of both parties, we can say that the groundwork has been laid to change challenges into opportunities for development and cohesion using a win-win approach, with a view to achieving economic and social objectives based on the common good. [5: European Commission - A Maturing Partnership - Shared Interests and Challenges in EU-China Relations - COM(2003) 533 final.] [6: http://eeas.europa.eu/china/docs/20131123_agenda_2020__en.pdf]

During the 17th EU-China Bilateral Summit held in Brussels on 29 June 2015, EU and Chinese diplomats agreed on the strategic priorities which must accompany cooperation between the two social and economic systems over the next few years. The decision was taken to focus on the challenges and opportunities connected to the One Belt One Road initiative (OBOR)[footnoteRef:7] and the EU's Strategic Investment Plan[footnoteRef:8], also known as the Juncker plan[footnoteRef:9]. [7: See Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road National Development and Reform Commission.] [8: European Commission An Investment Plan for Europe - COM/2014/0903 final.] [9: See joint statement The way forward after forty years of EU-China cooperation, adopted at the 17th EU-China Bilateral Summit.]

Recent EU-China bilateral summits have taken place in a geoeconomic and geopolitical climate shaped by the impact of the economic crisis, the repercussions of the war in Syria and the crisis in Ukraine, and the impact of the Trans-Pacific Partnership Agreement (TPP)[footnoteRef:10] and the negotiations on the Transatlantic Trade and Investment Partnership (TTIP)[footnoteRef:11]. [10: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2015/october/summary-trans-pacific-partnership] [11: http://ec.europa.eu/trade/policy/in-focus/ttip/]

An analysis of the prospects for economic and social cooperation between the EU and the PRC must begin with the awareness that we are facing systems with very different approaches to planning and implementing strategic policies.

While in the PRC the framing and implementation of development policies is very much centrally coordinated, the EU is definitely weak when it comes to framing common political and economic strategies; in many cases, particularly regarding economic issues, the Member States compete instead of cooperating, leaving individual enterprises to decide on strategies on how and where to invest. This dynamic could harm the economy of the majority of Member States, particularly given that these challenges cannot be tackled effectively by individual national systems.

The way forward, transforming the challenges and opportunities inherent in EU-PRC bilateral cooperation into drivers of prosperity, peace and cohesion, must be based on an approach geared towards meeting common objectives by integrating the policies and strategies which are the hallmarks of the social and economic development of the two systems, such as the 13th five-year plan[footnoteRef:12] for the PRC and Europe 2020 for the EU[footnoteRef:13]. [12: Adopted on 16 March 2016 during the 12th National People's Congress - http://news.xinhuanet.com/english/2016-03/17/c_135198333.htm.] [13: European Commission - EUROPE 2020 - A strategy for smart, sustainable and inclusive growth - COM(2010) 2020 final, 3 March 2010.]

Since 2012, through a series of political and economic initiatives, the PRC has shown a clear desire to strengthen its own position at macroregional and global level. Despite the multiannual planning which is the defining feature of the new Chinese approach, the economic growth analysis concluded that the growth rate was slowing down (from 10.6% in 2010 to 6.9% in 2015)[footnoteRef:14]; this dynamic could be largely due to the fact that the drivers of Chinese economic growth over the last three decades have failed to deliver. [14: https://www.worldbank.org/content/dam/Worldbank/document/EAP/China/ceu_06_15_en.pdf.]

Although not directly linked to EU-PRC relations, the 13th five-year plan is a basic planning document which should be analysed in greater detail. The plan hinges on five key concepts (innovation, balancing, green development, openness and inclusiveness), for which specific economic, environmental and social guidelines have been identified; these are compatible with the renewed objectives of the Europe 2020 strategy[footnoteRef:15] and there are clear synergies. [15: See EESC opinion SC/039 Taking stock of the Europe 2020 strategy.]

In the last two decades, the international geopolitical balance has been increasingly influenced by factors linked to progress and economic development objectives. The One Belt one Road initiative shows that the link between geoeconomics and geopolitics has become increasingly binding as regards planning long-term development strategies.

With this goal in mind, it is clear that from the EU's point of view, the forward-looking assessment of OBOR cannot be separated from the analysis of other basic factors, such as the potential entry of the PRC into the European Fund for Strategic Investments (EFSI) and the setting up of the Asian Infrastructure Investment Bank (AIIB)[footnoteRef:16]; these three issues must be tackled together in order to establish an integrated framework of challenges, objectives and opportunities that the EU should consider and support in its bilateral relations with the PRC with a view to achieving social and economic results beneficial to civil society. The potential influence of the ongoing negotiations on the EU-PRC Investment Agreement will need to be evaluated. [16: http://www.aiib.org.]

OBOR, EFSI and AIIB: challenges, opportunities and risks for the EU

The One Belt One Road initiative (OBOR)

The One Belt One Road initiative is the most important diplomatic awareness-raising initiative undertaken by Beijing in the last decade. The initiative was set in motion by the Chinese president, Xi Jinping in September 2013 in Astana (Kazakhstan) and aims to establish an "economic land belt" (linking China and Europe via Central Asia and Russia; linking China and the Middle East via Central Asia; linking China and South East Asia, South Asia and the Indian Ocean) and an "economic maritime belt" (linking China and Europe via the South China Sea and the Indian Ocean; linking China and the southern Pacific Ocean via the South China Sea) which will connect China to Europe via South East Asia, Central Asia and the Middle East (Figure 1 in the appendix).

55% of the world's GDP, 70% of the world's population and 75% of energy resources are concentrated in the region covered by the OBOR initiative. With a planned overall financial commitment of around 1400 billion dollars, the strategic objective of this pharaonic initiative is to reinforce the PRC's role in global relations and step up its economic and trade relationships with the 65 countries also involved through transport and logistics infrastructure projects[footnoteRef:17]. [17: EURASIAN COUNCIL ON FOREIGN AFFAIRS, December 2015, The New Silk Road: A Path to Regional Security?]

Analysis of the document on Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road[footnoteRef:18] clearly shows that the key concept underpinning the OBOR initiative is inclusion: an approach open to all countries interested in cooperating on infrastructure investments. This view is confirmed by the fact that in this document, OBOR is identified as an initiative and not as a strategy, implying a development plan based on projects identified and planned in advance and so less open to dialogue with and contributions from partner countries. [18: http://en.ndrc.gov.cn/newsrelease/201503/t20150330_669367.html.]

OBOR does not simply trace out a path for developing transport and logistics infrastructure: it identifies an open area for bilateral and multilateral cooperation between countries by establishing a specific financial instrument for the investments planned, called the Silk Road Fund (SRF)[footnoteRef:19], along with mechanisms for multilateral cooperation such as Cooperation between China and Central and Eastern European countries (CEEC)[footnoteRef:20], also known as the 16+1 mechanism, and the Eurasian Economic Union (EAEU)[footnoteRef:21]. [19: http://www.silkroadfund.com.cn/enwap/27363/index.html.] [20: http://www.china-ceec.org/eng/.] [21: http://www.eaeunion.org/?lang=en.]

While it is plain that this initiative is economically strategic for the EU, including with a view to regaining lost ground in the Eurasian region, it is also clear that OBOR is a complex and multidimensional project and so must be managed by the EU chiefly as a political challenge. The absence of a common EU-level strategy on this initiative (in economic, social and security terms) and the fact that some Member States have established unilateral relations with the PRC in pursuit of individual, specific economic interests, could turn opportunities into problems. It is equally clear that the lack of adequate communication and planning which is up to European standards could create problems in terms of making the initiative understandable and ensuring that European civil society takes part. In order to curb the concerns and doubts which have already arisen in Europe regarding OBOR, every possible step must be taken to help transform this vision into a more tangible, understandable reality for civil society.

The EU must focus on monitoring the rollout of OBOR infrastructure, particularly investments relevant to the territory of the EU and regions covered by neighbourhood policies, ensuring that they are compatible with EU strategies[footnoteRef:22]. [22: Regulation (EU) No 1316/2013 of the European Parliament and of the Council of 11 December 2013 establishing the Connecting Europe Facility, amending Regulation (EU) No 913/2010 and repealing Regulations (EC) No 680/2007 and (EC) No67/2010.]

The need to reinforce EU action on the "European dimension" of OBOR is clear from the fact that under the "16+1 mechanism" (12 of the 16 are EU Member States), cooperation is already underway between the PRC and the countries of Central and Eastern Europe. If not properly managed, this dynamic could lead to tension, damaging European cohesion and relations between the EU and its Member States and between the states themselves.

OBOR, and specifically its Eurasian corridor, must not be viewed solely as a tool to boost trade flows and economic advantages: it must also be seen as a means to promote broader Eurasian integration, strengthening dialogue and cooperation, particularly as regards cultural, education and youth initiatives and all the other values crucial to civil society, as enshrined in Article 3 of the Treaty on European Union[footnoteRef:23]. [23: OJ C 83, 30.3.2010.]

An analysis of the strategies underpinning OBOR demonstrates scant attention to problems connected to the crisis in the Middle East. It must be pointed out that OBOR's land and maritime corridors traverse conflict zones, and in many cases follow the same routes as refugees fleeing the war in Syria and other war-torn regions. The EU and the PRC therefore need to reinforce their joint efforts to support stability and peace in the regions surrounding the EU.

As regards the financial coverage of OBOR investments, it is important to point out that while the Silk Road Fund (SRF) is dedicated to the initiative's land and maritime infrastructure projects, the Asian Infrastructure Investment Bank (AIIB) is not dedicated exclusively to the initiative, and is one of the financial instruments which can support OBOR-linked investments in Asia.

The SRF was set up in 2014 with a budget of 40 billion dollars. Through this fund, the roll-out of OBOR in Europe has so far focused on financing rail and port infrastructure projects in South East Europe; the most relevant project is the Piraeus-Belgrade-Budapest corridor[footnoteRef:24] which involves the construction of Terminal 2 in the port of Piraeus and of a new high-speed railway line linking the Balkans and Hungary. Although it is clearly strategic for OBOR, this project has given rise to considerable doubt in Europe regarding the procedures followed to select the companies which will build the infrastructure and whether OBOR and EU transport strategies (particularly as regards the Mediterranean) are compatible. [24: Balkan railway part of Chinese "express lane" to Europe Euractiv, 18 December 2014.]

One factor which will be key to making OBOR a win-win initiative for bilateral relations between the EU and the PRC will undoubtedly be the capacity to uphold and apply the principle of "reciprocity". This prerequisite should apply when planning and implementing the investments, particularly as regards guaranteeing clarity, transparency and compatibility with European legislation on the awarding of infrastructure tenders.

Further added value for the roll-out of OBOR, particularly in Europe, would come from active civil society participation in planning and evaluating the investments, by involving economic and social actors in the areas concerned.

The European Fund for Strategic Investments (EFSI) and the Asian Infrastructure Investment Bank (AIIB)

After months of meetings and negotiations, the EU and the PRC are on the point of concluding the agreement which will enable China to enter the EFSI by channelling capital directly from the SRF (between EUR 5 and 10 billion). The potential entry of the PRC into the Juncker plan will be beneficial, due to the funds which will be added to the EUR 315 billion already planned and because this openness is likely to encourage other non-EU partners to follow suit. This initiative will also guarantee that EU public procurement standards, labour law and environmental legislation will be upheld during the roll-out of infrastructure projects, and that these projects will be selected on the basis of EU proposals and an analysis of compatibility with OBOR priorities in Europe.

Another advantage of the PRC's entry into the EFSI lies in the fact that through this cooperation, the EU will be able to extend the scope of the Juncker plan, specifically as regards sectors of particular interest to civil society: innovation and competitiveness of SMEs, energy, transport, social infrastructure, and resources and the environment.

The opening of the Asian Infrastructure Investment Bank (AIIB) is part of the PRC's vision of strategic development which aims to achieve the "two centenary goals"[footnoteRef:25]. On 24 October 2014, in the wake of the signing of a specific memorandum of understanding with 21 other Asian countries[footnoteRef:26], the PRC established the first international financial institute in which it is both leading economic system and principal shareholder. [25: Two centenary coals: process and challenges, LU Ding - EAI Background Brief No. 1072, 22 October 2015.] [26: Bangladesh, Brunei, Cambodia, China, India, Kazakhstan, Kuwait, Laos, Malaysia, Mongolia, Myanmar, Nepal, Oman, Pakistan, Philippines, Qatar, Singapore, Sri Lanka, Thailand, Uzbekistan and Vietnam.]

For the PRC, the new bank is fundamental for reinforcing its international position outside the post-Breton Woods system. The initiative is intended to support the introduction of a multipolar financial and currency system able to offer alternative solutions to the monopoly of the dollar[footnoteRef:27]. Unlike other, similar initiatives, such as the New Development Bank (NDB)[footnoteRef:28], which was set up by the BRICS, the PRC has asked other countries to be founding members of the AIIB without any prerequisites. While for Asian countries this provides an opportunity to take an active part in the decision-making process on investments which will reduce their infrastructure deficit, for European countries joining the AIIB is seen as an opportunity to tap into the major infrastructure market which will be developing in Asia in the coming years by winning tenders and subcontracting contracts for their own companies. [27: Geoeconomics Meets Geopolitics - Chinas New Economic and Foreign Policy Initiatives - Hanns Gunther Hilpert and Gudrun Wacker, June 2015.] [28: http://ndbbrics.org.]

Despite American scepticism about the Chinese initiative and its attempt to dissuade its allies from becoming founding members of the new bank, in March 2015, after initial hesitations, the United Kingdom accepted the PRC's invitation to join the AIIB, immediately followed by France, Italy and Germany (another ten European countries have subsequently become founding members of the AIIB)[footnoteRef:29]. In addition to giving these countries the right to help shape the new bank's policies, being founding members guarantees that they will be able to monitor the transparency rules governing the AIIB and other issues crucial for civil society, such as human rights, labour protection, environmental protection and social protection. [29: Austria, Denmark, Finland, Luxembourg, Malta, Netherlands, Poland, Spain, Sweden and Portugal.]

The absence of a clear and coordinated EU stance on the AIIB has not allowed for the planning and implementation of a common strategy, which would certainly have been useful for harnessing the EU's interests to those of the individual Member States. Given the pace of change and the considerable prospects for development of this new bank, the EU should support greater coordination at Member-State level, partly with a view to shaping initiatives planned and implemented using a common approach which analyses all the above-mentioned initiatives holistically.

EU-RPC Investment Agreement

The 16th EU-PRC Summit held in Beijing in November 2013 began negotiations on an investment agreement between the EU and the PRC. The eighth round of negotiations concluded on 4 December 2015 with the agreement to produce a text which would push the negotiations on to a more convincing and effective stage.

The EU-PRC Investment Agreement will unite the present 26 bilateral agreements safeguarding investments between the EU Member States and the PRC in one single agreement. Both parties to the negotiations thereby hope to improve bilateral economic and trade cooperation by opening up the markets in both directions. It is interesting to note that for the PRC as appears on the website of the Mission of the PRC to the EU the EU-PRC agreement is apparently an important opportunity to deepen the reform process by making the Chinese economy more open to foreign investors[footnoteRef:30]. [30: "In China, the agreement will serve to deepen reforms and make the Chinese economy more open to foreign investors http://www.chinamission.be/eng/mh/t1323653.htm. 28 April 2016.]

The agreement aims to:

provide for new opportunities and improved conditions for access to the EU and Chinese markets for Chinese and EU investors respectively; address key challenges of the regulatory environment, including those related to transparency, licensing and authorisation procedures; establish certain guarantees regarding the treatment of EU investors in China and of Chinese investors in the EU, including protection against unfair and inequitable treatment, unlawful discrimination and unhindered transfer of capital and payments linked to an investment; ensure a level playing field by pursuing, inter alia, non-discrimination as a general principle subject only to a limited number of clearly defined situations; support to sustainable development initiatives by encouraging responsible investment and promoting core environmental and labour standards; allow for the effective enforcement of commitments through investment dispute settlement mechanisms available to Contracting Parties and to investors[footnoteRef:31]. [31: Newsletter 1 April 2016 Sustainability Impact Assessment in Support of an Investment Agreement between the European Union and the Peoples Republic of China Commissioned by the European Commission (DG Trade).]

Currently, the European Commission (DG Trade) has commissioned a sustainability impact assessment involving three civil society hearings (May, September and November 2016), to be published in November 2016.

*

**

N.B.:Appendix overleaf.

APPENDIX

Figure 1. One Belt One Route

EESC-2016-02578-00-02-TCD-TRA (EN/IT) 12/12

80 World Commerce Review December 2015

infrastructure projects in western China and regions bordering Mongolia will be absorbed into the OBOR scheme. Therefore, the implementation of the OBOR economic belt will help the interior and western China to undergo significant development in terms of infrastructure and industrialization. The focus of such development is likely to go into the building of roadways, high speed railways, airports and ports, thereby improving the connectivity of such provinces with rest of China.

OBOR: implications for strategic and foreign policy issuesIt is well known that China aspires to be known as a major world power rather than to be known merely as a regional power. India, Vietnam and Japan feel threatened both politically and economically by China due to her aggressive posturing on bilateral, regional and global issues. Her meteoric economic rise has made western powers, in particular the United States,

nervous about maintaining the hegemony enjoyed by them in global affairs.

The differences in socio-economic ideologies between the two countries have brought them to loggerheads at many international fora. In recent years, the USA has endeavoured to develop or improve its relationships with countries of the Asia Pacific, especially with Chinas neighbours like India, Vietnam, Japan, Philippines etc, with dual objectives of containment and engagement with China. The US also concluded the Trans-Pacific Partnership negotiations which includes Japan, Australia, Canada, Mexico, Vietnam, Malaysia but not China.

Along with the formal objectives of OBOR, there exists some implied objectives which seek to benefit China and its industry. As has been noticed with other global multilateral initiatives

Chatham House