If Trump Wants to Take On China, He Needs Allies

And he should start with Europe.
By Julianne Smith

BERLIN — With the prospect of a trade deal between China and the United States all but dead, the Trump administration is no doubt weighing its next steps in its quest to rein in Beijing’s rise. President Trump should try something he hasn’t yet: call Europe.
Just five years ago, such a suggestion would have raised eyebrows. 

Europe’s relationship with China has traditionally been one of close economic cooperation, especially for an export-led country like Germany. 

To the extent that Europeans saw political and security challenges in working with China, they kept faith that growing economic ties with the West would temper the country’s worst instincts.
Over the last few years, though, Germany, along with several other European countries, have experienced a strategic awakening. 

German policymakers, along with industry leaders, have become much more vocal about China’s predatory trade practices, in particular forced technology transfers. 

They have begun to refer to China as a “systemic competitor.” 

So has the European Union.
This should make the countries of Europe, historically among America’s closest allies, well placed to work with Washington to confront China over trade, its destabilizing policies in Asia, and the authoritarian political model it is promoting around the world. 

Instead, Europe and the United States are consumed by cyclical arguments over — to name just a few issues — military spending, trans-Atlantic trade imbalances and the Iran nuclear deal. 

That’s exactly where the Chinese want the two sides of the Atlantic to be: distracted and divided.

On the subject of China, Europeans feel like they have been relegated to observer status. 

Trump administration officials have made few efforts either to brief allies on their China policy or to propose anything like a unified trans-Atlantic strategy. 

When the Trump administration has engaged Europe on China, such discussions tend to focus on tightening investment screening and preventing the Chinese telecommunications provider Huawei from constructing 5G networks. 

Those two important issues merit trans-Atlantic consultations. 

But the Trump administration’s approach — which includes threatening to limit intelligence sharing with any ally that proceeds to build its next generation of mobile infrastructure with Huawei — is a losing strategy. 

Europeans are tired of taking orders from Mr. Trump’s America, which makes them more inclined to ignore American directives on issues like Huawei.
The president should start over. 

The United States and Europe need to come to the table as actual partners and begin a much broader dialogue about China’s political, economic and technological ambitions. 

At the very minimum, the two sides of the Atlantic should be sharing insights on everything from Chinese influence operations to human rights abuses to investments in artificial intelligence and other disruptive technologies. 

More ambitiously, the United States and Europe should aim to fortify their trade relationship; coordinate American and European policies on China’s human rights abuses; and create alternatives to China’s Belt and Road Initiative.
The best way for the United States and Europe to compete with China would be to resolve their own bilateral trade disputes. 

The more the two sides bicker and threaten each other with more tariffs, the more space they allow for China to continue ignoring international trading rules. 

When — or if — the two trans-Atlantic partners turn down the heat on their simmering trade war and focus on strengthening trade ties, they should reach out to Japan and other allies that could bolster the West’s economic strength and influence.
Better coordination should be the next item on the trans-Atlantic to do list. 

In March, when Xi Jinping visited Paris, President Emmanuel Macron invited the chancellor of Germany and the president of the European Commission to join him. 

Mr. Macron’s intended message was clear: Instead of picking off individual European Union members, China would have to deal with a united Europe. 

The United States and Europe could send a similar message. 

The two partners could begin coordinating their messaging on issues like China’s continuing persecution of the Uighurs, or the two Canadian citizens that China is detaining.
One specific area of focus should be China’s Belt and Road Initiative — a vast network of infrastructure and connectivity projects, underwritten by China, across Asia, Africa and Europe. Some of those projects provide much needed investment. 

Many, however, lack transparency, leave the host country riddled with debt, and require political favors in return. 

Given the scale of China’s investment, it is tough for Europe and the United States to offer viable alternatives. 

They should still try.
They could also do more to help countries avoid the Belt and Road Initiative’s many pitfalls. 

Last year the United States Treasury sent a team of evaluators to Myanmar to help it navigate the challenges of a Belt and Road project. 

Europe should be doing the same thing. 

They could start that work not halfway around the world but in Portugal, Greece, Italy and Serbia, which have already signed on to Chinese projects and are looking at more.
It may be hard to imagine the Trump administration doing any of these things. 

This is an administration, after all, that has undermined, not strengthened, America’s network of alliances from the start. 

It prefers to see the world, as two administration officials put it in a 2017 op-ed in The Wall Street Journal, as “not a ‘global community’ but an arena where nations, nongovernmental actors, and businesses engage and compete for advantage.”
Mr. Trump is right to claim that America finds itself in an era of great power competition with China. Where his administration has repeatedly missed the mark, though, is in its determination to deride the very “global community” that could help America in its challenge. 

If Trump were serious about competing with China, he would be doing more to get as many allies on his side as possible.
Working with Europe will not be easy. 

The two will never be in perfect lock step on China, especially when it comes to security issues. Europe doesn’t have anything resembling America’s forces in Asia nor does it share America’s security commitments. 

Even inside Europe, there will continue to be different approaches to China. 

Nonetheless, the smartest thing for Europe and the United States to do would be to find areas where they can come together. 

Right now, they are not positioning themselves for even modest levels of success. 

They aren’t competing, and China wants to keep it that way.

Chinese Peril

China's Spreading Influence in Eastern Europe Worries West
Associated Press
In this photo taken Friday, March 1, 2019, a woman walks by Chinese flag placed on a street in Belgrade, Serbia.

BELGRADE, SERBIA — Coal-powered plants, mobile networks, major bridges, roads and railways: Chinese investments have been booming throughout Central and Eastern Europe's cash-strapped developing countries, even as European Union officials scramble to counter Beijing's mounting economic and political influence on the continent.
EU member Croatia is hosting a summit Thursday between China and 16 regional countries -- the 8th so far -- that focuses on expanding business and other links between China and the region, which Beijing sees as a gateway into Europe.
The gathering in Dubrovnik of the so-called 16+1 initiative consists of Central and Eastern European countries that have endorsed China's ambitious global "Belt and Road'' investment project, which has triggered concerns among some key EU states about increased Chinese political and economic clout in the region.
China has already invested billions of dollars in various infrastructure projects in Central and Eastern Europe. 

Western leaders worry that further investment in the states that are EU members -- or those hoping to join -- could mean lower environmental and other standards than those in the rest of the bloc.
Thorny issues include the flouting of EU competition rules, potential over-borrowing by some of the states, the quality of constructions, and security concerns over high-speed 5G network technology supplied by Chinese companies. 

Critics also say that in return for allowing Chinese expansion into the region, Beijing should give better reciprocal access for European companies to Chinese markets.
Top Chinese officials have sought to alleviate EU fears of unfair competition from Chinese state-controlled companies, which benefit from the government's financial backing. 

Chinese dictator Xi Jinping agreed during a recent visit to Paris to work with European leaders to seek fairer international trade rules.
French President Emmanuel Macron, Xi Jinping and European Commission President Jean-Claude Juncker hold a news conference with German Chancellor Angela Merkel at the Elysee presidential palace in Paris, France, March 26, 2019.

​Of the 16 participating countries -- Albania, Bosnia, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, and Slovenia -- 11 are EU member states, and the remaining five want to join.
Beijing has marketed its expanding initiative as a way to give some of Europe's neediest countries a financial boost, helping them gain access to more trade and investment. 

That has been mostly welcomed by the Central and Eastern European nations.
Major Chinese-led infrastructure projects in the region include a planned high-speed railway from the Hungarian capital, Budapest, to Belgrade in neighboring Serbia. 

The line will link up with the Chinese-controlled port of Piraeus in Greece as an entry point for Chinese goods to Central and Eastern Europe.
The project has drawn scrutiny from the EU because Chinese state-owned banks would provide financing, and Chinese companies would supply technology and the actual building. 

That conflicts with EU rules requiring public works to be broken into segments small enough to attract multiple bidders.
Hungarian Prime Minister Viktor Orban, whose own government often has been criticized for anti-democratic policies, says Hungary's relations with China should be based on "mutual respect.''
Hungary last year did not sign an EU report criticizing China's human rights record and business policies.
In Serbia, an EU membership candidate, Chinese companies are building major bridges and highways. 

They are also constructing a large coal-powered electricity plant even as China is trying to curb pollution at home by implementing renewable energy projects and reducing the use of lignite, by far the most polluting fossil fuel.
Power grid stand against the residential and office buildings in Beijing as the capital of China is shrouded by mild pollution haze on June 5, 2017.

Serbian analyst Mijat Lakicevic said the strategically-located Balkan country situated between East and West is a perfect place where "China can realize its economic concept, the way it wants to enter (Eastern European) markets,'' without much concern over fair bidding processes or pollution standards.
Bosnia, a potential EU candidate, is at odds with the bloc over its decision to issue a public guarantee for a 600-million euro ($676 million) loan from China's Export-Import Bank to expand Bosnia's largest coal-fired power plant.
EU's energy watchdog has warned that the move could eventually harm Bosnia's bid to join the EU because the agreement violates EU's subsidy and environment rules. 

Enlargement Commissioner Johannes Hahn has said the issue "raises serious questions'' about the Balkan country's "commitment to international treaties (and) European rules.''
Chinese companies are also involved in the construction of a $380-million Peljesac bridge in Croatia, which links two coastal parts over the Adriatic Sea, as well as a highway linking the Adriatic in Montenegro to neighboring Serbia.
In the Czech Republic, the National Cyber and Information Security Agency followed U.S. authorities' warning against the use of hardware or software made by Chinese companies Huawei and ZTE. 

That, however, did not change Czech President Milos Zeman's positive stance toward Huawei.
Zeman publicly criticized the Czech watchdog, saying it harms the Czech Republic's business interests as it could affect Huawei's plan to invest $370 million in 5G networks in the Czech Republic.
U.S. officials mounted an international campaign to keep Huawei gear out of any foreign 5G network that might carry sensitive U.S. intelligence.

Trophy Infrastructure, Troublesome Debt: China Makes Inroads in Europe

Beijing is constructing parallel financial and commercial networks across Central and Eastern Europe to challenge the global order
By James T. Areddy

BELGRADE, Serbia—Europe is distracted by internal discord over immigration and its tense relationship with Russia and the U.S. 

Seeking to fill the void, China is taking advantage of a historic opportunity to wedge itself into the heart of the West.
Deal by deal, applying experience honed in Asia and Africa, China is constructing parallel financial and commercial networks in Central and Eastern Europe to challenge the global order. 

It has taken footholds in more than a dozen nations on the periphery of the European Union. 

Some, such as Hungary, are smaller, more marginalized members. 

Others, including Serbia, are on the runway for admission.
Chinese workers set a highway through Montenegro’s impassable mountains on pillars as tall as a 50-floor skyscraper—part of an emerging corridor of highways, ports and rail lines that outlines a new Chinese trade route between Greece’s Aegean coast and Latvia on the frigid Baltic.
Chinese technology governs a new international money-transfer system in Serbia. 

Chinese banks gobbled up a newfangled issue of yuan-denominated bonds from Hungary. 

Outposts like Košice, Slovakia, are now stops for freight trains from China.
Beijing’s offers of trophy infrastructure and financial lifelines to troubled economies give those countries proposals they aren’t hearing from Washington and Moscow, which both generally view the region through prisms of national security. 

Nor are they hearing such proposals from Brussels, preoccupied with fraying EU cohesion.

Serbia’s Aleksandar Vučić and Chinese Premier Li Keqiang at a 2014 ceremony to open the China-Serbia Friendship Bridge over the Danube in Belgrade. 

For European politicians, the Chinese alternative promises quick results and less fuss over contracts and transparency than typically found in the West. 

The catch is that China’s package deals are government orchestrated and require borrowing from its banks to pay its contractors. 

A few countries, including Montenegro, are taking on large amounts of debt in the process.
Most of the Chinese financial support in Europe is loan-based, helping turn nations into clients of Beijing’s banks. 

And with each achievement, the Chinese companies building infrastructure and selling software or services gain more credibility in the West. 

Stretching its engineering capacity and technological innovation westward helps China expand and modernize its economy, as well as bolster alliances.
Beijing cheered when Greece blocked an EU effort last year to condemn a Chinese crackdown on political activists. 

Politicians in Brussels suggested that Athens had grown too dependent on China because a Chinese government-run company runs Greece’s main port. 

Greece called the proposed measure “unconstructive and selective criticism.”
The push is part of China’s Belt and Road Initiative to develop trade, financial and communication networks around the world—a strategy that came out of the global financial collapse a decade ago, to lessen China’s dependence on a U.S.-led economic order it blamed for the crisis. 

Major infrastructure is the initiative’s calling card.

China Calling
Serbia has welcomed billions of dollars' worth of deals from Chinese companies.

The $255 million China-Serbia Friendship Bridge marked the beginning of major Chinese construction engineering commissions in Europe.

Serbia in 2018 chose Zijin Mining Group Ltd. to invest in its largest copper mining and smelting complex, RTB Bor, in a $1.26 billion deal.

Serbia credits China's Hesteel Group with saving 5,000 jobs with its 2016 takeover of a steelmaker in the city of Smederevo.

Chinese engineers are at work on Serbia's $350 million portion of the Belgrade-Budapest high-speed rail line.

Serbia is emerging as China’s closest partner in middle Europe. 

China designed and built Belgrade’s first new bridge over the Danube River in seven decades, and helped modernize electrical and phone systems in the country. 

Most recently, Serbia got a financial-payments network from government-owned China UnionPay. The platform is Beijing’s answer to Visa and Mastercard, giving Serbians a way to use local credit cards overseas. 

It also gives China’s yuan a route into Europe.
UnionPay says its payment system in Serbia includes chips and other technology standards designed to guarantee “unblocked” international money transfers. 

That, in effect, could weaken a frequent U.S. tool sometimes used against Chinese companies—economic sanctions—by creating a parallel money-transfer system outside U.S. reach.
“For Serbia, it’s important that such a large international player has chosen to cooperate with it,” said Jorgovanka Tabaković, a prominent national politician and governor of the National Bank of Serbia.
As for its influence in Central and Eastern Europe, China points to its investment in the region, noting that it is a fraction of its pan-Europe exposure. 

Beijing committed nearly $8.9 billion in government-backed project loans and other development assistance to all of Europe last year, up from about $4 billion in 2016, according to a Wall Street Journal tally of deals cited in a compendium published by the Export-Import Bank of the United States.
That two-year tally is only 7% of China’s global total of $185 billion in loans and assistance for the period.
U.S. officials have cautioned developing nations that China’s outreach has strings attached. 

In an October speech in Washington, Vice President Mike Pence said of China’s infrastructure loans, “the terms of those loans are opaque at best, and the benefits invariably flow overwhelmingly to Beijing.” 

Defense Secretary Jim Mattis recently raised similar concerns, saying that “massive debt is piled on countries that fiscal analysis would say they are going to have difficulty, at best, repaying in the smaller countries.”
Outside of Europe, China’s $62 billion infrastructure plan in Pakistan is a factor in the country’s debt funk, which helped cost the ruling party a recent election and nudged the country closer to an international bailout. 

In August, Malaysia’s newly elected prime minister, Mahathir Mohamad, ordered a freeze on $22 billion worth of Chinese railway and pipeline construction his predecessor had endorsed, citing inflated contract values and excessive borrowing.
Last year, Sri Lanka surrendered a port to Chinese control to defuse a debt bomb. 

Chinese public works and their big loans are grist for political activists in Angola, Zambia and Kenya.
In Europe, Montenegro faces financial challenges associated with a deal from Export-Import Bank of China and China Road and Bridge Corp. to build its first-ever highway. 

The government calls it the nation’s “greatest engineering construction challenge in its history,” due to the country’s mountainous terrain.
The highway promises to link Central Europe to a port on the Adriatic Sea facing Italy. 

Montenegro already owes around $1.1 billion for the current work, which covers a 25-mile midsection that is due to be completed before mid-2019. 

The cost exceeds the original plans by hundreds of millions of dollars due to unhedged currency swings.
Unless the nation, known for cheap beach holidays, can come up with another $1 billion for a next phase, the four-lane roadway will terminate in a valley of 100 farmers and a general store.

Greece’s Port of Piraeus, pictured on Sept. 15, is managed by Chinese shipping company China Ocean Shipping (Group) Co. 

No data capture the breadth of the economic integration across the region, including private flows from investors who scrambled in after Beijing’s official nod in favor of Europe. 

Some styled themselves as trade middlemen in the continent’s Chinatowns and others formed “friendship” associations to link with local business and academia.
Oil company CEFC China Energy Co. amassed a $1.7 billion empire of property, brewery, soccer, bank and hotel assets in the Czech Republic, but they fell into question earlier this year when the company’s chairman came under investigation by Chinese authorities.
A senior executive at CEFC in Prague said plans were “developing” for China International Trust and Investment Corp. to take over the group’s Europe operations, which would in effect replace a private business with the Chinese state’s oldest-line international investment vehicle.
Beijing has talked about its inroads as a restoration of ancient Silk Road trade routes, but German politician Sigmar Gabriel sees bigger ambitions. 

“It is not a sentimental nod to Marco Polo, but rather stands for an attempt to establish a comprehensive system to shape the world according to China’s interests,” he said when stepping down in February as foreign affairs minister.
Along Europe’s east-west divide, Serbs, Slovaks, Croats and Czechs remain haunted by the Cold War and Yugoslavia’s bloody 1990s breakup. 

Those experiences partly cloud their views of the U.S. and Russia. 

China carries no such historical baggage.
In a near Central European future, a container of Chinese-made mobile phones or automobiles unloading at China Ocean Shipping (Group) Co.’s port in Greece could travel north through Macedonia and Serbia on Chinese toll roads and bridges and slot onto the Chinese-engineered railway to Hungary. 

China-run warehouses have been proposed in Poland, Lithuania and Belarus. 

The item might be purchased on the website of e-commerce company Alibaba Group HoldingLtd., which is expanding its cloud data services in Europe, as the internet traffic moves via the switches installed by Huawei Technologies Co. that dominate the region.
The fast-expanding ties between China and Serbia run from visa-free travel between the two countries to mining, manufacturing and weapons research.

Aleksandar Vučić, then Serbia’s prime minister and now president, meeting Xi Jinping and his wife, Peng Liyuan, last year in Beijing. 

A nation of seven million people with an economy similar in size to Vermont’s, Serbia projects political neutrality. 

Officials have called Beijing a “fourth pillar” of its foreign policy, along with Brussels, Washington and Moscow.
“We do not believe that we should choose between East and West,” Serbian Finance Minister Siniša Mali said in written responses to questions.
Serbian President Aleksandar Vučić describes Xi as a personal friend and has met him five times in two years. 

Their wives discussed bilateral relations in Beijing on Oct 29.
A poll last year by think tank Belgrade Centre for Security Policy found that Serbians see the U.S. as stronger militarily and politically than China but not far ahead of it economically. 

In the poll, the U.S. trails China in technology and in trust as an investor.
The nearly mile-long China-Serbia Friendship Bridge, opened four years ago, was the first major piece of infrastructure constructed in Europe by a Chinese team. 

That led to commissions for its builder, China Road and Bridge, in Croatia and Montenegro.
Even before the bridge’s dedication, according to the term sheet reviewed by the Journal, the clock was ticking on a 18-year requirement for Serbia’s Finance Ministry to wire millions of dollars each January and July to a New York bank account of the Beijing-based project lender, Export-Import Bank of China, until $217.4 million plus fees are repaid. 

The contract also stipulated that “goods, technologies and services… be purchased from China preferentially,” and that any disputes be settled in China.
Work is now under way by China Railway Signal & Communication Co. in Belgrade for a $3 billion rail upgrade to Hungary. 

Construction has been delayed on the Hungarian side because the EU challenged a no-bid award to a Chinese contractor. 

Serbia, unburdened by such rules, fast-tracked approval to the same Chinese contractors for its $350 million portion.
Down the block from Bank of China Ltd.’s new Belgrade office, an 11-floor, $60 million Chinese cultural and corporate center for a government-owned construction business is rising on the former site of China’s embassy. 

The mission was destroyed in 1999 when American planes dropped five laser-guided bombs on it during the North Atlantic Treaty Organization’s campaign to stop the Balkan conflict.
After taking three bows at a plaque to embassy “martyrs,” Beijing tourist Yang Xiaoyu said he was just 2 years old when the bombs fell. 

“I feel like our country was quite weak then,” Yang said. 

“When we came here today and recalled what had happened then, we feel that our motherland is indeed getting stronger.”

China's Debt Traps

Chinese 'highway to nowhere' haunts haunts Montenegro

By Noah Barkin, Aleksandar Vasovic

A worker hides from the sun on the Bar-Boljare highway construction site in Klopot, Montenegro June 11, 2018. 

PODGORICA -- Perched atop massive cement pillars that tower above Montenegro’s picturesque Moraca river canyon, scores of Chinese workers are building a state-of-the-art highway through some of the roughest terrain in southern Europe.
The government has described the 165 km (103 mile) highway, with its imposing bridges and deep-cut tunnels, as the construction of the century and a pathway to the modern world.
It is designed to link the port of Bar on Montenegro’s Adriatic coast to landlocked neighbor Serbia. But once the first, challenging 41 km stretch through mountains north of the capital is completed, the government faces a difficult choice.
A Chinese loan for the first phase has sent Montenegro’s debt soaring and forced the government to raise taxes, partially freeze public sector wages and end a benefit for mothers to get its finances in order.
Despite those measures, Montenegro’s debt is expected to approach 80 percent of gross domestic product (GDP) this year and the International Monetary Fund says the country cannot afford to take on any more debt to finish its ambitious project.
“There is a big question about how they complete it,” said an EU official who requested anonymity. “Their fiscal space has shrunk enormously. They have strangled themselves. And for the time being this is a highway to nowhere.”
The road is at the heart of an intense debate about Chinese influence in Europe, both within EU member states and countries aspiring to join the bloc such as Montenegro and its Western Balkan neighbors Serbia, Macedonia and Albania.
As Beijing extends its economic reach under the ambitious Belt and Road Initiative (BRI), poor countries across Asia and Africa have seized on attractive Chinese loans and the promise of transformative infrastructure projects.
This has allowed them to develop in ways that may not have been possible without access to China’s vast foreign exchange reserves. 

But some countries, such as Sri Lanka, Djibouti and Mongolia, have found themselves weighed down by debt and ever more reliant on Beijing’s largesse.
Montenegro is the first country in Europe to find itself in this position as its government presses on with its dream of a gleaming new highway to lead the nation to a brighter future.
“This highway is a big deal in Montenegro. It reminds people of Tito and the days of grand socialist projects in the region,” said academic Mladen Grgic, referring to former Yugoslavia’s long-time communist leader Josip Broz Tito.

“But it’s a trap. Now that it’s been started, the politicians can’t stop it – no matter how harmful it might be. And frankly they don’t want to,” said Grgic, author of a 2017 study on the highway.

‘NOT BANKABLE’
The idea of building a highway from the coast to Serbia can be traced back to 2005, a year before Montenegro’s vote for independence from its neighbor. 

The project was championed by Milo Djukanovic, who has served as president or prime minister of Montenegro nearly uninterrupted since 1991.
The government hopes the highway will give an economic boost to the country’s underdeveloped north, bolster trade with Serbia and improve road safety as Montenegro’s narrow, winding mountain roads are notoriously dangerous.
Having recognized that there is little scope to take on more debt, the government’s options for building the next three phases of the highway are limited.
The option it now favors is a public private partnership (PPP) in which an outside partner would build and operate the highway, then run it under a concession from the state for 30 years to get a return on their investment.
China Road and Bridge Corporation (CRBC), the large state-owned Chinese company that is building the first section, signed a memorandum of understanding (MOU) in March to complete the rest of the road on a PPP basis.
But European lenders worry that Montenegro would need to offer costly revenue guarantees to make that work, potentially deepening its financial woes.
“We told them that their PPP model was not bankable, that they would be taking on risks they don’t know how to manage,” said an official from the European Investment Bank (EIB), the European Union’s lender.

A bridge construction site of the Bar-Boljare highway is seen in Bioce, Montenegro June 07, 2018. 

The IMF cautioned the government in May against a PPP solution that could introduce large contingent liabilities. 

One official suggested Montenegro would be better off waiting until it joined the EU before finishing the highway.
Once it is part of the EU, Montenegro would have access to more structural and cohesion funds from Brussels. 

But the process of joining the bloc could take a decade or more, despite a loose target date of 2025 floated by the EU this year.

FEASIBILITY STUDIES
Doubts about the highway surfaced after two feasibility studies, conducted in 2006 and 2012, showed it was not economically viable.
Reuters reviewed copies of the studies, the first carried out by French firm Louis Berger for the Montenegrin government, and the second by U.S. company URS for the EIB. 

Both concluded there would not be enough traffic to justify a concession.
Louis Berger estimated the government would have to pay 35 million to 77 million euros a year in subsidies to make a toll-based system attractive to outside investors.
URS looked at each section of the highway and concluded that all possible combinations were economically unworkable. 

It recommended a more modest upgrade of existing roads.
“The low current traffic volumes and the weak economic forecasts mean that the economic benefits of the proposed route do not provide adequate return on the investment,” URS said.
To justify the grand highway envisioned by the Montenegrin government, URS said internal rates of return of 8 percent would be required but it estimated they would be below 2 percent.
Ivan Kekovic, an engineer who was involved in the project in its early years but later issued an open letter to parliament warning against it, told Reuters that average traffic of 22,000 to 25,000 vehicles a day would be needed to justify a highway of the proposed scale.
Daily traffic on the busiest stretch, from the capital Podgorica to the port of Bar, is less than 6,000 vehicles.
Early attempts to build the highway, first with a Croatian consortium and then with a Greek-Israeli one, collapsed after both groups failed to provide bank guarantees in time.
Critics breathed a sigh of relief, convinced the project was dead. 

Then China appeared on the scene.

CHINA FILLS VOID
Economics professors at the University of Montenegro were paid by the state-funded Export-Import Bank of China to conduct a new feasibility study.
This one found the highway was viable, according to the government. 

But this study has never been made public and attempts by Reuters to see it were unsuccessful.
China Communications Construction Co., CRBC’s parent firm, did not respond to a request for comment about the studies.
MANS, an EU-financed anti-corruption watchdog, pressed the government to provide members of parliament with data to support its vision before a vote to approve the highway in 2014. 

It refused.
“We have no doubt that the data that the ministry of transport used in order to justify the construction of the highway are fabricated,” said Dejan Milovac, deputy executive director at MANS.
The government denies manipulating the numbers and says the highway will deliver long-term economic and social benefits that prove the skeptics wrong.
Zorana Mihajlovic, deputy prime minister of Serbia, which is building a stretch of highway with Chinese help to link with the Montenegrin road, took a similar view.
“There are investments that may not be economically justifiable from a short-term perspective, but which are strategically important,” she told Reuters.
The six Western Balkan countries – Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Montenegro and Serbia - are surrounded by EU member states. 

But the region has suffered from under-investment and poor governance since the independence wars of the 1990s, making it an economic laggard.
Over the past decade, as the EU struggled with a succession of crises and put enlargement of the bloc on hold, other powers, including Russia and Turkey, have moved in to fill the void.
China has been especially active. 

In 2012, it began holding annual “16+1” summits with eastern and southern European states to discuss investment opportunities, infuriating Brussels.
A year later, it unveiled BRI, its grand plan to secure land and maritime trade routes from Asia to Europe and Africa.
The Western Balkans, strategically positioned on Europe’s southern flank, is a key access point for China to reach central Europe and beyond.
China’s investments in the region total more than 6 billion euros -- including highways, rail lines and power plants. 

Serbia, the largest economy in the region and Beijing’s long-standing ally, has received the lion’s share.
Montenegro could be attractive to China for a number of reasons. 

It gives Beijing a port of entry into Europe from the Adriatic, and close economic and political ties with the government in Podgorica could prove valuable for China if Montenegro becomes an EU member.

‘DISBELIEVERS’
The 809 million euros Montenegro received from China’s Export-Import Bank covers 85 percent of the cost of the first section of the road.
The dollar-denominated loan carries a 2 percent interest rate, 20-year repayment schedule and 6-year grace period – attractive terms but a major long-term burden for a country of roughly 620,000 people.
Under the terms of the contract, an arbitration court in China would have jurisdiction in the event of any legal dispute. 

CRBC won commitments that all imported construction materials, equipment and other goods be exempt from customs and value-added tax. 

Chinese workers were given 70 percent of the work.
Some 3,605 workers are busy building the first section of the highway. 

Roughly two-thirds of them are from CRBC, one of the largest engineering and construction firms in the world.
Four camps of neat blue-roofed bungalows house the Chinese workers. 

Dotting the area are billboards in Chinese and English exhorting them to be meticulous and responsible.
“CRBC expects to build the future sections of this project,” Kang Shifei, deputy project manager for CRBC, told Reuters on a blazing hot afternoon in June, beneath the giant pillars that will support a kilometer bridge above the Moraca canyon.
Because the government did not hedge against currency swings and omitted a vital turnpike from its original blueprint, the cost has continued to rise. 

It is now approaching 1 billion euros, nearly a quarter of Montenegro’s GDP.
A March report from the Washington-based Center for Global Development which examined the debt risks associated with BRI listed Montenegro as one of eight highly vulnerable countries, alongside Djibouti, the Maldives, Laos, Mongolia, Tajikistan, Kyrgyzstan and Pakistan.
The remaining three-quarters of the highway will plow through less mountainous terrain. 

The IMF estimates it will cost another $1.2 billion to complete.
Prime Minister Dusko Markovic has said it will be finished at any cost and promised to deepen cooperation with China in other areas, including hydropower and tourism. 

He has dismissed critics as “disbelievers”.
But opposition politicians are worried – about the country’s finances and about China’s role.
Dritan Abazovic, head of the United Reform Action opposition party, said it was normal for an economic power such as China to seek a role in the region, alongside the EU, United States and Russia.
But because of the scale of the project, he worries the deal with the Chinese will end up giving Beijing much more influence over Montenegro.
“It puts the Chinese in a very very comfortable position,” he said.

China's 16 European Horses

Beijing is lending billions to Hungary and Serbia for a faster rail link. The project has been called insane. But for China, at least, there’s method in the madness.
By Nick Miller

The nine-hour rail trip from Budapest to Belgrade gives new meaning to a slow Europe experience.

At 11.25am a whistle blows and our spray paint-smeared train pulls out of Belgrade’s 130-year-old central station, over weeds and crumbling concrete, past decades of neglect.
For the next half-hour we move at barely walking pace, crawling past old signal boxes, creaking over a narrow, rusty bridge.
Gradually we pick up speed. 

Not much, though. 

The single-track Belgrade-Budapest line was built in 1883 and last renovated in the 1960s. 

It’s not in a good way.
Children stare glumly out the windows at endless flat fields of unripe wheat, rippling green under the Central European sun.
There will be nine hours of this. 

Testing for even the biggest wheatfield fans.
At 8.24pm: stop number 25, Budapest. 

We’ve travelled roughly the distance of Sydney to Canberra, or Melbourne to Warrnambool, at an average speed of 30km/h, sometimes much slower. 

At one point we pause for half an hour then spend the rest of the trip going backwards.
“This is a catastrophe,” laughed passenger Gabriella, 43, who takes this train for a portion of its journey several times a week for work. 

“It smells like wet dog shit and it’s slow.”
One winter day she spent her journey counting deer in the snow out the window. 

She got to 72 before she gave up.
Some of Europe’s famous train trips promise old-fashioned romance, others high-tech speed.
The Belgrade to Budapest line delivers new, almost inconceivable levels of dullness.
But here’s the good news: China has promised to fix this. 

To help fund and build a modern, high-speed connection that will cut the journey time by a factor of three (making it just about faster than driving).
Gabriella has heard. 

She’s excited at the prospect.
“The only question is, why are they giving us the money?” she says.
It’s a very good question.

The train creaks along at 30km/hr.

All aboard?
In February, Germany’s then foreign minister Sigmar Gabriel gave a surprisingly frank assessment of what he believed China is up to in Europe right now.
“The initiative for a new Silk Road is not what some people in Germany believe it to be – it is not a sentimental nod to Marco Polo,” he told the Munich Security Conference.
“Rather (it) stands for an attempt to establish a comprehensive system to shape the world according to China’s interests.”
He didn’t blame China for trying it on, he said. 

But that didn’t mean Europe should let it happen.
“Powers such as China and Russia are constantly trying to test and undermine the unity of the European Union. Individual states or groups are tested with sticks and carrots to see whether they want to remain in the community that is the European Union.”
He, and other politicians in Berlin and Brussels, want to push back. 

There have been talks of a counter-Belt and Road fund, a way to export liberal European values counter to China’s vision of a new world order.
Others believe this is an overreaction.

But if what Gabriel fears is true, nowhere is it more true than in that most recalcitrant EU member state Hungary, which hosts the second half of our interminable train trip.
“We in this region have looked at China’s leading role in the new world order as an opportunity rather than a threat,” Hungary’s foreign minister, Peter Szijjarto, said last November – as his prime minister, Viktor Orban, prepared to sign 11 bilateral agreements with China and announced the opening of tenders for the Hungarian section of the train link to Belgrade, at the 16+1 summit in Budapest.
The 1 is China and the 16 are 11 eastern EU nations and five other European countries on the Balkan peninsula. 

The 16+1 format was born in 2012, with a permanent secretariat and yearly meetings.
The Belgrade-Budapest railway is intended to be a breakthrough project for 16+1.
But here’s a funny thing: no-one really asked for it.

Passengers are few and far between on the route. 

Mystery train
“Most Western and Hungarian experts say it’s insane to build the Belgrade-Budapest railway line,” says Tamas Matura, founder of the Central and Eastern European Center for Asian studies and assistant professor at the University of Budapest.
The government’s official justification for the project is literally a state secret. 

But academics have reverse-engineered the proposed $3.6-billion Hungarian leg, 152 kilometres of double-track railway over mostly flat ground, engineered to a 160km/h top speed and designed to take passenger trains and 750-metre-long freight trains.
There’s currently almost no commerce on this route, and less passenger traffic. 

Eastern Europe’s traditional connections go east-west, not north-south. 

Hungary’s biggest trade partners are in western Europe, and to a lesser extent Ukraine and Russia. Serbia is almost not on the chart.

It will take 2500 years to make a profit on the Belgrade-Budapest line.

And the link doesn’t come cheap. 

The Hungarian section will cost 750 billion forints ($3.6bn), 85 per cent financed by Chinese loans. 

Plus interest, the whole project will cost an extra $1 billion – and according to reports, the interest rate will be higher if Chinese companies don’t win the construction tenders (a matter of some contention, as EU rules insist on transparent, competitive public procurement).
On current figures, even given a generous multiplication factor for new trade opportunities, it will take 2500 years to make a profit on the Belgrade-Budapest line, says Matura. 

And that’s assuming it doesn’t need maintenance.
This is “building pyramids” kind of thinking, says another Hungarian expert, Adam Bartha, director at EpiCenter, the European Policy Information Center. 

And he points out that Hungary is the second-largest net recipient of EU funds per capita after Poland, so it was never about the money anyway.
Matura agrees: “Central Europe is not in need of liquidity, we have money,” he says. 

“And even if we want to build certain infrastructure projects, we get non-refundable European money.”
Says Bartha: “There are a lot of unanswered questions about this project.”

China's then vice-premier Zhang Dejiang addresses workers in Piraeus in 2010.

From Beijing’s perspective, the railway makes more sense.
China’s biggest shipping company, COSCO, bought a majority stake in the big Piraeus port in Greece in 2009.
The Belt Road Initiative (BRI) plan is to link China’s maritime routes from Asia, around Africa and into the heart of Europe via Piraeus – which is being aggressively expanded, with a plan to double its container volume in the next couple of years.
Hungary’s foreign minister Szijjarto says the train line from Belgrade to Hungary will be part of the main transport route for Chinese goods that arrive at Piraeus and head into Europe.
But Matura suspects that China has based its plans on a misunderstanding of the region – they just “looked at a map” rather than doing the sums, he says.
“To be fair, the Chinese way of thinking is very different from the Western,” he says. 

“We have a demand-based way of thinking: if there is a demand for something, we supply. In China it’s completely the other way around... there is even an ancient Chinese saying, ‘let’s build a road and they shall come’.”

Piraeus, flush with Chinese investment, is a portal to and from Europe. 

It’s a win-win proposition for China, anyway. 

They have insisted on guarantees so they will get their money back, plus interest, no matter what happens with the railway. 

Of course, they would prefer that it stimulates trade but it’s not essential.
And, once complete, it will be a demonstration project for Chinese companies keen to tap into the European market.
But that doesn’t explain why Hungary wants this train line, where there are many other infrastructure projects that would provide a bigger economic boost for the country -- nor why it wants China to fund and build it.
“Big question mark. Pretty big question mark,” says Matura.
Eva Balogh, a historian and publisher who blogs on Hungarian current affairs, wrote in November that the very unprofitability of the project explains the decision to go to China.
“The lure of the project, if it ever becomes reality, is that China might use Hungary as a distribution hub,” she said. 

“For that elusive prospect, the Orban government is ready to get involved in this risky venture.”
Matura says there is also some limited political value for Orban in having big non-EU investors: Hungary is one of the EU’s most perverse members, an “illiberal democracy” that often zags when Brussels zigs. 

Big allies outside Europe help Orban flaunt his independence.

The trip is long but the timeline on the tender was short – very short. 

But other knowledgeable observers, who spoke to The Age-SMH asking not to be identified, say there’s a more obvious reason the Hungarian government loves a big public project funded by a big pot of money: the opportunity to parcel it out to their mates.
Systemic corruption in Hungary’s public procurement system adds more than 20 per cent to the cost of government contracts, according to Transparency International. 

“In many cases the private sector trust in public procurement processes is so low that they don’t even bother to bid,” it said in a recent report.
The timeline on the tender process for the new train line was remarkably short – often an indicator that a tender has an invisible inside track.
Neither tender bidders nor the winner have yet been made public, but it’s very likely the money will end up, in part, in the pockets of oligarchs closest to the government, many of whom have become remarkably rich in recent years.
In 2016, a researcher from the Central European University in Budapest, Anita Koncsik, wrote that public procurement has become Hungary’s “most important payout channel enabling the allocation of state funds to government-friendly economic players”.
So much for Hungary. 

But is China getting more than a nice rate of return?
“For the first few years of 16+1 relations I really believed the Chinese intentions were mainly focused on economics,” says Matura.
“But it seems that in the past few years it turned towards political influence. I don’t know whether it was intentional from the very beginning or they changed their minds because they realised that the economic cooperation wasn’t going well.”

16+1 members have acted against the EU, including on issues to do with the Belt Road. 

How 16+1 is adding up
To the 16 members of the 16+1’s dismay, the economic flow from China has been much bigger in Europe’s west than east. 

Chinese foreign direct investments in the EU reached 35 billion euros in 2016, a 77 per cent increase over the previous year. 

Bloomberg has calculated that around 360 European companies have been taken over by China, from Italian tyre-maker Pirelli to Irish aircraft leasing company Avolon Holdings Ltd. 

It has gobbled up office towers in the City of London, a German robot maker, a Scandinavian carmaker and a Swiss pesticide maker.
Germany has tightened its investment rules in response. 

It is concerned about “technology flow” from Germany to China as well as security questions, its economy minister said in February.
France and Italy have joined in a push for a tighter screening regime for outside investments allowing the European Commission the right to supervise investments.
But while the west pushes back, there are some signs in Europe’s east of more favorable China policies.
In 2016, Hungary and Greece blocked the common position of the EU Council on China’s activities in the South China Sea. 

They were joined by Croatia and Slovenia. 

And in 2017, Hungary and the Czech Republic signed a joint declaration on the principles of financing BRI, against the recommendation of the European Commission.
The EU is increasingly suspicious that BRI is a part of the inspiration for this dissent. 

And it objects to the way China does business.
In April, Handelsblatt reported that 27 of the 28 national EU ambassadors to Beijing had compiled a report sharply criticising the Silk Road project because it “runs counter to the EU agenda for liberalising trade and pushes the balance of power in favour of subsidised Chinese companies”.
Only Hungary’s ambassador refused to sign the report, which was part of preparations for an EU-China summit in July.
The report said China was seeking to shape globalisation to suit its own interests, and should be pushed to adhere to European principles of transparency in public procurement, as well as environmental and social standards.
Whenever European politicians travel to China they are put under pressure to sign bilateral agreements to expand the Silk Road, the ambassadors said – deals that “lead to an unequal distribution of power which China exploits”.

China's influence might not be so great in Europe after all. 

Are we there yet?
Not everyone is panicking over China’s presence in Europe’s east, though.
A paper by Polish think tank OSW last September found that “Beijing has not succeeded in making an attractive offer to the region’s EU member states, who make up the majority of the participants in the 16+1 format”.
If China has a “strategy of divide et impera, aimed at breaking up the unity of the European Union” it was not having much effect, the paper said.
“The much-discussed infrastructure cooperation has not even started,” authors Jakub Jakobowski and Marcin Kaczmarski wrote. 

“Consequently, Beijing has failed to obtain the political tools which could have weakened policy coherence at the European level, or even divided the EU.”
China has two big problems driving the BRI into the EU, the authors wrote.
Their funding model linking loans to the appointment of the contractor without an open tender is incompatible with EU law.
And the EU just isn’t short of money at the moment.
“Allegations appearing in the public debate that the countries of the 16+1 have been fostering divisions within the EU seem to be substantially incorrect,” the OSW paper said. 

“As long as Central and Eastern Europe remains capable of pursuing its economic and developmental interests within the architecture of the European Union, the political risks coming from China’s capital inflow will remain limited.”
Much like that train from Belgrade, it’s proving a slow, sometimes frustrating journey for the Chinese as they try to push their influence north and west.

Just a handful of tourists opt for this rail experience. 

How China Skirts America’s Antidumping Tariffs on Steel

Government-backed manufacturers have avoided steep U.S. and EU levies by shutting production at home and expanding overseas

By Matthew Dalton in Smederevo, Serbia, and Lingling Wei in Beijing

A steel mill outside Smederevo, Serbia, that was bought and revived by Hesteel Group, a Chinese state-owned steelmaker. 

Three years ago, the steel mill outside the small city of Smederevo, Serbia, appeared headed for the scrap heap.
The Serbian government, which owned the mill, had stopped subsidizing it after six straight years of losses. 

Hemorrhaging cash, it struggled to buy spare parts and raw materials such as iron ore.
“It was like trying to drive a car without tires,” says Siniša Prelić, a union leader at the factory.
Now production is hitting all-time highs under its new owner, Hesteel Group, a Chinese state-owned steel producer. 

Exports from the plant, which is backed by tens of millions of dollars from Chinese state banks and investment funds, are surging. 

And it has started shipping steel to the U.S.
As the Trump administration ramps up its fight against Chinese steel and Commerce Secretary Wilbur Ross ended trade talks with Beijing over the weekend without a settlement, U.S. officials are confronting a strategic shift from China’s state-backed manufacturers. 

For the past several years, they have been shutting production at home and expanding overseas, fueled by tens of billions of dollars from Chinese state-owned lenders and funds.

Global Expansion
Chinese steelmakers have been buying and building plants overseas, fueled by tens of billions of dollars from Chinese state-owned lenders and funds.
By owning production abroad, Chinese steelmakers aim to gain largely unfettered access to global markets. 

Their factories back in China are constrained by steep tariffs imposed by the U.S. and numerous other countries—largely before President Donald Trump took office—to stop Chinese steelmakers from dumping excess production onto world markets. 

But their factories outside China face few so-called antidumping tariffs.
The Trump administration in March jolted the global trading system by imposing additional tariffs of 25% on all imported steel and 10% on aluminum, a move aimed at ratcheting up pressure on China to shut domestic steel and aluminum plants. (Last week, those tariffs were extended to Canada, Mexico and the European Union.) 

The EU is considering its own tariffs to stop metals exports blocked by the U.S. tariffs from flooding into Europe.
Even though the new U.S. tariffs apply to Chinese steelmakers that moved production abroad, the moves are still paying off. 

The Trump tariff rate is much lower than existing U.S. antidumping tariffs on steel produced inside China, which often exceeded 200%.
A spokesman for Hesteel declined to comment. 

China’s Ministry of Industry and Information Technology, which oversees the steel and aluminum industries, didn’t respond to inquiries.
Chinese overcapacity has depressed global steel prices and wreaked havoc on China’s competitors. After cajoling Beijing to cut domestic capacity, Western officials have watched with exasperation as Chinese companies boost production around the world. 

And Western industry executives worry the overseas investments are helping Chinese steelmakers avoid the antidumping tariffs that governments have imposed to protect their companies against unfair Chinese trade practices.

Chinese steel production rose sevenfold between 2000 and 2013. A worker helps load steel rods at a plant in Hebei province. 

China’s steel-production boom took off around the turn of the century as Beijing threw its support behind a sector seen as vital to the nation’s emergence as a global economic power. 

The 2008 financial crisis prompted Beijing to undertake an economic stimulus program that included the construction of hundreds of new steel plants. 

Chinese steel production rose sevenfold between 2000 and 2013, when it accounted for half of all global capacity.
By 2013, China’s domestic economy was slowing, leading Chinese steel and aluminum producers to flood global markets and drive down prices. 

The average price of Chinese steel exports fell by about 50% between 2011 and 2016.
Governments around the world responded by imposing more than 130 antidumping tariffs against Chinese metals manufacturers, mostly on steel, depriving the domestic market of an important outlet.
Beijing responded by ordering capacity cuts: a net of 150 million tons of annual steel capacity is slated to be shut between 2016 and 2020, as are aluminum plants that were built without government approval. 

At the same time, in 2014, the government launched a plan, called International Capacity Cooperation, that enlisted Chinese state financial institutions to help manufacturers add production overseas.
Analysts and Western government and industry officials say Chinese manufacturers are receiving hundreds of billions of dollars of state support to build and purchase plants on foreign soil, through money provided by institutions such as China Development Bank, Bank of China and funds like China Investment Corp. 

The overseas plants are likely to be tapped as exclusive suppliers for the “One Belt, One Road” initiative, Beijing’s trillion-dollar infrastructure plan to project economic influence across Eurasia and Africa.
“China is just moving whole industrial clusters to external geographies and then continuing to overproduce steel, aluminum, cement, plate glass, textiles, etc.,” says Tristan Kenderdine, research director at Future Risk, a consulting firm that tracks China’s overseas investments. 

“None of this is economically viable under a supply-demand regime without state subsidies.”
Chinese steel companies have signed agreements to build plants in Malaysia, Pakistan, India and elsewhere.
In northern Brazil, a Chinese consortium is expected to break ground later this year on an $8 billion project to build one of the world’s biggest steel plants, expanding Brazil’s potential steel output even though the industry there operates at less than 70% of capacity.
“This is total nonsense, with all the idle capacity that we have,” says Alexandre Lyra, chairman of the Brazilian Steel Institute, which represents Brazilian producers.
Chinese companies also are building new steel mills in Indonesia. 

Last year, Tsingshan Group Holdings, a state-backed steel producer based in Wenzhou on China’s southeastern coast, opened a two-million-ton stainless-steel plant on the Indonesian island of Sulawesi that accounts for 4% of the world’s stainless-steel production. 

The mill, built using a $570 million loan from the China Development Bank, is now pushing down prices from Asia to the U.S., industry executives and analysts say.
“We are seeing tenders in the area from Tsingshan at very, very, competitive prices,” Miguel Ferrandis Torres, financial director at stainless-steel companyAcerinox , told analysts in April. Tsingshan is likely losing money on those shipments from its Indonesian plant, Mr. Torres said.
Tsingshan declined to comment.
Tsingshan’s product is entering the U.S. through a joint venture with Pittsburgh-based stainless-steel producer Allegheny Technologies Inc. 

The joint venture is restarting a stainless-steel rolling plant in western Pennsylvania that Allegheny had shut in 2016 partly because of pressure from inexpensive Chinese imports. 

The new company is importing 300,000 metric tons of semifinished stainless-steel slabs from Tsingshan’s Indonesian plant—replacing slab Allegheny made in a now-closed production line—and processing them into sheets for products ranging from household appliances to medical equipment.
That put downward pressure on U.S. stainless-steel prices last year, industry executives say. 

“We’re moving from being a high-cost producer, which we’ve been for a while, to being the low-cost producer in the market,” Robert Wetherbee, an Allegheny executive, told analysts in November.
The Trump tariffs that came into force in March hit the stainless steel Tsingshan was importing from Indonesia to its joint-venture plant in Pennsylvania. 

Allegheny has asked the Trump administration for an exemption from the tariffs on those imports.
Tsingshan is expanding its Indonesian plant, and Jiangsu Delong, a Chinese producer based in Jiangsu province, is building another plant nearby. 

Those projects alone will increase global stainless-steel capacity by 9% from 2017 levels, according to Michael Finch, a steel analyst at  CRU Group in London, even though the stainless-steel industry has significant spare capacity.

Hebei province, a pollution-choked region near Beijing, is home to steelmaking operations like this one in Qian'an. 

In 2014, officials from Hebei province, a pollution-choked steelmaking region near Beijing, began hunting for overseas investments for the province’s most important company: Hebei Iron & Steel Group, renamed Hesteel Group in 2016.
When Hebei officials approached the Serbian government in 2014 about investment opportunities in the country, Belgrade immediately thought of the Železara Smederevo steel company, which had a mill on the Danube River, say people familiar with the deal.
The Serbian government had purchased the plant in 2012 for $1 from United States Steel Corp. 

After shutting the plant for several months, Belgrade restarted it to make it attractive for potential buyers, pumping tens of millions of dollars into it to keep it alive.
But with its public finances deteriorating, Serbia in 2014 sought a standby loan facility from the International Monetary Fund, which along with the European Commission, ordered it to stop subsidizing the steel company.
In early 2015, the Serbian government pulled the plug on subsidies for Železara, says Bojan Bojkovic, who was in charge of efforts to sell the mill for the Serbian government. 

“A lot of people, especially so-called economists, wanted to shut it down immediately,” he says.
Meanwhile, in March 2015, Hesteel signed an agreement with China Investment Corp., which has more than $200 billion in foreign assets, to fund Hesteel’s overseas expansion.

Beijing touted the $54 million acquisition of the steel plant in Serbia as one of China’s flagship overseas investments. 

During the talks with the Serbians, Hesteel pledged to invest at least $300 million in the plant over the next three years. 

Beijing touted the €46 million ($54 million) acquisition as one of China’s flagship overseas investments. 

Chinese dictator Xi Jinping visited the mill for the June 2016 signing ceremony.
Hesteel executives have said that they quickly turned around the money-losing plant after taking control in June 2016. 

Serbian corporate records show an operating loss of $34 million over the next six months. 

Records for 2017 aren’t yet available.
“This is all part of a huge political initiative,” says Markus Taube, professor of East Asian economic studies at the Mercator School of Management in Duisburg, Germany. 

“They are extremely insensitive to losses.”
The EU for years has applied tariffs to low-price Chinese steel exports. 

Now, Hesteel’s Serbian plant can export tariff-free into the 28-nation bloc.
“We feel like the Serbian plant is a Trojan horse,” says Sonia Nalpantidou, a trade-policy expert with Eurofer, a trade association representing EU steel producers.
At a steel expo in Beijing last month, a “Hesteel of the World” banner hung near the company’s booth. 

Pins in a map marked countries where Hesteel had invested—Serbia, Macedonia, Switzerland, South Africa, Australia and the U.S. 

A company representative said overseas expansion is now a core strategy. 

The company is planning to build more plants in regions such as North America, she said, and plans to derive 20% of revenue from non-Chinese markets by 2020.
“Products made in Europe shouldn’t be subject to European tariffs,” the representative said.
Late last year, Hesteel offered $1.5 billion for a large steel mill in Slovakia owned by United States Steel, according to a person familiar with the talks. 

The Slovak prime minister said last month that U.S. Steel wouldn’t sell the plant to Hesteel. 

A U.S. Steel spokeswoman declined to comment.

After purchasing the plant in Serbia, Hesteel began selling its output onto the U.S. market. 

After purchasing the plant in Serbia, Hesteel began selling its output, including a sheet-steel product called wide hot-rolled coil, onto the U.S. market through Duferco, a Swiss trading company in which it owns a 51% stake.
Since 2001, China’s domestic producers of that product have faced antidumping tariffs of more than 64% at U.S. borders, effectively shutting them out of the market. 

Hesteel’s Serbian plant could export to the U.S. with minimal tariffs—until the additional Trump tariffs took effect earlier this year.
In March, one of the Serbian plant’s U.S. customers, Priefert Ranch Equipment of Mount Pleasant, Texas, asked the Trump administration for an exemption from the tariff to import 24,000 metric tons of steel sheet annually made at the plant. 

Priefert argued that it has long relied on overseas steel mills to supply product that domestic mills don’t produce. 

Priefert executives didn’t respond to a request for comment. 

The Trump administration hasn’t yet decided on the request.
“We want to be the world’s Hesteel,” Yu Yong, the company’s chairman, said when he signed the deal to buy the Serbian plant. 

He pledged to make the Serbia plant “the most competitive steelmaker in Europe.”

China told to back off: China hits roadblocks in Central Europe

Tough competition laws and investment from the bloc slow Beijing’s infrastructure push.
By LILI BAYER

China's Trojan horse Viktor Orbán

BUDAPEST — China’s seduce-and-divide strategy in Central Europe is getting a reality check.
For years, Beijing has promoted heavy investments and a particular diplomatic format — called 16+1 — to build its influence with a cross-section of 16 Central and Eastern European countries, some that belong to the EU or NATO, some to neither. 

Chinese Premier Li Keqiang and Hungary’s Prime Minister Viktor Orbán on Monday open the sixth China-Central and Eastern Europe summit in Budapest.
This push has set off alarm bells in Brussels, in particular about Beijing’s activities in the Balkans. But it is now also running into regulatory, financial and political hurdles, highlighting possible limits to Beijing’s economic and diplomatic influence in Europe.
China’s “One Belt, One Road” program has pumped money into infrastructure, logistics and transportation networks to allow Chinese products easier access to European markets. 

Chinese officials estimate that the country has invested over $8 billion (€6.7 billion) in Central and Eastern Europe. 

This region of some 120 million is relatively new and unknown to the Chinese, but trade is growing: Last year bilateral trade between China and Central and Eastern European countries was up 11 percent from 2011.
As much as Beijing envisioned 16 Central and Eastern European countries as a cohesive entity that could work together to implement joint projects, in practice they have different priorities and operate under different legal regimes. 

The EU members among them are less welcoming to Chinese investment.

For Hungary, the host of this week’s summit and the country that absorbs the most Chinese investment in Central and Eastern Europe, Beijing is a source not only of capital but of political leverage that could play to Orbán’s advantage as his government’s relationship with EU institutions become more tense.
“As a country that cooperates with the EU, China — if it notices us, because there’s the problem of size, the problem of the difference in our sizes — can quite confidently say that they have an interest in Hungary being strong in the European Union,” Orbán said in July in his annual speech at Băile Tuşnad (Tusnádfürdő), Romania.
But China faces significant challenges as it tries to push through its plans in the region.
“Chinese investment in EU members of the 16+1 has remained limited,” said Tamás Matura, an assistant professor at the Budapest-based Corvinus University. 

“Some countries have not received any new major Chinese investors in the last five years.”
China has had more success in Western Balkan countries like Serbia, Montenegro and Bosnia and Herzegovina, “where EU funds are not available and EU regulations are not applicable,” he said.
Western Balkan leaders have warmly welcomed Chinese economic initiatives and worked to build friendly ties with Beijing. 

In Serbia, the region’s largest beneficiary of Chinese investment, China has bought factories and provided funding for roads, bridges, energy projects and railways.
“There are no problems in our economic and political relations, we are always on the same side, and when China has something to say, we are always on the side of China,” Serbian President Aleksandar Vučić said in May.
China’s flagship project in the region is the planned Belgrade-Budapest high-speed rail link, with construction work on the Serbian stretch expected due to begin this week. 

The modernized railway would enable Chinese goods coming through Greek ports to quickly move from Serbia into the EU.
Currently, the journey between the Serbian and Hungarian capitals by rail takes eight hours. 

The planned railway would allow passengers and cargo to travel up to 200 kilometers per hour, cutting travel time to less than three hours.
Progress on the project has been slow. 

The Export-Import Bank of China is expected to lend about 85 percent of the funds for the €2.4 billion-project, and an agreement between China and Hungary over the railway raised concerns within the European Commission earlier this year that the planned tender process may not be in compliance with EU rules.
“The EU welcomes investment — whether domestic or foreign — as long as it is compatible with EU law,” the EU Delegation to China said in a statement in February regarding the Belgrade-Budapest railway project.
“It is standard practice for the Commission’s services to assess the compliance of major public contracts with EU law. Against that backdrop, a dialogue with the Hungarian authorities, at technical level, is ongoing in order to seek some clarifications,” the delegation wrote.

Analysts say China is also likely to face challenges when attempting to implement projects in other Central and East European states that are members of the EU.
The bloc’s newer members are not only bound by EU competition rules, but also receive significant infrastructure funding from the bloc.
China’s interest in the Baltic states “focuses on transportation and logistics,” with Latvia hoping to offer its ports and railway network to help Chinese goods reach Scandinavian markets, said Una Aleksandra Bērziņa-Čerenkova, who heads of the New Silk Road program at the Latvian Institute of International Affairs.
Nevertheless, she said, “under the current situation and the availability of the EU funds it is difficult to see a viable project that could require Chinese loans.”
“We cannot guarantee Chinese companies would win tenders” due to EU rules, she added.
Despite the hurdles, for some leaders in the region, China is still seen in some respects as a friendlier negotiating partner than Brussels.
“It has become increasingly offensive that a few developed countries have been continuously lecturing most of the world on human rights, democracy, development and the market economy,” Orbán said during a television appearance in May. 

“Everyone has had enough of this; and of these the Chinese are the strongest.”