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SMALL STEP FOR CHINA - GIANT LEAP FOR THE BALTICS?

  • 2015-02-05
  • Richard Martyn-Hemphill and Etienne Morisseau

More than two decades on from the Baltic states’ independence from the Soviet Union, relations with China are only just getting into their stride. TBT editor Richard Martyn-Hemphill and TBT reporter Etienne Morisseau look at what’s caused this holdup in the development of Sino-Baltic relations, and why everything could be about to change.

RIGA — Four Chinese dairy inspectors, armed with clipboards, arrived in Latvia this January, under orders from Beijing. Their task was to test how well Food Union, a Riga-based dairy products company, is making its milk. If Food Union has managed to prove the safety of their procedures to the inspectors, the company will be granted an export certificate from the People’s Republic of China within the next few months, and Food Union will be allowed to send Latvian milk, ice cream, and cheese to Chinese supermarkets by springtime. If not ... well, Food Union will surely be pretty cheesed off.

“We haven’t entered the Chinese market yet,” says Normunds Stanovics, Chairman of Food Union. “So at this point I cannot evaluate the process being hard or easy. It has been quite long, almost two years, since we started working on it by ourselves.”

Though Latvia received certification from China’s General Administration of Quality Supervision, Inspection and Quarantine for dairy products at the end of summer 2014, each company wanting to export dairy products to China still needs to go through its own lengthy inspection process — and Lithuania and Estonia are still not even at that stage: they are still waiting on their national certification.

Awkward beginnings

Sino-Baltic relations have been a continuous test of patience — for both sides — ever since the three Baltic States first gained their independence from the Soviet Union. Beijing, keenly aware of secessionist forces within its own borders, was reluctant to support the Baltic opposition parties in their pursuit of independence — which made for an awkward start when they succeeded in forming their own independent states in 1991. Latvia, much to the dismay of Beijing, even signed a consular agreement with Taiwan, whose territorial independence Beijing does not recognise to this day.

While in retrospect that now seems like a naive decision by Latvia, it was based on the new Latvian ruling order’s ardent anti-Communist stance, combined with a belief that the Chinese Communist Party had not long to last. And it was an understandable belief at the time: the Chinese government appeared vulnerable in the wake of the Tiananmen Square protests of 1989, and China’s economy was stuck in recession. The Latvians must have assumed that Francis Fukuyama’s “End of History” — a world of liberal, capitalist democracies — was at hand. What’s more, Latvia’s foreign policy makers were optimistic — ultimately too optimistic —  that more foreign aid would come from the West and from anti-Communist countries in Asia if Latvia fostered closer relations with Taiwan.

But it turned out to be a bad miscalculation: Beijing forestalled the other Baltic States following Latvia’s lead and also giving consular representation to Taiwan by granting swift and full recognition of the newly independent Baltic States. In return, China pushed for Baltic recognition of the ‘One China’ policy. Then, China managed to pull itself out of recession in 1992, and its spectacular economic rise just went on and on. Very few people in the new Baltic foreign policy-making elite had any experience or knowledge of China, and in turn, China had little knowledge of the Baltic States.

So the Baltic States were largely overlooked in the early independence years, and as China grew rapidly through the 1990s and early 2000s, China’s direct investment focused more on Russia and Western Europe. This showed little sign of changing in the first decade of the 21st century, with countries like the United Kingdom, France and Germany attracting the lion’s share of China’s direct investments in Europe. Indeed, these three western European countries, according to Eurostat, represented 68 percent of China’s EU investments between 2000 and 2011.

Meanwhile, Baltic foreign policy was focused on primarily on moving towards NATO and EU membership; and after their accession to both institutions in 2004, further economic integration with other EU member states and with the US came higher on the agenda than developing trade links with China.

2012: the end of the beginning

So it was only in 2012 that Sino-Baltic relations began to take off, ignited not only by China’s ever-growing economic reach, but also by the increasing economic credibility of the Baltic States. Of particular interest to China is their potential position as a staging post for the New Silk Road, a prospective trade link between China and Europe by land through Central Asia. Meanwhile, as Western European economies struggled for growth after the global economic downturn and the crisis in the eurozone, the Baltic economies still managed to attain relatively high GDP growth. 

Over the last few years it has become increasingly clear that the Baltics have caught the attention of Beijing. “Nowadays, the Chinese embassy is one of the largest embassies in Riga, in terms of the number of diplomats,” says Alf Vanags, director of the Baltic International Centre for Economic Policy Studies. “But it is still in Chinese administrative terms a village or township with regard to wider Chinese strategic thinking.”

In turn, the growing purchasing power of the Chinese consumer has increasingly caught the attention of Baltic policy-makers and company owners looking to find new potential trade partners for their products.

“The Baltic States should be thinking about the Chinese market. It’s a big market, and there are a lot of opportunities there.” continues Vanags.

Close trade relations, however, cannot be developed overnight. “The China market is very big and extremely difficult,” says Artis Kampars, Chairman of the Latvia-China Business Council, and former Latvian minister of Economics. “There are high-level barriers and large amounts of high-level bureaucracy.”

“But,” Kampars continues, “both of which are beginning to open up right now.”

A number of those barriers had begun to creak open in 2009, with the creation of the modern “Silk Road”, known also as the Northern Distribution Network. Primarily built in order to supply military logistic supplies during NATO’s war in Afghanistan, the Northern Distribution Network links the port of Riga to the Afghan city of Termez, passing through Russia, Kazakhstan and Uzbekistan.

This route, however, even if it is faster, is more for the benefit of Chinese companies that own a large number of shares in the maritime staging posts of the New Silk Road. For example, the Silk Road continues down to the Port of Djibouti, Lamu port in Kenya and Gwadar port in Pakistan — and in each of these ports Chinese companies are already highly influential. It is with good reason that China is interested in promoting the establishment of the New Silk Road as a major global trading route.

Kampars, however, finds a number of problems with the land Silk Road Economic Belt: “I don’t see the arguments why these companies, and these ports which are handling these goods, should send them through Central Asia; there are serious problems in that region.”

Wider Chinese Influence

Chinese investors have already become well-entrenched in the Baltic States in a number of  sectors, and are using the region as a springboard for expansion. For instance, GRG Banking Equipment, China’s largest producer of ATM machines, recently made its first big investment in Lithuania, establishing a branch in Vilnius in March 2012. The company — which has a 23 percent share of the Chinese market  — will use the Lithuanian capital as the location for its European headquarters.

In Latvia, a great deal of the initial attractiveness for Chinese investors came from the possibility for foreign investors to get a residency permits through the purchase of real estate, or through business or financial investment.

When in possession of this document, Chinese nationals can then travel freely all throughout the EU. However, Latvia risks losing out to Cyprus in this respect, because the minimum cost of a Latvian residency permit has gone up, making a Cypriot residency permit a much cheaper option (and with better weather thrown into the bargain). Before September 2014, the required price for a Latvian residency permit was 70,000 euros; but amendments to the laws by the Saeima, Latvia's parliament, increased it to 250,000 euros. Currently Latvian real estate represents 40 percent of China’s total investments in Latvia. The higher residency permit price could lower this percentage, though it is uncertain how this will affect the other 40 percent of Chinese investments in Latvia — the construction industry.

Constructive relations?

“According to my information there are two real projects which are more or less moving forward: Riga free port, who are negotiating with a Chinese construction company to build some port infrastructure, and there are some logistic discussions about the communication networks between Riga free port and the capitals of the Baltic Sea region.” explains Kampars. As Europe's northermost warm water ports, Riga could prove a strategic investment if the icecaps in the artic recede further, and the Northern Passage trade route, a maritime passage across the arctic sea which links China with Europe, is developped.

But in recent months, it is exports that have gained more prominence in the media: the search for new markets has gained more urgency as the standoff between Russia and the West drags on, and the Baltic States have begun to feel the adverse effects of economic sanctions and a weaker rouble. One of the main openings for Baltic exports could be in agricultural products, although Vanags also mentions the possibility that the Baltics will export education and vocational training to China as well. Chinese consumers are distrustful of their own locally sourced food products, and now that the growing Chinese middle-classes have greater purchasing power, they are increasingly willing to look abroad for alternative sources.

Despite this, it is still a difficult undertaking that requires government support and close cultural understanding to get going.

“If Baltic agricultural producers manage to export more to China, it should be considered as a remarkable success for them,” says Czes Tubilewicz, a specialist in EU-Asia trade policy at the University of Adelaide.

In mid-January, Estonian Minister of Agriculture Ivari Padar and Niu Dun, the Deputy Minister for Agriculture of the People’s Republic of China met in Estonia to sign a cooperation agreement for 2015 and 2016. Tallinn is currently exporting fish products and frozen berries to China, and is also willing to enter the dairy and meat product market. It just needs the General Certification from the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), a certification that Estonia does not currently possess, although Latvia does.

To help give Estonian exports a welcome boost, the Estonian Foreign Minister Keit Pentus-Rosimannus flew to Beijing to unveil a chic, quirkily-shaped building, appropriately called Tetris, which will now serve as Estonia’s Embassy in China.

“China is a very important partner for us in Asia, with whom we wish to promote both trade and cultural and educational cooperation,” said Estonian Foreign Minister Keit Pentus-Rosimannus, speaking at a recent press conference.

Fresh emphasis is being put on cultural exchanges. Currently there is only a small percentage of people learning Chinese in the Baltic States; but this number is beginning to rise. The main consequence of this development will be a new generation of Baltic exporters who are much more keenly aware of Asiatic traditions than they are at present. Estonia is planning to develop the linguistic level of its students in Chinese by offering Mandarin language lessons on an advanced or C1 level from spring. At the moment, Estonia’s Confucius Institute has the capacity to welcome 179 students; there are currently 500-600 people learning Chinese in the country. In Latvia, the number learning Mandarin continues to increase every year. Though Latvians have a tough workload when it comes to language learning as it is — as many Latvians already speak three languages or more — Chinese language learning is beginning to catch on.

“The Confucius Institute at University of Latvia is developing quite steadily and fast,” says professor Quanyu Shang, Director at the University of Latvia’s Confucius Institute.

“We also recently opened a Kids Class which supplies a platform for kids under 10 years old to learn Chinese language and culture,” Shang added, putting the number of Chinese students at around 600. To complete the picture, Quanyu specified that the Confucius Institute now offers scholarships for Latvian students to study in China for a month, a semester, a year, or three years, either for credits or for a degree.

It seems China’s cultural policy in the Baltics in some respects mirrors the Chinese proverb: “If you are planning for a year, sow rice; if you are planning for a decade, plant trees; if you are planning for a lifetime, educate people.”

Time for tourists?

Another aspect of the cultural exchanges between China and the Baltic region is the tourism sector. In July of this year, a Chinese delegation of this sector returned from a trip to Vilnius and spoke highly of their interest in Lithuania’s UNESCO World Heritage sites; its amber, architecture and art; and especially of the Centre of Oriental Studies at Vilnius University.

The number of tax-free purchases made by Chinese tourists in Latvia doubled during the first nine months of 2014, compared to the same period in 2013, and Estonia is prioritising retail channels attractive to Chinese customers in a bid to entice more Chinese toursits..

The Dalai Lama dilemma

The situation between China and Tibet is still a sensitive subject, and a hard one for the Baltic States to overlook. Beijing considers the Himalayan region to be part of Chinese territory. But China has a reputation of riding roughshod over human rights in defence of its sovereignty over Tibet. These abuses are listed in the Tibet section of the 2013 Human Rights Report and include extrajudicial detentions and killings, torture or arbitrary arrests, strict control on information and access to Tibetan areas along with financial and social exclusion from China.

At the start of Latvia’s EU presidency, Vincent Metten, EU Policy Director at the International Committee for Tibet’s Brussels office, called upon the country to make sure that advocacy for the independence of Tibet is pushed up the EU’s agenda: “The people of the Baltic states, once under Soviet rule, know what it is to face political persecution under an occupying power. There are many similarities between Latvia’s recent history and the current situation in Tibet.”

For this reason, there is widespread popular support for the Tibetan cause in Latvia and the other Baltic countries.The official positions of the Baltic States are, however, in support of China’s Tibetan policy. But echoes of solidarity with secessionist movements remain: there remains a strong contingent of politicians who support the idea of an independent Tibet in the Baltic States. In 2011, the Dalai Lama was invited to Estonia on an official visit; Beijing responded by freezing high-level relations, which were only restored in 2014 after a formal apology from Estonia. The message was, and remains, clear: if you want to benefit from the rise of China as an economic, political and military power, don’t object to China’s Tibetan policy.

Which brings up a conundrum: as growing trade with China becomes the new reality, at what point do economic incentives to surrender principles of human rights become too strong to resist? Twenty-five years on from the Baltic Way, will Baltic leaders, in return for ever-increasing rewards, be prepared to do away with promoting and supporting ideas of anti-Communism, democracy, and freedom of speech?