Economic versus political engagement with China and Taiwan in Central and Eastern Europe

Abstract

The transition of Central and Eastern European (CEE) countries from centrally planned to market economies in the late twentieth century transformed the region’s external economic relations. During this transition period, CEE countries went through radical economic restructuring, largely induced by foreign capital. Multinational enterprises (MNEs) realized significant investment projects and established their own production networks in the region. Investors, primarily from core European countries, were attracted by macroeconomic factors, including relatively low unit labor costs, market size, openness to trade, and proximity. Institutional factors, such as the prospects for CEE countries’ economic integration with the European Union (EU), also increased foreign direct investment (FDI) inflows. Compared with investments from Western Europe and the US, non-Euro-Atlantic FDI remained modest in CEE, although the first wave of such investment did start directly after the transition and picked up again beginning in the early 2000s. Both Chinese and Taiwanese companies have targeted the CEE region: Some smaller companies first arrived in the 1990s, while medium-sized and larger companies made their first investments after the millennium, with the Czech Republic, Hungary, and Poland (CEE3) among the most popular destinations. Historically, geographically, and politically bound to Europe and highly dependent on the EU for trade and investment, the CEE region as a whole has not managed to reach a common position on China. Some countries have more reservations about the growing Chinese presence, while others are more welcoming in the hope of greater economic opportunities. CEE countries are also aware that even lower levels of cooperation with Taiwan may provoke a backlash from China, although some of them are willing to take the risk. This diversity of approaches is also reflected in their attitude toward Taiwan. It must be emphasized that CEE countries – like other European countries – are certainly not planning a diplomatic switch between China and Taiwan for the time being, but informal relations with Taiwan have indeed strengthened in recent years in several cases. In line with the above, the aim of this chapter is to analyze economic relations – and their possible effects on the political terrain – between China and Taiwan and the CEE3 region. Besides presenting the evolution of formal and informal diplomatic relations, trade, and investment volumes since 2000, we outline how important the CEE region is in Chinese/Taiwanese companies’ expansion strategies, and the primary factors that make it attractive. The study will also examine the effects of China/Taiwan– CEE economic relations on their image in CEE3 countries. The chapter intends to analyze whether China and Taiwan are more favorably perceived as a result of greater economic activities, and whether diplomatic gestures from the CEE3 can generate more trade and investment from China/Taiwan.