Xi and Putin Place the Greater Eurasian Partnership on the Path to Realization

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Commitment given to link the Belt and Road Initiative with the Eurasian Economic Union 

Op/Ed by Chris Devonshire-Ellis 

There were several takeaways in terms of China trade and regional development at the recent St. Petersburg International Economic Forum (SPIEF) last week, not least of them the criticism leveled at Washington and the current policies of the United States, which I wrote about earlier in the week here: “Xi, Putin, International Institutions Begin Pushback Against US Trade Impositions“.

I also wrote about the partnership between the two men, posing the question “Xi or Putin or Trump – Who is the Most Senior Figure?” which brings us neatly to the main geo-political development of the relationship between China and Russia: the development of the concept of the Great Eurasian Partnership. That idea was initially proposed many years ago by Charles De Galle, who envisaged a common free trade area stretching from Portugal to the Ural Mountains. More recently, as both China and Russia have developed, that has now extended to the potential for a bloc that covers the entire Eurasian landmass and more. The Great Eurasian Partnership has been mentioned, especially by Xi Jinping, and elaborated upon by us in the piece nearly three years ago, “China and Russia Propose Vast Eurasian Free Trade Zone“.

Since then, things have been mostly quiet on the subject, although some developments have taken place to slowly move the concept to more central ground. The most significant of these, although it went largely unremarked at the time, was China signing off a free trade agreement (FTA) with the Eurasian Economic Union. The reason it was ignored was because the document didn’t contain any details on tariffs for any goods; what is known as a “non-preferential agreement”.

My argument at the time was, and still is, that getting the FTA onto the statute is the most significant thing – adding product categories to it at a later stage is then rather easier. That is apparently what is happening, and as I explained in this piece “The Great Eurasian Partnership is Back on Track“, negotiations concerning tariffs are taking place. As President Putin said, “We are discussing products and tariffs and there are some sticking points, but we will find solutions”.

That was echoed by President Xi, who specifically stated that he had agreed with President Putin to link together the Belt and Road Initiative with the Eurasian Economic Union. How this will be done remains unclear, however it would create a part of the world that in terms of China, the EAEU, Central and Southeast Asia, Africa, and the Pacific, would look like this:

Linking all this together will take time, and it involves several negotiations and multilateral developments to take place. However, steps are being taken to do this, and are already underway. I can explain these stepping stones as follows.

China, Russia, and the EAEU add products and tariffs to their existing FTA

As mentioned, this is already being discussed. Given the urgency in the current global trade situation as concerns the US, which has imposed serious sanctions on Russia and is engaged in a trade war with China, I suspect that a solution to this is likely to be found sooner rather than later and that a basic list of products may emerge by the end of this year, to be followed by an expanding list during 2020 as negotiations continue to develop.

When this happens, the volume of products traded between China and Russia will significantly increase.

Steps are in place to permit this, with trade volume expected to be at US$200 billion by 2024, a growth of about US$50 billion per annum. That outstrips China-US trade growth, which will probably fall into negative territory, by a very long way.

China, the Belt and Road Initiative, double tax treaties, and the European Union 

China has been getting involved with the EU in terms of infrastructure build for a number of years now, and has been winning Belt and Road tenders with a number of EU nations, including those bordering non-EU members. That has created concern in Brussels that its influence is being eroded. This hasn’t prevented the formation of the 17+1, or as it is officially known, the Co-Operation Between China and Central and Eastern European Countries (CEEC).

To date, the members include Albania, Bulgaria, Croatia, the Czech Republic, Greece, Hungary, Poland, Romania, the Slovak Republic, Slovenia, and the three Baltic States: Estonia, Latvia, and Lithuania. That has created a de facto North-South Euro-corridor, and China has been stepping up with funds to build infrastructure to improve multilateral trade between Europe and China. I wrote about this in the article “China Targets, Funds, And Incentivizes Eastern Europe“.

In addition to this, China has gradually been making inroads into the EU with an increasing number of EU member states signing off Belt and Road MoUs, with Italy being the most recent, and the largest. That has created some concerns over “Chinese workers taking Italian jobs” an issue I dealt with in the article “Will Italy Be Overrun With Chinese Workers?” in which I compared minimum wages in Italy and the EU with those of China.

Moreover, although the EU itself hasn’t agreed to a free trade deal with China, every single EU member state has a double tax treaty with China. This means that individually, the EU is embedded with China trade, it just hasn’t yet agreed to do this on a unilateral Belt and Road basis. That, followed by the long awaited EU-China EU free trade deal will cement the position of the EU very firmly into Eurasia, at least from the China perspective. What needs attention and some realistic talking about is the relationship between the EU and Russia.

Relations between the EAEU and the European Union 

They sit, uneasily, side by side, both often politicized as imagined as one in the “Free West”, and the other in the Soviet Union. In reality, both are pushing forward with new technologies, developments, and trade flows, and have significant benefits to offer each other. While the EU sanctions on Russia have interfered with bilateral trade, an easing of relations between the two can be expected to be on the cards and especially now as a new EU leadership will take effect from October, and as there are benefits in both sides talking to each other.

EU-Russia trade grew to US$300 billion last year, despite sanctions. There will have to be a softening of relations at some point, not least because the EAEU sits between the borders of the EU to the West and rubs up against the borders of China to the East. The article “Prospects for European Union / Eurasian Economic Union Development” explores the dynamics, problems, and opportunities between the two, while the article “Russia’s Eurasian Economic Union Free Trade Agreement Brings Chinese Goods to the EU Border explains the exact impact a China-EAEU FTA will have when it becomes product specific. EU member businesses need to get prepared for the inevitable, because this scenario is on the way.

The EAEU signs FTA with Iran and Turkey 

These two countries are powerful economies in their own right and sit between Europe and Asia. The EAEU has effectively already agreed an FTA with Iran, while Turkey is currently close to completion. They are also key logistics points between East and West, with the development of trans-Iranian International North-South Transport Corridor  which effectively connects India to Russia via Iran and Armenia, a secondary route from Iran to the Mediterranean and Turkeys development as a pivot between China and Europe. All this is being built and agreed now. It will change regional dynamics from India to the Mediterranean.

India signs an FTA with the EAEU 

India has not signed up to the Belt and Road Initiative, mainly due to disputes along borders with China and Pakistan. But in real terms, it is supportive and is a major shareholder in the Beijing-backed Asian Infrastructure Investment Bank. It is also a member of the Shanghai Cooperation Organization. While India does not have a free trade agreement with China, like China it does have one with ASEAN.

India is also negotiating an FTA with the EAEU. As and when that happens – and both sides have expressed willingness to make a deal, although both can be difficult negotiators at times – India will become an important and influential dynamic within the concept of Greater Eurasia.  We wrote about this in the article EAEU-India Free Trade Zone: Initial Negotiations Offer Improved Market Access. Russian companies will be able to access India and vice-versa. For professional assistance and advice on this trade dynamic, please contact here.

The African Continental Free Trade Agreement (AfCFTA) 

This came into effect on June 1 this year and eliminates cross-border taxes on 90 percent of all goods traded across the continent. Although this seems some way away from China and the EAEU, both China and Russia have significant business investments and a massively growing presence in the continent. As can be seen in the list above, a large number of African nations also have a double tax agreement (DTA) with China and a Belt and Road MoU. The article “China’s African Moves Through the Belt and Road, Double Tax Treaties and AfCFTA” explains the importance of this in more detail.

The EAEU and ASEAN nations strike free trade deals

ASEAN already has an FTA with China, and it is examining the potential for an FTA with the EAEU. Moreover, several ASEAN nations are individually negotiating FTA with the EAEU bloc, among them Singapore, Indonesia, Cambodia and Thailand. Vietnam already has a highly successful FTA with the EAEU while Malaysia and the Philippines are considering the option. You can read more about the potential for ASEAN-EAEU trade in the piece “The Eurasian Economic Union and ASEAN. How the Bloc’s Intra-Regional Trade is Developing“. Singapore meanwhile is being fast tracked for a FTA with the EAEU and this can be expected by the year end.

Belt and Road MoUs are upgraded to DTAs to include product-specifics and reduce tariffs

China has signed off MoUs concerning the Belt and Road Initiative with many countries. Although these MoUs are largely non-specific other than to agree to promote mutual investments, and may in some cases refer to specific projects, they are not tax or tariff-based agreements. But what China can, and is doing, is introduce bilateral investment treaties as an initial step.

These documents essentially protect the rights of investors in each other’s countries and provide mechanisms in terms of basic trade and visa rights and so on.

Beyond these, and with more defined strategic global partners, China has signed off on DTAs.

These documents are a higher level of agreement that can limit the amount of duties paid on specific products and services, prevent double tax in both China and the country concerned, and provide mechanisms to reduce profits tax by imposing the lesser withholding tax service charge. (You need professional advice to do this. Please see the complimentary magazine download here).

However, the sheer number of DTAs that China has signed with countries worldwide is staggering. This is a list of countries that have both joined the Belt and Road Initiative and have a DTA with China:

If you need assistance with understanding what is in a specific country DTA with China, please contact us here.

The applications therefore of linking together the Belt and Road Initiative, existing and future DTAs with China, in addition to free trade agreements being arranged with members of the Eurasian Economic Union are beginning to bring the united picture of a Great Eurasian Partnership into better focus.

Much still needs to be done; the members of the EU need to patch up differences with Russia and also need to engage with developing free trade agreements with EAEU members and beyond, including with Africa, parts of the Middle East, Central Asia, India, and so on. The status of countries such as Azerbaijan, Georgia, and Ukraine as well as others in terms of being able to access a trade bloc as a member still needs to be determined. It will take some time and efforts to work that all through.

But, as can be seen, although the total picture is somewhat incomplete and lacks definition, the evolution and development of the Greater Eurasian Partnership is already underway. This will have significant implications for global supply chains and create new opportunities across the entire region. It will have major impacts on the economy of China and Russia, and then as agreements currently under negotiation come into effect, upon India, the ASEAN nations, and Central Asia. An upgrading of treaties with Africa will follow, and then finally Europe will eventually get on board. Given the geographic positions of each of these countries and blocs, a coming together is pretty much inevitable.

There can be expected to be other developments as well. Given the sanctions and threats of tariff problems created for virtually all of the Eurasian regions by the US, the introduction of a Eurasian Clearing Bank system cannot be ruled out, an idea I introduced in the article “A Eurasian Central Clearing Bank is the Next Logical Step for China, Eurasia, and the Belt and Road“. Other initiatives and ideas to compliment, support, and develop what is happening will also arise. This is an exciting time for companies to get ready for the emergence of a new trade bloc dynamism – that of the Eurasian land mass.

About Us

China Briefing is produced by Dezan Shira & Associates. Chris Devonshire-Ellis is the Practice Chairman. The firm provides business intelligence and professional services throughout Asia and has done since 1992. With offices across China, ASEAN, India, and representation in Russia, Central Asia, and Africa, we are well placed to understand regional dynamics, laws, taxes, and the business opportunities and execution of these throughout the region. Please contact us at china@dezshira.com or visit us at www.dezshira.com.