Serbia and China: Walking a Delicate Line

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Despite the significant increase in China’s contribution to the Serbian economy in the last decade, EU countries’ investments in Serbia largely outperform those of the Asian economic powerhouse. Here’s how FDI from China is influencing Belgrades’ trade priorities, but outstanding questions over Serbia’s 5G rollout could make or break their relationship.

Unexpected troubles for Huawei

The Serbia-China partnership involves an important technological framework, initiated back in 2009, when the two countries signed an Agreement on Economic and Technical Cooperation in the Field of Infrastructure, which consequently allowed Huawei to establish a strong presence and strategically incorporate Serbia in its “Digital Silk Road” project.

However, Huawei’s plans for Serbia encountered an unexpected turn in September 2020, when Serbia and Kosovo signed what was described as a historic “economic normalization” agreement under the auspices of former US President Trump in Washington. The agreement, mostly dedicated to economic, energy, and political issues between the two countries, also incorporated a few rather unexpected external provisions, one of them including the prohibition of 5G equipment supplied by “untrusted vendors,” clearly coinciding with Trump’s sanctions towards Huawei. Although the signed document is not legally binding “per see,” the move has put Serbia in an unfavorable position considering its comprehensive partnership with Huawei, which, among others, also includes a EUR 150 million contract with state-owned Telekom Serbia for developing the country’s 5G network.

FDI from China on the rise

China’s foreign direct investment (FDI) in Serbia has been rising increasingly in the past decade, from EUR 2.5 million in 2010 to EUR 318 million in 2019. Despite the notable increase in China’s contribution to the Serbian economy, the EU’s numbers largely outperform it, with the Union’s cumulative FDI tallying EUR 1.87 billion in 2019 alone. Trade between Serbia and China has also grown rapidly in the last decade, from USD 1.18 billion in 2010 to USD 2.837 billion by 2019. However, the import-export relationship is leaning strongly in favor of China, with Serbia imports totaling USD 2.5 billion, while its exports to China stand at only USD 329.2 million, resulting in a significant trade deficit for the country.

Apart from China’s long-standing friendly and political ties with Serbia, which include mutual support in sensitive issues (like Serbia’s position on Kosovo and China’s policy towards Hong Kong and Taiwan), its increased presence in the country, and recently tightened security and defense cooperation, the economic relationship between the two countries increased substantially after the signing of the Belt and Road Initiative (BRI) in April 2019, through which China has loaned and invested more than USD 9 billion to construction projects in Serbia. In addition to infrastructure, the Chinese government has also been active in state-led concessional investments into the energy sector.

Our take on future Chinese FDI in Serbia

In the past decade, the Chinese presence in the Balkans has been gradually increasing. Predominantly in the course of the past year, Serbia has cautiously shifted its foreign policy towards the ruling powers, with China gaining much more focus than its traditional ally, Russia.

The COVID-19 pandemic has further strengthened China-Serbia relations. Due to the EU’s temporary ban on medical equipment exports at the beginning of the pandemic, Serbia was first unable to secure urgent medical aid, prompting president Vučić to approach China, which responded quickly, sending generous amounts of medical supplies, equipment, and, later, huge deliveries of COVID-19 vaccines to Serbia, making the country a front-runner in mass inoculation in Europe.

Given that Serbia is not yet a member state, the country enjoys a much greater latitude when it comes to its dealings with China. The accord with the US against 5G implementation including Huawei may have only been currying favor with former US president Trump.

Although there is no doubt the implementation of the EU – China Comprehensive Agreement on Investment would give economic and political benefits to both China and Serbia, particularly due to their already enhanced cooperation and Serbia’s position as an EU membership candidate (which does not oblige it to follow common foreign and security policy, thus allowing China some maneuvering room), the unresolved Huawei issue is expected to raise some big questions and could prove a decisive factor in the future, especially in light of the announced visit of the Chinese president Xi Jinping to Serbia.