Mihajlo, good afternoon. Welcome to New Magazine podcast.
Good afternoon, thank you for inviting me.
I am glad that you set some time aside to be with us today.
I have to say, for a start, as I have been treated the issue
of Serbian Chinese cooperation for many years, not too long,
but long enough to say, without any doubt, that the number of experts
in Serbia on this subject is really small.
Right from the start of dealing with this issue, given the high
intensity of economic cooperation in the early stage of research,
the way in which you treat certain elements of Serbian-Chinese relations
in the field of economy were really very useful for understanding this
particuar subject, and I want to thank you for being here with us today.
Currently, you are acting in the capacity of a President of
Libertarian Club, a.k.a. Libek. You are also editor in chief of
portal Talas. You are rather busy, so every minute of your
time is greatly appreciated. I would like to reiterate that
we are honored to have you here. Prior to launching the main theme
of our podcast, that is economic cooperation of China and Serbia,
this deep ocean of our relations, and given that our podcast is named
Understanding the Steel Friendship, how do you perceive this syntagma?
We know more or less its origin, but when you hear it in the media,
or read about it somewhere, how does it sound to you?
First of all, thank you for your kind words.
Still, one should never consider oneself too serious, otherwise
we could end up facing all sort of problems...
I believe that this syntagma was actually translated from Chinese.
Chinese language is rich with such expressions,
having in mind their history, state propaganda,
that we often find their phrases or propaganda messages,
when we interpret them directly from Chinese into Serbian,
rather awkward and obscure, but they are fully sensible
when we regard it in the spirit of the Chinese language.
So, I don't react emotionally on those phrases, I regard them
as rather excessive, especially as I am cynic by nature,
and on the other hand, considering diverse interests
in the international arena, I am sure that there is no
friendship among the states, but only interests that might be
common in some domains, meaning that people can
establish friendship, unlike the states.
I'm glad that you mentioned the phrase interests, as when
we consider the relationship between Belgrade and Beijing,
we have to have in mind the starting point, that those
relations are quite complex. When you reach the level of
comprehensive strategic partnership with some country, it means that
those relations are developed in many aspects and levels
than it has been done partially with some other countries,
but the most dominant relations are linked to economic cooperation.
There is very thin difference when it comes to the cooperation in the field
of infrastructure, based on loan agreements, the so called
preferential credit arrangements, foreign direct investments (FDIs),
and what is currently most popular, this is the domain of foreign trade.
Of course, this is not the only thing to focus in economic aspect,
but three topics that I would like to focus on in our conversation
will get us back some fifteen years ago, to 2008, 2009...
It is perhaps the first agreement that was signed in the contemporary
period of relations between Serbia and China.
That is the Agreement on the construction of brigde on Dunav,
linking Zemun and Borca. Certain cooperation mode
has been established, so I would like to hear from you whether
this is something specific only for Serbia or to put it this way,
I would like to know whether China is main partner of Serbia
in the process of modernization and construction of new infrastructure.
We are witnessing new highways, new bridges, including the field of
energetics, we had thermal power plant in Kostolac that
we worked on in cooperation with China, how it came to that,
and how things developed in the course of the past fifteen years?
I believe that in order to understand today's cooperation, we need to go
back to the past, to see how it all started.
Actually, Chinese presence here in the economic aspect, through
insfrastructure projects had started with the construction of Pupin bridge,
this was the initial project that emerged from the signing of
that strategic document, which was part of Serbian foreign policy
referred to as four pillars: Brussels, Washington, Moscow and Beijing.
This was launched by the then leadership, meaning the regime
of Democratic Party and its coalition partners.
So, nowadays, we just witness the continuation of this policy,
where Serbia wants to be close to European Union, establish
good relations with the United States, but also to be still brother
country to Russia, including to establish good relations with
the People's Republic of China. So, on a structural level,
there were no major changes, in the past fifteen years.
In the meantime, Chinese impact is slightly stronger,
having in mind the number of different levels of cooperation
that China launched in Serbia. We could analyse it on several
levels, the first one being economic aspect, meaning
foreign direct investments of some Chinese company here
in Serbia, a privately owned company, that came here to make profit.
They benefited of the comparative advantages of Serbia, such as
Serbia's geographical position, as it is close to EU market,
Serbia borders with Hungary, which is part of Schengen treaty,
so they find it cheaper to produce something here rather than
to deliver goods from China in order to sell it in EU.
It can be the same labor price compared to neighboring countries.
The second level, linked to this one, are investments of Chinese state
companies, as for the private ones, there is some kind of state influence,
in the sense that they support the investment or simply are there
to assist if some problems appear. This is a standard procedure known
as the unwritten policy in any state, so if a German company faces
certain regulatory problem, it can always ask for help of the German
Embassy, that will, in turn, try to solve through diplomatic channels,
in communication with Serbian administration, but when some
Chinese state company invests in Serbia, it means that it is
directly backed by a Chinese state, that is, then, not only economic
but also a political decision where state company will invest and how.
Chinese infrastructure projects make the next level of analysis,
those are construction of roads, bridges, there are negotiations
underway on some other big projects, such as the construction of sewage
system and accompanying sewage equipment in smaller
towns throughout Serbia, as well as subway station in Belgrade, etc.
The largest number of those projects is here presented on the part of the
government as Chinese investment, which is obviously all wrong,
given that investment's when someone opens up a factory for production,
and then pay tax on the profit, and so on, but it is altogether
different when you borrow money from someone, then construct
infrastructure, only to get the money back with interest.
We find it useful as we need the infrastructure, as Serbia
hadn't invested for the last, let's say, three decades,
in its infrastructural development, but this simply isn't an investment.
Why is it presented as such probably depends on political reasons.
Current state government wants to present as comparative advantage
to its voters and the electoral body its ability to establish good
relations with other stakeholders on the international level.
This is their way to gain trust of their voters,
and when we live in such media environment, major media outlets,
being influenced by executive power, won't dare point to finance minister
prime minister or president... -That it's not an investment but loan.
Exactly. Then it gets into public discourse and public opinion...
I have two additional questions that arise from this.
Let's return again to 2008 or 2009...
Perhaps, I know the answer to this particular question, but I would like
to hear it from you, as I've learnt it from you.
Back in 2008, 2009 and later, Chinese loans were so popular,
not only in Serbia, but it was definitely the case in Serbia,
and whether the reason for which we opt for Chinese loans changed
now or two years ago compared to the main reasons in 2008, 2009?
I would like to make two or three time divisions how it looked like.
First, we realized the first loan, the construction of Pupin bridge,
at that moment, the financial consequences of the global crisis
were just spilling over to Serbia, companies were closing down,
foreign investments were decreasing, people lost their jobs,
unemployment rate was getting higher, wages were stagnating,
dinar devalued by 20 percent, so that we could somehow
manage to sustain export industry, so the state has to get loans,
we had quite high deficits, in order to pay off high expenditure on
salaries in the public sector, and pensions, which were just raised
for 30 percent a quarter prior to the start of global crisis,
so this left the state without funds to invest into the infrustructure.
All the funds that were assigned to be invested into construction of
the roads and accompanying objects were diverted to current expenditure.
On the one hand, that happened because of the promise of raising
the pensions, and on the other, as public revenues decreased
due to the recession in the economy. Chinese factor, then, proved capable
of patching up the hole created in the state's capital expenditures.
Therefore, we were able to borrow under relatively good conditions,
with a low interest rate and a long repayment period,
placing those funds into building the infrastructure.
This continued on a smaller scale, than it is the case with the current
levels of Chinese presence here, all the way until 2012, 2013...
Then, we are faced with a new momentum as meanwhile
Serbian public debt faced a considerable growth, namely,
from the level of eight billion euros prior to the crisis,
we reached fifteen billion euros debt level, while
the participation in GDP of our public debt was about 70 percent,
which was rather high, interest on Serbian public debt was very high.
To whom Serbia owed the most at that moment?
Do you have that information? -To the private banks...
We financed most of our deficits on the international market.
In 2012, we have for the first time appeared in London to borrow
large sums of money from foreign banks, and this costs us dearly.
As far as I remember, interest rate back then was 7.5 percent
in US dollars in accordance to which we borrowed money in 2012,
that was still Mirko Cvetkovic's government.
What were the interest rates of Chinese loans for infrastructure?
Those were around three percent. So, it was much cheaper to get
loans from China, through Chinese state export banks, and to invest
it into infrastructure, than to get loans on world financial market.
That was the case until 2016, when we were on the verge of bankrupcy,
so we had to turn to fiscal consolidation that meant
reduction of pensions and salaries in the public sector, and so on...
Then, it became obvious why it was easier for us to get loans from our
Chinese partners, to implement infrastructural projects with them.
Simply, it was cheaper to get the loans under preferential interest rate
than the one we could get on the international market.
However, then we are getting into a second time division,
where interest rates decreased. On one hand, internal factors
had an impact on this, and on the other, this reduced Serbia's
public debt from 70 percent of GDP participation to some
level of 55 or 50 percent, so Serbia was not perceived
as a state with fiscal difficulties. We even started recording relatively
decent growth rates starting in 2016, we didn't have prolonged recession
that was the case up to that time, and on the other hand,
European Central Bank launched its quantitative easing programs,
which led to an inundation of liquidity in the financial market,
followed by a major decrease in interest rates' level.
That launched a new investment cycle, both in European Union,
and beyond it, cash has become cheap, Serbia was in a position
to get loans on international market under the same terms as with
Chinese preferential loans. At that point, there is no
economic logic to get loans from the Chinese as we can
get loans under the same conditions on the international financial market.
When COVID reached us in 2020, we faced with new easing of monetary
policy, so it was actually more expensive to get loans on
Chinese market than on the international market.
Just to recall, Serbia back then had long-term interest bonds,
with an interest rate amounting to 1.89 percent, including even 1%
for the green interest bonds. It was obvious that it was more
expensive to get loans from the Chinese, but we continued to do so.
Why? -The answer lies completely
in a political, rather than in economic sphere, and I would
say that it was partly foreign and partly internal politics.
Foreign policy as certain agreement have already been made,
obviously, behind the scenes, and it was not clear what were
the promises given to China, to what extent their impact
would be allowed here, in other words, there was series of
infrastructural projects that were already being agreed upon,
or their finalization was expected to happen soon.
Therefore, it was not easy, from a political aspect,
to say that we are no longer going to implement those projects,
but they continued with negotiations and next stages of the projects.
The second step taken was probably internal in nature.
Namely, when you get loans from international financial institutions,
just to reiterate that in Serbia EBRD and EIB are very active,
along with World Bank as international development institutions, offering
loans under preferential interest rates, cheaper than commercial
banks, but they demand different types of control in spending.
In other words, bid for construction of infrastructure is necessary, and
the bidder who presents the lowest offer with guaranteed quality wins.
Technically, it could be some of the Chinese companies as well.
Yes, it could, as it was the case with building the bridge in Peljesac.
There were problems, both political and administrative.
Finally, the Chinese got the bid, and build that infrastructure.
If I get it right, at this moment section of the expressway of
the loop near Pozarevac to Golubac is being constructed by the Chinese
company, from EBRD funds, is that right?
So, we also have such a case in Serbia as in Croatia.
When we have this negotiation process
on the part of the states of China and Serbia, respectivelly,
the deals were such that if Chinese finance some project,
then their construction companies execute the works without bid.
It is agreed in advance which companies will be engaged,
our negotiators then asked that part of the works should be
implemented by Serbian companies as subcontractors, it was usually
some minor package, some 30 to 40 percent of overall works,
so that something is left for our local construction industry,
and for the trade in political influence in the same time.
This was among the aspects that was favorable for our country,
it was profitable to cooperate with Chinese partners,
as slow tender procedures were avoided, the works
could be launched earlier, on the other hand,
if someone had taken advantage of the whole project as all was
done without a bid so the price offered is higher than necessary,
still it is all fine as the deal was struck in friendly discussions.
The third moment is that you can give part of the stake in the project
to a certain privileged domestic company as a subcontractor.
So, it is fine from a political aspect.
What I find fascinating is the fact that all this is absolutely legal...
So, everything is in line with certain Serbian legislation
which is currently in effect, in accordance with our
constitutional order, if you have an international agreement signed
with some state, for example, on the infrastructure development,
as Serbia and China has at the moment, every infrastructure
project that is being implemented based on preferential laon is
being signed in accordance with that international agreement.
It's worth noting that those loans and projects are always being
implemented through a separate special law, this is the Law on
taking loans and construction of infrastructure, in other words,
as you nicely put it, international agreement has greater importance
in our legal system than our local legislation, so this is the
way that makes it possible to break the law,
so we don't need to carry out standard procedures such as
calling for bids, that are linked to the Law on Public Procurement,
and so on. Problem solved! That s the bush where hare squats.
Catch 22. And now the question of a couple of billion of dollars.
Is there in case of Serbia now a time to mention the
issue of debt bondage, i.e. there are different data on
what might be total worth of the projects that China and Serbia
had signed based on preferential loan arrangements.
One digit that circulates nowadays, especially with this announcement
of four billion sum, even more than ten billions of total worth.
What we have to point out is the fact that this sum includes
all the projects that are partially, if not fully, repaid, some are
being repaid right now, some are going to be repaid in future.
We also have in mind the projects that we don't know how they will be
financed, we have the project that you've mentioned, a sewage system,
the famous project of Clean Serbia, that from the start was announced
to be worth EUR 3.2 billion, but we still don't have a clearly
defined system and way of financing of this particular project,
apart from the fact that strategic partner for this project has been
chosen, this is Chinese company that will convey implementation of
this project and the whole process from the first day till the end.
Having in mind all these criteria that you've mention, do we have
to worry that we're going to end up facing fiscal problems that wouldn't
allow us to repay Chinese loans in future?
I don't think that we should worry, not at this point, of course,
I don't know what might happen in a decade, I don't have a crystal ball,
so I cannot make a wild guess, but I am economist by profession,
so I am rather skeptycal when we make some assessments
that involve the period longer than two to three years, as to
in what way some economic variables can change.
Just to reiterate, that no one predicted global crisis in 2008,
not to mention the pandemic which cannot be considered
an economic event but it involved economic consequences, etc.
Therefore, whenever economists say something will happen in two to three
years, you can regard it as highly uncertain data.
Current amount of public debt in Serbia amounts to 55 percent
of GDP, and it is around EUR 30 millions reach.
When we consider it from this point of view, then current debt
amounting to six billions euros, this is around 20% of total
Serbian public debt, so it is not such a high sum, neither in total
public debt nor by how much Serbia can allocate for that debt repayment.
We can take a look at our public deficit, this year it will amount to
EUR 1.5 billion, this is not such a large sum whatsoever.
For those who are not experts in economy,
public deficit stands for... -It is the difference between
how much money from the budget we decided to spend and how much
we managed to collect, and that minus in the cash register
is actually a public deficit. So, this sum is not so high,
we'll see what will happen with this 4 billion, whether those
projects will be realized or not. I can imagine the scenario in which
some of the projects were not finalized, or are being dropped,
because we don't have money in our system.
I find highly questionable the construction of underground
here in Belgrade, as Belgrade cannot finance it for sure,
whether the state can finance, apart from EXPO, this project
of subway station, I'm not so optimistic about this...
Especially if we have in mind low rates of economic growth,
which are projected for Serbia for the next couple of years...
Maybe, we'll have less than 4 billon and, of course, if Serbia
would have decent economic rates, between three, four, four and a half
percent, that was usual for the past couple of years,
until 2018, it is not a problem to finance public debts, as
we will have enough fiscal room, through the inclusion of new taxes,
as tax basis has been expended, so the unemployment rate has been
decreasing, the salaries grow, as well as economic activities,
so public expenditures are hereby financed.
Not only growth in pensions and salaries but also other state bodies,
including the construction of new infrastructure, in the same time
repaying earlier debts. -So, it is not expected
that Chinese companies would take state property or land...
No, I don't see that for the next five years.
Afterwards, it all depends on our politics, if we have bad
fiscal policy, everything's possible, but I believe that such scenario is
not realistic for Serbia for the time being.
Let's go back to the title of our podcast ''Understanding
the Steel Friendship'', often this phrase Steel Friendship is used
since 2016, the visit of Xi Jinping not only to Belgrade but to the
whole of Serbia, and actually the first bigger direct foreign
investment in this modern period since China entered Serbia.
Prior to that, there were some minor small-scale investments.
Let's say that the first large investment, in the modern age
of establishing relations between Serbia and China, back in 2016,
was acquisition of the property of the ironworks Smederevo.
What seems evident is that starting from 2016, we've upward trajectory
of Chinese investments, with minor declines, due to pandemic,
or in general due to slowing down of economic cycle in Serbia,
but in 2021, China has become for the first time the biggest individual
investor in Serbia. When I say China, I mean Chinese companies.
That means that no other country had invested in Serbia in the volume
that China had done. However, in 2022,
we have a rather specific situation, it's certain that EU member countries
are the biggest investors in the Republic of Serbia.
We regard it on a cumulative level, out of 27 EU member states...
In 2022, we had an even sum of investments, amounting to slightly
more than 1.4 billion worth investments from the EU,
and slightly less than 1.4 billion worth investments from China.
Why are Chinese investments in Serbia so important, and
what I find most interesting, do you see any pattern in
the sectors that China choses to invest in, with the largest presence
of Chinese companies? -Well, this is such complex issue.
We have to unravel so many things in order to get to the core of Chinese
economic presence here in Serbia. So, on one hand, Serbia had
performed rather badly in attracting foreign direct investments (FDI),
until monetary policy of European Central Bank after 2014,
when the level of FDIs starts to grow in Serbia.
But we still have something that can be called 'Balkan's effect' of
attracting foreign investments. When we compare the countries
of West Balkans, Serbia among others, with the CEE countries
which are slightly more successful, being already EU members,
when we have in mind all other variables that we use to describe
attracting of foreign direct investments, when we make
so-called gravity models, such as the quality of the institutions,
geographical proximity, core market of Eurozone, human capital quality,
the quality of infrastructure, regulatory framework, and so on,
we still have doubts as to why the Balkan countries hadn't
attracted larger number of direct investments.
Only in 2016, Serbia starts to solve this puzzle, to attract
larger investments with participation in the gross domestic product than
it was the case prior to this. When we regard cumulative
status, that's when an investment enters during one year time,
we refer to it as the flow, but when it's already there,
and we accumulate it, we call it direct investments stock.
When we look into that stock of FDIs, measured in euros,
per capita, Serbia is still at the bottom of the countries in transition.
In other words, there's still much room for the entry of FDIs into
Serbian market. We have to be aware of this.
It is true that China appeared to be a minor investor till 2016,
we talk about the amount of less than EUR fifty million of FDIs per
year from China, for instance. Then, we have a spike with HBIS.
When we look into world statistics of FDIs, we have to know that it is
not so direct or clear. For example, Chinese company
operates in Germany, its German branch invests
certain funds here in Serbia, i.e. creating new factory section,
displacing part of production here, it will be registered as German
investment, making Netherlands one of the biggest investors in Serbia.
Although, we don't have many Dutch companies here,
Luxembourg is also among top investors, and when
we look at 2011, we experienced a large growth of investments from
Luxembourg, how come? Well, Fiat came to Kragujevac,
it paid its participation fee and started building its production,
and they were registered in Luxembourg back then,
to be later merged with Chrysler, then with Peugeot Citroen group...
In that way, international statistics of the origin of certain investment
is not so easy to trace, it is more of a directive than a rule.
We have to bear that in mind. With 2016, growth of Chinese
investments is evident, but what seems to be interesting is the fact
that all those investments pertain to three projects.
The first one is HBIS Group Serbia Iron & Steel Smederevo,
the second, Zijin Bor Copper, taking over RTB Bor,
as it's not only paying the purchase price,
it was relatively low, given overall level of the Chinese investments
in that particular year, but they also made heavy investments
into the production itself, expansion of new mines,
new machinery, there was a story about blast furnaces...
I have to interrupt you here... Apart from taking over RTB Bor,
in 2018, Chinese took over on a global level, a Canadian company,
Freeport-McMoRan, and this is why we nowadays actually have
two Zijin plants in Serbia, Zijin Copper and Zijin Mining.
This purchase of a Canadian company on the global level
hadn't been registered in our statistical system.
However, everything that China invested afterwards in the capacity
building of the ukaru Peki Cooper and Gold Mine, is registered.
If I got right what you've been saying.
That's right. There is the third major project, the construction
of a Linglong Tire Factory in Zrenjanin.
Given that Serbia is a rather small market, not only in view of the
number of people, but also of the level of wealthiness.
In the financial sense, our GDP amounts to EUR 62 billion,
so the construction of one or two huge greenfield investments will
be rather evident in our ecomonic data, so we are witnessing the
blooming of Chinese investments for the last couple of years.
We have really reached that level last year, in 2022, of Chinese
investments being equal with the European Union's investments.
This is only when we consider flow, but when we are talking about stock,
meaning how many accumulated Chinese investments are there in
Serbia, we see that EU states are much more present here.
Employment rate in foreign companies is also a very good indicator.
Those are records of the last quarter of 2021,
led by our Institute of Statistics. They register employees in
the foreign-owned companies, where the ultimate company owner
is registered abroad, not only companies but entrepreneurs
that submit financial reports, and back then, there were
330.000 individuals employed in the foreign-owned companies.
Out of that number, some 20.000 are employed in Chinese companies.
Around 5.000 employees in the Steel factory in Smederevo,
around 5.000 employees in Bor, half of the people employed in
Chinese companies belongs to these two companies.
There is a series of smaller companies in Serbia,
several car parts manufacturers, there are some Chinese companies
that actually are not Chinese, such as Mei Ta from Baric,
a company from Taiwan, but as Serbia doesn't recognize Taiwan
as an independent state, we register it as part of China statistically.
There are also Huawei or some other companies, from that sector,
and let's not forget of small Chinese shops throughout Serbia.
The story of Bor is rather interesting when we look
from the perspective of foreign trade exchange,
but prior to posing a question pertaining to what happened
in October, i.e. signing a free trade agreement,
we can't help but look back, apart from economic benefits
achieved through modernization of infrastructure and raising the
level of FDIs, opening up some new factories and new job
opportunities, along with certain challanges that came along with
FDIs, the most common criticism includes the impact on environment,
this is something local activists mentioned as major problem...
The issue of the use of manpower also remains open, as large number
of employees comes from China, so there's little room for jobs
being given to local workers. Is there something else that
you perceive as challenging arising from growing level of FDIs
from China, what seems important, although it falls into the scope of
foreign trade exchange, this is the fact where the product made
here ends up, when we talk about Mine in Bor.
I think that this issue should be regarded as important component
of our conversation, maybe we could demystify some aspects of it...
Anyway, it is important to have an insight into it.
I would like to finish the previous topic, as I regard it important
when it comes to the current issue. Namely, when we regard the level
of investments of other countries that came to do business in Serbia,
there is a kind of unused space for China.
We made certain EVI gravity model (Economic Vulnerability Index)
for Serbia, and I used data from 2010 till today.
I used variables such as GDP level of the host countries,
the level of development measured by the per capita income,
geographical distance from Serbia, and this model explains two-thirds
of the discrepancy in investments among diverse states in Serbia.
As a country is wealthier and closer to Serbia geographically,
it is more likely that it will invest on our market.
There is lots of unused potential when it comes to China, as well.
In other words, they invested significantly less than such a
model envisages. That is to say, there is room for Chinese investments
to continue entering here, both private and state-owned.
We should bear this in mind.
I think that all those problems that are being recognized in public are
evident thanks to the experts who tried their best to make them work.
However, the problems stem from our local problems and issues.
In other words, Chinese investors here, both private and state,
mainly state-owned, are recognized as some kind of significant political
factor, mainly due to the fact that Serbia wants to establish good
relations with China. Thus, it will not interfere much in their business,
it will avoid getting on their nerves with respecting laws
and regulations... -God forbid!
This is generally a problem and a flaw when we talk about major
FDIs here in Serbia. So, Chinese companies hadn't prescribed dipers
to the workers, as they denied them right to a toilet break,
but it happened in the companies that were given state subsidies
from South Korea to open their factories here in Serbia.
So, I wouldn't say that only Chinese companies are having preferential
treatment when it comes to respecting some rules within labor legislation,
up to the regular framework linked to pollution, ecological issues,
the air quality is here an issue, when it comes to Smederevo and Bor.
Other companies are treated the same way, perhaps in a slightly
smaller domain than the Chinese. Our regulations are the same
when it comes to Chinese companies and any other company in the world.
This is an aspect that makes foreign investors thrilled to place
their investment here, as they are allowed to do some things here
that they wouldn't be able to do in their own countries.
As for the question pertaining solely to Bor, when we consider
foreign trade between Serbia and China, we have something
that is below the level of statistical error,
and then Zijin based in Bor starts exporting ore from Bor to China,
and then we see its bloom.
It started to grow slowly, but gradually in 2018...
Not only that they started to export ore from Bor to China, but they also
increase the amount of exports along with the increase of the
production, then the price of copper on the international market rises,
so the worth of their export is also significantly higher.
What seems most interesting is the fact that they export
raw ore, the concentrate, rather than materials such as
wire, copper sheets, etc. This means that added value
that could be performed in Serbia is not of the volume it should be.
To put it briefly, it would be much better for our economy if they
could understand that they would have economic benefit
if those new functions in product creation were performed here...
The question is why isn't that so. Maybe they have lots of empty
capacities in China, which is highly possible, as China is
known for its poor investment decisions.
In other words, when they start investing in certain sector,
they pumped it up that they can produce it for the whole
world, still having empty capacities, those are mainly
state-owned investments, not driven by economic profit.
So, it happens that in one decade China produces small amounts of
cement and steel, but still is the biggest manufacturer of
the same cement and steel... Then, EU is forced, due to
dumping, to introduce tariffs on those products from China,
as well as United States of America, and so on...
Maybe that's their main reason why they export ore to China,
as they have empty processing capacities there,
and maybe we have certain limiting factors in Serbia
due to which they hesitate to conduct such production
processes here in Serbia, as it would be too expensive.
This is good introduction to a final part of our conversation.
This is the issue of free trade agreement,
signed in October, during the Third Summit of Belt and Road in Beijing.
Lots of things were discussed after the signing of this agreement,
starting with that People's Republic of China will be the only one
to benefit from this agreement, i.e. Chinese companies that
do business in Serbia, to the fact that Serbia doesn't have the capacity
to actually meet the needs of the Chinese market in
any field, let alone in those that we've already established
certain level of cooperation with. What struck me rather interesting
as an argument was the fact that Serbia can actually benefit not
from cooperating with China but from attracting investments
from the third countries which would regard positioning in Serbia
as an opportunity to export their products to the Chinese market,
if they open their own production capacities here.
Those are rather broadly defined statements, so I would like to hear
your impressions on that signing of the free trade agreement
between Serbia and China, and whether you think that
Serbia could benefit from it, or would it be challenging
to make something positive from signing this agreement.
I would like to welcome the signing of this agreement.
Free trade is always good for the parties taking part in it...
When it comes from the President of Libertarian club Libek...
It's so surprising that I advocate free trade being a liberal...
Those are standard excuses agains free trade that you've mentioned...
Maybe we couldn't do the export for China, or they will now start
exporting their cheap products to Serbia, and so on...
It could be, but we are not mere manufacturers.
Rather small number of people in Serbia are the manufacturers,
larger number of them are consumers.
No FDI had done more good to an average Serbian citizen
in improving our life quality, than a small local Chinese store.
Namely, their arrival to Serbia allowed us to buy loads of goods
for a rather cheap price, thus increasing our own production.
So, yes, it might happen that some of the companies that
operate here in Serbia lose their part of the market,
as they would face with tougher competition on the part of the
Chinese companies that export their goods here.
However, Serbian market is rather small, so it is not rational
to find a company that employs 200 to 300 employees, that
produces goods only for some local market.
For example, just for Novi Sad, or just for Serbia.
If they want to grow and develop further, large companies have to
produce goods for the foreign market, as our market is too narrow to be able
to organize any efficient production, quantity wise, when we consider
industrial products, I mean standard ones, such as
plastic toys for children, and so on, to produce it only for local market,
which is relatively poor market such as Serbia's.
So, I don't think that this would contribute to reducing production
level in Serbia significantly, as we would buy Chinese
products, as was the case so far. China has an opportunity to produce
goods in large amounts, thus minimizing costs per unit of product.
So, they have already been competitive on our market
due to low prices, having in mind that customs amount to 10-15%
on various products, so this is not something that could be considered
as game changer in positioning their goods on the Serbian market.
As for the hope arising from the fact that signing free trade agreement
would contribute to attracting foreign investors to Serbia,
so that they could start exporting goods to the Chinese market,
this is an argument that makes sense, this is something that
Vucic used to mention in his public addresses,
in the foreing media, not only locally...
I am not so optimistic with that regard.
On one hand, there's a problem of high transportation costs
between Serbia and China, as we are no longer in the
globalisation era as prior to pandemic, so transport
expenses have grown, they are reduced to the costs from 2019,
we are not in the peak that we've reached in 2020,
when the whole international global trade was congested,
but those prices are not reduced, so I think that it is still cheaper
for them, if they want to place products in Chinese market,
to target geographically closer locations, such as Cambodia
and Vietnam which had lately become rather popular places,
as manpower in China is also being in decline since 2021.
It is due to demographic changes, as in Serbia, elderly generations prevail,
the level of labor is decreasing and price of labor in China rises,
and if you do not have growth in the productivity of the economy,
that means it's getting expensive to produce anything in China,
so that labor intensive productions started to move to Vietnam,
which is close geographically to China, with a relatively good
level of infrastructure and political stability, although we are talking
about one-party system there. They have relatively good human
capital, with a manpower that wants to work for lower wages
compared to the ones in China. Having all this in mind,
I don't think that this would lead to any major export activities
from Serbia to China, for diverse reasons, but the consumers here
would benefit as we would be able to purchase some of the products
made in China at a lower price in the stores in Serbia.
We should start with its implementation in 2024,
and we can probably see initial results at the end of 2025.
That's right, because the reduction of those tariffs on the Chinese side
is kind of gradual, as it was the case with Stabilization
and Association Agreement, customs weren't abolished
over night, but they were gradually reduced over the years,
to reach the agreed level in five year time, as with China now...
So, it will be done gradually, so we'll see the effects of it.
What's interesting for us is the fact that China was the one
who initiated the negotiations, as their big company was major
investor and exporter from Serbia to China, so they would find it
agreeable to straighten out and accelerate certain procedures,
than it was important to our exporters.
What needs to take place is for Serbia to join European Union,
so that this agreement would then be obsolete, as Serbia will have to
align with the EU policies, which for the time being,
has no agreement with China.
That's right. When we gain membership in some regional block,
we have to act in accordance with common economic policy.
Of course, Serbia's EU accession is not in sight right now,
if it happens at all, and I find it interesting that noone considers
strategic aspect, given that we had taken up obligation to make regional
market, with the neighbouring countries, we'll see which
countries will that be, but we are talking about Berlin Process,
or Open Balkan Initiative, which implies establishing
joint regional market, and common trade policy in the same time.
In other words, this is a kind of prerequisite for Serbia to become
EU member, Urusla von der Layen repeated that claim recently,
in her address when she presented investment agenda for Western Balkan.
But nobody mentions trade policy. So, we sign foreign trade agreement
with China, but if everything goes as expected, we should place that
agreemet ad acta, as we would create certain regional trade policy
in the Western Balkans prior to this agreement taking an effect.
I don't see any strategic logic here, unless we show huge
skepticism that something like that would be possible to achieve.
It would certainly be interesting to see whether Serbia reached
decision that Albania, for instance, sign foreign trade agreement with
China, but anyway, those issues can be reviewed with deep insight,
and I believe that in this short period of time we managed to
make an overview and made people familiar with those topics.
I would like to call people who are interested in these studies
to visit portal Talas, where they can read some great articles,
including those related to the cooperation of Serbia and China.
We will certainly in the following episodes cover the question of
trade cooperation as it is inseparable from other aspects of cooperation
between Serbia and China, but this is brilliant introduction
for understanding something we are going to discuss in
the forthcoming period.
I would like to take this opportunity to thank you once again for being
my guest and I am certain that we will cover future development
in the field of economic cooperation between Serbia and China in future.
Thank you for inviting me, it was a pleasure to be your guest.
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