Serbia and China to Sign Free Trade Agreement by End 2022？

Serbian President Aleksandar Vučić has stated that Serbia and China are talking through a free trade agreement in 2022; the Chinese side are yet to confirm.

What we know of the Serbia-China FTA discussion

On February 5, 2022, Chinese President Xi Jinping met with Serbian President Aleksandar Vučić who attended the opening ceremony of the Beijing 2022 Winter Olympic Games. After the meeting, the Serbian President stated that he spoke with Xi on a number of important issues, including a free trade agreement (FTA) between the two countries. According to Vučić, Serbia and China would sign an FTA by the end of 2022 at the latest, stressing that “it will significantly increase trade between Serbia and China and additionally attract foreign investors to Serbia”, as indicated in a video posted on the YouTube channel of the ruling Serbian Progressive Party on the same day.

Upon the finalization of the trade deal with Beijing, the Serbian president believed that this would benefit not only Serbian goods and service exporters but would also make Serbia more attractive to investors from Western countries.

“For us, the issue of the Free Trade Agreement is very important and when we talk about it, it is not only a question of our agricultural producers, our winemakers and winegrowers, brandy producers and others so they can sell their large quantities in that demanding but largest market in the world which is China’s, it is also a question of bringing in new investments,” Vučić states.

According to the official website of the Ministry of Commerce of China (MOFCOM), however, China has yet to launch the formal FTA negotiation with Serbia. A China-Serbia FTA has also not yet been included in the list of “FTAs under Consideration”. Analysts say it remains to be seen what the form of the agreement will be and what it will pertain to.

Overview of China-Serbia relations

China established diplomatic relations with Yugoslavia (the predecessor to Serbia) in 1955. After the disintegration of Yugoslavia, the Chinese Embassy in former Yugoslavia was renamed the Chinese Embassy in Serbia and Montenegro in 2003 and the Chinese Embassy in the Republic of Serbia in 2006. In 2009, China and Serbia announced the establishment of a strategic partnership.

In 2013, China and Serbia signed the Joint Statement on Deepening Strategic Partnership between the People’s Republic of China and the Republic of Serbia. In 2016, the two countries signed the Joint Statement on the Establishment of Comprehensive Strategic Partnership between the People’s Republic of China and the Republic of Serbia.

In the meeting held on February 5, 2022, Xi stated that China and Serbia have an “iron-clad friendship” and that the high-level mutual political trust between China and Serbia has endured the test of time. The two countries have supported each other since the outbreak of the COVID-19 pandemic.

In the economic and trade area, China and Serbia have established a joint economic and trade committee mechanism between the two countries, as well as a bilateral Investment Protection Agreement, an Avoidance of Double Taxation Agreement, an Economic and Technical Cooperation Agreement in the Field of Infrastructure, a Cultural Cooperation Agreement, and a Scientific and Technological Cooperation Agreement.

China is one of Serbia’s largest trading partners and its largest economic partner in Asia. Bilateral trade has accelerated rapidly in recent years despite economic slowdowns caused by the COVID-19 pandemic. According to statistics from China’s MOFCOM, bilateral trade between Serbia and China reached US$3.2 billion in 2021, at a growth rate 54.3 percent from the previous year. Of this, China’s exports to Serbia reached US$2.24 billion, up 37.9 percent from the previous year, while imports from Serbia reached US$995 million, up 99.7 percent from 2020.

The latest breakdown available of bilateral trade from 2019 shows the vast majority of exports from China to Serbia constituted machinery, which accounted for over half of all exports. Among these, China exported US$138 million worth of broadcasting equipment to Serbia, US$48.7 million in video displays, and US$43.9 million in computers to Serbia, according to the Observatory of Economic Complexity (OEC). Imports, meanwhile, were dominated by copper and copper products, which accounted for over 65 percent of all imports. This included US$263 million in refined copper, US$17.7 million in signaling equipment, and US$17.5 million in lead ore, according to the OEC.

Chinese infrastructure investment in Serbia and the BRI

Serbia is a strategic Belt and Road Initiative (BRI) participant country and has signed the Memorandum of Understanding on Jointly Advancing the Belt and Road Initiative (2019) and the Plan for Bilateral Cooperation under the Framework of the Belt and Road Initiative (2018).

The country forms part of China’s “16+1” initiative (formerly “17+1”), also known as the Cooperation between China and Central and Eastern European Countries (China-CECC Cooperation). Serbia was the largest recipient of Chinese outbound direct investment (ODI) among this bloc in 2019, having absorbed US$270 million in investment that year, amounting to a total of US$1.66 billion.

Most of this investment has been spent on infrastructure projects. The start of this collaboration began in 2009, when China and Serbia signed the Economic and Technical Cooperation Agreement in the Field of Infrastructure. Since then, the two countries have worked on a series of projects in transport and energy, including bridges, power stations, highways, and railways.

Major Serbian infrastructure projects that China has invested in include:

• Construction of the “Pupin Bridge” in Belgrade (financed mostly by the Export–Import Bank of China (Exim Bank of China))
• Modernization of the Kostolac thermal energy power plant (financed by Exim Bank of China and implemented by CMEC)
• Construction of major sections of Corridor XI motorway (partially financed by Exim Bank of China and constructed by CRBC)
• Modernization and construction of Belgrade-Budapest high speed railway (partially financed by Exim Bank of China reconstructed by CCCC and CRI)

Potential benefits of the China-Serbia FTA

Currently, China and Serbia grant each other the most favorable nation (MFN) treatment in trade. For some products, the tariff ranges from 10 to 35 percent, which is still high compared to the rates under FTA arrangements. If China and Serbia concluded an FTA by the end of 2022, the scope of trade exchange between the two countries will certainly increase. Relevant exporters of the two countries will enjoy the associated benefits.

In addition, such an agreement will enhance China-Serbia ties. From Serbia’s perspective, it believes the agreement will make it a more attractive investment destination among European countries.

China’s FTA framework

China has developed a strategic position when it comes to entering into free trade agreements. A cornerstone of the country’s international development strategy, it has allowed dutiable and tax reduction on certain products and services, helping the nation become the world’s manufacturing hub in recent decades.

In total, China has signed 18 FTAs (excluding upgrades) covering 25 countries and regions. China has also launched 11 FTA negotiations with 16 countries, the most recent of which started on February 8, 2022, with Ecuador. Moreover, China has initiated feasibility studies for reaching new FTAs with seven countries and regions, including Colombia, Fiji, Nepal, Papua New Guinea, Canada, Bangladesh, and Mongolia, and upgrading the FTA with Switzerland.

For the moment, there are only two European countries that have effective FTAs with China—Iceland and Switzerland. If the China-Serbia FTA will be concluded as Vučić intends, Serbia will be the third. However, as Serbia is also trying to join the European Union, it will have the obligation to withdraw from all bilateral free trade agreements on the day of joining the EU.

China and Russia’s Access EU Gateway

Serbia signed a Free Trade Agreement with the Eurasian Economic Union (EAEU) last year and is looking at US$4 billion in bilateral trade with Russia. The EAEU includes Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan – the latter two are neighboring countries with China. Serbia’s western neighbor Bosnia & Herzegovina is also negotiating an EAEU FTA.

Russia has also been financing rail links between Serbia and Montenegro. These trade and development links place the Balkan regions of Europe very much in the overall sphere of influence of China and Russia, with implications for trade also with regional EU neighbors Bulgaria, Croatia, Hungary, and Romania.

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