China-Poland Bilateral Relations: Trade and Investment

Poland and China have maintained a constructive relationship since 1949, with significant economic and diplomatic engagements. Recent high-level meetings, including Duda’s 2024 visit to Beijing, have focused on enhancing bilateral cooperation, particularly in trade, agriculture, and infrastructure under the Belt and Road Initiative, amidst global geopolitical challenges.

China and Poland have cultivated a constructive relationship since establishing formal diplomatic ties, marked by significant economic and diplomatic engagement. Poland’s participation in China’s 16+1 format, the Asian Infrastructure Investment Bank (AIIB), and the Belt and Road Initiative (BRI) underscores its commitment to enhancing bilateral ties, aiming to boost economic growth and secure alternative funding outside the EU.

However, in recent years, this relationship has undergone notable changes. The anticipated economic benefits did not fully materialize, prompting a reassessment in Warsaw, especially amidst increasing geopolitical tensions, including the Russia-Ukraine conflict. Despite these challenges, high-level political interactions between both nations have remained consistent, indicating ongoing, albeit cautious, dialogue.

Poland’s approach towards China has become more strategic, reflecting a need to balance economic interests with national security and policy considerations. While there isn’t a formalized China strategy, there’s a growing consensus among Polish political parties to adopt a more risk-aware policy towards China. Poland aims to create a secure economic environment while selectively engaging with China in areas that offer mutual benefits.

This article provides insights into bilateral trade and investment between China and Poland, alongside an overview of the tax and investment treaties that underpin their economic relationship.

China-Poland diplomatic relations

Diplomatic ties between the Republic of Poland and the People’s Republic of China were established in 1949. Since then, the relationship between Poland and China has evolved into a multifaceted and evolving partnership. In June 2016, under the leadership of Chinese President Xi Jinping and Polish President Andrzej Duda, China and Poland elevated their relationship to a strategic partnership.

Since the beginning of the Trump administration’s trade disputes with China in 2017, however, Poland, as Europe’s largest participant in China’s BRI, has experienced significant shifts in its relations with Beijing. This period coincided with heightened Sino-US rivalry, exacerbated by the global pandemic, which has influenced Polish perceptions of China.

A pivotal event impacting Sino-Polish relations has been Russia’s invasion of Ukraine. China’s perceived neutrality and alignment with Russia in this conflict have strained ties with Poland, as its seen by many in Poland as favoring Russia.

Despite these political tensions, economic cooperation between Poland and China has continued to grow, with Chinese investments making significant inroads into Poland.

Official dialogues between the two nations increasingly center around addressing concerns related to Russia’s actions in Ukraine. Senior Polish officials, including Deputy Minister Wojciech Gerwel, have emphasized the importance of upholding international law and achieving peace in Ukraine, urging China to contribute constructively to resolving the conflict.

The 2023 Polish-Chinese Strategic Dialogue exemplifies efforts to bolster economic ties and manage geopolitical challenges. Discussions have focused on expanding economic cooperation, particularly in sectors such as agriculture and logistics, alongside broader considerations of regional stability and NATO’s role in Eastern Europe.

Recent developments: Duda’s visit to Beijing in 2024

On June 24, 2024, Duda and Xi met again in Beijing to discuss a range of issues, including global peace and the expansion of bilateral trade.

During their talks, Xi called for enhanced bilateral cooperation under the Belt and Road Initiative, particularly through the China-Europe Railway Express (CRE), emphasizing its strategic importance. He also advocated for increased collaboration in trade, agriculture, the digital economy, green industry, and clean energy. Xi pledged to expand the Chinese market for Polish agricultural and food products and announced a 15-day visa-free entry for Polish nationals to China.

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Duda, on the other hand, expressed Poland’s interest in fostering EU-China relations and strengthening cooperation between Central and Eastern European countries and China, especially during Poland’s upcoming tenure as the rotating chair of the EU in the first half of 2025. Both leaders affirmed the positive state of diplomatic, political, and interpersonal relations between their nations, which are based on mutual respect. Duda invited Xi to visit Poland in the first half of the next year. The two presidents also witnessed the signing of several bilateral agreements related to trade and agriculture.

Duda’s visit to China, his first in over two years, included participation in the World Economic Forum meeting in Dalian and a stop in Shanghai. His visit occurred amid Chinese efforts to strengthen ties with European countries, highlighted by Xi’s recent tour of France, Serbia, and Hungary. Duda’s discussions with Premier Li Qiang focused on economic issues and the situation in Ukraine. They also reached a consensus on various global challenges, including the Ukraine crisis and the Israeli-Gaza conflict, reaffirming their commitment to contributing to world peace, stability, and growth through enhanced bilateral cooperation and multilateral engagement.

From the point of view of Polish business, it was an important visit, especially in the context of building a good climate for the development of bilateral relations. The signed agreements increasing the possibilities of Polish exports to China, especially in the field of exports of agricultural products or cosmetics, although important, will not in any significant way change the negative balance in trade with China. Poland is one of the leading European Union countries with the largest trade deficit with China.

It is worth emphasizing, however, that Polish companies are an important component of European value chains, hence a large part of Polish exports indirectly reach the Chinese market through multi-European companies. Therefore, in relations with China, the European context and all comments and reservations made by the EU, in particular maintaining the level playing field, are important for Polish business. – Zbigniew Niesiobędzki, President of the Polish Chinese Business Council.

Bilateral trade and investment

Over the past five years, trade between China and Poland has seen an average annual growth rate of over 10 percent. In 2023, their bilateral trade reached US$42 billion.

Poland was one of the first European countries to sign an intergovernmental memorandum of understanding with Beijing to develop the BRI. Approximately 90 percent of trains on the China Europe Railway Express (CRE) pass through or have Poland as their destination, underscoring Poland’s strategic importance in the initiative.

China is Poland’s second-largest trading partner, following Germany, and Poland is China’s top trading partner in Central and Eastern Europe. According to Chinese customs data, in the first five months of the year, China’s imports from Poland decreased by 0.7 percent in US dollar terms compared to the same period in 2023, while China’s exports to Poland increased by 2 percent. As a result, Poland’s trade deficit with China widened by 0.7 percent year-over-year, reaching US$13.6 billion from January to May 2024.

In 2023, Poland’s primary exports to China, based on value-added categories, included electrical and electronic equipment (US$1.21 billion), cooper (US$843 million), machinery, nuclear reactors and boilers (US$628 million), optical, photo, vehicles (US$486 million), and wood and articles of wood, wood charcoal (US$229 million), according to data from ICT Trade Map.

Meanwhile, in the same year, the main goods exported from China to Poland were electrical and electronic equipment (US$11.51 billion), machinery, nuclear reactors and boilers (US$6.52 billion), furniture, lighting signs, prefabricated buildings (US$1.72 billion), vehicles (US$1.68 billion), and plastics (US$1.38 billion).

Chinese investment in Poland

Chinese investment in Poland has seen a significant rise over the past decade. By 2020, Chinese investments had surged to more than US$338 million, almost eight times the level in 2013. According to the Polish government, the cumulative Chinese investments in Poland amounted to US$2.2 billion by the end of 2020. Although the effects of COVID-19 and increasing international tensions during 2021 and 2022 caused a decline from peak investment levels, Chinese interest in Poland remains strong.

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Major Chinese manufacturing companies, including Guangxi Liugong, Hubei Sanhuan, TCL, Nuctech, TPV, Dalian Darent, CIMC Vehicles, Hongbo Clean Energy, BWI, Bioton Biopharmaceuticals, SDIC Zhonglu, Cathay Pacific Huarong, and Xinzhoubang, have made substantial investments in Poland. Additionally, leading Chinese information and communication technology firms, such as Huawei and ZTE, have also established a significant presence. Financial institutions like China Construction Bank, China-Central and Eastern Europe Investment Cooperation Fund, and Haitong Bank have set up operations in Poland in recent years.

As a member of the EU, Poland offers Chinese investors a strategic gateway for further expansion into the EU market. With its sizable population and strong economic growth rates, Poland has long served as an attractive foothold for foreign investors aiming to penetrate the Central and Eastern European region. It presents a cost-effective and dynamic entry point compared to many Western EU member states.

The Polish government has shown a general willingness to welcome foreign direct investment in various forms, including greenfield investments and takeovers of existing businesses. While FDI in Poland is typically unrestricted, there are limitations in sectors deemed essential for national security, such as electricity production, oil and gas distribution and storage, and the production of explosives, weapons, and ammunition. In 2020, Poland extended its foreign investment control laws to enhance oversight over takeovers of strategic Polish firms by non-OECD investors. However, this has not been used to disadvantage Chinese investors. The ex-ante review process has been initiated several times since its implementation, but Polish authorities have consistently approved the proposed takeovers, including the acquisition of the automotive logistics service company Adamed by Changjiu Logistics in 2021.

Notably, there are no restrictions on foreign investment in key sectors like e-commerce and gaming. Poland has become a hub for computer game developers, with prominent companies such as CD Projekt RED, Techland, and Hugge Games leading the industry. The country is also home to numerous innovative startups in healthcare, e-commerce, fintech, and IT, further solidifying its attractiveness to foreign investors.

Looking ahead, Poland’s proactive investment policies, including tax incentives and subsidies under the “Programme for supporting investments of major importance to the Polish economy,” will be pivotal to further attract Chinese investors seeking strategic opportunities in sectors like electric vehicles, renewable energy, and logistics.

Polish investment in China

Poland’s investment footprint in China spans a diverse array of industries, showcasing its expertise in sectors such as furniture, green technologies, biotechnology, pharmaceuticals, and automotive components.

Recent data from the Polish National Bank highlights the growing trend of Polish investments in China, totaling approximately US$249.3 million by the end of 2020, with notable investments in sectors such as mining, manufacturing, and renewable energy. The largest investment projects included KGHM, Selena, Davis International, Aero At, Aiut, Sanok Rubber Company, Maflow Poland, Rafako, Famur, and Fasing.

As of 2022, Poland has established a cumulative total of 548 enterprises in mainland China, with a total investment amounting to US$260 million.

Trade and investment treaties

China-Poland bilateral investment agreement

In 1988, China and Poland signed a Bilateral Investment Treaty (BIT), which came into force in 1989. The China-Poland BIT features a broad asset-based definition of investment under Article 1, though it notably excludes “business concessions,” unlike other Chinese BITs. The definition of an investor includes both “natural” and “juridical persons,” but is somewhat narrow, restricting juridical investors to those “having its seat in the territory of this Contracting Party.” While the BIT does not explicitly address its applicability to investors and investments from Special Administrative Regions (SARs), it is likely to be interpreted as applicable based on broader interpretations of similar provisions.

The Fair and Equitable Treatment (FET) provision ensures “equitable treatment,” along with Full Protection and Security (FPS) and a Most-Favoured-Nation (MFN) clause, including a customs union exception. However, the FET standard’s definition needs clarification due to inconsistent arbitral interpretations. The MFN provision is broadly drafted but applies mainly to substantive issues, not procedural matters.

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Article 4 of the BIT allows for nationalization or expropriation for public purposes or security reasons, provided it is conducted under due process of national law and is non-discriminatory. Compensation must equal the value of the expropriated assets at the time of expropriation. The legality of expropriation can be contested and reviewed by a competent domestic court, an uncommon feature. Compensation for losses due to war or similar events is not guaranteed but should be treated no less favorably than for third-state investors.

The BIT briefly addresses investment promotion, requiring the admission of investments in accordance with national laws and regulations. This acknowledges the significant role of national law in promoting investment, including incentives like tax reductions and work permits.

The dispute settlement mechanism in the China-Poland BIT is more generous than other first-generation Chinese BITs but remains limited compared to global standards. Article 9 allows for state-to-state disputes over the treaty’s interpretation or application to be submitted to ad hoc arbitration after six months of diplomatic efforts. Article 10 permits investors to arbitrate disputes over expropriation compensation if unresolved by domestic authorities within one year.

China-Poland double taxation avoidance agreement

In addition to the BIT, China and Poland have also signed a double taxation agreement (DTA), which prevents companies and individuals from being taxed on the same income in both countries. The China-Poland DTA, originally signed on June 7, 1988, was modified by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) on June 7, 2017.

The DTA pertains to income taxes imposed by both China and Poland. The Polish one include:

• Income Tax;
• Tax on Wages and Salaries;
• Equalization Tax;
• Tax on Immovable Property; and
• Agricultural Tax.

In China, the DTA applies to:

• Individual income tax(IIT);
• Income Tax for Joint Ventures with Chinese and Foreign Investment;
• Income Tax for Foreign Enterprises; and
• Local Income Tax.

The DTA also outlines the definition of “permanent establishment” with respect to tax liability in one of the contracting countries. According to the DTA, the term permanent establishment refers to a fixed place of business where an enterprise conducts its operations either wholly or partially. Additionally, the term encompasses activities like construction, assembly, installation projects, or supervisory activities lasting more than six months. It also covers the provision of services, including consultancy services, by an enterprise of one Contracting State through its employees or engaged personnel in the other Contracting State, provided these activities continue for more than six months within any 12-month period, either for the same project or related projects.

Withholding tax rates are outlined as follows:

• Dividends: Rates are set at 10 percent.
• Interest: Typically set at 10 percent.
• Royalties: Rates vary from 7 percent to 10 percent, contingent on the type of royalties paid.

The DTA also explains circumstances under which capital gains derived by a resident of one contracting state may be taxed by the other. Notably, gains arising from the sale of ships or aircraft used in international operations, and any movable property associated with the operation of such ships or aircraft (excluding real estate), are taxable exclusively in the Contracting State where the enterprise’s place of effective management is located.

In the context of double taxation relief, China follows the credit method, which means that if income is taxed in both China and another country, the taxpayer can typically claim credit in China for the taxes paid abroad, thus reducing the overall tax burden.

On the other hand, Poland allows for the elimination of double taxation for its residents deriving income that is taxable in China under the provisions of the bilateral tax agreement, except where China taxes the income solely because it is also derived by a Chinese resident. In such cases, Poland grants a deduction from the resident’s Polish tax liability equal to the income tax paid in China, up to the amount attributable to the income taxed in China.

Multilateral treaties

China and Poland, both members of the WTO, are signatories to various multilateral treaties concerning trade and investment. These include:

• The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which mandates WTO members to extend intellectual property rights to owners in any member state. It incorporates a most-favored-nation (MFN) clause, ensuring equal treatment for IP rights protection across all member countries. Additionally, it provides mechanisms for dispute resolution and compensation.
• The Agreement on Trade-Related Investment Measures (TRIMs), which prohibits the implementation of investment measures that restrict trade between members. This includes measures like local content requirements, which mandate the use of locally-produced goods or services by companies operating in a market.
• The General Agreement on Trade in Services (GATS), which grants most-favored-nation status to service providers of any WTO member, excluding governmental services such as social security, public health, education, and certain services related to air transport.

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