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“Expansion of Chinese Interests in Portugal and the North Atlantic”

Henry Carson and Matthew Howard, Illicit Finance


December 21, 2020


The Azores Archipelago[1]


Introduction


The Azores archipelago is an autonomous region of Portugal located in the mid-Atlantic. The islands are of strategic importance as they are situated between Europe and the Americas, thus possessing economic, military, and political advantages. The United States has long maintained troops at the Lajes air field on the island of Terceira, which helped secure American victories in both WWII and the Cold War. Over the past decade, China has expressed growing interest in establishing a presence in the Azores after the United States Defense Department slashed $35 million in funding towards the U.S. military presence there under the Obama Administration.[2] Portugal is welcoming non-military Chinese engagement against the wishes of the United States and NATO partners alike. A Chinese foothold allows Beijing to leverage the islands for immediate economic gain by utilizing logistics centers and fostering lucrative business ventures. Increased Chinese access also enables the future exploitation of the region for military and political objectives. China is likely to continue its expansion into the Azores under current circumstances. Despite China’s pursuit, negative impacts can be limited by increasing joint American-Portuguese commercial projects, reestablishing a United States military presence on Terceira, and strengthening diplomatic relations between Azores and NATO partners.




Position of the Azores in the North Atlantic.[3]


Economic Implications


China is eager to diversify its export markets and find new sources of energy and natural resources to fuel its growing economy. These objectives are achieved through its Belt and Road Initiative designed in 2013 to expand Chinese influence and economic standing via worldwide investments and partnerships. Portugal is one of the first countries in Western Europe to cooperate with Beijing’s strategic vision. Chinese companies have invested heavily in Portugal in recent years. From 2010-2015, China funneled more than 5.5 billion euros making Portugal the fifth-highest invested nation in the European Union (EU).[4][5] Portugal received four times the amount of funding as Spain and ten times more than Greece over this timespan.[6]


The Chinese state-owned Three Gorges Corporation paid 2.7 billion euros in 2011 to obtain 21 percent of Energias de Portugal (EDP), the European country's primary utility provider.[7] China currently possesses 21.47 percent of EDP as of August 2020.[8] Additional investments include the expansion of the Chinese telecommunications and electronics company, Huawei into Portuguese markets. In 2018, Huawei sold the most phones to Portugal, ending a seven-year streak held by the Samsung Group and partnered with Altice Portugal (formerly known as Portugal Telecom or PT) to establish a co-operations center which laid the foundation for future partnerships in the development of 5G and fiber-optic technologies.[9] These wide-spread entanglements indicate that China is prepared to play a significant role in the Portuguese economy for years to come. These actions may appear benign, but might easily be utilized to gain economic leverage through debt-trap diplomacy. The more Portugal relies on Chinese investments, the more freedom Beijing will have to assert its unchallenged authority throughout the Atlantic and beyond.


The Azores is an ideal location positioned 2,200 miles east of New York City and approximately 900 miles west of Lisbon, thus connecting Europe to the Americas.[10] A presence in the Azores would allow China to expand its global footprint and reduce logistical challenges associated with opening new markets in Latin America, Africa, and the Middle East. The Lajes air field on the island of Terceira is of particular importance when discussing Chinese economic expansion. The base is currently occupied by approximately 178 American troops compared to 1,100 service members a decade prior.[11] A recent scale back in the U.S. military presence stemming from the aforementioned budget cuts and consolidation of NATO troops on the European mainland have created a strategic vacuum that China is eager to fill. While Portugal declares Chinese military operations are off-limits, it encourages foreign investments in commercial developments and scientific research by utilizing existing infrastructure. An estimated 300 of 400 buildings located at Lajes were returned to the Portuguese government during American force reductions.[12] These buildings may be used for future Chinese commercial endeavors, including storage and product processing. Furthermore, the runway at Lajes is one of the longest in Europe and can provide support for many aircraft. China undoubtedly recognizes the economic potential and will continue to champion the commercial use of existing infrastructure.


Likewise, the port town of Praia da Victoria is also a strategic location on the island of Terceira. The ocean port can receive large vessels and is an optimal site due to its central place amongst the seven Azores islands.[13] China is likely to seek further permission to house its cargo ships while moving goods throughout the Atlantic. Gaining access to Praia da Victoria is yet another avenue for China to expand its economic and political influence throughout the world. A useful shipping port enables longer voyages and increases the ability to transport larger payloads while limiting the impacts of issues at sea.


Locations of Lajes Airfield and the port at Praia da Vitoria on the island of Terciera.[14],[15]



Several Chinese leaders, including President Xi Jinping and Premier Li Keqiang, have shown overt interest in increasing economic involvement by visiting the Azores while returning from overseas travels.[16] In addition to visits, China has begun to gain influence through the acquisition of real-estate. For instance, a Chinese investment group purchased the Monte Palace Hotel on Sao Miguel Island with aspirations of turning it into a five-star hotel by 2021.[17] Portugal’s “golden visa” program also grants residency to those purchasing property valued at more than 500,000 euros.[18] This program provides Chinese citizens with a legal framework to exert a greater presence in the region. China is also seeking scientific partnerships with Portugal to study paleontology, volcanology, and climate change, enhancing China’s access to the Azores.[19] These investments will help generate positive sentiments towards Chinese involvement and drive the local economy, which experienced an estimated 30 percent reduction when the U.S. cut activities on the islands.[20] The Azores is an autonomous region of Portugal with authority to set taxes, adopt regional economic/social development plans, and ability to participate in negotiations for international treaties/agreements concerning the region.[21] China will likely take advantage of Azores’s autonomy and rapport with indigenous populations to gain economic concessions and spread its global influence.



Potential Military Considerations



The same characteristics that make the Azores strategically significant commercially also apply to the military possibilities of having a foothold on the archipelago. Though the Chinese government has stated that its presence on the Azores is for research and commercial logistics, several key points provoke warranted anxiety surrounding the military strategic value of the location: the high runway capacity at Lajes field, proximity to and display of investment interest in telecommunications infrastructure, and its location between the United States and NATO allies. The strategic importance of the Azores as a midway point between North America and Europe is significant and, commercial as Beijing’s intentions may be in the short term, a large Chinese presence on the Azores as a logistics hub could interrupt a history of NATO strategic advantage in the North Atlantic.


Until recently, the U.S. military had a significant presence on the Azores beginning around the time of WWII.[22] The troops, at some points totalling over three thousand, enjoyed a good relationship with the Azoreans, and many lived with their families among the locals.[23] A large U.S. presence brought significant economic activity to the Azores, and the withdrawal of troops dealt a major economic blow from which the island nation has had difficulty recovering.[24] American withdrawal from the Azores has created a vacuum of influence that could be filled by a large Chinese presence in the form of their proposed research station and commercial logistics hub, likely being welcomed by the Azoreans because of the stimulation it would bring to the local economy.



The United States has been resistant to the idea of Chinese logistics and research centers so close to U.S. military resources in the Azores, but Chinese assistance to Portugal during its debt crisis following the global recession in 2008 leads some experts to believe that the success of such projects may be more likely than previously anticipated.[25] When EU governments responded to Portugal’s debt crisis with austerity measures, China bought up chunks of Portugal’s debt and made key investments after Portugal resorted to a series of privatizations.[26] With this Chinese foothold in Portuguese companies, cooperation between the two nations economically is certain to continue, and increased cooperation on other fronts is already being observed.


In addition to looking for ports and commercial staging areas, China has been looking for opportunities to make investments in research and telecommunications in Portugal. Under one new agreement, research centers located in China and Portugal will construct microsatellites that will be launched from a spaceport on the Azores, providing agricultural and oceanographic data.[27] The joint venture, dubbed STARlab, will be located on the Azorean island of Santa Maria and will cost an estimated $57 million USD to be split equally between China and Portugal.[28] Despite international pushback, there are also talks of a deal between Portuguese telecom company Altice and Chinese tech giant Huawei that could lead to Chinese involvement in the development of 5G and fiber-optic telecommunications infrastructure.[29] This level of involvement in the development of telecommunications infrastructure is concerning and has led to some resistance, namely over fears that characteristics of the Chinese surveillance state could expand to the European continent via Chinese 5G hardware. Having a launch site for Chinese-made satellites in the North Atlantic also provokes concern should Chinese interest in the project shift from the academic and research-oriented to goals that may threaten national security interests.



Political Ramifications



China’s interest in Portugal and the North Atlantic is not without political ramifications. Portugal’s openness to Chinese investments is troubling to many in Washington and is likely to place strains on bilateral relations between the U.S. and Portugal. America is generally skeptical of Beijing’s Communist Party, and it's true intentions for economic expansion. China has a record of gaining power by creating “economic hostages” through debt-trap diplomacy. The U.S. welcomes China into the international community as long as it adheres to established norms. However, questions remain whether the authoritarian regime will cooperate with accepted standards of international conduct. American defense officials should also be concerned that economic expansion might lay the foundation for future military modernization. While Portugal claims Chinese military activity is prohibited in the Azores, greater access to the Lajes air field and strategic ports near vital underwater fiber-optic cables enables the possibility for military behavior. On the other side, the people of Azores are likely to feel abandoned by reductions in American service members and are likely to welcome outside investments to kickstart the local economy. Portugal may be utilizing China to scare the U.S. into recommitting to the region. Although it is also possible that Portugal will accept Chinese involvement and begin to operate without American dependency. America wishes to remain the primary foreign actor in the Azores and Portugal needs economic stimulation. China complicates relations between the U.S. and Portugal and forces both sides to draw redlines that will upset the other party if crossed.


Portugal's relationship with the NATO alliance is also likely to be negatively affected by a greater Chinese presence for many of the same reasons listed above. Although Portugal forbids Chinese military activity, NATO members will continue to denounce a Beijing foothold in the strategic Azores archipelago. If a global conflict were to emerge NATO may need to utilize the Azores to secure victory. Allowing China to station dual-use aircraft and shipping vessels near the NATO controlled Lajes air field outpost would likely hinder battle operations and provide China with valuable intelligence. Disagreements are likely to remain within the NATO alliance as long as China continues to pursue an increased role in the Azores.



Finally, Azores is a unique opportunity for China to enhance economic and political relations with Portugal (a western nation) which has traditionally been a challenge. Both parties are able to offer economic benefits. Greater access allows China to establish a commercial logistics hub in the North Atlantic to aid in the diversification of export markets and Azores gains stimulus from foreign investments. This growing partnership will remain a point of contention in America and could easily further exacerbate the current trade war or deteriorate bilateral relations.



Recommendations



The Counterterrorism Group’s Illicit Finance team encourages the participation of U.S. companies in novel Portuguese infrastructure projects, particularly tech infrastructure projects, in order to counter Chinese interests in Europe. The efforts of Chinese government-linked companies to gain an advantage on the front of 5G infrastructure proliferation could pose a national security threat to the United States and its allies because of the potential for monitoring and surveillance. CTG also encourages interested parties to displace Chinese investment in Portugal’s main power company EDP, which has significant involvement in projects on the U.S. mainland.


CTG recommends the re-establishment of a NATO military presence on the Azores, specifically at Lajes field on the island of Terceira, in order to preserve NATO’s strategic advantage in the North Atlantic. Significant pre-existing infrastructure at Lajes Field and the Azores proximity to the European and African AORs make it both a cost-effective and strategic move to consider placing intelligence and logistics resources there in addition to maintaining the base as an important contributor to enduring air superiority in the region. These efforts should be accompanied by military cooperation between the United States, NATO, and Portugal.


The United States should continue seeking diplomatic avenues to counter Chinese influence and the extension of the Belt and Road Initiative to NATO allies, a scenario that would provide the Chinese with an economic, political, and diplomatic advantage to influence American interests in Europe.


CTG continues to monitor developments in the North Atlantic with regards to the expansion of China’s economic influence. Moving forward, CTG’s Illicit Finance team continues to produce materials detailing threats on the front of money laundering, fraud, terrorist financing, corruption, and other emerging financial and economic threats.



[1] “Azores satellite photo-NASA” by Jeff Schmaltz, MODIS Rapid Response Team, NASA/GSFC licensed under Public Domain


[2] Portugal Rattled as U.S. Military Pares Back, The Wall Street Journal, March 2013, https://www.wsj.com/articles/SB10001424127887324789504578384482465801050


[3] Azores, Google Maps, January 2021, https://goo.gl/maps/vVEGacLrykn8Lhri7


[4] China Eyes Azores as Possible Commercial Hub Amid US Concerns, SouthEUSummit, October 2019, https://southeusummit.com/europe/portugal/china-eyes-azores-as-possible-commercial-hub-amid-us-concerns/


[5] Portugal Open to China Investment in Azores as U.S. Sway Wanes, Bloomberg, October 2016, https://www.bloombergquint.com/politics/portugal-open-to-china-investment-in-azores-as-u-s-sway-wanes


[6] China’s Atlantic stopover worries Washington, Politico, September 2016, https://www.politico.eu/article/chinas-atlantic-stopover-terceira-worries-washington-li-keqiang-united-states/


[7] Factbox: Chinese investments in Portugal, Reuters, May 2018, https://www.reuters.com/article/us-edp-m-a-china-investment-factbox/factbox-chinese-investments-in-portugal-idUSKCN1IF24M


[8] China Three Gorges maintains stake in Portugal's EDP, S&P Global Market Intelligence, August 2020, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/china-three-gorges-maintains-stake-in-portugal-s-edp-59804913


[9] Chinese companies in Portugal – Part 2, MacauBusiness, September 2019, https://www.macaubusiness.com/chinese-companies-in-portugal-part-2/


[10] Lajes Field In-depth Overview U.S. Department of Defense, n.d., https://installations.militaryonesource.mil/in-depth-overview/lajes-field


[11] Lajes Field: Why This Airbase Is Important to U.S. Strategic Interests, Heritage Foundation, December 2020, https://www.heritage.org/sites/default/files/2020-12/BG3566.pdf Lajes Field: Why This Airbase Is Important to U.S. Strategic Interests, Heritage Foundation, December 2020, https://www.heritage.org/sites/default/files/2020-12/BG3566.pdf


[12] Ibid.


[13] Research for REGI Committee: The economic, social and territorial situation of the Azores (Portugal), European Parliament, n.d., https://www.europarl.europa.eu/RegData/etudes/BRIE/2017/601971/IPOL_BRI(2017)601971_EN.pdf


[14] Terciera, Google Earth, January 2021, https://earth.google.com/web/@38.69562698,-27.23640644,454.60145721a,75500.65388108d,35y,0h,0t,0r


[15] Praia da Vitoria, Google Earth, January 2021, https://earth.google.com/web/@38.72353047,-27.05783447,-0.75713353a,3255.24117057d,35y,-46.75991817h,73.65971683t,0r


[16] Lajes Field: Why This Airbase Is Important to U.S. Strategic Interests, Heritage Foundation, December 2020, https://www.heritage.org/sites/default/files/2020-12/BG3566.pdf Lajes Field: Why This Airbase Is Important to U.S. Strategic Interests, Heritage Foundation, December 2020, https://www.heritage.org/sites/default/files/2020-12/BG3566.pdf


[17] Ibid.


[18] Factbox: Chinese investments in Portugal, Reuters, May 2018, https://www.reuters.com/article/us-edp-m-a-china-investment-factbox/factbox-chinese-investments-in-portugal-idUSKCN1IF24M


[19] Portugal Open to China Investment in Azores as U.S. Sway Wanes, Bloomberg, October 2016, https://www.bloombergquint.com/politics/portugal-open-to-china-investment-in-azores-as-u-s-sway-wanes


[20] Lajes Field: Why This Airbase Is Important to U.S. Strategic Interests, Heritage Foundation, December 2020, https://www.heritage.org/sites/default/files/2020-12/BG3566.pdf Lajes Field: Why This Airbase Is Important to U.S. Strategic Interests, Heritage Foundation, December 2020, https://www.heritage.org/sites/default/files/2020-12/BG3566.pdf


[21] Research for REGI Committee: The economic, social and territorial situation of the Azores (Portugal), European Parliament, n.d., https://www.europarl.europa.eu/RegData/etudes/BRIE/2017/601971/IPOL_BRI(2017)601971_EN.pdf


[22] Defense Dept. decision gives China chance for foothold between U.S. and Europe, CBS News, Sept. 2017, https://www.cbsnews.com/news/azores-withdrawal-gives-china-foothold-between-us-europe/


[23] Ibid.


[24] Ibid.


[25] Portugal: A China-friendly EU nation driven by need, Deutsche Welle, March 2019, https://www.dw.com/en/portugal-a-china-friendly-eu-nation-driven-by-need/a-47872582


[26] Lisbon rebuffs claims Portugal is China’s ‘special friend’ in EU, Financial Times, January 2020, https://www.ft.com/content/862c633e-393b-11ea-a6d3-9a26f8c3cba4


[27] Lisbon targets the “New Space” economy, MacauHub, February 2019, https://macauhub.com.mo/feature/lisbon-targets-the-new-space-economy/


[28] Ibid.


[29] Chinese companies in Portugal – Part 2, MacauBusiness, September 2019, https://www.macaubusiness.com/chinese-companies-in-portugal-part-2/



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