China is not alone. CEE countries are benefiting from firms shifting production closer to the European market (near-shoring) or to places considered politically reliable (friend-shoring), as well as old-fashioned offshoring for lower costs. In his recent report on European competitiveness, Mario Draghi, a former head of the European Central Bank, argued that the EU needs to build more resilient supply chains and invest in domestic production of key goods such as semiconductors. Globalisation in the early 2000s fuelled impressive growth in the EU’s newer members. Now they are set to benefit again.

Take Poland, which has not had a recession since 1991, except during the pandemic. Its real consumption levels per person have caught up with Spain’s. Net foreign direct investment has doubled from an already large $10bn per year in the mid-2010s to about $20bn these days. A survey by Kearney, a consultancy, ranks Poland in the top 25 destinations for FDI in the coming years, behind Mexico and Taiwan.

There are three reasons to expect more investment into the region. The first is the global transition to climate neutrality. From electric vehicles (EVs) and batteries to heat pumps and windmills, new production capacities have to be built. Upgrading legacy factories in Germany or France costs about as much as building a new plant in Poland or Hungary. Rich countries may offer more subsidies, but CEE countries have cheaper land and labour, looser regulations and lower taxes.

The second reason is Chinese overcapacity. As growth slows, China is doubling down on its outsized manufacturing sector, especially in new areas such as EVs. The EU is the only market still fairly open to Chinese imports, increasing the pressure on European producers to compete. That pushes them to lower-cost regions of the single market. In a decade, “most of the car production in Europe could be in CEE countries and other, cheaper places such as Portugal and Spain,” says Zoltan Torok of Raiffeisen Bank Hungary.

Finally, tension between America and China, with Europe in between, can disrupt supply chains. This is why firms have started to bring production closer to markets (near-shoring). Chinese EV makers will try to produce in Europe, using Hungary as their bridgehead. The biggest announcements of Chinese FDI in the past three years were in Hungary and Serbia, according to fDi Intelligence, a consultancy; Hungary got the first European factory of BYD, a Chinese EV producer. Western firms are doing it too. Olaf Scholz, Germany’s chancellor, went to Serbia on July 19th to sign a deal to mine lithium for EVs. Intel, a chipmaker, picked Poland for a $4.6bn plant, though it has paused European investments amid financial woes.

But the FDI boom also carries risks. Foreign investors are not exactly popular. A big chunk of the region’s economy is already foreign-owned. The value added in car production is almost entirely in foreign hands. Two of the top four banks in Poland are subsidiaries of ING, a Dutch bank, and Santander, a Spanish bank. Populist parties like Poland’s Law and Justice claim the FDI model leads to lower wage growth and rising inequality. (In fact Polish wages have grown handily.)

Weaning countries off foreign firms, capital and know-how is hard, though. CEE countries spend much less on research and development than western European ones do, and lack deep capital markets. Poland’s attempt to build an EV of its own has barely started, even after it joined forces with Geely, a Chinese EV maker, for much of the technology. The country’s biggest bus manufacturer, Solaris, was recently acquired by CAF, a Spanish firm.

CEE countries must compete for FDI with countries such as Germany and France, which can afford bigger subsidies, and those with much cheaper energy, such as the Nordics and Spain. Labour costs are still lower in CEE countries but the gap is narrowing: their wages are set to go from 44% of the western EU average today to 59% by 2035, according to Tomas Dvorak and Mateusz Urban of Oxford Economics, a consultancy. To compete, CEE governments offer foreigners cheap land, which displeases local firms; subsidised energy, which other consumers pay for; and lighter regulation, which enrages environmental groups. “Battery assembly with lots of imported inputs is locally a low value-added activity that on top requires a lot of energy and water,” says Gergely Tardos of OTP Bank in Budapest. “There is debate about whether it is good for the country or not.”

Foreign investors also need assurances that they can find workers. That is a challenge for countries with declining working-age populations. Millions of their citizens have moved to richer economies in the West. “Importing labour for blue-collar jobs is now common,” says Mr Torok. Firms turn to private agencies and governments for help. “We go as far as India, even Laos to find them,” says Jakub Fekiac of Edgar Baker, an agency in Slovakia. Foreign services firms do not show up much in FDI numbers, but analysts say they employ as many people as industrial ones do. The number of foreign students at Hungarian universities has doubled over the past decade, lured by European visas. Importing workers may not play out well in countries where voters oppose immigration.

The investment boom in CEE countries will boost their standing in the EU along with their economic prospects. It will also make them more friendly towards China and other authoritarian countries seeking to nearshore to Europe. Already, Hungary is resisting EU tariffs on Chinese EVs. Some analysts worry that CEE countries’ chicken exports will prove a poor trade for a Chinese Trojan horse.