How should the EU support SMEs internationally?
Bigger companies tend to have a bigger place in international trade and investment, although when it comes to exports, SMEs probably export more in value terms than big companies. But the reality is that even with WTO rules and regulations, it's still a much greater risk to trade and invest internationally than to operate locally.
Bigger companies can take bigger risks than small companies. SMEs might have to borrow against 50% of their capital to invest in China. If something goes wrong, they go bankrupt. It’s the same with trade. If a company that exports 10% of its goods to China loses its market share, it’s not critical. But if it starts exporting 80% to China and something goes wrong, it’s dead. Bigger companies can deal with the risk much better.
The big challenge is how do you help limit the risk? SMEs need to be protected from difficult operating environments. Under the Lisbon Treaty, the EU can do that. If an SME is facing a problem, the Commission should step in to protect them. They need a Commission delegation to immediately go to the relevant government to help them overcome practical problems. That would require more resources for Commission embassies.
One of the things we’re considering is that the External Action Service could have a trade and enterprise unit, who could be problem solvers for this kind of thing. If an SME has an IPR [intellectual property rights] problem in China, they could get advice from the EU embassy.
Wouldn't member states resist that because they prefer to keep such functions within their own embassies and agencies?
I think if it was within the EU’s competencies on things like market access it could work. If it’s trade promotion, that would not be acceptable to member states. The main problem for SMEs is that these problems have to be solved quickly. They don’t have time for lengthy WTO cases.
The problem with these new embassies is that the Commission doesn’t think of it in that way. They are busy discussing what kind of officials to send, most of whom will be foreign policy experts. We take a more functional view. If we could convince the Commission that this kind of functional service would help the EU’s own trade and enterprise policy, maybe they would go for that. Of course, you would need to send people from Brussels with knowledge of trade and business.
Is some of this work already done by business associations?
In some countries there are very good European Chambers of Commerce – including China, but also in Seoul, Moscow and elsewhere. They tend to be dominated and financed by bigger companies or else they are a conglomerate of the larger bilateral chambers of commerce like Germany-China or Britain-China. But typically, small companies are not going to be lobbying in China. And I think in some ways the Commission could support these chambers – if they paid a fee or gave them a subsidy – they could provide a special service for SMEs along with their work for larger firms.
That could be done pretty cheaply. They already have offices and senior staff. You just need a small number of staff who can be an SME contact point. So if SMEs want to set up in China, they know who to talk to first. This has to be linked to EU competence. There’s no point in doing what the member states do themselves. There is an argument that the EU should do this for smaller countries with limited diplomatic structures. The easiest thing to do is leave national issues to member states and stick to practical advice.
When it comes to discussions about SME centres, there hasn’t been any clear objective about what the Commission is doing here. A number of projects have been pursued under an SME banner but I’m not sure it has really been well thought out. I think they’ve developed projects and then decided to say they’re for SMEs so that everyone will approve them. I’m being a little critical here but if you look at the projects there’s not so much coherence to the EU’s strategy.
In which sectors are European companies most active in China?
China has a real industrial policy. By that I mean the Chinese state is playing a role in fostering the development of certain industries. Until recently the main focus of that policy was on developing heavy industry, like steel and chemicals. In some of those industries – like chemicals – European companies were invited to participate but in others they were excluded – like steel, which is dominated by state companies.
More recently, China’s industrial policy has focused on more sophisticated manufacturing, like the auto and aerospace sectors, and electronics. There, European companies are quite active. This is welcome if European companies are growing but there are concerns about whether China is going to create competitors to European business that will be a threat at some point.
China is a country that presents a lot of opportunities because it has high growth and a lot of expansion, so a lot of European companies are taking advantage of that either by trading with China or by setting up businesses there.
However, there are also a lot of challenges, partly driven by the fact that China is an emerging economy – one that has gone from extreme poverty to middle income and, in some parts, quite high income – as well as problems with governing such a huge body.
You wrote to the Commission before Christmas to complain about growing protectionism in China. Did you receive a response?
We haven’t had an official response, probably because we had a caretaker commissioner who had just taken over, but we believe it is being dealt with.
Do you expect protectionism in China and elsewhere to become an increasingly prominent issue?
One of the biggest problems that I see looming on the horizon is that of subsidies. The Chinese market is still complicated by a lot of state participation in the economy – state-owned companies, state-owned banks, and direct support for industry through the tax system. This problem with subsidies has become worse with the financial crisis. It’s not always clear whether these are subsidies for weak industries or just serving to boost demand.
For instance, anecdotally we see a lot of the stimulus spending is going to state-owned companies that are just stockpiling raw materials in anticipation of the next boom. Obviously that’s not really driving growth or demand. The Chinese state-owned banking system, in our experience, lends a lot of money to state-owned industrial companies who don’t necessarily pay that money back.
Over the long term that’s not very good for the stability of the financial system in China. In the short term it leads, for example, to the production of far too much steel, which ultimately results in anti-dumping cases. If you don’t have the demand internally, you have to export it, but it has been subsidised and is sold at a very low price, which depresses prices. This is going to cause a major risk of a lot of anti-dumping cases against China.
Is this how you view the issue of EU tariffs on Chinese shoes?
That’s a tricky one. It depends on the extent to which the companies are acting like private companies or as state companies. It’s certainly a problem for heavy industry.
Do you foresee a race for raw materials developing?
China produces some very special raw materials known as rare earths – there are rare metals used in sophisticated environmental products such as catalytic converters, special parts of windmills and hybrid-electrical car engines. For the time being, most of these rare metals are mined in China and they basically control the market. That they make money on selling these raw materials is, of course, not a problem. But now they are beginning to restrict exports, and if you want access to these materials you have to put your factory in China.
Considering how important this industry is for the EU we are adamant that China must not apply any restrictions to these rare metals. In any case it’s a violation of China’s WTO accession agreement. We firmly believe the Commission should use WTO cases against things like this as it’s a critical issue.
Beyond that, China also has a strategic raw materials policy when it comes to securing commodities from the rest of the world – like oil, copper and so on. They are trying to secure supply of these goods regardless of the price. They want to maintain the growth of their industry. What that does is take a certain amount of raw materials production out of the global market.
The Chinese are making sure raw materials are extracted and making special deals to guarantee that these commodities are only going to China rather than being sold on the global market.
There are now two markets – an open market and a market that only China has access to. This has to be addressed as it will have a major trade-distorting affect.
Looking at the longer term, China and the EU, which have the biggest industries in the world, we have to come to some kind of arrangement. Nobody would win from a conflictual approach to this. It would be a disaster to have a race for raw materials.
What other issues are of concern in terms of trading with China?
There are different types of problems with China, some are large, politically-sensitive; others are day-to-day challenges. One of the major political issues relates to China’s currency. It’s not simply a trade issue – although the fact that it’s more or less pegged to the US dollar is having an impact on our exports globally – we’re also concerned about how this affects the stability of the world economy.
Why would China want to let its currency appreciate?
Well, we’re quite concerned that this artificially low currency is leading to an export-driven economy in China, which is supporting the US economy and is one of the causes of the bubble that burst in 2008, which led to the worst recession since the Great Depression.
This kind of bubble could happen again, perhaps not in the housing market but maybe elsewhere, and it’s partially fuelled by this exchange-rate issue. In all of our contacts with the Chinese government you can see they are genuinely concerned by this and they are becoming more active at G20 level. We’re trying to convince the Chinese that it’s not just a trade issue which is the way the US portrays it. We have written to the ECB and the Eurogroup about this.
The EU Chamber of Commerce in Beijing has claimed that information provided by European companies when filing patents or complying with environmental standards is being 'leaked' to local competitors. Is this something your members are reporting?
Yes, this is a very big problem in China. For investment purposes China is a very good place to invest. Of course when you invest somewhere you need legal guarantees and protections for your investment, and that’s where it becomes difficult.
It can be difficult to manage joint ventures because if there’s a dispute between partners, the law tends to put foreign companies in a weak position legally.
How difficult is intellectual property patent protection for EU companies operating in China?
Intellectual property protection is a major problem – not just in terms of counterfeiting but regarding patents. And there are a number of different measures in procurement regulations or in patent filing or even in anti-dumping cases where companies are being asked for detailed industrial information which has no impact on price. The intention obviously is to get that information and give it to Chinese companies so there are definite problems of technology control. That has to be dealt with in the interest of fairness.
Procurement in the EU is more or less open, from a legal perspective, so any foreign company can come into the European market. The EU doesn’t have to have such an open market, according to our WTO obligations. Our market is only open to the other signatories of the WTO Government Procurement Agreement. China promised to join this group but has yet to do so, leaving a rather one-sided situation. Our market is legally very open, their market is legally very vague.
European companies are operating in China but we’re seeing more and more closing of the market, particular in areas where they have competitive technologies. The easiest thing to do would be for China to join this GPA group. If China continues to close its market there will be pressure on Europe to close its market and that would probably not be good for either side.
