EU dangles carrot, shows stick to China

China's Premier Li Keqiang, Commission President Jean-Claude Juncker (R) and European Council President Donald Tusk attend a signing ceremony at a China-EU summit in Beijing in 2016. [Reuters]

This article is part of our special report EU-China: Mending differences.

The EU is ready to keep pushing for an investment agreement with China, but not without getting reassurance from Beijing that it is serious about fair trade. Until then, Brussels will keep brandishing the stick of trade defence instruments.

Ahead of the 19th EU-China summit this week (2 June), the two economic powers seem to be entrenched on their long-standing positions.

“The country needs to walk the talk,” said EU Trade Commissioner Cecilia Malmström. “Whatever President Xi says in Davos, China is still far from a market economy,” she slammed last week, speaking at the European Business Summit.

Malmström referred to President Xi Jinping’s fervent defence of open trade at the World Economic Forum in January, in response to US President Donald Trump’s protectionist push.

Chinese president defends globalisation, rebuffs protectionism

As world leaders gathering in Davos on Tuesday (17 January) tried to make sense of recent economic and political turmoil, Chinese President Xi Jinping made a fervent case for globalisation.

The EU has repeatedly pressed for better access to the Chinese market and argued that China’s market reforms have fallen short of expectations, especially in aluminium and steel, where state intervention has led to overcapacity, threatening industries around the world.

The EU and China are currently negotiating a Comprehensive Agreement on Investment and hope to make progress during the summit.

Walk the talk

“It’s not fair competition or fair trade when the playing field is tilted against you, with dumping and subsidies,” added Malmström.

But Beijing has downplayed EU concerns that it is reducing market access for foreign companies in a wide variety of sectors from automotive to finance, while subsidising its own domestic companies.

China refutes claims of market access reduction for foreign firms

China on Saturday (11 March) tried to downplay concerns it is reducing market access for foreign enterprises, days after a report by an EU group accused Beijing of trying to skew its business playing field towards domestic firms.

China ranked 84th globally — behind Saudi Arabia and Ukraine — in the World Bank’s ease of doing business index for 2016, and second to last in an OECD report on restrictiveness towards foreign investment.

Since President Xi Jinping took over in 2012, the government has moved away from liberalisation on several fronts, strengthening state-owned enterprises, increasing capital controls and tightening restrictions on the free exchange of information and ideas online.

Tit-for-tat or dialogue?

While Brussels has responded to concerns by imposing a number of subsidies and trade defences, China has filed a dispute with the World Trade Organisation over the approach used by the European Union and the United States to calculate anti-dumping measures against Chinese exports.

China starts trade battle over Market Economy Status

Beijing on Monday (12 December) filed a dispute with the World Trade Organisation over the approach used by the European Union and the United States to calculate anti-dumping measures against Chinese exports.

“We should focus on resolving differences through dialogue and consultation,” Chinese Ambassador to the EU Yang Yanyi told EURACTIV, expressing the hope that the EU will maintain market openness and use trade defences cautiously and refrain from politicising economic and trade issues.

“Otherwise, problems will only become more difficult to solve and obstacles to bilateral economic and trade cooperation will be created,” she added.

China’s share of global GDP and global trade has increased since it joined the WTO in 2001. As China has grown, so has the involvement of European companies.

As of 2015, the EU’s total outward foreign direct investment stock in China was €168 billion, with exports to China totaling €170 billion in 2016. China is the EU’s second trading partner after the US, with a share of 20% in our imports and 10% in our exports.

In addition to market access limitations, foreign investors cite a number challenges to establishing and operating businesses in China. These include: rising costs in doing business; difficulty in finding qualified human resources; unclear and inconsistent enforcement of laws and regulations; corruption; opaque and selectively enforced investment approval procedures; licensing barriers that favour domestic firms; an unreliable legal system; lack of effective administrative and legal resources; forced transfer of technology and new barriers on cross border data flows. The list goes on.

“China demonstrates leadership when it is needed, “ BusinessEurope director general told EURACTIV, mentioning last years’ G20, the Paris Climate Agreement and President Xi’s defence of globalisation, as well as his push to major multilateral institutions to join China’s One Belt, One Road Initiative (OBOR) just in May.

“But we need to see more action from China, more engagement in bilateral and multilateral trade discussions, more willingness to commit,” he added.

Ambassador Yang Yanyi said China is ready to add new dimensions to the cooperation between the two economic partners.

“For instance, given that China has embarked on an ambitious transition to a new model of economic development based on innovation, and innovation remains essential in the European integration process, we should make it a high priority to enhance cooperation in science and technology and innovation,” the Ambassador said.

“There is also the need to further promote cooperation between small and medium-sized enterprises (SMEs) and give full play to their role as principal driving forces in economic development and regional integration.”

China’s economic repositioning, through the OBOR, signals a global infrastructure spending spree worth an estimated $1 trillion.

“Not surprisingly, the US and Japan are not pleased. Most Europeans are interested but cautious,” said Shada Islam, director of Europe and geopolitics at Friends of Europe.

And rightly so. Research has found that large infrastructure projects delivered in China have a patchy record. Half were poorly managed, featuring cost overruns, lack of real economic benefit in the areas where they were built, and little in the way of returns to investors.

“China may not always be the gentlest of interlocutors, but many countries are ready for a change,” added Islam.

“After all the world needs to get better connected. Global infrastructure needs are enormous. Better connectivity is crucial for trade, to attract investments and to achieve some of the most crucial anti-poverty goals included in the Agenda 2030 Sustainable Development Goals (SDGs),” she continued.

Some analysts are confident that steel overcapacity can be addressed through the OBOR projects. Thousands of jobs will be created for Chinese workers, as well as foreign nationals, noted Islam.

“The way ahead is going to be complicated and difficult. China will need to learn how to deal with complex demands and painful facts on the ground in its myriad partner countries,” Islam concluded.

Chinese interest in the investment treaty is essentially driven by the willingness to protect its offensive interests in FDI projects in the EU, said Pascal Kerneis, heading the European Services Forum. “The agreement with the EU is the natural prolongation, if not the final destination of the OBOR initiative. But to succeed, the talks will need to deliver both ways” he insisted.

The potential is there and the EU-China summit this week will be a testing ground for a new start, if the two partners are really serious about making a difference, as the Ambassador seems to believe.

China and Europe: Together we can make a difference

Ahead of the Belt and Road Forum for International Cooperation (BRF), to be held in Beijing this weekend, H.E. Ambassador Yang Yanyi, head of the Chinese Mission to the EU, explains what can be expected.

Subscribe to our newsletters

Subscribe

Want to know what's going on in the EU Capitals daily? Subscribe now to our new 9am newsletter.