EU-China trade hampered by EU divisions

EU-China trade hampered by EU divisions
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The unbalanced China-EU business relationship can be seen as the outcome of a divided EU and an opportunistic China that has successfully exploited the EU’s weaknesses. But there is scope for improvement.

Fresh out of the APEC summit in Beijing, China’s ambassador to the EU, H.E. Yang Yangyi, published an article entitled, “Asia-Pacific Cooperation Presents Opportunities for Europe.” The article identified a range of areas where the EU would benefit from APEC’s latest agreements in areas including trade, investment, development and climate change.

But despite China’s latest outreach to the EU, the EU-China business relationship is becoming increasingly unbalanced. In this respect, the EU, its businesses and political partners should rethink how they move forward.

The EU often seems out of place in a world where aggression outweighs diplomacy and dialogue; its norms-based trading system is known to cause headaches for developing countries across the world. If the EU wants to remain relevant in the Pacific Century, it must work closely with China and APEC at large.

But China needs the EU as much as the EU needs China – a fact that many fail to remember. Together, they represent the largest trading bloc in the world with trade flows totaling well over $1 billion a day. While China is the EU’s second trading partner, the EU is China’s first.

Statistics have shown that Chinese investments in Europe have steadily grown following a spike during the financial crisis in 2008. But these investments have sparked fears over Chinese investment in strategic European assets.

The latest sale of a 49.99% stake in Toulouse Airport to a consortium including a Chinese state-owned enterprise (SOE) struck a nerve across the political spectrum in France with one deputy decrying, “the cat is among the pigeons.” This was hardly surprising considering the airport is also used by Airbus, headquartered nearby, to test its planes.

These deals add fuel to the belief that European and other foreign companies are finding it increasingly difficult to operate in China. This, coupled with the rising costs of doing business in China has confirmed that the heyday for foreign companies operating in China has passed.

As Chinese SOEs accumulate more capital, foreign companies face increasingly difficult entry and expansion barriers to the Chinese market. While some barriers are transparent and in line with WTO standards, others are less so. For example, recent assessments of China’s anti-monopoly investigations have claimed – although it is denied by Beijing – that China is targeting foreign companies who have direct competing interests with Chinese SOEs.

However, when Chinese SOEs attempt to access the European market, their bids are assessed on an equal platform with other European companies. The bid on Toulouse Airport, which attracted offers from all over the world, is a case in point. Little can be said for European companies operating in China, where they face severe trade barriers and restrictions on the public procurement market, while many complain about the lack of transparency and clarity in government decision making and an unsatisfactory appeals processes.

China has also become adept at exploiting differences between the EU’s member states to gain what it wants. For example, the EU’s anti-dumping investigation against Chinese solar-panel manufacturers was dropped because Beijing managed to successfully retaliate by threatening wine tariffs on imports that would disproportionately hurt individual member states. Beijing also managed to convince Germany to undermine the EU’s case to protect its own solar panels industry, which saw Chinese companies as a partner rather than a competitor.

European firms are also unwilling to begin a trade war with China and risk losing out on contracts in China’s market. In light of this, it seems that the EU’s biggest strength, the ability to speak as one on issues of trade, has been displaced.

The unbalanced China-EU business relationship must be seen as the outcome of a divided EU and an opportunistic China that has successfully exploited the EU’s weaknesses. But there is scope for improvement. The EU rightly believes that in order to solve its huge trade deficit with China, more exports and not fewer imports are needed.

The EU service sector’s exports to China remain minimal in comparison to their economies. For example, the value of the EU service sector’s exports to Switzerland is roughly double that of China. But opening up China’s service sector requires a severe overhaul of Chinese government regulations and practices. The ongoing negotiations over a comprehensive EU-China Investment Agreement must respond to these issues.

Should China refuse to rectify these discrepancies and hold back on greater reforms to bring transparency to business dealings, European companies will increasingly find themselves locked out of China’s market. Accordingly, should Europe fail to unite and stand strong in the face of Chinese opportunism, there is little hope for the EU to remain a strong actor in the 21st century.

This is not a question of EU trading standards versus China’s. Rather, both sides should recognise that there is more to gain from addressing the key problems in their relationship, rather than side-stepping issues which will ultimately come around and harm the bilateral relationship permanently.

Categories: Economics, International

About Author

Nicolas Jenny

Nicolas Jenny specialises in European and Asian political risk analysis. He has lived extensively throughout the region and speaks English, French and Mandarin. He holds a double master's from Sciences Po Paris and Fudan University and a BSc in politics from the University of Bristol.