Thursday, Aug 17, 2017, 9:59 AM CST – China

International

China-EU Relations

REFRESHING CHANGES

China and the EU are trying to discover new products, new partnerships and new possibilities to boost the world’s second-largest trading relationship

French Prime Minister Manuel Valls takes a selfie with Chinese Premier Li Keqiang during a signing ceremony in Toulouse, France, July 2, 2015 Photo by cns

An A320 passenger jet undergoes final assembly at the Airbus plant in Tianjin, China, January 30, 2015 Photo by IC

To keep a relationship from growing stale, both sides are often advised to introduce some fresh elements into proceedings. After more than 10 years of close business relations, this is what China and the European Union (EU) appear to need. Trade in goods between the world’s top two markets already approximately matches trade volume between the EU and the US, the world’s two largest trading blocs, and is increasingly competitive in nature. China and the EU hope to expand bilateral annual trade volume to US$1 trillion by 2020, nearly double the figure recorded in 2013 when this target was set.

Meeting that US$1 trillion target will require the value of bilateral trade to increase by 7 percent year-on-year until 2020, returning to the average pace recorded between 2009 and 2014. However, the actual rate was down by nearly 7 percent in the first half of 2015. Perennial friction between a large number of Chinese and European industrial sectors and a rapidly changing global economic climate mean China and the EU need to share something new with each other, and spice up their trade relations.

Trade in services and two-way investment have been identified as key potential areas that could achieve this. China has also seen opportunities in Central and Eastern Europe. Besides securing deals worth tens of billions of US dollars with France and Belgium during his recent trip to Europe, Chinese Premier Li Keqiang, dubbed China’s “super salesperson” in domestic media, was eager to promote the idea of joining hands with the EU to establish a global supply chain not only in their own, but in third-party markets, notably developing ones.

More importantly, it is hoped that, if these two economic and trading giants can work together more closely, Sino-EU cooperation could help reshape the international system of financial governance, a prospect that experts see as both likely and mutually desirable.

Good Service

Services currently account for a mere tenth of the EU-China trade value currently represented by trade in goods, but increased tourism from China can offer an immediate boost to the EU service sector.

At the annual China-EU Summit in Brussels on June 29, 2015, Premier Li declared that Schengen visa centers would be set up in 15 Chinese cities lacking EU or member state consulates. France, Germany and Italy have already taken steps to expedite tourist visa services for Chinese applicants. On July 1, 2015, joint visa centers, where Chinese visitors can apply for a UK visa and a Belgian Schengen visa simultaneously, opened in Beijing, Shanghai and Guangzhou. In a briefing before the summit, the EU estimated that trips to the EU by Chinese travelers would rise from two million in 2012 to three million by 2020.

Tourism can, in turn, boost trade in goods. Yan Xinmin, an organizer of sporting and cultural events in Beijing, has enjoyed vacations in central and eastern EU member or candidate states, including Poland, Hungary, Bulgaria, Serbia and the Czech Republic. She told NewsChina that she wanted to find Chinese importers keen to sell European food. “Food [in Central and Eastern Europe] is delicious, fresh and cheap,” she said.

In his speech at the 5th China-EU Forum in Brussels on June 30, Chi Fulin, president of the China Institute for Reform and Development, a think tank based in Hainan Province, noted that the growing share of China’s economic mix represented by the service sector means more trade opportunities in the EU. Indeed, European and US service providers, including legal and accounting firms, healthcare providers, education businesses and the financial sector, have always been keen to exploit demand among China’s growing middle class.

Both sides can offer complimentary resources to jointly develop their service sectors. With significant advantages in this sector, the EU enjoys a trade surplus with the rest of the world, including China, in contrast to the deficit it has seen in its trading in goods. Greater trade volume in the service sector could help reduce the currently enormous size of the EU’s total trade deficit with China. While a few labor-intensive manufacturing sectors have been a source of friction between the two sides, the tens of thousands of jobs these sectors represent, whether in textile work or solar panel manufacturing, have made these disputes politically sensitive and, consequently, difficult to solve.

Togetherness

The impact of the global financial crisis and the subsequent changes in market structure have cast a shadow over the prospects of the China-EU partnership. Organization of Economic Cooperation and Development (OECD) data show that French government debt rose to 116 percent of the country’s GDP in 2015, up from 79 percent in 2008, a bigger rise than the average recorded in the eurozone and even in Spain, one of the member states worst hit by the crisis. A survey by the European Commission shows that the cost of labor in Germany has been rising since 2011, and frequent strikes there over the past two years have fueled concerns over even the most powerful growth engine in the EU economy.

Ayhan Kose, director of the Development Prospects Group under the World Bank, believes the eurozone is already in a “cyclical” period of recovery, with significant progress made in terms of structural reform in former “problem” countries like Spain, Portugal and the Republic of Ireland. Kose told NewsChina that the outlook for EU competitiveness remains “uncertain,” depending largely on how far commitments on structural reform, mainly labor efficiencies, can be implemented. The recent Greek debt crisis has also aroused global concerns over the prospects of the eurozone as a whole, doubts which have extended to cast a shadow over the future of China’s exports to the EU.

Meanwhile, China, formerly the world’s factory only for cheap consumer goods, is now offering more sophisticated goods to its trading partners, such as heavy machinery, railroad track and locomotives, cell phone handsets and even nuclear power plant equipment. European companies specializing in these areas are already feeling the pressure from the East. China, meanwhile, is also facing its own economic slowdown, which does little to boost its attractiveness as a destination for European goods.

Cooperating, rather than competing, has therefore emerged as the most appealing option for both sides. By the end of May, EU-based companies had made investments in China valued as much as eight times those made by US companies. In 2014, for the first time, more Chinese investment flowed into the EU market than the other way around.

Several big European acquisitions by Chinese companies have been made in various sectors since 2014, ranging from olive oil production and vacation resorts operation to energy and manufacturing.

According to a recent report by international consultancy Ernst & Young, Germany, a world manufacturing champion, is regarded by Chinese companies as the EU’s most attractive investment destination. George Wang, senior partner with Shanghai law firm Duan & Duan and co-chair of the International Investment and Anti-Trust Commission of the Shanghai Bar Association, has noticed strong interest from Chinese companiesin buying out or acquiring a controlling stake in European small- and medium-sized enterprises. Meanwhile, China’s burgeoning legion of billionaires continues its spending spree, buying up European vineyards, hotels and real estate at an unprecedented rate. In Wang’s opinion, Chinese investors intend to diversify their assets, and are attracted to the EU by a cheap euro and favorable property-related immigration policies implemented in certain European countries.

Great potential, therefore, remains. Hans Dietmar Schweisgut, the EU ambassador to China, told NewsChina that EU investment in China is currently only one-tenth of its investment in the US, while China’s business presence in the EU is also in its infancy. In the past few years, China has attached more importance than ever to 16 Central and Eastern European countries, 11 of which are EU member states. In his summit in Belgrade with these countries at the end of 2014, Premier Li announced US$3 billion in funding to help finance public-private partnerships and privatization projects in these countries involving Chinese companies. The cheap, highly skilled labor pool offered by the region, Wang believes, should be attracting as many Chinese investors as it has Western European ones.

Strength

Premier Li and his EU counterparts have accelerated the negotiation of a bilateral investment agreement (BIA), with a joint draft scheduled to be prepared this year. Ambassador Schweisgut described the BIA as an “ideal” solution to address spiraling competitiveness in the EU’s business relations with China.

As the talks on a separate EU-US agreement, the Transatlantic Trade and Investment Partnership (TTIP), are also ongoing, some Chinese observers are concerned that the EU will be reluctant to reach an agreement with China before a new set of “Anglo-Saxon” international trade and investment rules are drawn up and ratified. Sun Yongfu, director-general of the European Affairs Department of the Ministry of Commerce of China (MOFCOM), does not think this would be the case. It is not in the EU’s interest or intention, he told NewsChina, to develop its business relations with its largest trading partner (the US) at the cost of its relations with the second-largest (China).

The EU has been the largest exporter of technology to China for a decade. However, doubts have emerged in China over whether the crisis-wracked EU can continue to play such a big role in helping China modernize its manufacturing and service sectors. “The EU is still well ahead of China in [terms of] technology,” noted Sun Yongfu, the MOFCOM official. Taking all factors into account, including the level of technology, the market openness and the willingness to cooperate with China, as he explained to NewsChina, the EU is a “much better” partner than the US or Japan in terms of helping China with industrial upgrading, and China, a big, enthusiastic buyer of technology with the advantage of a full-fledged supply chain, is also a very good client and partner for EU companies.

Sun’s conclusion is that the EU’s role as China’s largest trading partner, and most important supplier of technology, will remain unbeaten for the foreseeable future, adding that he believes China will work with the EU more equally and actively than ever. George Wang agrees, adding that the EU’s well-regulated market offers a “predictable” business environment for investors.

Chinese scientists have already become major participants in Horizon 2020, the EU’s largest research and innovation program, which launched in 2014. At the Second China-EU Innovation Cooperation Dialog, held in Brussels on June 29, the two sides agreed to establish joint funding for scientific research and academic exchanges, and expand collaboration on research concerning food safety, nuclear energy, aviation, telecommunications and environmental protection.

Trilateral

Not satisfied with expanding their bilateral partnership, China and the EU are also expected to step beyond politics to tap the global marketplace. During his European tour, Premier Li signed agreements with France and Belgium to jointly explore the “third-party market,” represented mainly by African and Asian economies. Li also repeatedly advocated the idea of “international cooperation on production capacity” in his meetings with EU and OECD leaders during his trip.

Jointly building production facilities in developing markets, as Li said in his speech at the OECD headquarters in Paris on July 1, will “not only improve the industrial level of developing countries, but also force the upgrading of China’s equipment industry and other industries, and drive the exports of key technologies and creativity of developed countries.”

According to the joint statement, with half of all EU member states becoming founding members of the Asian Infrastructure Investment Bank (AIIB), an institution in which China holds the biggest share, the EU, as a whole, looks to be guaranteed a place as a partner in such future projects. A joint investment fund will be established to match China’s One Belt, One Road initiative, and the EU’s 315-billion-euro (about US$346bn) Juncker investment plan, named for European Commission president Jean-Claude Juncker, with an additional “connectivity platform” to help integrate Chinese infrastructure projects into the EU’s Trans-European Networks.

The major EU financial hubs of London, Frankfurt, Paris and Luxembourg are already building offshore trading centers for the Chinese yuan. On May 27, the Deutsche Börse announced plans for a joint German venture allowing the Shanghai Stock Exchange and China Financial Futures Exchange to offer yuan-denominated financial products to overseas clients.

Sun Yongfu believes that the EU as a bloc would welcome the internationalization of the yuan, particularly when the euro is so weak. He told NewsChina that both EU and China share an enthusiasm for a more diversified international financial system that is less reliant on the US dollar.

This is why some Chinese experts believe China and the EU could and should work more closely within the G20 framework, a new platform of major developed and emerging economies, allowing the two blocs to reshape the landscape of global economic governance.

The United States Congress has not, for example, ratified the 2010 IMF reform agenda which would give emerging economies, notably China, more quotas and voting power without impacting Washington’s veto. The reform agenda was initiated and driven by the G20 group of nations. In an article published July 7 in Boao Review, the quarterly official journal of the Boao Forum for Asia, Professor Jiang Shixue with the Institute of European Studies of the Chinese Academy of Social Sciences suggested that China and the EU join hands within the G20 framework to seek alternatives with other IMF members.

There are signs that the IMF is losing patience with US intractability on this issue. In April, IMF Managing Director Christine Lagarde asked staff to prepare an alternative reform plan that would not need US approval.

The existing plan requires the EU to collectively transfer a greater proportion of their established quotas than the US to emerging economies. Such moves, Jiang told NewsChina, prove that the EU is acknowledging that emerging economies, including China, will play a bigger role in the international financial arena in the future, and are adopting multilateralism in the area of global economic governance.

Obstacles do, however, remain. For years, China has raised the issue of EU restrictions on some hi-tech exports. According to the 2015 annual confidence survey published by the European Union Chamber of Commerce in China, European companies, especially multinationals with a significant presence in China, are worried about China’s growth slowdown and persistently bemoan China’s slow progress in establishing rule of law. Politically, the EU has continued to stress that human rights take precedence over sovereignty, while China remains prickly towards what it calls interference in its domestic affairs. This, as Chinese analysts say, could become a sticking point in the operation of future joint projects in Africa.

Fundamentally, China and the EU need to invest more political will in bolstering their business ties and establishing the more equitable system of global economic governance that both sides have long wished for. It looks like a long road ahead.

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