Economy & Business
EU-China trade and economic relations
China is gaining unfair advantages from its hybrid and state dominated economy. Reciprocity in trade and economic relations will be required for a sustainable and mutually beneficial relationship.
By Darryl Lupton
The European Union (EU) and China need to improve their trade and investment transactions to ensure a reciprocal economic relationship. This was recognised and elucidated in the March 2019 EU-China Strategic Outlook. A key sentenced expressed that, “The EU should robustly seek more balanced and reciprocal conditions governing the economic relationship.” In 2020, after seven years of negotiation, both sides agreed to finalise a bilateral investment agreement that Germany pushed through in its closing days as president of the EU, though this final draft would need to be ratified by the EU parliament. They also agreed to increase cooperation in the fight against climate change and the agreement also included a commitment to continue dialogue on other important issues such as intellectual property rights, subsidies, and market access for EU companies in China.
Nonetheless, there were also issues that surfaced from European partners that the Comprehensive Agreement on Investment (CAI), was principally in the interests of certain German firms. In addition, there was a mood shift in Germany (post-Merkel) and the EU, which was evidenced in the bloc targeting Chinese individuals and entities with sanctions that were/are involved in the mass persecution and detention of Uighurs. There were retaliatory sanctions by China against the EU and its members, which further soured the relationship between the two. This further weakened the CAI as the European partners saw the deal as not being in their best interests. As a result, the agreement has been frozen since May 2021 and not been ratified, hence an impasse has been reached. So what are the principal obstacles blocking an economic rapprochement and how can these be addressed to the satisfaction of both parties?
At the end of September 2023, Valdis Dombrovskis, the EU’s trade chief, held a meeting with He Lifeng, a Chinese vice-premier, to organise the 10th EU-China High-Level Economic and Trade Dialogue. The talks did not indicate a significant advancement in bilateral trade relations. The EU has several issues that it wishes to address with China to ensure a ‘level playing field.’ Among these are its concern that Chinese electric vehicle (EV) manufacturers are receiving government subsidies, there are access barriers to European goods like medical devices and public tenders and arbitrary licencing delays regularly occur. The European Union has further raised concerns regarding several issues that include market barriers to European cosmetics, agrifoods, and infant formula. Additionally, the EU has expressed concerns about cross-border data flows, supply-chain resilience, and export controls. Will working groups and dialogue help to resolve these issues and find mutually acceptable solutions? EU economic analysts are pessimistic as these impediments may be systemic.
At the core of Beijing’s economic model is the government having control over every aspect of the economy. As an ex-communist economy, it retained state owned enterprises (SOE) in most key areas, leaving the ‘private’ economy to flourish in the realm of tech-innovation and other emerging technologies. However, since 1993, even these are carefully monitored with embedded Chinese Communist Party (CCP) members within committee cells in over 70% of private companies. In fact, of China’s top 500 private enterprises, 92% host party cells. The CCP’s objective is to “cultivate a team of private persons who are resolute in working with the party.” With this approach, it is unlikely that EU companies are going to get a fair go at public procurement or other projects where more compliant and ideologically aligned local companies are deemed more suitable, regardless of price and quality factors. With the introduction of military-civil fusion, first mentioned in 2007 and now elevated under president Xi to be more comprehensive and integrated, local companies need to work with the military if they are deemed to have useful technology. Again, the Chinese government would rather have controllable local firms in areas that might yield technology advantageous to the military. Further control over foreign firms by Beijing has been achieved by passing a new foreign relations law and also new espionage laws. Dombrovskis has also brought these up with his Chinese counterpart in Beijing and conveyed the negative reaction of EU businesses in China to these new regulations. “Their ambiguity allows too much room for interpretation. This means European companies struggle to understand their compliance obligations,” emphasised Dombrovskis. Decreasing business confidence with vague laws arbitrarily enforced, will not boost EU business relations nor spur investment.
Decoupling is a term that has gained popularity in recent times, particularly since the escalation of US-China tensions during the Trump administration and the onset of supply chain issues due to the Covid-19 pandemic. Initially it was the US that believed it was over reliant on China and needed to become more self-sufficient in strategically key areas. However, China also realised that US tariffs and sanctions made it vulnerable so it should consider decoupling on its own terms. After the Russian invasion of Ukraine and Western sanctions, China perceived that its economy was significantly more vulnerable to sanctions than Russia’s and less dependence on the West was a security necessity, if it wanted the option of taking Taiwan by force. In a globalised world with such integrated supply chains, complete decoupling is almost impossible, but a ‘dual-circulation strategy’ involving tech self-sufficiency and more domestic demand would lead the way forward. Autarky in the 21st century is an unlikely prospect, but insulating one’s economy from deliberate outside disruptions seems to be Beijing’s aim. All of the above factors do not bode well for EU firms.
China runs massive trade surpluses. In 2023, these figures have ranged from US$92 billion in January to US$68 billion in September. This is not a sign of a robust economy, but instead shows very weak internal demand arising from an unbalanced economy. The EU had a trade deficit of over US$200 billion with China in the first eight months of 2023. This trade imbalance is another issue that the EU wishes to address, but with barriers to market access, and a government prioritising supply side measures, householders in China do not have a fair share of the economic pie and this restricts their spending capabilities. By underpaying workers, financially advantaging certain sectors of the economy, undervaluing the currency and not providing enough of a social safety net, people in China feel they need to save more and spend less, which results in weak consumer demand. This affects foreign exporters – and internal manufacturers – whether local or foreign. This weak demand is externalised by China resulting in trading blocs like the EU and US running big deficits with China. Dialogue with China is not going to change this, only aggressive trade measures from trade partners or Beijing being willing to relinquish political control for economic liberalisation can balance these trading figures. Under the current CCP government, it seems unlikely that any political control will be voluntarily ceded.
Beijing has been astute and strategic in its ‘opening up and reform’ years when identifying future technologies or vital resources to control. This is evidenced by the government’s sponsoring or subsidising Huawei and 5G technology, aimed at giving it an advantage over Western rivals. China has also stolen a march in green tech, particularly in solar panels and wind turbines. Furthermore, processing rare earths (an intense and polluting endeavour) is overwhelmingly done in China. These are vitally important to digital tech, green tech, and especially computer chips. The same applies to EV batteries, which make up over 40% of an EVs value. China dominates the market in processing the minerals required to make them and in their actual production. Beijing heavily subsidised EV vehicles and strongly promoted them in Chinese cities, thereby creating national champions like BYD, Nio, Xpeng and SAIC. Consequently, China leapfrogged traditional internal combustion engine manufacturers and has become a leader in producing and exporting EVs. According to the Chinese business news group, Caixin, Chinese auto brands in 2023 captured 55% of the local market. Moreover locally, BYD is the leading passenger car brand with Volkswagen second and the next two brands being Chinese.
Despite the EU being the world leader in exporting cars in 2022 with a value just short of US$700 billion, China is catching up fast with the increased worldwide demand for EVs. With China’s questionable industrial practices involving subsidies, either direct or indirect, for example, cheap or free credit, the EU is concerned that China will flood its market with EVs that are too cheap for local producers to compete against. This strategy was successful in solar energy technology and put European rivals out of business, leaving Chinese companies completely controlling all factors of production and manufacturing. Wanting to avoid a repeat of this in the EU’s main market of automobiles, the EU announced in early October 2023 that it has formally launched an anti-subsidy investigation into the imports of battery electric vehicles (BEV) from China. Ursula von der Leyen, President of the European Commission, reiterated that “This anti-subsidy investigation will be thorough, fair, and fact-based.” The EU has stressed that ‘a level playing field’ is important for fair trade to be conducted and wishes to ensure that Chinese companies are not gaining unfair advantages from its hybrid and state dominated economy. Valdis Dombrovskis, Executive Vice-President and Commissioner for EU Trade has emphasised that, “Electric battery vehicles are crucial for the green transition ... But competition must be fair. Imports must compete on the same terms as our own industry.”
The EU cannot afford to lose a US$700 billion per year market and is ensuring that reciprocal trade standards are in place for all competitors, though China has objected to this investigation. Recently the Chinese Foreign Ministry said that China views and develops its relations under the three principles of mutual respect, peaceful coexistence and win-win cooperation. Here it would appear that the two competitors are in agreement as reciprocity and win-win are equivalents that wish for both parties to mutually benefit.
Dr Darryl Lupton is an Australian academic who is a 2023 Taiwan Ministry of Foreign Affairs’ research scholar affiliated with National Taiwan University.