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.