EU-China trade and investment: views from East and West

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Asia & Emerging Economies

Photo of These articles are part of the series ‘EU-China: views from East and West’
These articles are part of the series ‘EU-China: views from East and West’

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What started off as a potentially breakthrough year for EU-China relations has quickly been transformed into a time of uncertainty. But despite interruptions caused by COVID-19, the EU and China are still working to meet their end-of-year deadline for concluding a Comprehensive Agreement on Investment. To dive deeper into the issues, Friends of Europe asked Chi Fulin, President of the China Institute for Reform and Development (CIRD), and Richard Ghiasy, Subject Matter Expert at The Hague Centre for Strategic Studies (HCSS) and Lecturer and Senior Fellow at Leiden University, to offer their insights on what China and the EU should do to take their trade and investment relationship to the next level.

These articles are part of the series ‘EU-China: views from East and West’. Each issue in the series is addressed by a European and Chinese author, offering two views on the story. Contributors offer their perspectives on how Europe and China are making progress, what pitfalls to look out for, and how they should work better together in the years ahead.

China-EU economic and trade cooperation at a historical crossroads

Author

Chi Fulin

President of the China Institute for Reform and Development (CIRD)

The COVID-19 pandemic has had a significant impact on globalisation, triggering new concerns about future economic and trade ties between Beijing and Brussels. To respond to this uncertainty, a new three-pronged approach must be taken.

First, a joint and firm reaffirmation of the multilateral principle should be made to encourage renewed economic cooperation. This is in the strategic interest of both actors, given the profound changes brought about by this pandemic.

Externally, due to COVID-19, regionalisation and localisation of certain industrial supply chains seem likely to become the new trend. At the same time, the pandemic has strengthened unilateral, isolationist, nationalist and protectionist tendencies, hindering economic and trade relations between major economic powers.

Internally, if the coronavirus were to trigger another sovereign debt crisis in the eurozone, advancing the EU integration process could prove more difficult. As for China, the pandemic has already posed serious challenges to its efforts in opening up, affecting its economic reform and transformation.

Since 2010, China has been the fastest-growing market for the EU’s service exports

At this historical crossroad, firmly upholding multilateralism and fighting together to uphold economic globalisation should be the priority for both China and the EU. This is necessary to maintain and strengthen their economic and trade cooperation.

Second, both sides should commit to building up a large integrated market connecting China and Europe. The EU, as a whole, is already in a phase of post-industrialisation, while China is just entering its late stage of industrialisation. In 2018, the EU’s GDP per capita was nearly four times that of China, and its service sector took up 78.8% of its GDP – much higher than China’s 52.2%.

So, it is clear that the economic structures of China and the EU are more complementary than competitive. The full potential of trade and investment demand between the two sides, especially in trade in services, is far from being unleashed. In the next 10 to 15 years, China’s urbanisation, together with the transformation and upgrading of its industries, promises a huge market space for bilateral economic and trade cooperation.

Since 2010, China has been the fastest-growing market for the EU’s service exports. Given the rapid increase in China’s service consumption demand, if both sides work together to cultivate a new economic relation, the true promise of trade and investment demand will be unleashed. This will not only help unlock China’s huge consumption potential, but also speed up the EU’s economic recovery and help in its stabilisation.

The ability to unlock the enormous demand potential of a large integrated market connecting China and the EU will depend on institutional arrangements

Finally, completing their bilateral investment treaty negotiations as soon as possible should be a strategic priority. This should be finalised before 2021 and immediately be followed by a joint feasibility study of a bilateral free trade agreement.

The ability to unlock the enormous demand potential of a large integrated market connecting China and the EU will depend on institutional arrangements for free trade between the two parties. Currently, the absence of such arrangements is a major constraint to the strengthening of bilateral trade and investment.

These three aforementioned proposals are realistic and in the strategic interest of both parties. A renewed commitment to multilateralism, the creation of a China-EU integrated market and the finalisation of an investment treaty can, and should, be accomplished. This will not only send the world a strong signal of the two large economies’ dedication to free trade, but also inject new confidence and positive energy into a global economy devastated by the pandemic.

Translated by Wei Wenfeng


Beyond the horizon: EU-China trade and investment

Author

Richard Ghiasy

Subject Matter Expert at The Hague Centre for Strategic Studies (HCSS) and Lecturer and Senior Fellow at Leiden University

The third decade of the new millennium has begun with incomparable global tumult. Will this impact the long-pending EU-China Comprehensive Agreement on Investment (CAI)? And, will the two parties reach the end of the decade with as much interest in mutual trade and investment as they express today?

Seven years. That is how long negotiations will have taken if the CAI concludes at the end of this year. This agreement would eliminate discriminatory laws and practices for investment on a bilateral basis. In other words, the deal would grant investors from both sides greater access and predictability to invest and better protects their ventures.

The CAI is quite the accomplishment and demonstrates the progress booked on trade and investment between these two Eurasian economic powerhouses since 2013. Even when considering the sluggish pace that has characterised negotiations, the agreement would replace 26 existing bilateral investment promotion and protection agreements (BITs) between China and EU member states. Still, essential items – more specifically market access for European companies – have yet to be addressed. A fair share of this requires more significant political commitment from Beijing.

Although COVID-19 restrictions will likely delay the CAI timeline to some degree, the need for this agreement is more urgent than ever. In most countries, the pandemic’s peak is —gradually and tentatively — nearing, nonetheless it has caused major setbacks for global trade. Boosters to the economy are even more welcome than before, be it in China or the EU.

This does not mean the pandemic will somehow ‘reverse globalisation’

However, since the pandemic hit Europe in early 2020, the EU may have developed different views on how to run and protect (sub)industries that are deemed strategic.

This does not mean the pandemic will somehow ‘reverse globalisation’. On the contrary, EU-China trade and investment relations will continue to boom. There should be no doubt about that. Yet, the pandemic has exposed, among other things, the strategic need for indigenous supply chains of pharmaceutical and medical supplies. For example, 97% of all antibiotics in the US come from China. Strategically, this is sheer folly. Inevitably, major powers will have to re-evaluate their approach to certain key sectors. Trade and investment will open up for less strategic industries yet become much more select and protective for strategic sectors.

China has pursued policies to protect and promote strategic industries such as media, telecom, energy, and healthcare for decades. This has been a prudent choice: as a newcomer to the forces of globalisation, China simply had no choice. Today, China has caught up and, in some small cases, even surpassed the US and European technological lead.

The strive for greater autonomy of select industries that has long been pursued by China, and now in the US under the Trump administration, will also grow in the EU. This is evident. Mind you, a more selective stance on trade and investment is not singlehandedly brought by the pandemic, but was already the case when China, led by Huawei, introduced 5G.

The EU and China should focus on lowering political suspicion and avoiding the pitfalls of zero-sum games

The frenzy around China’s lead in 5G telecom technology is a prime example of competition over who sets the standards in the digital transition. We live in an era where neither the US, China, nor the EU wants to enter into armed conflict with one another. Therefore, competition mainly proceeds on the economic and – directly tied to that – technological fronts. The pandemic has shown that foreign dependence on non-technological items as simple as face masks has become a strategic necessity. This will need to be reflected in upcoming CAI negotiations.

Yet, this is not necessarily a sign of deteriorating relations between China and the EU. Autonomy in select (sub)industries could provide policy leaders in many European capitals and Beijing a ‘psychological massage’. In a world that is more convoluted than ever, such peace of mind is welcome and could reduce anxiety.

That said, entering this new decade, the EU and China should focus on lowering political suspicion and avoiding the pitfalls of zero-sum games. If two of the world’s major civilizations bring it to that extreme, what example will it set for the rest of the world? By and large, fear and anxiety should not dominate the relationship. Mutual respect and benign competition must be the norm. These two qualities could make both the EU and China excel — beyond the horizon and well into the next decade.

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