Greek Business File, September-October 2020, No 127

China-EU

The challenges in economic cooperation

China is by far the largest emerging economy in the world, and the European Union is the largest consortium of developed countries. China and EU represent about one fourth of the world’s total population, nearly 40% of the world’s total economic output, and nearly one third of the global trade. 2020 is the 17th year since the establishment of the China-EU comprehensive strategic partnership, it is also an important turning point for China-EU economic, investment, and science relations as the international situation is undergoing unprecedented changes (the Covid-19 pandemic, anti-globalization policies of the Trump government, an international economic downturn, and a technology shock as data analytics revolutionize capitalism)

While disruptions brought by the Covid-19 pandemic and great power competition have affected the overall ties between China and the EU, we can still observe an underlying convergence between the two sides on some basic issues, such as economic and trade cooperation, support for a rules-based global trade order, as well as a commitment towards global peace and stability underwritten in a UN-led governance system.

Challenges in China-EU economic, trade and investment cooperation

There is no doubt, however, that the trade and investment relationship of the EU and China is facing new challenges. First, rising Trade protectionism has perplexed China-EU economic and trade cooperation. From 2010 to 2019, the average annual growth rate of China EU trade is 7.4%, including three years of negative growth. This is 14 percentage points lower than the average annual growth rate of the 10 years before 2008. Lower demand due to the overall economic downturn of the EU and rising labor cost of China have particularly affected China’s labor-intensive products export to the EU. But still, one of main reasons of faltering trade is the rising trade protectionism in EU, as more and more trade barriers and restrictions have appeared against China.

Second, China remains discontent with the EU’s denial to recognize China’s “market economy status”. This allows the EU to impose high anti-dumping duties on Chinese products, and has caused huge losses to China’s export enterprises. At the same time, the EU believes that the “unfair” trade policy of the Chinese government is the main reason for EU’s huge trade deficit with China, and China has not fully complied with its WTO commitments: it has not fully opened its market as WTO rules require, it has not effectively enforced the protection of intellectual property rights, while at the same time it has increased state support to domestic industry.

Third, in recent years, the EU has adopted a stricter attitude towards China-EU technical cooperation, and EU countries have adopted restrictive policies on high-tech exports, which have decreased high-tech trade, and exacerbated the trade imbalance between China and the EU.

Fourth, the anti-globalization wave in Europe is surging. Some EU member states ignore the benefits of economic cooperation and deliberately emphasize the negative impact of regional economic integration and globalization on their own economies and employment. Hence, politicians hold a negative attitude towards China’s development and Sino-EU economic and trade cooperation. They exaggerate the impact of EU trade deficit on China and the impact of China’s investment on EU security, with the intention of hindering the development of China EU economic and trade cooperation.

Fifth, Covid-19 and the resulting global economic downturn has exacerbated the protectionist and right-wing conservative trends of thought within the EU, which, in turn, brings about a more negative atmosphere to the overall normal China-EU economic and trade development.

Suggestions on ways to strengthen China-EU Relations

Although there are pressing problems in China-EU relations, both sides still believe that their bilateral relationship is very important to preserve the global order and support the global economy. What should be the way forward?

For China

First, make full use of various exchange and dialogue mechanisms to further strengthen communication with EU counterparts on China’s development strategy and policies and views on major international issues. Beijing needs to make more efficient explanations about its interests and so, enhance mutual understanding at a deeper strategic level. Importantly it should clarify the complementarity of interests in a rules-based global economic order.

On the bilateral relations, China should enhance its flexibility. China does not need to seek agreements across the board, but instead, to earnestly understand some red European lines and seek common ground while reserving highly divisive issues for future negotiations. As a matter of fact, China should distinguish the specific issues in China- EU cooperation from the political and diplomatic relations between the two sides, and avoid easy labeling or excessive politicization.

Second, China needs to more actively promote the negotiation of China-EU bilateral investment agreement (BIT), and take this opportunity to strengthen bilateral trade and investment cooperation. For this purpose, China should adopt more ambitious opening-up (especially to European enterprises) policy, and take a more effective measures in improving IPR protection, business environment and law enforcement.

Third, China should appropriately increase investment in the Eurozone to support the consolidation of the Euro. A strong Eurozone is in China’s national interest as it promotes global multipolarity and a shift from the hegemony of the US dollar.

Fourth, the trade relations between China with US and China with EU should be handled in a balanced way. The interests of European enterprises should also be taken into account in China-US trade activities and agreements.

Fifth, China should strengthen cooperation with Europe in addressing global climate change, financial stability, debt restructuring for developing economies post-Covid and enhance nuclear nonproliferation.

For the EU

First, the EU should have a clear and unified understanding on the importance of China-EU strategic cooperation. Although leaders of some countries like Germany, Greece and Hungary have increasingly realized the significance and value of carrying out cooperation with China, others do not fully understand it. This is striking given the urgency of solid bilateral relations in the current highly disruptive world situation.

Second, as global economy and the European economy are showing signs of serious recession, EU should conduct a comprehensive review of China’s trade and investment policies, and discuss with China the areas where they can further open up and strengthen cooperation. If a BIT is not viable until autumn, then cooperation in other realms must not atrophy.

Third, the EU should regard China’s rise in a more rational and objective way, especially China’s progress in new technologies (see 5G) and explore how to balance and deepen China-EU economic and technological cooperation within the constraints of great power competition.

Fourth, it is in Europe’s current and future interests to recognize China’s economic position and future role in a constructive way. A more cooperative European approach will enhance China’s economic reform and assist in opening up and empowering domestic reformist voices.

Fifth, the EU should also seek common ground while reserving differences in maintaining relations with China, and adopt more flexible ways to prevent new friction under the current international situation. On the Hong Kong issue, for example, Europe has a large number of residents and investments in Hong Kong, the stability of Hong Kong is in the interests of both China and the EU, and Europe can maintain a posture of communication without adding chaos, which is conducive to China’s national interest and the wellbeing of HK.

Finally, the EU should take a more active initiative to carry out exchanges and cooperation with China on climate change, WTO reform, the Middle East and Africa and other major international issues. The current problems of Iran, Syria and Libya are of great concern to both sides and joint Sino-EU infrastructure initiative should be sought off. Overall, the two parties should work together to determine the direction and goal of bilateral cooperation, so as to jointly expand and strengthen China- EU relations and consolidate the foundation for comprehensive and in-depth strategic cooperation.

As Trump administration has lost interest in major international issues and stressed “American First” policy in numerous global issues, China-EU relations have become more important than ever to restore order and predictability, and to provide solutions to various problems that transcend national borders. There is no reason for China-EU relations to stagnate or regress, for neither side constitutes a national security threat to each other. The world needs comprehensive cooperation between China and Europe, and both sides need to mobilize political entrepreneurship.