CHAPTER 6: TRADE AND INVESTMENT
172. Trade and investment have traditionally
been the core of the EU-China relationship. They were the rationale
for the original 1985 agreement and remain a key feature of the
relationship today. We deal with them here as part of the total
relationship. EU-China trade has increased dramatically in recent
years, and China is now the single most important challenge for
EU trade policy.
China has emerged as one of the world's largest economies, and
is now the EU's second trading partner and the biggest source
of imports, with the EU being China's largest trading partner.
EU-China Trade and Investment
|Trade in goods|
EU exports to China: 78.4 billion
EU imports from China: 247.6 billion
Trade in services
EU exports to China: 20.1 billion
EU imports from China: 14.4 billion
Foreign Direct Investment
EU investment into China: 4.5 billion
Chinese investment into the EU: 0.1 billion
(All figures for 2008)
Source: European Commission Directorate-General for Trade, see
173. Baroness Ashton of Upholland, giving evidence
to us as Commissioner for Trade, took a generally positive view
of the EU-China economic and trade relationship. China had acceded
to the World Trade Organization (WTO) in 2001. Competitively priced
goods from China had contributed to lower inflation in the EU,
and China was a growing market for EU exporters. However, although
the EU had a surplus in services exported to China, the EU overall
had a trade deficit (169 billion in 2008). This trade imbalance
of "very serious magnitude" was not sustainable, even
though many of the goods "exported" from China were
from EU-owned firms or factories to which production had been
outsourced (pp 239-41).
174. The EU-China economic and trade relationship
had matured considerably in the last ten years. The well-developed
framework of dialogues now included a High Level Economic and
Trade dialogue, which brought together inter alia Chinese
ministers and European Commissioners (p 239). The purpose
of the Dialogue is to address the trade imbalance.
The first meeting took place in April 2008.
175. Baroness Ashton of Upholland highlighted
non-tariff barriers to trade as the main obstacle to market access
for the EU. In particular, protection of intellectual property
rights (IPR) in China was an area of "major concern".
Although China's legal framework for intellectual property protection
had been largely aligned to WTO standards, "much remained
to be done" to improve enforcement. The EU held a regular
dialogue with China on IPR in which the EU raised not only instances
of specific concern but also the broader question of the key role
a sound IPR system had in an economy. The EU was providing technical
assistance to improve the effectiveness of IPR protection and
enforcement in China (pp 239-40).
176. Jonathan Peel (European Economic and Social
Committee) noted that there were profound cultural and ideological
differences between the EU and China, and disputes often arose
through a lack of understanding. The Chinese perception was that
the EU applied "double standards" including on the question
of Market Economy Status (MES).
A solid framework was needed to address issues fairly and on a
"win-win" basis. IPR was a major concern. The major
issues faced by EU businesses in China occurred below the surface,
notably due to the absence of effective and consistent implementation
and enforcement of IPR legislation. The EU's concerns about IPR
and its reluctance to export high-tech and other sensitive products
to China were strongly linked (pp 264-70).
177. Baroness Ashton of Upholland thought that
the best way to deal with market access and China's WTO obligations
was through dialogue. But "where dialogue does not bring
results, and we believe there is sufficient evidence that China
is in breach of its WTO obligations, we canand doresort
to the WTO Dispute Settlement Mechanism" (pp 239-40).
178. Ambassador Wu
stressed that China had acceded to the WTO and its rules, and
should therefore be treated on an equal footing with others. Market
economy status had been granted to Russia, but not to China, despite
its economy being more market-oriented than Russia's.
179. The European Chamber of Commerce in China's
on EU trade with and investment in China details the areas where
China has made progress but also problems such as non-tariff barriers
to trade. The European Chamber told us
that China had not fulfilled all the commitments it had entered
into upon accession to the WTO in 2001. Transparency and speed
in addressing problems faced by European firms were particular
issues. European companies investing in China found it difficult
to obtain 100% ownership. Where problems could not be resolved
satisfactorily through dialogue, one method of recourse was legal
action against China through the WTO. The EU, with approximately
500 million people, was a larger market than the United States
and therefore had considerable leverage, but competition between
Member States and the lack of a single EU voice hampered the EU
in using it. Some Member States, including Cyprus, Romania and
Bulgaria, were generally more favourable towards China than others.
Spain, Poland and Germany were more outspoken when China cut corners
on the environment and labour laws and produced cheap goods with
which the EU could not compete.
180. Professor Ash (School of African and
Oriental Studies) judged that the EU's trading and economic relations
with China were a "very mixed picture". While closer
economic ties had benefited both sides, China's "massive"
trade surplus with the EU was an important challenge. The maintenance
of Chinese non-tariff barriers and other kinds of restrictions
prevented a genuinely reciprocal trading relationship (Q 183).
181. Stephen Phillips, Chief Executive of the
China-Britain Business Council (CBBC), outlined several challenges
for businesses operating in China. The Chinese market was complex
and could not be treated as a single market. China was not well
understood by the business community in the EU, and a major challenge
was that it was changing rapidly. The regulatory environment was
the main obstacle to increased investment into China. Some of
the main sectors in which European businesses had invested were:
- the UK: banking and financial services, advanced
engineering, oil and gas and increasingly creative industries;
- Germany: manufacturing, automotive and chemicals;
- The Netherlands: manufacturing, consulting and
- France: engineering, nuclear, cement and retail
(QQ 640-2, 671).
182. Scott Wightman (Director for Asia Pacific,
FCO) said that the EU needed to identify its market access priorities,
on which the Commission and Member States could focus their
diplomatic efforts in order to increase the EU's effectiveness.
Financial services were one priority (Q 768). He advocated
an approach based on partnership with the Chinese. However, the
EU could use trade defence mechanisms to protect against unfair
Chinese competition. The EU could also explain to the Chinese
that where Chinese competition was seen as unfair it would be
harder for European political leaders to justify maintaining open
markets (Q 766).
183. Professor Godement noted that the EU
was not in the same situation as the United States with regard
to China. The EU compensated for its trade deficit with China
through a trade surplus with other parts of the world. The bulk
of China's surplus was transferred into US dollar holdings, not
euros. The result was that the EU did not have the mutual dependence
that existed between the United States and China. It was crucial
for the Chinese to keep the EU market open but there was little
reciprocity in the process (Q 577).
184. Charles Grant told us that one reason for
the EU's trade deficit with China was the deliberate undervaluation
by China of its currency. It was in China's own interests for
its currency to increase in value, which would rebalance its economy
185. Lord Mandelson believed that engaging with
China was the right way to tackle the currency issue; the US had
adopted that view. The financial imbalances created by Chinese
trade surpluses had been harmful and the EU was entitled to point
them out. Many commentators believed that the imbalances were
responsible for the current instability in the world's financial
system. Without refuting that view he nevertheless rejected the
notion that China could be held specifically responsible for the
international banking crisis. There was scope for a quicker adjustment
of the exchange rate and for a continued, and expanded, diversification
of Chinese official reserves into the euro (Q 731).
186. This was confirmed by Lord Patten of Barnes,
who told us that although the Chinese were probably disappointed
that the integration of the eurozone had not gone further, they
were content with the recent strength of the euro because of their
substantial euro holdings. The Chinese also had large holdings
in US dollars. This meant that they were "in a bit of a bind"
because they had to be careful not to take any action which would
have the effect of devaluing the dollar (Q 556). Professor Breslin
thought that the Chinese were uncertain about moving into the
euro until its stability had been confirmed (QQ 189-190).
187. Mr Phillips said that in the three
years he had worked for the CBBC no company had raised the issue
of the valuation of the Renminbi. Companies saw foreign exchange
movements as a risk of doing business and managed it in the same
way as they would in another country. The Renminbi was not a freely
traded currency and therefore did not float; it was pegged to
a basket of currencies but nobody knew exactly what the basket
was (QQ 675-9).
188. China is a key trading and investment
partner for the EU and its importance will grow. An important
objective for China is EU recognition of its status as a market
economy. Yet China is not meeting many of its existing obligations.
The EU expects China to open its market to fulfil its WTO treaty
obligations, address non-tariff barriers and protect intellectual
property rights. The EU should not consider granting market economy
status until China meets its obligations.
189. Meanwhile the EU should take firm action
when dialogue does not produce results, including use of the World
Trade Organization dispute resolution mechanism.
190. The EU and its Member States should define
their priorities for Chinese market opening and focus on these
in all negotiations with the Chinese government.
191. The vast trade imbalances between China
and the West are not sustainable. They contributed to the recent
failure of global financial systems. The continued undervaluation
of the Renminbi will be an increasing source of friction between
the USA and China and will inevitably come to a head in the near
future. Any consequent fall-out between the US and China in terms
of trade or protection will inevitably have major effects on EU
trade and its markets. The EU, in partnership with the United
States, must address this issue firmly with China through the
192. The EU, and the European Central Bank,
should find ways of encouraging the Chinese authorities to hold
a higher proportion of their reserves in euro-denominated instruments.
193. The EU needs to have a trade presence
in major industrial centres outside Beijing, in order to extend
its influence and effectiveness.
194. The EU must consider what needs to be
done to enhance its competitiveness and maintain its global position
in the light of the economic challenge from China and emerging
80 European Commission Directorate-General for Trade
The EU's imports from China are mainly industrial goods: machinery,
transport equipment and miscellaneous manufactured articles. The
EU's exports to China are mainly machinery, transport equipment,
and miscellaneous manufactured goods and chemicals. Back
FCO, China country profile. http://www.fco.gov.uk/ Back
This is a highly technical issue related to anti-dumping cases
arising from China's WTO accession agreement. China agreed to
be considered a non-market economy until 2016, because its economy
is such that it is impossible to ascertain the true price of goods,
critical for anti-dumping investigations. Back
Adviser to the Ministry of Foreign Affairs, Meeting Beijing, Appendix
EU Chamber of Commerce in China, "European Business in China
Position Paper", 2009, available at: http://www.euccc.com.cn/view/media/publications Back
Meeting with the European Chamber of Commerce in China, Beijing,
Appendix 4. Back