Stars and Dragons: The EU and China - European Union Committee Contents


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[80]. 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 footnote.

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[81]. 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)[82]. 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 can—and do—resort to the WTO Dispute Settlement Mechanism" (pp 239-40).

178.  Ambassador Wu[83] 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 comprehensive report[84] 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[85] 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 agriculture;
  • 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 (Q 93).

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 G20.

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 markets.

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

81   FCO, China country profile. Back

82   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

83   Adviser to the Ministry of Foreign Affairs, Meeting Beijing, Appendix 4. Back

84   EU Chamber of Commerce in China, "European Business in China Position Paper", 2009, available at: Back

85   Meeting with the European Chamber of Commerce in China, Beijing, Appendix 4. Back

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