Memorandum by Jonathan Peel, Member of
the European Economic & Social Committee (EESC), representing
the UK—Group I (Employers/Industry)
1. INTRODUCTION
1.1 I very much welcome this opportunity
to submit evidence to your Lordships for this important and timely
Inquiry into the EU and China.
1.2 This evidence is being submitted in
my personal capacity as a UK Member of the European Economic and
Social Committee (EESC), on which I sit as part of the Employers/Industry
Group, (Group I). As such I have also been selected as a member
of the EU—China Round Table, which was set up as a result
of the Helsinki (EU—China) Summit in late 2006 and
which is comprised of fifteen Members each of the European Economic
and Social Committee and of the Chinese Economic and Social Council
(CESC), representing civil society on both sides.
1.3 As a Member of the Round Table I have
twice been Rapporteur on the issue of EU—China Trade and
Investment and have presented papers to meetings of the Round
Table, in June and November 2008. Previously in November 2007 as
joint Rapporteur I submitted a paper on the issue of Corporate
Social Responsibility. This submission in turn is based on a distillation
of these papers and our subsequent discussions, which has led
to a proposal by the Chinese to set up a special research group
from the Round Table to go into particular issues in greater depth
that are relevant to the ongoing EU—China PCA negotiations,
a mark I believe of Chinese appreciation of our work hitherto.
1.4 This submission does not attempt to
answer each question posed by the sub-committee, but concentrates
on mutual perceptions, the nature of and managing the EU—China
relationship. The CESC does represent civil society in China,
albeit with clear Chinese "characteristics"—probably
not fully in line with nor likely to be recognised as such by
European standards. In turn much of the detailed information as
to the conditions met with by EU owned companies operating in
China comes from briefing sessions held separately with members
of the EU Chambers of Commerce in China (EUCCC) and other businessmen
based in China, including the German Centre in Beijing, with its
particular emphasis on SMEs.
1.5 Previously I have given evidence to
the Committee both for its Inquiry into European Trade Policy
last year and before that following the WTO 2003 Ministerial
meeting at Cancún, which I attended (as well as the WTO
meeting in Hong Kong two years later) on behalf of the UK Food
& Drink Federation, my then employer.
2. BACKGROUND
TO EU—CHINA
RELATIONSHIP
2.1 Economic links between the EU and China
have grown rapidly over the past 30 years, to the extent
that there now exists a very deep level of economic linkage and
interdependence between us. The interaction of the world's largest
market and fastest growing economy, China, with the world's largest
single market, the EU (with a population of nearly 500m making
it comparable to the US and Russia combined) is of fundamental
importance in an increasingly interdependent world. The EU and
China now hold highly significant economic and political stakes
in each other and therefore in each other's economic and social
wellbeing.
2.2 In a relationship of this depth, issues
and disputes are bound to arise. As history shows, all too often
disputes arise through lack of understanding, and the EU and China
need to work closely together to prevent this from happening wherever
possible. Given the very different historical and cultural backgrounds—mirrored
in our very different political and administrative systems—between
China and the EU, a large number of differences and therefore
difficulties are bound to arise, which need to be managed with
due appreciation and respect on each side. Indeed it is surprising
that there have not been more problems, especially when compared
with, for example, the number of major trade disputes between
the EU and the US, with systems far more closely aligned.
2.3 Issues which arise in the key areas
of trade and EU company investment in China are to my mind symptomatic
of the wider issues and differences that arise between the EU
and China, not least due to these profound cultural differences
and very diverse ideological backgrounds. Indeed the interchange
of ideas from such diversity may be beneficial to both parties,
but the history of our relationship clearly shows that the West
cannot simply impose or expect China to adopt our ideals and standards.
2.3.1 On the contrary there is a clear school
of thought that sees China in the long term setting out to remodel
global institutions and practices with clear Chinese characteristics,
or failing that, ensure that these carry much greater compatibility
to the basic Chinese approach to international matters. Most global
institutions, from the World Bank to the IMF to the WTO or ILO,
were of course not established with any Chinese input, where in
general China has only become involved in recent years, yet the
balance of financial and economic power is undoubtedly moving
eastwards.
2.4 Hitherto, in order to build a lasting
relationship between the EU and China, emphasis has inevitably
been placed on the bigger, more strategic goals whilst detail,
problems and other irritants (even where longstanding) have been
overlooked and ignored.
2.4.1 As mutual trade and investment have
become more open and sophisticated, and with a mature relationship
now firmly established, this must be the time to start to develop
a solid framework to tackle such issues and problems and deal
with them fairly, on an overall "win-win" basis. No
longer brushing these aside should help prevent future crises
and other disruption of the main strategic agenda.
3. CORPORATE
SOCIAL RESPONSIBILITY
(CSR)
3.1 An early indication of basic cultural
differences arose when the Round Table began to discuss Corporate
Social Responsibility (CSR). It became clear that to CESC Members
CSR was a means whereby companies fulfilled their legal obligations.
The idea contained in the European Commission's statement [36]
that CSR is "a concept whereby companies integrate social
and environmental concerns in their business operations and in
their interaction with their stakeholders on a voluntary basis"
was new to them. The EU Members reiterated the Commission's point
too that CSR "is about enterprises deciding to go beyond
minimum legal requirements and obligations stemming from collective
agreements in order to address social needs … through
CSR, enterprises of all sizes, in cooperation with their stakeholders,
can help to reconcile economic, social and environmental ambitions".
3.2 It was only when many EU based companies
reacted and contributed so positively, and without prior Chinese
Government direction, to relief work following the Sichuan Earthquake
of May, 2008, that the concept began to be understood in Western
terms. It remains to be seen how deeply this perception penetrated
and how long it will last. There is already a significant CSR
achievement by several EU owned companies operating in China,
although this must clearly be a long and on-going process. The
key remains in finding ways that such principles are also shared
by local companies operating up-stream and down-stream in China,
but that is outside the scope of this submission.
4. TRADE AND
INVESTMENT
4.1 As mentioned, much of these basic cultural
and ideological differences are also echoed in issues arising
out of trade and investment. Trade and investment is I believe
at the core of the EU—China relationship. Trade and investment
offer the most effective, deepest and most enduring means of building
contact between countries and global regions, from which other
contacts and ties will most readily develop and grow. Trade and
investment are also the key drivers of European economic growth
and of the external dimension of EU competitiveness. As the Commission
"Global Europe" Communication (2006) stated, "our
prosperity depends on trade".
4.2 In 2007 according to Commission
statistics, EU-China trade reached €300bn—more than
double that of 4 years previously, although figures are bound
to have retracted since then due to the financial crisis. China
is the EU's second largest trading partner (after the US), with
over 10% of its trade, its leading source of imports, and its
fourth largest export partner. For China, the EU is its largest
trading partner with some 20% of its trade.
4.3 The growth of China—EU trade by
more than 70 fold since 1978 has been matched by foreign
investment in China. The EU is now one of the main sources of
foreign direct investment in China (excluding the Chinese diaspora).
More than half of China's foreign trade is now conducted by multinational
companies, many EU owned. China too is a major source of foreign
investment—including in the EU, mainly through purchase
of significant holdings within existing companies.
4.3.1 Investment in China has enabled many
European companies to remain competitive by gaining access to
lower cost inputs, thereby helping them to maintain jobs and investment
in Europe in key activities such as design and research in face
of ever tougher global competition. Partly as a result of such
pressures many lower-skilled jobs nevertheless have disappeared
from Europe, leading to greater demands for protectionist measures,
notably in the south.
4.3.2 In addition there are major issues
arising both from currency imbalances and from the trade imbalance
(roughly 3:1 in China's favour). For the latter there are
two mitigating factors that need to be taken into account:
— over half of China's exports come from
foreign investment—in the electronics industry this is as
high 65%—demonstrating China as the preferred location for
production that might otherwise be in OECD countries
— many Chinese exports include components
that have previously been imported—for example a Chinese
made mobile phone may contain both a battery and a chip that have
been imported from elsewhere—usually in Asia. Previously
such parts would have been directly exported to the EU: the overall
trade picture with east Asia has not radically altered.
4.3.3 Nevertheless, the growing threat of
protectionism needs to be guarded against: it remains a major
threat to EU-China relations—as to all trade and investment.
4.4 China in turn needs to ensure that its
economic growth remains sustainable in the long term, with major
implications for how future investment into China is best channelled.
This includes opening up internal markets in those parts of China
distant from the more prosperous coastal regions. Pump priming
low-cost production through state funding has been relatively
easy—but it is the sheer size of the Chinese workforce and
the need to create annually a large number of new jobs that presents
the main longer term challenge for its authorities.
4.5 The basic cultural differences between
us readily lead to major EU concerns in the area of trade and
investment with China. These problems include
— Standards—where the EU and China
appear to operate on different sets of standards but where one
international set of rules, especially with regard to public,
animal and plant health, is essential (recent examples include
lead in toys, melamine in milk and contaminated petfood)
— Market Access obstacles that are faced
by EU companies, notably non-tariff barriers and licensing issues,
especially variations in different parts of China
— Lack of a Level Playing Field for EU
companies operating in China—in particular IPR (an area
where the cultural differences are perhaps most stark—see
8 below), differing local interpretations of Chinese legislation,
as well as access to government procurement, and local subsidies
— Overall transparency in dealings with
Chinese authorities at each level
4.6 In turn, Chinese members of the Round
Table listed a number of their main concerns with the relationship
with the EU. These included:
— The charge that the EU had lost sight
of the strategic partnership due to "forthcoming elections":
too many in the EU just see China as a major competitor
— The accusation that the EU uses double
standards when dealing with China, especially discriminating between
dealing with companies based on EU investment in China and with
local companies, with the comment that China gets blamed for far
too many things based on "pride and prejudice", whilst
in turn real Chinese concerns are overlooked/"neglected"
— The accusation that the EU is over-aggressive
in launching "anti-dumping" measures against China through
the WTO (India and the US lead here!); here highlighting steel
and leather shoes, adding that such anti-dumping measures often
followed a failure by EU companies to acquire Chinese interests
in these areas
— The failure by the EU to grant China
Market Economy Status/Treatment (MES/MET), where the EU is accused
of double standards, adding that "enterprises invested by
EU in China were more likely offered MET while China's enterprises
were refused based on minor issues", and that this was based
on "political and trade protectionist considerations"
and used as a "delaying strategy": China's progress
is being ignored, and Chinese enterprises "suffer unfairness"
— The EU arms embargo on and its "prohibition"
of high-tech products exports to China was also a key contradiction
of a strategic partnership with China, and was based on cold war
ideology: to link all this now with IPR related issues was again
harmful to further bilateral economic cooperation
— Other issues raised included poultry
exports to the EU (where Brazil and Thailand were favoured at
China's expense) and restrictions/discrimination in allowing "non-EU
banks" to open branches in Europe—the latter varying
from one EU member state to another—"China often does
not know with whom to negotiate, the EU or the Member States".
IPR in exhibitions, exports of traditional Chinese medicines,
Sovereign Wealth Funds, "etc", were added here, but
without details.
4.7 Standards remain a key issue. The recent
crisis over milk contamination in China is an example of the type
of crisis experienced by the EU in recent years involving human,
animal or plant health issues (eg dioxins, BSE, FMD, Para Red).
Ever more advanced technology has led to greater awareness of
such issues, also seen over lead in paint on toys (through the
use of chemicals banned in the EU) and pet-food. All this has
led to the very high standards now rightly demanded by European
consumers.
4.7.1 China in turn imposes complicated
and costly labelling and packaging requirements for imported goods,
where regulatory overlap and where inconsistent implementation
by customs can cause major problems and lead to unnecessary technical
barriers to trade.
4.7.2 It is impossible to prevent or anticipate
such crises, but trust needs to be built in each other's ability
to deal with such problems without resorting to unilateral action.
Mutual trust is essential: unilateralism in such issues should
be a matter of last resort. Harmonisation of standards offers
the opportunity to increase trade whilst ensuring both safety
and quality: it must be in the interests of both China and the
EU to participate in the international standard setting bodies
as far as possible. The initial agreement between the EU and Chinese
standards agencies is thus to be welcomed.
5. HIGH-TECH
BAN, MARKET
ECONOMY STATUS
(MES) AND RELATED
ISSUES
5.1 The key issues listed above include
China's concern at the EU ban on high-tech exports [37]
and its decision not to grant China Market Economy Status (MES),
which are in fact very closely related to EU concerns arising
out of transparency and a level playing field for foreign investors
in China. They must be tackled jointly and in balance in order
to resolve them.
5.2 There would clearly seem to be a strong
and direct link between such EU concerns arising from problems
faced by EU (and other foreign) businesses in China, notably over
Intellectual Property Rights (IPR) and insufficient patent protection,
and the EU's clear reluctance in turn to export high-tech and
other sensitive products to China, not least to avoid meeting
such risks in those areas.
5.3 MES in turn sounds like an important
judgement on the sophistication of the Chinese economy, but it
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 as a result of issues arising
from its economy that make it impossible to ascertain the true
price of goods, critical for anti-dumping investigations. The
EU has welcomed the real progress China has made, notably in new
accountancy and bankruptcy legislation, but its position has remained
that China has not yet fulfilled the criteria needed and that
any decision to give China MES in the near future must be made
on economic, not political, grounds. However, it is clearly a
highly political issue (Russia has already been granted MES) and
the HMG line is that it should be used as a negotiating tool,
a view it is increasingly hard to dispute.
5.3.1 Nevertheless, increased openness,
transparency and consistent, even-handed treatment of foreign
investment by China, as set out below, would bring early benefit
to China and help resolve these issues.
6. TRANSPARENCY
AND A
LEVEL PLAYING
FIELD FOR
FOREIGN INVESTORS
IN CHINA
6.1 Both China and the EU look for the rule
of law, including for Intellectual Property Rights (IPR) so outwardly
there do not seem to be major differences. Rather it would appear
that many of the problems for European businesses operating within
China occur beyond that point, when recognisable similarities
start to disappear.
6.1.1 According to the EUCCC,[38]
the lack of transparency, even implementation and enforcement
of new laws across China present fundamental problems to European
companies investing there. After a new law is passed through the
Chinese legislative processes problems they state start to arise
when this is not followed by any clear, centralised, readily accessible
or uniform information or set of guidelines as to how the new
law is to be implemented; what information that may become available
may also only arrive through obscure channels.
6.1.2 In many cases there will be no regular
or even implementation or enforcement across China as the country
is subject to local variations which are then perceived as inconsistencies.
In some cases implementation and enforcement may vary within the
same province or even within the same district or city. Other
problems arise when more than one government Ministry is involved,
as each Ministry will pursue its separate implementation policy
and these may not converge to any great degree. New regulations
may appear at very short notice, or even retrospectively—and
may likewise be published through obscure websites.
6.1.3 Draft implementation rules can appear
unofficially, or on obscure websites, and definitions can be unclear
or inconsistent. For example, technical import and export regulations
may aim to cover what is allowable, restricted or even forbidden
in these areas, but nowhere are basic concepts (such as the meaning
of "technical") clearly or consistently defined.
6.2 According to the EUCCC, problems faced
by EU companies in China include:
— Not all laws are published
— Time to adapt to incoming legislation
is not always sufficient—and laws can be implemented retrospectively
— Foreign law firms can only be represented
in court by Chinese law firms
— The courts system is not consistently
open to foreigners
— There is no right of appeal or appeals
mechanism
— Difficulties in gaining access to Government
Procurement opportunities on an equal or comparable basis to local
firms: here early Chinese accession to the WTO GP Agreement would
be most welcome
7. PARTICULAR
PROBLEMS FACED
BY SMALL
AND MEDIUM
SIZED COMPANIES
(SMES)
7.1 The problems listed above are often
exacerbated for SMEs investing in China. Many of these are highly
innovative, form a notable proportion of EU based investment in
China, and bring with them specialities and opportunities from
which major growth can follow, not least the development of Chinese
SMEs. With necessarily limited resources and small numbers of
staff such investment is comparatively complex and risky for such
companies, especially for those without adequate support resources
(in some cases provided by European industry bodies). Problems
of particular concern for SMEs in China, in addition to those
wider issues already listed above, include:
— Lack of a safe and predictable operating
climate exacerbated by insufficient transparency in legislation
and its operation, inadequate enforcement and insufficient time
to adapt to new legislation
— Enforcement of taxation rules, and often
lack of adequate notification
— IPR protection—not least as small
companies do not have sufficient means or muscle to pursue successful
enforcement
— Randomness of relevant websites—critical
information can all too easily be missed—together with difficulties
in gaining authoritative translation of key legislation/regulation,
and the need to interact with so many local institutions
— Hiring and retention of quality local,
Chinese staff (foreign experts are costly and may defeat the original
reasons for investing in China).
8. IPR (INTELLECTUAL
PROPERTY RIGHTS)
8.1 Such problems as those mentioned above
can be intensified when it comes to issues connected with Intellectual
Property Rights.
8.2 As previously mentioned, there is a
strong and direct connection between the EU's clear reluctance
in turn to export high-tech and other sensitive products to China
and EU concerns over the wide ranging problems faced in China
by businesses over Intellectual Property Rights (IPR). This is
a key area where the EU and China need a high-level, in depth
commitment to examine these issues closely together.
8.2. At the Round Table meeting, the Chinese
rapporteur stressed the need for China to encourage its own national
innovation and development, as it was China's aim to become one
of the top 20 innovative countries by 2020: China took IPR
and its protection very seriously. He pointed to the success of
China's Customs in stopping the export of counterfeit goods.
8.3 Welcome progress has been made by China
in setting up an IP regime, dating from 1982 (trademarks)
and 1983 (patents), revised in 1993, and again in 2001/02 following
China's WTO accession. A third revision of IP legislation is now
in hand.
8.4 The major issues and difficulties over
IPR faced by EU businesses in China occur below the surface, notably
through the absence of effective and consistent implementation
and enforcement of IPR legislation across China, a problem due
to the lack of coherence between central, provincial, district
and local authorities, and where courts' judgements may not always
be actually implemented.
8.5 The EUCCC also state that problems occur
at the early stage of application for IP rights, in particular
patents. Understandably Chinese authorities want to stimulate
local innovation and development, but this is perceived in turn
by many Chinese companies to mean that they should file for the
largest possible number of patents, regardless of the level of
innovation that they are to protect. This is particularly so for
the Utility Models (a sort of second rate patent, which requires
little technological innovation, and is relatively easy, cheap
and fast to acquire), where Chinese companies file hundreds of
applications that, for a large part, are simply based on existing
(mostly foreign) technology.
8.5.1 Foreign technology may become available
to the Chinese companies through perfectly legal means, such as
a technology transfer contract. However, the EUCCC say that technology
can also be spread to Chinese companies, competitors of a European
company, against the will of such European company. Indeed, it
happens that, when going through compulsory certification of their
equipment or products, companies may then have to supply detailed
and sensitive information—often going well beyond what is
strictly relevant (eg details of the overall chemical process
as opposed that part for which the patent is actually being sought)—to
the Panel in charge of the certification, which may often include
a representative from a local competitor. The overall lack of
adequate protection for foreign companies of confidential or commercially
sensitive information in these circumstances is a major problem,
despite high level assurances to the contrary by the Chinese authorities.
8.6 Other major areas of concern include
the enforcement of patents (where political control can be a factor
bringing added levels of uncertainty), the criminal threshold
(the level of "seriousness" beyond which an act of infringement
is considered as a crime) which is perceived to be set far too
high, as well as the fact that IP owners are not considered as
being a fully concerned party. Hence, their legal right to have
access to information and actively argue their case is very limited,
if not non-existent.
8.6.1 Penalties for IP infringement are
seen as too low to be a deterrent. Tools against infringement
involving the Internet are even weaker, where more than one authority
can be involved, whilst the burden of proof is set at an extremely
high level.
8.7 The Customs authorities, though, are
often mentioned as well trained, dedicated and efficient. Their
activity is applied to both inward and outward flow of merchandise,
which is of great benefit. However, their investigation powers
are limited. They handle smuggling infringement themselves, with
a special police force, but such police force has no jurisdiction
over IPR matters.
8.8 There is obviously strong pressure—both
political and economic—to transfer R&D to China. This
has proved successful so far, but there are risks the EUCCC say.
Current regulations categorise technologies in three categories:—prohibited
(mostly military) restricted (where various administrative approvals
are required) and allowed, but which must be registered—and
that can be a very lengthy and complicated process, each local
administration having its own interpretation of the regulations.
Foreign enterprises are not really aware of the risks that they
are taking when they "repatriate" the results of their
research done in China, if they do not follow these administrative
procedures. On the other hand, these procedures are so burdensome—not
to mention the risk of leakage—that there is often no choice.
8.9 Joint action to deal with these problems
needs to be taken at the highest levels, backed by effective implementation
and enforcement. This is a key area where the rules "with
Chinese characteristics" need to be as closely matched as
possible with those worldwide. None of the problems listed above
are insurmountable given sufficient will and commitment by both
the EU and China. The challenge is to be able to develop a solid
framework to tackle and deal with them fairly on a win-win basis,
whilst maintaining the overall strategic goals of our relationship.
5 May 2009
36 European Commission Communication "Implementing
the Partnership for Growth and Jobs: Making Europe a Pole of Excellence
on Corporate Social Responsibility", March 2006 Back
37
This includes the ban on militarily sensitive products, an issue
only for the highest political levels and outside the scope of
the Round Table Back
38
The EU Chambers of Commerce in China Back
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