EU, China try to smooth over trade and investment differences

The European Union and China signed a joint declaration at the end of their high-level summit in Brussels on Tuesday. It was not a foregone conclusion, given the many divisions between the two sides, but their hostility to United States President Donald Trump’s protectionist policies and unpredictable diplomacy helped find common ground.

Trump has slapped tariffs on US$250 billion worth of Chinese goods and threatened punitive measures against European cars, aircraft parts and agricultural goods.

European Council President Donald Tusk said China and the EU set the direction for their partnership “based on reciprocity.” Nonetheless, it is likely that the EU bloc will become more assertive in dealing with Beijing, especially if they fail to sign a comprehensive investment agreement by the end of 2020, and the Chinese continue to privilege bilateral ties with friendly EU member countries over relations with the Union.

Subsidies, connectivity and investment

China is the EU’s most important trading partner after the United States, and the European grouping had a trade gap with the Chinese of $125.8 billion in 2018. Faced with such an imbalance, the EU has often criticized China’s market-distorting practices and unfair investment policies.

In a 10-point document published in mid-March, the European Commission defined Beijing as an “economic competitor” and “systemic rival,” emphasizing the need for a more balanced relationship with the Chinese partner.

That said, Tusk and European Commission President Jean-Claude Juncker were far less confrontational in their approach during the Brussels meeting with Chinese Premier Li Keqiang.

They hailed an agreement with China to reform the World Trade Organization on industrial subsidies as a “breakthrough.”

Since December 2017, the EU has new rules to prevent dumped and subsidized Chinese goods from entering the European market. At the end of 2018, the EU had 93 anti-dumping and 12 anti-subsidy measures in place. More than two-thirds (68%) of them concerned products imported from China.

The controversial Belt and Road Initiative, with its implications for world trade, is another sticking point between China and Europe. The EU says the Chinese plan to revive the ancient Silk Road is too opaque and wants it to be open and inclusive, as well as based on international rules and standards.

The two parties apparently made progress on the issue on Tuesday, agreeing to identify “the most sustainable railways-based transport corridors between Europe and China.”

Furthermore, EU leaders pressed Li on reciprocity in procurement, particularly in the public sector, and investment practices. Juncker said the Union welcomed “the explicit agreement that there should be no forced transfer of technologies as a price for investment [in China].”

Beijing’s new foreign-investment law, which should level the playing field between domestic and foreign investors, does not meet the EU’s demands, especially with regard to forced technology transfer for European firms that intend to operate in China, and the exclusion of some sectors of the Chinese economy from foreign competition.

The EU cannot accept that the Chinese have free access to the European market, while European companies have restrictions to invest in China. Significantly, this month, the EU will roll out a screening mechanism for inbound foreign direct investments, which is evidently aimed at Beijing.

China’s divide and rule

The EU leadership and the Chinese premier also dealt with the problem of “malicious” cyber activities and the development of 5G networks. The possible acquisition of Huawei’s 5G technology by some European countries has raised eyebrows in Washington. The US government has said the use of Chinese-made 5G gear could compromise the security of its European allies and undermine Atlantic relations.

The EU is working on a concerted approach that does not include a pre-emptive ban on Huawei devices. On March 26, the European Commission called upon all EU countries to take the appropriate security measures when deploying 5G systems.

But European unity on the 5G matter, as well as other issues related to engagement with China, is not that strong. Greece has already said that the EU’s concerns over some aspects of China’s policies must not damage its interests. Last month, Italy signed up to the Belt and Road scheme – a decision that angered France, Germany and the US.

The EU is wary of China’s official statements pledging support for European integration and has several times warned that dependence on Chinese loans and investments could ensnare some EU countries in a debt trap, and divide the Union.

Indeed, EU member states that have close economic and financial links to Beijing often do not toe the bloc’s line and refuse to condemn Chinese violations, particularly when it comes to human rights.

This situation could change in the foreseeable future, however. The 11 EU member states that are part of the 16+1, a format of 16 central and eastern European countries plus China, have not really benefited from their cooperation with the Chinese so far.

Six of them joined the Belt and Road project four years ago, but among them only Hungary and Slovakia saw a marginal improvement in their trade gap with China between 2015 and 2017. Chinese surplus with these six EU countries taken together increased 10.8% to US$54.2 billion during this period, according to World Bank data.

The same is true with investment. Between 2013, when the Belt and Road was launched, and 2018, China invested $6.7 billion in the EU countries involved in the 16+1 grouping, according to the China Global Investment Tracker. Of that amount, only $1.2 billion went to transport projects.

If Beijing does not start to deliver on promises of mutual gains, its “divide and rule” strategy towards Europe will inevitably lose steam – to the benefit of EU institutions.