With the comment this week by Phil Hogan, the European Union’s trade chief, that “meeting halfway will not work for the EU” in signing a new investment deal with China, one is moved to inquire whether Brussels appreciates that, first, it is negotiating with a regime that won’t even acquiesce to the United States the concessions that the EU wants, and, second, that Beijing actually holds the better hand at the negotiating table.
What Hogan means by no halfway measures is that before any investment pact is signed, Beijing must commit to allowing European companies a level playing field when doing business in China, which one imagines also means changes to how Beijing favorably treats its state-owned enterprises and improvements to its laws on IP (intellectual property) protection – perennial problems that are the root causes for the US-China trade war and which have gone unsolved since China joined the World Trade Organization in 2001. (Whether these are even possible for the Communist Party of China to enact is another matter entirely.)
This year, 2020, is the deadline that the EU and China gave themselves to conclude the Comprehensive Agreement on Investment, over which talks began in 2013 and entered their 26th round this month. This pact will replace the bilateral investment deals all EU members, except Ireland, have already agreed with China. It will no doubt be the main talking point at the EU-China summit in April in Beijing, hosted by Chinese Premier Li Keqiang, and also when President Xi Jinping travels to Germany in September for a special summit called by Chancellor Angela Merkel. In between, there will also be the annual “17+1” summit, which includes 13 EU members of the Central and Eastern Europe region.
Brussels is seemingly osculating between whether it wants to rush through this deal or is happy to wait until China accedes to its demands. Sabine Weyand, the EU’s director general for trade, said in December that the investment agreement was moving at a “snail’s pace” and called for more action by Beijing. Perhaps there is now extra urgency after the US and China signed “Phase 1” of their new trade accords this month. But Hogan’s comments this week would suggest that the ball is now in China’s court and Brussels is prepared to wait, reckoning that no deal is better than a bad deal.
Both sides have been reasonably straightforward in their demands. What Beijing wants was spelled out in December, when Foreign Minister Wang Yi said that an investment agreement must include provisions by the EU to allow Chinese technology firms to operate freely in Europe, a nod to recent decisions by some EU states to prevent Huawei from developing their 5G (fifth-generation telecom) networks over security concerns raised by Washington. The Huawei issue is now also reportedly causing much friction between the US and Britain, which leaves the EU at the end of this month and appears quite content (to American frustration) to use Huawei equipment.
Later in December, Beijing’s envoy to the EU, Zhang Ming, added that any attempt by the European bloc to prevent Chinese companies from investing in or acquiring European firms – such as measures floated by French President Emmanuel Macron – would also need to be stopped. Attempts by Brussels to prevent certain takeovers of vital European firms by Chinese companies have made “many Chinese entrepreneurs working in Europe suspicious,” Zhang said, and has “had some kind of impact on Chinese investment in the EU.”
Responding to Weyand’s “snail’s pace” comment, Zhang also questioned whether this was a “tactic or a trick played by the EU side,” and called for negotiators to “meet each other halfway.” This was perhaps in the mind of Hogan when he said this week that “meeting halfway will not work for the EU.” He added: “Our markets are largely open, probably the most open in the world. We have therefore have made it very clear that we expect and are demanding a rebalancing of the asymmetry.… It’s up to China to level the playing field for our companies operating in their country.”
But who has more to lose if the halfway point is met and a bad deal signed? Yes, China experienced one of its slowest years of growth in 2019 and, yes, Chinese businesses need to expand further into European markets to maintain growth. Between 2013, when the Belt and Road Initiative was launched, and 2019, Europe was by far the largest recipient of Chinese investment and contracts: US$312 billion compared with second-largest East Asia’s $201 billion, according to the American Enterprise Institute’s China Global Investment Tracker. But, as this makes clear, the EU also needs to maintain investments for China for its own economies’ growth – and perhaps more so than China. In fact, Chinese foreign direct investment into Europe fell 40% in 2018, to the lowest point since 2014. The record year was 2016, when China directly invested $42 billion.
But aside from security concerns over Huawei, what most worries some Europeans is seeing their own major companies being taken over by foreign firms – not only an economic concern, but a vivid illustration of the continent’s weakness in the 21st century as it struggles to play a larger role in global affairs. In 2016, a Chinese firm bought out German robotics manufacturer Kuka for €4.5 billion (US$5 billion), a deal that led Michael Clauss, then German ambassador to China and now Germany’s permanent representative to the EU, to say certain Chinese investment were “to be feared” if takeovers of vital European firms “will only be used as tools and thrown away once they have transferred sufficient technology.”
The Financial Times last year published an internal EU policy document that warned of non-European firms – most likely meaning Chinese – “with unprecedented financial means [that have] the potential to obliterate the existing innovation dynamic and industrial position of EU industry in certain sectors.… Europe has no such companies.…This presents a risk to growth, jobs, and … Europe’s influence in key strategic sectors.”
Much ink has been spilled over the merits of the “Phase 1” trade deal signed between the US and China this month, with most analysts taking the opinion that is has changed relatively little in the overall trade war. But one thing is clear: China has committed to buying $200 billion worth of American goods in order to reduce its trade surplus. Most probably, that will mean China restricts purchases from Europe to make up from new purchases from the US, something Hogan alluded to last week.
What Brussels hates – but most readily understands, albeit begrudgingly – is that its own dealings with China are constrained by the actions of the US. The first issue to note is that President Donald Trump may well now turn his sights on the EU, imposing new tariffs on European imports. Hogan’s remarks were certainly robust when he visited Washington this month, as would be expected from a politician known for his bluntness. The second is whether it’s most sensible for the EU to bide its time over the China investment deal in order to wait and see how America’s presidential elections turn out in November.
What Brussels hates – but most readily understands, albeit begrudgingly – is that its own dealings with China are constrained by the actions of the US
In one scenario, Trump wins in November and, at a next stage of trade talks, actually manages to get Beijing to enforce more business equality for foreign firms, scale down influence over its state-owned firms and generally liberalize its economy – wishful thinking, but the same ambitions the EU shares. Alternatively, Trump wins in November but grows bored by China issues and accepts whatever Beijing offers – which will fall far short of economic liberalization and leave the EU alone to fight this campaign.
Another alternative is that the Democrats win, in which case it’s unlikely that their president would go as far as Trump in demanding radical change from Beijing. Yes, competing with China is now one of the only bipartisan issues in US politics – along with taking down the big tech firms – but would a President Bernie Sanders or President Joe Biden have the nerve and energy to take on China as vehemently as Trump has done?
What one finds, then, is that so much of the EU’s negotiation capacity depends a great deal on what happens in Washington. Why, indeed, would Beijing open up its economy for an investment deal with the EU – even for more investment opportunities in Europe – if it is unwilling to do the same to restore full trade links with the US, by far a more important economy for China?
In the best-case scenario, patience might work for Brussels. And if relations between Europe and the US are soothed, even under another Trump term in office, it is conceivable that US and EU negotiators might have informally worked together to force China to open up its economy. Restoration of trade links with the US and a new investment pact with the EU combined would be quite the incentive for Beijing. But if the EU goes it alone (either willingly or unwillingly) and if its tensions with the US escalate, it is likely to be met by a less budging and more resolute China that may well turn around and say: “Meeting halfway will not work for China, either.”