20 March 2017

CEPS: EU-China Leadership in Trade Policy: Feasible? Desirable?

Rationale

The EU and China are the biggest traders in the world economy. For well over one hundred countries, China is the first trading partner and, for many of these countries, the EU ranks second or third in terms of bilateral exchange. For several dozens of other WTO partners, the EU ranks first in their bilateral trade, with China having moved up to second, third or fourth position. Bilateral trade in goods and services between China and the EU is huge: in 2016 two-way goods trade amounted to €514 bn, and for services (2015) another €64 bn. For goods, this compares to trans-Atlantic trade, but for services, where the potential between China and the EU is much greater, services from China are only beginning to develop. Moreover, in both services and goods, the restrictiveness of China in terms of market access is far greater than that in the US and the EU. The same holds for the restrictiveness of China with respect to incoming FDI. The 2015 EU stock of foreign direct investment (FDI) in China was €168 bn, with Chinese FDI in the EU being €35 bn − a fraction of the trans-Atlantic values.

The US has withdrawn from multilateral and interregional (TPP!) trade initiatives, and some policy advisers are even casting doubt on the acceptability of WTO Appellate Body rulings that are adverse to the US. The leadership role to uphold multilateralism and further pursue trade initiatives must therefore fall to China and the EU. These two economies can do a good deal with their regional partners and the countries with which they are negotiating free trade areas (FTAs). A far more strategic move, however, would be to turn the EU-China trade and investment relationship into an example, thereby also creating a bundle of opportunities for many other partners.

China and the EU are continuously deepening their bilateral relationship as well, for example with over 60 dialogues and capacity-building exercises (e.g. in safety of consumer goods; in SPS matters; etc.) and ongoing talks on an investment agreement (CAI), partly linked to market access. China (via President Xi’s call in Bruges in 2014) has suggested exploring a bilateral FTA.  After some hesitation, the EU has begun to speak about this idea in positive terms, once the CAI is agreed. These intentions were exchanged in a world economy without Trumpism, however.

The EU-China FTA: a reality check

In Pelkmans, François et al. (2016),  a detailed factual analysis of a possible FTA between China and the EU has been presented, besides an economic impact assessment based on a modern CGE (Computable General Equilibrium model) and the Global Trade Analysis Project 2011 database. The underlying idea of the book is to better understand what it takes for both partners to conclude such an FTA successfully. After all, leadership is not a matter of ‘convincing by speech’ and ‘vision’ only, but of realising concrete results in terms of mutual market access and acknowledgement of opportunities by market players. The FTA assumed to be negotiated is a ‘deep and comprehensive’ one, as the EU now routinely negotiates with other partners such as South Korea, Vietnam, Singapore, Canada, Japan (unfinished) and (now pending) in TTIP.

Of these trade partners, only Vietnam is a developing country. China is more developed than, say, a low- middle-income country, like Vietnam, but nonetheless has many lingering development challenges. The ‘deep and comprehensive’ nature of the FTA is expressed in nine broad areas, all scrutinised in depth: industrial tariffs, agro-food tariffs and TRQs, technical barriers to trade (TBTs), food and feed safety barriers, market access in services, public procurement, IPRs (Intellectual Property Rights) and GIs (Geographical Indications), SOEs (State-Owned Enterprises) and investment (the CAI). The overall conclusion of our work is clear: with the exception of TRQs, where the EU’s TRQs are more problematic than those of China (both in number and complexity), China presents a wide-ranging set of formidable problems in its market access regimes. [...]

Chinese reforms and readiness for leadership

In the November 2013 Third Plenum, China presented an impressive vision of structural and wide-ranging reforms. These reforms were drafted largely in market-economy language and, for the most part, go in the right direction. However, they are not directly operational, so it is critical to observe what operational reforms and implementation have been accomplished. Some clear examples can be mentioned (e.g. an overhaul of the technical regulation, standards and conformity assessment regimes and institutions, see Pelkmans et al., 2016, ch. 9) but overall there is widespread disappointment inside China and in European business. The wisdom of late 2013, which accords so well with sound long-run development and an open economy, seems to have been replaced by another wisdom that justifies slower progression. [...]

Further opening-up would benefit the Chinese economy. For example, if a bilateral FTA were to be negotiated (as in Pelkmans et al., op. cit.), the extra GDP for China (in percentages) would be 2½ times the gain for the EU. Note that the impact simulation is necessarily a considerable underestimation as the economic impact of the EU-China comprehensive agreement on investment (CAI), a prerequisite for a ‘deep and comprehensive’ FTA, is not incorporated. Greater openness beyond a bilateral EU-China FTA would bring further gains and should also underpin China’s ambition of trade and investment within the context of the One Belt, One Road (OBOR) initiative, in which many European countries are involved via the AIIB.

Premier Li revealed at the press conference of March 15th that China had called for an acceleration of the CAI negotiations, and was awaiting a positive response from the EU. He then stressed that, even without the CAI, China would continuously enhance market access for, and extend equal (‘national’) treatment to EU businesses as if they were local Chinese enterprises. This would be very welcome news. [...]

Overall, market access may not be just a European problem. It could well be a Chinese problem, too, if one only realises China’s activism in FTA negotiations. Presently, China is undertaking nine FTA negotiations, including the China-Japan-Korea trilateral FTA negotiations and the Regional Comprehensive Economic Partnership (RCEP) with the 17th round of negotiations concluded on March 3rd. China is conducting six FTA studies, in addition to a joint exploratory study of a Canada-China FTA building on the Canada-China Foreign Investment Promotion and Protection Agreement, which entered into force in October 2014.

Reflecting on China’s FTA strategy, given that the FTAs with neighbouring countries seem to function (but are not ‘deep’) and that a basis has been formed in FTAs with developing countries, it is time for China to approach ‘great powers’ and grasp the ‘key’ to further economic development. Needless to say, before that can happen, China - herself a great power, must live up to the expectations of other ‘great powers’ in terms of economic openness. With uncertainty looming over the fate of the TTIP, EU Commissioner Malmström (in Singapore on 8th March 2017) unveiled the EU’s global trade agenda of doubling down in advancing EU trade talks with partners around the world. Will China be ready to foster a closer trade relationship with the EU, as President Xi himself proposed three years ago?

Despite Premier’s Li’s call for an acceleration of the CAI negotiations with the EU, the EU remains reluctant to enter into FTA talks with China. In the new world of Trumpism, the sequence of first CAI and subsequent FTA talks might not be the best signal to send to China and the rest of the non-Trump world economy. Moreover, China shows signs of a shift towards another type of FTA: after all, the common vision shared by China, Japan and Korea for their trilateral FTA negotiations is ‘comprehensive, deep and mutually beneficial’, which corresponds to what the EU would want as well.

Both sides should now make a move: the EU should discuss with China at the highest level whether acceleration of CAI talks and granting more ‘national treatment’ by China to EU investors can lead it to reconsider the sequencing of CAI and FTA. And China, for its part, needs to accelerate the implementation of its reforms, especially those with relevance to market access and better market functioning. [...]

Full article on CEPS

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