Following the UK’s decision to leave the European Union last summer and Donald Trump’s decision to bin the Trans-Pacific Partnership (TTP) in January, the EU has kept the spirit of global trade alive by signing long-pending free trade deals with Canada and Japan. In fact, with Washington backtracking on US-Asia relations and other global issues, the ties between the world’s largest trading partners, EU and China, has strengthened greatly.
On the auspices of G-20 Summit in July, Angela Merkel, Germany’s Chancellor and a driving force behind the EU’s domestic and international policy, described Beijing as a partner in ‘troubled times in the world’ — raising potentially of a G-2 partnership between China and the EU.
Strong trade ties between China and the EU
China is EU’s second largest partner, where the primary imports are industrial and consumer goods, machinery and equipment, and footwear and clothing, and exports machinery equipment, motor vehicles, aircraft, and chemicals to China. Sino-Europe trade averages over EUR 1 billion a day, according to the European Commission. Chinese investments have funded infrastructure projects in cash-starved regions of Greece, Italy, and Spain. In fact, Beijing’s purchase of European debt was pivotal in the European Central Bank’s (ECB) liquidity injection to revive the EU’s economic health.
China has been investing heavily in Europe’s agriculture, energy, finance, real-estate, transport, and technology sector. According to Rhodium Group, a New York-based policy think-tank, China’s foreign direct investment (FDI) in the EU rose to 77% year on year in 2016 to EUR 35 billion. In April 2017, a direct freight train service started from China’s eastern city of Yiwu to London as part of Beijing’s ambitious ‘One Belt One Road’ initiative, aimed at restoring ancient trade routes linking Europe to Asia. Thus, China’s strategic importance to the EU is undeniable.
Widening rift between the US and EU
Geopolitical concerns are unlikely to dampen EU-China trade negotiations. For instance, the EU has endorsed the One China Policy, which ratifies Beijing’s control over Taiwan. Furthermore, the EU is likely to overlook China’s relationship with Russia, Europe’s major gas supplier. In fact, the EU criticised the US government’s recent sanctions on Russia. Thus, the widening rift between the US and EU is bringing together policymakers in Beijing and Brussels.
The EU is unlikely to support the Trump administration’s potential vetoing of Iran Nuclear Deal, as many European companies have struck commercial deals with the country’s lucrative petrochemical sector; China has a first-mover advantage in Iran. Following North Korea’s missile testing earlier in August, Angela Merkel called for peaceful talks — contrary to Donald Trump’s provocative rhetoric. In fact, the EU would not support Washington, should the Trump administration wage an economic trade war with China, due to the latter’s allegedly unfair trade practices and inaction in containing the North Korean leader, Kim Jong-un.
Improvements in Sino-European trade relationship in the form of a trade agreement, would not only restore the faith in the EU’s unity, but also halt the UK’s plan to get a favourable trade deal with China. Given the growing rift between the US and EU, meanwhile, the UK is likely to concentrate on angling a free trade with the US after Brexit.
Free trade deal won’t be easy
Despite an impressive growth in bilateral trade and investment in recent years, the possibility of forming a free trade bloc between China and the EU has been met with various stumbling blocks. The EU wants to ensure that China trades fairly, respects intellectual property rights (IPRs), and meets its obligations as a member of the WTO. The European regulators have been demanding greater transparency about Chinese state-owned companies’ asset purchase in the region.
EU-China negotiations for an investment agreement, initiated in 2013, have remained so far inconclusive, partly due to Beijing’s disregard for the international standards of human rights, labour laws, and freedom of expression. In January 2017, the Commission imposed anti-dumping duties, ranging from 30.7% to 64.9%, on steel products from China to avoid glut in the European market. Such measures are aimed at coaxing Beijing into adhering international trade practices, as isolating China would endanger nearly 2 million jobs in the EU, half of which are based in Germany.
The success of EU-China trade negotiations, nevertheless, depends on finding an amicable agreement related to tariffs and quotas for agro-foods and industrial goods, market access in services, investment protections, agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), and market conformity of state-owned enterprises and other competition issues.
International trade negotiations, undoubtedly, are lengthy and complex. For instance, the EU’ Comprehensive and Economic Trade Agreement with Canada (CETA), which is likely to come into effect later in the year was initiated in April 2009. Similarly, negotiations between Japan and the EU were initiated in November 2009.
China’s President Xi Jinping, in the meantime, has addressed some of the concerns raised by the international agencies, by limiting the country’s outbound investment, relaxing norms for foreign investments and upgrading environment protection laws and labour standards. These reforms, although insufficient, have paid lip-service to the EC’s trade enthusiast, who would prefer to sign a comprehensive trade agreement with China, preferably in time with the finalisation of Brexit negotiations.
Prashant Sawant is a Senior Analyst for IHS Markit and Economic Advisor for the Department of Transportation in the United Kingdom. His expertise concerns strategic analysis in Asia and the Middle East.
Commision, E. (2017, July). China - Trade - European Commission. Retrieved from http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/index_en.htm
European Commission, D. o. (2017, June 03). Retrieved from European Commision: http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf
Group, R. (2017, January). China Investment Monitor. Retrieved from http://rhg.com/wp-content/uploads/2017/01/RHG_Merics_COFDI_EU_2016.pdf