Calibrating the EU’s more assertive approach to China

China’s continuous rise is a confounding phenomenon for the European Union. It is on course to be the world’s biggest economy and some regions have achieved an advanced stage of development, yet China is still in some respects considered a developing country. It is responsible for more carbon emissions than any other country, but is now a leading player in global climate change policy alongside the EU. And it is asserting itself through substantial investments in Europe, yet sets tight conditions for foreign investment in its own market.

The European Commission tried to juggle all these issues on March 12 when it published its 10-point EU-China Strategic Outlook that aims to guide relations over the coming years. The plan, which is due to be debated by EU leaders at their summit in Brussels on March 21-22, takes a more engaged and assertive approach towards China than before. It calls for controls on Chinese state-owned enterprises in Europe, while also suggesting more cooperation in areas such as climate change, dealing with Iran, and peace.

When EU leaders meet with Chinese Premier Li Keqiang at a summit in Brussels on April 9, they will ask China to open up its economy by a series of deadlines, with a 2020 goal to clinch a special treaty to boost investment. The key allegation made by European officials remains a “lack of reciprocal market access”: the European Commission wants more access for its companies and fewer Chinese subsidies for Chinese companies.

 Shift in posture

The plan reflects a shift in the EU’s posture towards China after decades of gentle diplomacy. Just a few years ago, the EU talked of its “partnership” with China, but now it says the Middle Kingdom is a “systemic rival”. The EU says it has been frustrated by barriers to foreign businesses in the Chinese economy, with EU Commission Vice President Jyrki Katainen saying Chinese state financing and state-owned enterprises distort EU markets. For the first time, the strategy describes China as “an economic competitor in pursuit of technological leadership and a systemic rival promoting alternative models of governance.”

The EU’s change of stance comes as US President Donald Trump is currently engaged in a trade war with Beijing over what he says is unfair competition. The EU’s new plan seeks a “balanced and constructive relationship,” with Beijing while pressing for “action on market access, subsidies, overcapacity and technology transfer”. To many Chinese, the EU’s 10 points sound like what they have been hearing from the US recently and suggest a level of coordinated action against China.

 Recognising China’s strengths

The strategy recognises China’s giant economy, its 6% annual growth, its 1.2 million consumers, and its increased impact in global affairs. China is the EU’s biggest source of imports and its second-biggest export market after the US, with trade between the two worth more than €1 billion per day. By contrast, the EU economy is treading water with even Germany forecasting only 0.8% growth this full year and others teetering on the edge of recession. Meanwhile, the US enjoyed 3.3% growth in 2018.

For many in the European business community, the new approach signals an end to treating China as a developing economy and treating it as a mature, developed one. Given China’s considerable leverage with individual countries, the EU needs to be careful in pressing forward with a more assertive approach – but this could still represent an opportunity to recalibrate the relationship to benefit both sides.

There are certainly hopeful signs that Beijing might respond positively to the many proposals in the EU strategy. Here are some:

  • China’s trained scientists and engineers have impressed on the Chinese leadership the internal security risks from climate change and unsustainable development, and the associated need to offer its people higher health and social standards.
  • While the Belt and Road Initiative (BRI) – China’s €1 trillion global infrastructure development plan – is perceived by some to contain elements of threat for Europe, positive engagement could maximize the shared benefits, and this is urgent.
  • The Commission’s proposal was followed on March 15 by news that the Chinese Foreign Investment Law had been adopted, entering into force at the start of 2020. This would open-up hitherto protected sectors of the economy to foreign business; cut requirements for local partners; involve fewer technology transfers for Chinese subsidiaries; and give more protection for both property rights and intellectual property. However, the implementation matters more than the policy and it remains to be seen how far China will follow-through.

That said, there has been a wary official reaction to the EU’s more assertive stance. A spokesman from China’s Mission to the EU in Brussels called for both sides to join forces, “for a sustained, healthy and steady growth of China-EU relations.” And an editorial in China Daily, the Chinese government mouthpiece, looked ahead to President Xi’s visit to Europe, saying, “President Xi’s visits will nonetheless convey the message that China is a ‘cooperation partner’ that is dedicated to win-win outcomes, a ‘negotiating partner’ that is serious about mutual benefits, an ‘economic competitor’ that brings boundless opportunities, and a ‘systemic rival’ that cherishes ‘peaceful coexistence’.”

A more open relationship?

The Commission’s Strategic Outlook is ambitious in its scope, promoting cooperation on peace, security, international aid and sustainable development. Pragmatically it offers specific proposals to improve the chances of European business competing both through improved access to the Chinese market and by closing loopholes in the EU’s internal market. If the EU is able to differentiate its stance from the more aggressive US position, it could result in a more collaborative and open-minded relationship.

Most of all, though, the strategy aims to rebalance the relationship. If it succeeds, it could make the EU’s relationship with China a lot healthier, which would be good for both EU and Chinese businesses and consumers.

Author: Jim Currie Senior Advisor

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