New EU team must engage urgently with China

The European Union’s new leaders must waste no time in engaging with China. Urgent matters at home and in Europe’s troubled neighbourhood certainly command immediate attention. However, upgrading and reinforcing ties with the world’s second largest – and still-fastest growing – economy must be also be a priority.

After a few troubled years, Europe-China ties are now encouragingly sound. Although trade frictions are unlikely to completely disappear, major trade quarrels have been settled. Differences over human rights notwithstanding, the EU and China have developed a good working relationship. As such, the new EU team inherits a relatively solid EU-China agenda. It must use this to further shape and update relations to fit a complex and rapidly-changing environment, both at home and in China.

Promises and commitments must be implemented. In a world in constant flux, EU policy towards China must at the same time be constant and flexible, realistic and ambitious. There should be a mix of short-term responses to urgent questions and medium to longer-term reflection on anticipated future developments. Relations must be strong enough to cope with inevitable trade spats, foreign policy differences and disagreements over human rights.

Resilient, robust and respectful

As China and the EU prepare to celebrate the 40^th anniversary of their partnership next year, the relationship must be made more resilient, robust – and mutually respectful.

This requires sustained engagement at all levels. Clearly, all eyes are on Federica Mogherini, the new EU foreign policy chief. Much will also depend on Jean-Claude Juncker, the new European Commission President, and members of his team who, inter alia, deal with economic and monetary affairs, agriculture, industry, environment, energy, research and innovation, urbanisation, transport and culture.

Trade Commissioner Cecilia Malmström will play a leading role as the EU and China step up negotiations on a first-ever bilateral investment agreement – and possibly begin the ground work on an EU-China free trade deal. Donald Tusk, as European Council President, as well as European Parliament counterpart Martin Schulz will be equally pivotal in determining the future direction of EU-China relations.

Importantly, the new EU team would be well-advised to work closely with member states – such as Germany – which have increasingly robust ties with China. Berlin’s privileged relationship with Beijing can and should be made to work in the EU’s favour. Intra-EU rivalries over China are damaging. But they are also unlikely to disappear given member states’ national histories and current economic interests and priorities. Competition between EU institutions and national governments, such as those generated over China’s “16+1” dialogue with central and eastern European states, must, however, be avoided.

Keep it fresh

More inter-action is needed with European business leaders, including the European Union Chamber of Commerce in China (EUCCC), whose knowledge and experience of working in China provides useful insight into the national economic reform agenda. Think tanks, academics and journalists with an inside track on China’s economic, social and political evolution also make an important policy contribution and can help to keep the China-EU dialogue fresh and up-to-date.

It is worth repeating: Europe and China need each other, not least for economic reasons. Its growth rates may be slowing down, but China’s appetite for European goods and investments continues to be crucial in determining the pace and success of Europe’s economic recovery. China’s economic transformation – and plans for even more change in the coming years – demands that it has access to European know-how, experience and technology. China’s reform agenda also gives European companies myriad opportunities for enhanced trade and investments.

Second, a deeper EU-China relationship is important in order to polish Europe’s foreign policy credentials – in Washington, Moscow and in many Asian capitals. Asian countries, including Japan, Vietnam and the Philippines, which are locked in territorial quarrels with Beijing in the East and South China Seas, believe Europeans can temper Beijing’s assertiveness on the issue and use its experience in managing cross-border challenges to ensure stability in the region.

Third, while Europe’s one-time dream of ensuring that China would one day become a “responsible” international stakeholder now appears hopelessly out-of-date and patronising in view of Beijing’s increasing global outreach and self-confidence in world affairs, there is no doubt that the EU needs to engage with China on a range of urgent foreign and security policy issues, including relations with Russia, Iran’s nuclear plans, policy towards the so-called “Islamic State”, fighting Ebola and combating climate change.

Recent speeches and statements indicate a shared desire to up the game. Following up on the ambitious “EU-China 2020 Strategic Agenda for Cooperation” adopted last November, President Xi Jinping and EU leaders issued a joint statement on “Deepening the EU-China Comprehensive Strategic Partnership for mutual benefit” in March this year. China, meanwhile, has come out with its second policy paper on the EU, highlighting the potential for further cooperation in global affairs, defence and security, economic cooperation and people-to-people ties. Even more significantly, President Xi’s speech to the College of Europe in April underlined his vision of building “four bridges for peace, growth, reform and progress of civilisation” between China and Europe.

Significant headway

Significant headway has been made in recent years, especially in EU-China economic ties. Trade relations remain buoyant, with bilateral trade in goods valued at about 420 billion euros in 2013. Trade in services, currently estimated at about 50 billion euros annually, is expected to grow as China opens up its services sector and as new reform efforts begin to bear fruit. Beijing has just issued detailed measures to support imports of high-tech equipment, resource products and consumer goods and said it will encourage banks to expand credit support for imports of high-tech equipment and key components to promote industrial upgrading, creating more opportunities for European business.

While the outgoing EU trade commissioner Karel De Gucht was strongly against the negotiation of an EU-China free trade agreement, little is known about the stance to be taken by his successor. In any case, a recent suggestion that the US and China may embark on free trade negotiations may make the EU less hostile towards such an agreement – especially since Germany and Britain have said they favour an EU-China FTA.

Chinese investments in EU are rising

More is being done to increase bilateral investment flows. China currently accounts for only 2-3 per cent of total European investments abroad and while Chinese investments in Europe are rising as Chinese companies, both state-owned and private, buy cheaper European assets, they represent only 2.6 per cent of total foreign direct investment in the EU. But this is expected to change. As growth continues to slow at home, many Chinese companies are looking abroad to make investments, enter foreign markets and acquire valuable technology and brands. This interest in overseas corporate expansion is increasing just as foreign direct investment (FDI) into China is slowing sharply.

To reverse the trend, China will have to change what Joerg Wuttke, President of the EUCCC, describes as a “restrictive” and “idiosyncratic” investment environment. There are signs that Beijing is responding. In a draft foreign investment catalogue, China’s National Development and Reform Commission (NDRC) recently cut the number of sectors where China limits foreign investment to 35 from 79, opening up areas such as real estate, steel, oil refining, paper making and premium spirits, saying the move would help China actively hasten its “opening up” process and improve transparency.

EU-China investment agreement

Foreign companies are, however, demanding the removal of the investment catalogue altogether, in favour of a short negative list, and increased opening in the service sectors. There are hopes that the negotiation of an EU-China bilateral investment agreement which ensures better access to the Chinese market while also ensuring legal certainty and investment protection will encourage Chinese and European investors to step up their stake in each other’s economies.

“The negotiations represent the most important engagement with China on trade and investment policy since China’s accession to the World Trade Organisation in 2001,” Wuttke said in a recent article in Britain’s Financial Times newspaper. He added: “The successful conclusion of a comprehensive BIA would convey China’s willingness to engage in a deep and comprehensive trade agreement with the EU.”

Keep talking

There are now a total of 71 EU-China sectoral dialogues. The EU and China are working on an urbanisation partnership, and also reinforcing cooperation on science, technology and innovation. A good start has been made in initiating an EU-China dialogue on the Middle East and North Africa. Both sides exchange views on Africa and have held joint naval exercises on counter-piracy in the Gulf of Aden. There is an agreement to deepen exchanges on human rights. Also, a range of initiatives have been launched under the “high-level people-to-people dialogue” with a special emphasis on encouraging student contacts and exchanges. Over five million people travel between China and Europe every year. China is providing 30,000 scholarships for Chinese and European students, while the EU is offering help to 7,000 students.

More to discover

There is still much more to discuss and discover. China is in the midst of massive change as the focus shifts to boosting consumer demand and away from an excessive reliance on investments and exports. The emphasis is also on fighting pollution, ensuring sustainable urbanisation and implementing other aspects of last year’s massive national reform agenda agreed at the Third Plenum. More recently, China’s Fourth Plenum shifted the focus to the rule of law, governance and legal reform. President Xi, widely regarded as China’s most powerful leader in recent decades, is stepping up his anti-corruption campaign. More information is needed about the strengths and weaknesses of the Shanghai Free Trade Zone and its ambitious goals for economic and financial reforms.

Following the decision earlier this year to set up a BRICS bank, China has spearheaded the 21-Asian nation agreement to set up a $50 billion Asian Infrastructure Investment Bank (AIIB), a move which further bolsters Beijing’s vision of boosting continent-wide trade by building a Silk Road economic belt and a 21st-century Maritime Silk Road. Given Asia’s desperate need for better infrastructure, the “One Belt and One Road” initiative has been gaining traction across the continent. These and other initiatives need to be further discussed and debated by Europe and China.

Year of Europe 

With the groundwork for a strengthened EU-China relationship more or less in place, the focus must now turn to deepening and widening the dialogue and to turning words into action. To do so, the EU needs to keep constant tabs on the multiple and rapid changes taking place in China and articulate European policy responses.

Beijing has been true to its word in making 2014 “the year for Europe”, with both President Xi and Premier Li Keqiang travelling to key European capitals, including Brussels. The EU’s new leaders must reciprocate quickly through visits, the convening of an EU-China summit early next year and the rapid organisation of the high-level political, economic and people-to-people dialogues. Above all, there must be an immediate and strong EU signal to Beijing of continuing – and upgraded – engagement.