The EU-China relationship characterised by ineffective political action and lack of trust

Dr Paul Irwin Crookes is Director of Graduate Studies, School of Interdisciplinary Area Studies; Departmental Lecturer in the International Relations of China at the University of Oxford

The EU-China economic relationship appears to be in troubled waters. Battered by policy tensions and hamstrung by political obstacles inhibiting progress, it is necessary to look behind the smiles of summit leaders and beyond the ever-increasing value of goods traded between the economies to try to understand why there continue to be problems.

By analysing the context of the key areas of this relationship, it becomes clearer why its potential is not being fully realised. What emerges as the best description for the current state of relations is that there is now a palpable crisis of mutual trust.

Real disquiet is emerging in European circles over China’s direction of travel over promised economic reforms, especially in respect of the continuing visibility of state-owned enterprises (SOEs) in key industrial sectors.

Also linked are concerns about Chinese fairness and openness in economic relations with the European Union, given a trade deficit of €174.5bn for 2016 (despite bilateral goods trade of more than €1.5bn per day) as well as product dumping and over-capacity in Chinese industrial sectors such as steel.

A particular frustration is the poor showing of services in the economic partnership, struggling to reach more than ten per cent of the value of goods traded – even though EU member states include some of the leading services-based economies in the world.

Whilst outward foreign direct investment (FDI) from China into the EU soared by 77% to a record €35bn in 2016, the same year actually saw a noticeable decline in European investment flows into China, reflecting a more troubled regulatory picture, whilst the accelerating pace of technology acquisitions by China in some EU member states (such as Germany) has promoted sharply negative political commentary about relinquishing Europe’s competitive advantage. Even the issue of whether to create a pan-EU FDI monitoring regime – akin to a European version of the United States’ – appears to be back on the table with China in its sights, albeit as yet with no final decision having been made.

All of this is explained in European circles by pointing to the continuing absence of reciprocity in market access in China linked to suspicions of a nationalist edge to economic policy priorities where the promotion and subsidy of national champions is seen as more important for the Chinese than fulfilling their World Trade Organization commitments.

EU business groups point to the persistence of issues such as compulsory local content requirements in key sectors, unfair procurement tendering rules in the absence of China’s membership of the WTO’s Government Procurement Agreement, required disclosure of business-sensitive information to support collaborative projects, and enforced joint venture creation as a precursor to knowledge transfer to domestic Chinese firms who then become competitors.

Concerns have also been expressed about the persistent instrumentalism underpinning the application of law in China’s economy, such as in intellectual property enforcement cases or through anti-monopoly investigations aimed particularly against foreign firms. Perhaps most worrying is that European businesses in China report growing negative sentiment about the future.

Yet, of course, trust works both ways. The Chinese reject the EU’s focus on anti-dumping measures as unhelpful protectionism and argue that European criticism of government subsidies misunderstands how China’s financial system works while also failing to recognise the progress already made. China is growing more confident in challenging the EU’s application of trade defence measures, most recently at the WTO where the Chinese launched a formal complaint against the EU over the continuing refusal to grant China market economy status. The Chinese maintain this is a clear breach of faith in the commitments made by European economies at the time of China’s accession in 2001.

Moreover, the Chinese point out that they have offered trenchant support for the euro in recent times of crisisand that China’s investments across Europe bring direct benefits to local businesses and communities while also showcasing technology for infrastructure and utilities that bring considerable value to EU economies.

Finding political solutions to these tensions should be a priority for both sides but is actually very difficult as each faces internal political challenges to overcome.

In China, there is an ongoing debate about the direction of reform linked to divergent views over whether to prioritise supply-side or demand-side adjustments whilst ensuring the continuing economic stability and social cohesion that underpins the ruling Communist Party’s power. Leadership manoeuvres ahead of the 19th Party Congress in the autumn of 2017 make radical action politically unpalatable and therefore unlikely. Yet a renewed mandate for Chinese President Xi Jinping could offer a platform to relaunch reforms in more far-reaching directions, although whether these moves would overlap with EU demands is of course a completely different matter.

For the EU, some measure of coherence in policy management towards China is desperately needed. A zero-sum mentality between member states undermines the credibility of the Union and can be exploited by global powers. There is at present a fractured response from across the EU to China’s flagship Belt and Road Initiative, ranging from overt enthusiasm to lukewarm consideration. Divisions over trade defence instrument reform need to be addressed at the EU Council to find a balance between supporting the consumer and protecting the producer without unfairly penalising a particular trade partner. But the variable geometry with which the EU exercises power can make finding an agreed pathway problematic.

None of these steps are easy to deliver politically for either side and current evidence suggests no early resolution to these tensions is likely – and it is not due to lack of opportunities.