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Perspectives: Where now for EU-China relations?

This week’s EU-China summit will be dominated by discussions on Russia and Ukraine. There is also a trade dimension to the conversation, amidst increasing mistrust and fears of full economic decoupling in the future. There is a need to prepare for the possibility of the latter while still setting out how a more positive agenda may look.

Fifteen months after signing the Comprehensive Agreement on Investment, it is hard to discern a coherent EU trade strategy towards China beyond the well-known generic principles of seeing it as “a negotiation partner, an economic competitor and a systemic rival”.

The exchange of sanctions in the months after agreement, prompted by Chinese actions in Xinjiang, means the chances of CAI ratification anytime soon are non-existent.

The EU is rolling out defensive trade and investment policies which can be seen as primarily targeting China: the anti-coercion and international procurement instruments, a new foreign subsidies regulation, and a coming ban on products made with forced labour.

Work also continues with the US and Japan on tackling non-market practices, possibly through the WTO. The EU has also launched its Indo-Pacific strategy, seeking to strengthen relations with China’s neighbours, albeit somewhat tentatively.

The above is all part of treating China as a rival. But if China is also a partner – China is hard to be ignored given significant trade links and its population size – then there needs to be the possibility of something more positive.

There seems to have been a resentment of China’s economic growth in the West, particularly in the US – as if it this growth were bad. But this is a poor message to send to other countries that seek economic expansion through trade ties. It should not be the EU’s approach. Indeed a globally active EU must surely to seek to strongly engage with both India and China given that between them they contain ten times the numbers of the next most populous country in the world.

It isn’t possible to remove complexities and ambiguities from the EU’s approach towards China. What should be achievable, however, is to have a better-defined approach coming out of Brussels. That could be built around the lines of being open to Chinese trade where possible, within global norms, but also being prepared to sustain more difficult relations.

Back to basics

There is a need to return to first principles with all partner countries in stating that the EU should seek mutually beneficial trade relations. China’s growth since the 1980s should not be seen as coming at the expense of the EU, but generally as a good news story which has lifted millions of people out of poverty while increasing demand for our goods and services, and benefitting our consumers.

By far the largest product groups imported by the EU from China are consumer electrical products, particularly phones and computers. These most likely include EU intellectual property and have never been areas of strong domestic production. They reflect particular investments made by China in the 1990s in producing complex goods at scale – but equally do not guarantee future economic success.

Even in areas in which China is now seeking competitive advantage, such as electric vehicles, it is reasonable to think that their leading car makers would seek to establish European operations. For the EU to be a global leader it has to consider how such trading arrangements could benefit all parties. Erecting trade barriers is always likely to have worse outcomes than growing trade, even if there are individual winners and losers.

Governments shouldn’t run supply chains

While we can hope for improvements in the future, relations between the EU and China are likely to remain strained for some time. China’s general support for Russia in its current war in Ukraine and sanctioning of prominent EU figures are instead strengthening the view that the EU needs to be prepared for decoupling.

The breadth and complexity of modern trade supply chains that include the EU and China mean that change is likely to take some time, though companies are starting to make appropriate plans. The EU and national governments have shown since the COVID-19 emergency a growing desire to be involved in such decisions, one that needs further consideration. Working with business and setting broad aims of resilience are reasonable objectives, but overt state direction is potentially costly and damaging.

Similarly, the design and use of new instruments such as anti-coercion and anti-subsidies needs care. There are clear cases for their use such as that regarding – what are in effect Chinese – sanctions on Lithuania, as a result of its policy towards Taiwan. However, invoked too frequently, or used in response to behaviour that the EU may also demonstrate in its industrial subsidies – and there will be loss of credibility.

Continue nurturing and developing global trade rules

Just as with the US, the EU’s trade relationship with China really matters for global trade. As the superpowers in the field, the three should take extra responsibility to seek fair rules that keep markets open and benefit all. These should include challenges of any of the parties not following rules to gain unfair advantage, while avoiding any sense of penalising the success of others.

We should bear in mind that China is involved: it signed up to the EU-championed Multi-Party Interim Appeal Arbitration Arrangement to replace a non-functioning Appellate Body in the WTO, it is part of the Regional Comprehensive Economic Partnership with other countries in the region, and seeks membership of the Asia-Pacific trade pact CPTPP – even if quick accession seems unlikely.

While there are reasonable questions as to whether Beijing sticks to all the committed rules, it clearly recognises the value of such agreements. It seems that its neighbours would also tend to see the value of agreements with China.

Unilateral or bilateral defensive measures have value in helping discipline countries to follow trading norms. But ultimately it is at the multilateral level that rules applicable to all countries need to be agreed. There is no real substitute, or at least none that seems likely to be any kind of improvement on the status quo.

At this time the idea of the EU and China resolving all their issues at the WTO seems fanciful. It should not stop this being the aspiration, alongside good trade relations, flanked by precautionary and defensive trade measures, should the latter not be possible.

At the very least this week’s summit could show the EU still has such a vision.

 

 David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.

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