What does the future have in store for China and the EU?

  • China is the EU’s second most important trade partner after the USA, while the EU is China’s foremost trade partner.
  • The trade deficit in goods with China amounted to almost 177 billion euros in 2017. Forty-five per cent of this comes from high-tech products, for which China has become the leading supplier.
  • Chinese foreign investments mainly focus on sensitive sectors, such as transport, public utilities and infrastructure (e.g. the Belt and Road Initiative), and ICT.
  • China and the EU have comparable strategic interests and goals, but there is tension between them, primarily where high-tech products and infrastructure are concerned.
  • However, chances of a clash of strategic interests might be reduced by collaborative efforts based on complementarity, by seeking areas of application involving common challenges and by observing the principle of reciprocity which is of paramount importance to the EU.
  • It is imperative that the investment agreement with China is concluded and a cooperation agreement that includes a free trade agreement is negotiated. 

We live in economically and geopolitically turbulent times. Considering that the EU can, in all likelihood, no longer depend on the unconditional support of its most important trade partner, the USA, the EU has been accelerating the process of concluding free trade agreements with Canada, Japan, Australia, the MERCOSUR countries, Singapore and the ASEAN member states. However the absence of China from this list is striking. Nevertheless, China and the EU could both benefit from closer collaboration. Professor Filip Abraham (Vlerick Business School and KU Leuven) and Jan Van Hove (KBC and KU Leuven) take a close look at the trade and investment relationship between the two parties - from the perspective of the EU.

China, trade partner no. 2

China is the EU’s second most important partner in trade after the USA, while the EU is China’s foremost trade partner. Most exports to China come from Northern European countries, with Germany accounting for the lion’s share. The past fifteen years have shown a strong increase in both the export and import of goods. China’s share in total EU imports from countries outside the EU has doubled, from almost 10% in 2002 to 20% in 2017. During the same period, the EU has also noted an increase in its export figures to China: from less than 5% to approximately 10% of its total exports to non-EU countries. This would be a positive development, were it not for the fact that the trade deficit in goods with China had grown to almost 177 billion euros by 2017. Because the EU has a minor trade surplus with the rest of the world, the situation is not as precarious as in the USA. Incidentally, the EU has a trade surplus in services with China amounting to 8.8 billion euros (2016).

China, the biggest supplier of high-tech products

Looking at the top five import and export activities to and from China and the EU reveals that machinery and equipment, base metals, and chemicals and related products are sectors represented on both the import and the export side. In addition to this, the EU is a key exporter of transport material, optical instruments and photo and film equipment, while it primarily imports textiles and sundry goods.

It is striking that China has become the biggest supplier of high-tech products (mainly electronics, telecom and digital equipment). In 2017 it surpassed the USA with an export of 120 billion euros to the EU: a year in which the EU exported 40 billion euros’ worth of high-tech products to China, resulting in a trade deficit of 80 billion euros, comprising 45% of the total trade deficit with China. Considering that China is evolving rapidly into a knowledge-based economy, there is no reason to assume that this deficit will diminish: cause for concern for anyone who considers high-tech one of the EU’s key assets.

China invests primarily in sensitive sectors

Another point to take into consideration is the spectacular increase in Chinese foreign direct investments in the EU, primarily in sensitive sectors like transport, public utilities and infrastructure, and ICT. In 2016 these investments amounted to almost 36 billion euros, but a decline was initiated in 2017 and the first figures show that this decline is not only continuing but accelerating. Foreign direct investments made by EU enterprises in China have been stagnating since 2012 and have even decreased. 

The paper also draws attention to the ambitious Belt and Road Initiative: major Chinese infrastructure investments for transportation routes over land and sea, intended to connect China and the EU better. The countries that will experience the greatest impact of these routes are, however, ones that trade less with China.

Similar interests and goals

It can be deduced from the speech by President Xi Jinping at the 2017 World Economic Forum in Davos that China and the EU have comparable strategic interests and goals.

Both partners will benefit from supporting globalization and preventing a trade war. Despite growing criticism of globalization, most EU Member States remain proponents of an expansion in international trade. There is a strong correlation between the annual growth of world trade and the annual growth of the gross domestic product. A trade war would cause serious economic damage to the EU.

Both parties aim to maintain a strong position in technology and knowledge-intensive sectors, and wish to avoid being too dependent on foreign enterprises for crucial technology and infrastructure.

Finally, both China and the EU have major regional economic differences. This is why both parties want activities in the fields of international trade and foreign direct investments to strengthen internal cohesion. This should result in benefits for as many regions and/or member states as possible.

Outlook is not entirely rosy

The trade relationship can be expanded and deepened by focusing on mutual interests. This may sound logical, but it is anything but easy. The strategic interests of the EU and China are at odds with one another, certainly where high-tech products and infrastructure are concerned.

The EU distinguishes itself on the market with technology and goods that provide substantial added value, and it wants to keep this situation unchanged. This is why the emergence of China was received with mixed feelings. Close relationships with China may facilitate access to the Chinese market for EU enterprises, but the rising bilateral trade deficit shows that EU enterprises may not be able to weather the competition with their Chinese competitors in the same sector. Moreover, the import of Chinese products is detrimental to imports from other EU countries: in other words, the EU is growing more and more dependent on China.

Furthermore the EU aims to remain sufficiently independent with regard to foreign direct investments, particularly in the areas of technology and infrastructure. In this sense China’s focus on ICT, infrastructure and public utilities gives cause for concern, and media attention to Huawei’s illicit activities fuels these feelings of unease.

A clash between the strategic objectives of the EU and those of China sooner or later cannot be ruled out. In today’s turbulent times, even a minor conflict could escalate into a full-blown trade war.

Opportunities and preconditions for collaboration

How can the risk of clashing interests be reduced? By entering into partnerships on the basis of complementarity. China is good at valorising new technologies by applying them to products that sell well. Europe, on the other hand, is good at fine-tuning existing technologies. Collaboration with regard to technology may be valuable, particularly in areas where the EU and China are facing the same social challenges (e.g. healthcare), considering that both regions have to cope with ageing populations, environmental pollution and the impact of climate change. Furthermore, the export of services to China currently amounts to less than 15% of the trade in goods. The fact that China is transitioning towards a service-based economy opens up perspectives.

So what are the preconditions for a good business relationship with China? In all its trade and investment relations, the EU upholds the sacred principle of reciprocity. The EU is prepared to open up its own market on the condition that EU enterprises gain access to its trade partners’ markets. It expects its trade partners to observe multilateral rules with regard to market access, subsidies and IP. In addition, the EU is a proponent of far-reaching free trade agreements that are concluded not only with a view to freeing up the trade in goods, but which also encompass services, agriculture, public tenders, collaboration in the field of legislation and sustainable development.

What’s next?

In a climate of increasing protectionism, it is imperative to build trust and make use of as many win/win opportunities as possible.

It is clear that neither China nor the EU can benefit from closing the market to foreign direct investments. It would be better to make clear agreements. The authors are of the opinion that, after five years of negotiations, the time has come to bring the investment agreement between the EU and China to a satisfactory conclusion.

They also believe that a collaboration agreement should be concluded between the EU and China by 2025. An agreement of this kind would include a free trade treaty and arrangements governing closer collaboration and innovation, healthcare and sustainability.

Furthermore, the two parties should join forces to facilitate the financing and realization of the Belt and Road projects that are of benefit to the EU member states. In conclusion, the EU and China could strengthen the multilateral system by committing to open markets and globalization.

Source: Working paper “EU-China trade and investment relations in turbulent times: a European perspective”, based on the keynote speech presented by Filip Abraham during the 4th International Conference on China’s Rise and Internationalization: Challenges and Impacts Regionally and Globally. This conference took place on 7 and 8 December 2018 in Ningbo, China and was organized by Edith Cowan University (Australia), KU Leuven, Ningbo University (China) and Yokohama National University (Japan), in collaboration with Dongbei University and Xi’an Jiaotong University (China), Vlerick Business School and Ho Chi Minh Open University (Vietnam).

About the authors
Filip Abraham is a full professor of International Economics at KU Leuven and a professor and partner of the Vlerick Business School. Jan Van Hove is chief economist at the KBC Group and a part-time lecturer in International Economics at KU Leuven.

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