China-EU Investment Pact on the Right Track

The China-EU investment talks have begun. Due to different levels of economic development, each side has different strategic goals. Nonetheless, the bilateral talks are on the right track.

Last week, China and European Union had their first round of talks for an investment pact. While both parties hope to start a new decade of broader and deeper economic ties, the bilateral relations have been haunted by a series of trade disputes.

The primary objective of Brussels is to ensure broad access into the Chinese marketplace, whereas the main goal of Beijing needs technology and know-how and hopes to ensure faster transition to the new growth model.

Further, the China-EU talks are taking place amidst the ongoing scramble for trade deals and trade blocs in the region.

 

Different goals, similar hopes

The start of the bilateral talks for an investment treaty reflects an important change, especially after the two countries have been embroiled in a number of trade spats.

In early 2013, the EU accused China of dumping solar panels on the European market and illegal subsidies, while threatening actions against Chinese telecoms equipment giants Huawei and ZTE. These moves were followed by a tit-for-tat accusation from China that the EU had dumped wine on the Chinese market.

Nonetheless, both sides have incentives to move ahead in bilateral relations. As international multilateral trade talks continue to linger, the spotlight has shifted toward free trade agreements (FTAs). Since Washington is pushing for the Trans-Atlantic Pacific (TPP) agreement, in which Brussels plays no role and which Beijing is following from the sidelines, it is hardly surprising that there is renewed interest to forge a Sino-EU investment agreement.

These days any increase of trade-driven output in Europe feels like manna from heaven. However, European leaders also have pressing needs to negotiate a deal.

From the standpoint of Brussels, it is vital for Europe not to fall behind the United States in the scramble for Asia, as the economic gravity is now shifting from the transatlantic axis to Asia.

To Beijing, this is even more important because the future growth of China and the prosperity of the Chinese depend vitally on how fast the mainland can catch-up with the competitiveness and innovation of the advanced nations, particularly the core European economies – Germany, the UK, France and Italy.

To Brussels, then, the proposed pact ensures long-term positioning in the Chinese marketplace. To Beijing, it is a way to accelerate catch-up growth, to improve human capital and to support the ongoing reforms.

 

From trade and goods to investment and services

Today, the EU is China’s largest trade partner. Last year, bilateral trade soared to $559 billion, up 2.1 percent year-on-year. In turn, China is the EU’s largest source of imports and has become one its fastest-growing export markets.

The investment story is very different. China accounts for barely 2-3 percent of total European investments abroad, whereas Chinese investments in Europe are rising fairly fast, but from a very low starting-point.

Last year, the EU non-financial investments in China rose more than 18 percent to $7.2 billion, whereas Chinese investment in Europe declined almost 14 percent.

The massive potential of trade and investment is hampered by old obstacles in the bilateral relations. Consequently, Brussels is eager to broaden and deepen its access to the Chinese marketplace and to overcome current sources of tension.

Conversely, Beijing wants to use the pact to broaden and deepen its access to the European marketplace and to ensure the protection of Chinese investors from European governments.

Chinese penetration of Europe’s advanced industries and markets will facilitate the accumulation of advanced technology and capabilities, which, in turn, will foster the transition of Chinese companies from cost-efficiencies to innovation.

Currently, bilateral trade in services amounts to only 10 percent of total trade in goods and only 20 percent of the EU’s exports to China are in services. From the Chinese standpoint, it is vital that the role of services as share of total exports will steadily increase.

 

From individual to common BITs

If the talks are difficult to Beijing, they are also challenging to Brussels. It is the first time the EU is negotiating an investment treaty on the basis of the new power by the Lisbon Treaty.

Consequently, different member states have different views about the common investment tool. All members hope to institute symmetric market relations with China to ensure that European and Chinese companies will have equal access to each other’s markets.

However, different countries have already negotiated different deals.

Further, there are real differences in the industrial resources and innovation capabilities among major EU economies and small EU states, among fiscally conservative Northern Europe and the ailing Southern Europe, as well as the transitional Eastern Europe.

 

On the right track

The good news is that that stars may be better-aligned for broader and deeper China-EU cooperation in 2014.

While Europe continues to suffer from low growth and secular stagnation, it is moving toward a fragile recovery. While China is no longer enjoying double-digit growth, the new leadership has now had time to establish its position, initiate economic reforms domestically and new opening-up policies externally.

In the end of March, Xi Jinping will reportedly pay his first visit as China’s president to Brussels, as part of a European tour which will partially coincide with U.S. President Barack Obama’s stay in Europe.

While there will be many topics to discuss at the top level, clearly the proposed investment pact will be one of them. The deal would increase the interdependence of the two blocs, thus potentially reducing the risk of new trade disputes.

By increasing investment in each other’s territory, Brussels and Beijing might also circumvent the controversial issues of dumping and other bilateral challenges.

The Sino-EU investment talks are not a spurt, but a marathon. Nevertheless, the negotiations are moving ahead, in the right direction, in the right way.

 

The original version was published by China.org, the mainland’s authorized government portal to China, on January 28, 2014.