Trade and Investment Drive China-EU Ties
European Council President Donald Tusk, Chinese Premier Li Keqiang and President of the European Commission Jean-Claude Juncker. (Photo: DPA)
By Anita Inder Singh

Trade and Investment Drive China-EU Ties

Feb. 15, 2019  |     |  0 comments


China and the European Union (EU) differ on political and human rights issues. The EU complains about China’s lack of reciprocity and market access. Nevertheless, trade and investment comprise the main components of the China-EU tie. Burdened by a decade of declining economic investment, the EU and its member-states have welcomed China’s investments. China has the world’s second-largest economy and a range of internationally operating, state-owned banks which can lend money for several projects. Both stress complementarity in their economic relationship.


Political and Intellectual Differences Between China and EU


China holds that “differences in history, culture, social systems and development stages” have not created “fundamental strategic conflicts” between them. Since 2003, Beijing has highlighted cultural differences between the EU and China, as important representatives of western culture and “the oriental culture” respectively. China and the EU stand as “two major civilizations” advancing human progress.


In 2018, China’s paper on the EU echoed its 2014 strategy by highlighting the shared interest of “the world’s most representative emerging economy” and “group of developed countries” in world peace, building prosperity and a multi-polar world.


China highlights its basic political and intellectual differences with an EU grounded in democratic and human rights norms. Whether on domestic or international issues, China is working “[U]nder the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era”. For China, mutual respect, equality and the “One-China principle cement “the most important political foundation of China-EU relations”.


The EU confirms its “One China” policy. It affirms the promotion of human rights and the rule of law as “a core part” of its engagement with China. Significantly, its caveats about Tibet and Taiwan have not blocked the development of strong EU-China economic ties.


The EU sees itself as a partner in China’s economic and governance reforms and links its prosperity to sustainable growth in China. As China’s biggest trading partner, it views the “fundamental principle” of its relationship with China as one of “reciprocal benefit in both political and economic terms”. China, says Brussels, needs the EU as much as the EU needs China.


At another level, given that most EU countries are members of the US-led NATO, amicable EU-China ties are a contrast to the fractious Sino-US relationship. Although China is the largest trading partner of both the US and the EU, it is simultaneously the main political and military challenger to the world’s only superpower. It alleges that Trump’s trade war has made the US “an enemy to all”.


For its part, Washington’s National Security Strategy document (NSS 2017) perceives China as an economic and political foe seeking to displace the US from its global primacy. NSS 2017 also warns that China was “gaining a strategic foothold in Europe by expanding its unfair trade practices and investing in key industries, sensitive technologies, and infrastructure”. And China is the archenemy in Trump’s trade war. That has not stopped him from being equally — if not more — uncomplimentary about the EU, which he also condemns as a foe: “[I]n a trade sense, they’ve really taken advantage of us”.


The fact is that China is not challenging the EU, which is not the world’s primary power. When dealing with the EU, China, the aspiring global power, modestly describes itself as “the world’s biggest developing country”.  Its 2018 paper refers to the EU in an analogous manner, as “a grouping of countries with the highest level of integration and strong overall strength”, playing “a strategically important role in the international arena”. Elsewhere, though, President Xi Jinxing has spoken in different tones about the direction China will take. In 2017, he told the Communist Party’s 19th Congress that by 2050, China will “become a global leader in terms of composite national strength and international influence”.  And the three Chinese policy documents on the EU — in 2003, 2014 and 2018 — are clear that neither China nor the EU poses a threat to the other.


The EU’s strategy gives primacy to its own interests. But it “recognises the need for and helps to define an increased role for China in the international system”. At the same time, it wants China’s larger role to be linked to its greater adherence to international rules and standards.


That again is a contrast to the US, which acknowledges the increase in China’s international clout, but would hardly perceive the enhancement of Chinese influence as “a need”, let alone “the need”.


Neither EU nor China Threatens The Other in its Main Sphere of Interest


Europe and the Asia-Pacific and are the respective core interests of the EU and China. The EU respects China’s sovereignty and territorial integrity. And China declares its support for EU integration. Economically, too, the EU poses no economic threat to China in Asia. Its external action budget for 2021-2027 is EUR 123 billion. Of this, a mere EUR 10 billion would go to Asia and the Pacific as part of the Neighbourhood, Development and International Cooperation Instrument. So, it will never match the USD 1 trillion that China reportedly plans to invest in Asia. And militarily, the EU is not a significant security player in Asia.


The emphasis on trade by both sides is unsurprising. But not all Europeans are happy with the EU’s stance on human rights in China. In 2017, some members of the European Parliament regretted that during her visit to Beijing, Federica Mogherini, the EU’s High Representative for Foreign Affairs and Security Policy, missed an opportunity to underline human rights issues in Tibet and Xinjiang. Instead she focused on global cooperation between the EU and China in Syria, North Korea, and Afghanistan, and on issues such as trade and climate change. Their criticism of Mogherini raised awkward questions about the place of human rights in EU-China diplomacy.


Export-oriented economic policies have played a large part in promoting China’s progress — which in turn has made it the world’s second most powerful country. China and the EU trade nearly USD 600 billion every year or over USD 1 million every minute. There is very little friction in their trading relationship.


China assures EU member-states and Brussels of favorable responses to their priorities. Beijing has also encouraged Chinese policy banks to partner up with the European Bank for Reconstruction and Development (EBRD) and European development agencies in the implementation of Belt and Road Initiative (BRI) projects in Europe and its immediate neighborhood in North Africa, parts of the Middle East, the Caucasus and the former Soviet Union to the west of the Urals. China’s BRI extends across Central and Eastern Europe, all the way up to the Baltic states in northern Europe. Most BRI projects are in the hands of Chinese lenders and companies. And most Chinese investments are in West European countries — with the UK, Germany and France having received the largest amounts. In the first half of 2018, China invested USD 3.6 billion in Sweden — compared to USD 1.6 billion, USD 1.5 billion and USD 1.4 billion for the UK, Germany and France respectively.


China sees the BRI, and its economic influence in Europe, facilitated by the active participation of EU countries in a joint effort to build a road that promotes peace, prosperity, openness and innovation, connects civilizations, facilitates green development, and upholds high ethical standards. In other words, China welcomes European support for the BRI. From the EU’s side, a Comprehensive Agreement on Investment is its main priority towards deepening and rebalancing its economic relationship with China. What the EU does ask for is the liberalization of China’s economy, a reduction in the role of the state sector and a level-playing field for business that would open new market opportunities for European companies.



The EU is not necessarily looking at China through a rose-colored commercial lens. But as the bloc stands disunited and in need of foreign investment, the chances are that its member states will continue to welcome the Chinese investor for quite a long time to come.



How much has the EU done to secure these conditions from China? In April 2018, the German business paper, Handelsblatt, reported that 27 out of 28 ambassadors from EU countries (Hungary was the odd country out) noted that China had blocked free trade and put Chinese enterprises at advantage through the BRI. China riposted that 80 countries had joined the BRI and that Brussels had clarified that the report by Handelsblatt was “inconsistent with facts”.


Brussels hardly took — let alone coordinated — a tougher line on Chinese investments. Barely three months later, European Council President Donald Tusk and Jean-Claude Juncker, the President of the European Commission, signed six framework agreements covering everything from a joint investment project worth EUR 500 million to cooperation on securities issues. Juncker waxed enthusiastic about the agreements: “I’ve always believed in the potential of European-Chinese partnership”.


Then, in September 2018, the EU drew China into its connectivity strategy on Asia, which is mostly about increasing connectivity in Europe itself. The projects highlighted by the EU as part of development cooperation with ASEAN amount to just EUR 250 million. Most of the connectivity strategy is about working with China on advancing projects like the EU-China railway or the Trans-European Transport Networks. At a time when the EU has been suffering from low levels of investment, Brussels envisages new opportunities for co-operation on all aspects of investment emerging through the Investment Plan for Europe.


The EU also anticipates the engagement of the China-led Asian Infrastructure Investment Bank, the European Investment Bank, the EBRD and the China-EU Joint Investment Fund. In short, Brussels itself seeks to attract Chinese investment in connectivity projects in the EU and its immediate neighborhood.


China is helped by the absence of a unified EU policy on the BRI. China started making inroads into Europe even before launching its BRI in 2013. In 2012 it initiated the 16+1 format, a group designed to facilitate government and business contacts between China, Eastern and Central Europe and the Baltic countries. Of these 11 countries are members of the EU, including Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. All these countries are simultaneously America’s allies in NATO.


China’s EU paper of 2018 claims that common interests and needs form the basis for win-win and transparent cross-regional cooperation with Central and Eastern European countries. For its part, the EU stresses that China’s involvement in the EU’s Eastern and Southern neighborhoods should reinforce rules-based governance, sustainable development and regional security.


What has made China attractive to Central and Eastern Europe (CEE)? The region accounts for less than 10 percent of total Chinese investment in Europe. The EU and the US account for around 90 percent of investment flows to countries in CEE. Most Chinese investment still goes to West European countries like the United Kingdom, Germany, Switzerland and France.


But CEE states have found Chinese investment a useful alternative to cooperation with the EU. The reason? Central Europe needs money to build new roads and pipelines, according to Hungary’s Prime Minister Viktor Orbán. In March 2018, he explained that Hungary had turned to China because the EU was unable to provide enough cash for such projects. Meanwhile, President Miloš Zeman of the Czech Republic opined that his country had been “too submissive” to Brussels and Washington and presented it as “unsinkable aircraft carrier for China in Europe”.


With a combined population of just over 6 million, Northern Europe’s three small Baltic countries — Estonia, Latvia and Lithuania — see China’s BRI increasing their international connectivity. They enthuse about cooperation with China in developing e-commerce ecosystems, digital services, the exchange of technical information and the facilitation of connectivity of logistics and trade information. Latvia anticipates becoming the link between the EU and the Russian-led Eurasian Economic Union. Lithuania visualizes itself as a gateway for China’s financial services to Europe “and is ready to undertake a role of the leader”.


China has benefited by helping EU countries with cash. Some years ago, Beijing threw Greece a lifeline when it was weighed down by the EU’s harsh austerity measures. China was rewarded through Greek diplomacy. In June 2017, Greece blocked an EU statement at the United Nations criticizing China’s human rights record. A year earlier, it joined Hungary and Croatia in supporting China’s stand on the South China Sea.


Even so, CEE countries have complained of indebtedness to China, low levels of Chinese investment, and Beijing’s wish to have the upper hand in controlling joint projects. Similar complaints have been made by the older and larger EU countries about Chinese financing and contractual terms. Prominent among them are Britain, France and Germany, which have welcomed large amounts of Chinese investment. But they have refused to join the BRI. To France and Germany, it reflects China’s efforts to shape the world in its own interests, even as an alternative to one based on freedom, democracy and individual human rights.


To date, none of these three countries has signed a formal BRI memorandum of understanding. More countries have rejected Chinese-proposed agreements on the grounds that they fail to meet the EU’s standards for transparency and accountability. The frequent European objection is that China insists on retaining too much control over envisaged collaborative projects.


Nevertheless, dissatisfaction and resentment at China’s investment methods cannot paper over the cracks between EU countries themselves. Some of them, and the European parliament, want Chinese investments to be screened. At the very least, they call for greater transparency in screening those investments. Countries in favor of screening include Germany, France, the UK, Italy, Spain, and Poland. But Finland, Greece, Hungary, the Czech Republic, Austria, and Malta are critical of the screening proposals on the grounds that they are protectionist.


These divisions within the EU have acquired a new significance with the ongoing controversy about the activities of  Huawei, the Chinese telecom giant, in Europe. Prompted by Trump, EU countries are debating whether cooperation with Huawei in building a 5G network might pose a security threat to Europe. A united European stand on the controversy has yet to emerge.


Outlook


Eventually, the ability of the EU — or of individual EU countries — to “counter China” will hinge on how much cash they can raise from the domestic private sector as well as international institutions.


The EU’s long-term concerns about trade and investment ties with China include the lack of reciprocity and market access, the absence of a level playing field in China for foreign investors and China’s access to critically sensitive European technologies. The outstanding reality is that the EU and China laud their economic tie as mutually beneficial and enduring. Even if some EU countries continue to question China’s economic methods and influence, there is presently little sign that political divisions between Brussels and EU countries on China’s role in Europe will lessen in the near future. The EU is not necessarily looking at China through a rose-colored commercial lens. But as the bloc stands disunited and in need of foreign investment, the chances are that its member states will continue to welcome the Chinese investor for quite a long time to come.



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