EU Pushing Forward an Economic and Trade Oriented China-EU Strategic Partnership

Jin Ling

EU Pushing Forward an Economic and Trade Oriented China-EU Strategic Partnership

Jin Ling

A combination of internal and external factors – from the changing international environment and enhancement of China’s international status to the EU’s increasing sense of crisis and its ongoing internal reform process – are pushing the European Union to continuously adjust its policy towards China. In the context of the current debt crisis, the enforcement of the Lisbon Treaty, and the release of Europe 2020, the EU is presented with a more pragmatic and expansionary foreign policy, increasing its use of trade policy as a diplomatic tool. Specifically with regards to Sino-EU relations, the EU promotes the China-EU strategic partnership to be economic and trade oriented. Along these lines, they want to give priority to the economic and trade issues in their bilateral relations, put more emphasis on the pursuit of practical economic interests, and promote the materialization of interests and goals in a more expansionary manner through economic power.

I. A Transformation from a “Comprehensive” to an

“Economic and trade oriented” China-EU Strategic Partnership

Ever since the introduction of its first communication paper on China policy, the 1995 A Long Term Policy for China-Europe Relations, the EU has always set great importance on developing a bilateral relationship with China that goes beyond economic and trade relations and contains international political and security dimensions. The EU has hoped to enhance cooperation with China on major regional and international issues in response to global challenges. In the abovementioned1995 document, the EU’s interests were defined successively as “global and regional security interests, interests on other global issues, global economic stability, and competitiveness,” while its primary policy goal toward China was “to promote a dialogue on regional and global security issues that encourages full Chinese engagement in the international community through accession to all the key international instruments governing non-proliferation and arms control.” In 2003, the EU introduced a new China policy paper– A Maturing Partnership – Shared Interests and Challenges in EU-China Relations – which further confirmed the global and strategic dimensions of the bilateral partnership. Given the internal changes that have occurred in the EU and China, as well as their relative increases in status in the international arena, the document pointed out that “the EU and China have an ever-greater interest to work together as strategic partners to safeguard and promote sustainable development, peace and stability. Interests converge on many international governance issues,” and such issues were focused on promoting common responsibilities in global governance as their primary goal in developing future China-EU relations, whose comprehensive and strategic features were thus highlighted.

In 2005, the EU re-launched the Lisbon Strategy, which regarded economic growth and employment as the primary goal for its economic and social reform. It also determined that foreign relations, the external dimension of the Lisbon Strategy, should serve to further this goal. In this context, the 6thEU policy paper toward China that was issued in 2006 – EU-China: Closer Partners, Growing Responsibilities – stressed that the partnership should meet the interests of both parties and pointed out that in order “to build and maintain political support for openness towards China, the benefits of engagement must be fully realized in Europe. China should open its own markets and ensure conditions of fair market competition.” Correspondingly, issues of energy, climate change, and the economy and trade, all of which are closely related with the realistic interests of the EU, replaced their cooperation on global and regional issues and became strategic priorities of their bilateral relations. Together with Closer Partners, Growing Responsibilities, the EU also introduced A Policy on EU-China Trade and Investment: Competition and Partnership, in which the EU drew up a list of issues that did not only highlighted the strategic importance of economic and trade issues in China-EU relations; it effectively activated a process of the China-EU strategic partnership becoming more economic and trade oriented. Since then, the debates within the EU about the strategic importance of China-EU relations have become ever more intense.

It goes without saying that China and the EU need to enhance their strategic cooperation on global issues, but in the end, the interpretation of strategic importance as realistic interests got the upper hand. At the autumn summit of heads of state and government on September 16, 2010, the EU reflected on its relationship with its strategic partners and stressed in the summit Conclusions that “the European Union and its Member States will act more strategically so as to bring Europe’s true weight to bear internationally. This requires a clear identification of its strategic interests and objectives at a given moment and focused reflection on the means to pursue them more assertively”. Based on this, the document further pointed out that “the European Union’s strategic partnerships with key players worldwide provide a useful instrument for pursuing European objectives and interests”. Therefore “enhancing trade with strategic partners constitutes a crucial objective, contributing to economic recovery and job creation,” and “we must take concrete steps to secure ambitious Free Trade Agreements, gain access to greater markets for European businesses, and deepen regulatory cooperation with major trade partners.” The above strategic objectives of the EU highlight the dominant role of economic and trade issues in its strategic partnerships. As for China-EU relations, the summit Conclusions confirmed that its strategic priorities would be the promotion of bilateral trade and market access for goods and services and investment conditions; the protection of intellectual property rights and the opening up of public procurement markets; stronger discipline in the field of export subsidies; and a dialogue on exchange rate policies. All of these demonstrate the economic and trade orientation of the China-EU strategic partnership. In December 2010, the High Representative of the European Union for foreign affairs and security policy Catherine Ashton took“fairer and freer market access” as the EU’s primary objective toward China in her review of the relations between the EU and its major strategic partners. Meanwhile, other objectives, such as“partnership for low-carbon development” and “enhancing rulesbased global governance,” also had a direct and close connection with EU economic objectives. The above changes reveal that the interpretation of strategic importance as realistic economic and trade interests has become the mainstream in EU policy toward China. The core of the economic and trade orientation is to bring into play the EU’s competitive advantages by utilizing the EU’s market size as well as its technical and regulatory system in order to promote the realization of economic growth and employment in accordance with the principle of reciprocity.

II. Impacts of the EU’s Economic and Trade Orientation on Its Policies toward China

The economic and trade orientation of the China-EU strategic partnership is, to some extent, a reflection of the EU’s reclarification of its interests, goals, means of foreign policy, and modes of power. It is also the inevitable result of its pursuit for more realistic interests and objectives in the context of an overall economic and social crisis. The EU promotion of an economic and trade orientation for the China-EU strategic partnership is the most significant manifestation of the adjustment of its China policy in recent years and will have a direct impact on future China-EU relations.

First, the EU’s policy objectives toward China have tended to be more pragmatic. After the EU explicitly defined resolving a series of economic and trade issues as its strategic priority with China, its China policy objectives have been moving in a more pragmatic direction. On December 17, 2010, Catherine Ashton pointed out in her progress report on China-EU relations that “it is hard for the EU to change Chinese society,” and that “China cannot meet the EU human rights and the rule of law standards over a period of time, so the future convergence should focus on those areas where both sides share common ground, and we need to manage our expectations on each other.” In the meantime, she listed “fairer and freer access to the Chinese market” as a top priority of the EU’s policy toward China, thus highlighting the direction for this pragmatic adjustment in policy. Over the years, the EU’s policy objectives toward China have maintained an overarching sense of idealism: the EU expects China to fully integrate itself into an international system dominated by the West through engagement and cooperation, and to cope with global challenges together with China in line with its own ideas and rules. It also expects that China will achieve economic, political, and social transformations through political dialogue within China. Although the economic and trade orientation of the China-EU strategic partnership does not mean that the above fundamental objectives have been changed, the EU’s pragmatic strategy toward China will not change before its reform strategy for growth and employment yields any significant result. In short, realistic interests in economic and trade areas have become the core and primary EU goals toward China. This will make China-EU relations assume more technical rather than political features. Just as what Ashton has pointed out, “the EU should combine China-EU summit, strategic dialogue, and highlevel economic dialogue into a ‘summit coordination mechanism’whose role is to select key political issues for the Summit and decide how to exchange interests between relevant issues.” The EU efforts to push forward the economic and trade orientation of China-EU relations were somehow reflected at the 13th China-EU summit held in October 2010, during which the EU had to some extent “filtered” the political issues and instead expressed its concern over the problems stemming from the economic and trade relations between the two sides.

Second, the economic and trade orientation of the China-EU strategic partnership turns trade policy into a major EU policy tool towards China. In the EU foreign policy toolbox toward China, political dialogue, development aid, trade policy and institutionalized cooperation have constituted constant instruments. Since China and the EU established diplomatic ties in the 1970s, the EU has utilized the above policy tools alternatively in different periods – with political dialogue and development cooperation being the main ones – to promote the realization of its China policy goals. However, as the EU has explicitly put “fair and open access to the Chinese market”at the top of its strategic priorities toward China, trade policy will prove to be its major China policy tool. Consequently, the current political dialogue mechanisms in more than 50 areas between the two sides will decline in importance in the EU policy toolbox toward China, or even face potential restructuring. The EU is now facing external competitive pressures from emerging economies and internal low productivity resulting from structural imbalances. In this context, the EU must necessarily view trade policy as its main policy tool toward China, expecting to take its huge market for Chinese products as a bargaining chip and bring its competitive advantages into play through trade. The EU maintains that its market “is highly open, which to some extent weakens the impetus of the trading partners to open their own market in the process of negotiation. Therefore, the EU will reconsider its policy designs and focus on reciprocal openness, especially with regards to the government procurement market.”

Moreover, in line with the principle of reciprocity, the use of trade policy as an EU tool will also be reflected in a series of other aspects. First, the EU will more frequently use trade remedies, especially countervailing measures directed against Chinese enterprises, and promote their application to “new forms of trade distortion,” such as subsidies to strategic industries, and to those actions that adopt export restrictions to profit the downstream industries. The statistics of the Chinese Ministry of Commerce reveal that the EU launched 10 trade remedy investigations against Chinese products during the first 10 months of 2010, outnumbering the total number of cases in 2009 and involving about US$ 4.74 billion, 550% greater than the sum in 2009. It also for the first time conducted three kinds of trade remedy investigations into data cards from China. Second, the EU will now strive for breakthroughs on competition and investment issues so as to increase its say in multilateral negotiations through concluding a large number of free trade agreements at the bilateral level. The EU pointed out in its Trade, Growth and World Affairs: Trade Policy as a Core Component of the EU’s 2020 Strategy passed in 2010 that “a multilateral set of rules adopted in the WTO framework would be the best outcome. However, many key issues can also be addressed through bilateral agreements.”Such willingness on the part of the EU has yielded some limited results in Asia. The EU and ASEAN started negotiations on a free trade agreement (FTA) in 2007, but they agreed in February 2009 to suspend them as a result of slow progress. The EU then turned to conduct separate FTA negotiations with ASEAN countries and launched talks above all with Singapore, its largest trade partner among the ASEAN countries. After three years of hard bargaining, the EU and the Republic of Korea (ROK) officially signed an FTA on October 6, 2010. In addition, EUIndia FTA has also now basically taken shape. During the 2010 ASEM summit, Vietnam, Thailand, and Japan also expressed their willingness to conclude bilateral FTAs with the European Union. It is becoming increasingly apparent that the EU will focus on bilateral trade negotiations. Third, the EU will strive to promote its own regulatory system as the basis for international standards, strengthening “regulation” against China in the field of rules. The EU believes that “absent or ineffective competition and state aid rules in third countries limit market access for EU exporters. The EU therefore has a strategic interest in developing international rules to ensure that European firms do not suffer in third countries from unfair subsidization of local companies or anti-competitive practices.” The EU pointed out in its new 2010 industrial policy paper, An Integrated Industrial Policy for the Globalization Era: Putting Competitiveness and Sustainability at Centre Stage, that standardization is an indispensable means for the EU to boost its industrial competitiveness and that “Europe must also take additional measures to maintain its strategic position in international standardization. By driving the development of European or international standards for the newly emerging tradable goods and technologies, Europe can create a competitive advantage for its companies and facilitate trade.”

Third, the EU policy toward China will be increasingly expansionary. Although the EU policy objectives toward China tend to be more pragmatic, it does not mean a strategic contraction. Instead, the pragmatic adjustment of its China policy has shown an expansionary feature. The economic and trade orientation of the China-EU strategic partnership is merely a realistic adjustment of its strategic priorities and policy instruments that was prompted by the pressures of the internal and external crises facing the EU. In the above-mentioned policy reviews on the relationship between the EU and its strategic partners presented by Ashton, both “closer cooperation in the context of global challenges and security threats” and “spreading democratic governance, the rule of law and human rights,”all remain top policy priorities for the EU. To bring about the abovementioned strategic goals, the importance of political dialogues as instruments will be reduced. At the same time, alliance-building and multilateral institutions will be used more frequently as instruments to make China shoulder more international responsibility, advancing the materialization of its strategic objectives in the context of the economic and trade orientation of its strategic partnerships. Or, it is possible that the EU will transform the above issues as its negotiation tools of exchanging practical interests. In its strategic planning on foreign policy, the EU has repeatedly highlighted “reciprocity” and said that it would “pursue its policy goals more assertively.” Moreover, in the process of bringing about its strategic objectives, the European Union will carry out more proactive policy initiatives, which will be particularly evident with its foreign trade policy. Recently, the European Commission issued a communication on trade policy entitled Trade, Growth and World Affairs: Trade Policy as a Core Component of the EU’s 2020 Strategy; the document highlights the EU’s strategic ambition of realizing its competitive advantages through trade policy. The document pointed out that“for an open trade policy in Europe to succeed politically, others– including both our developed and emerging partners – must match our efforts, in a spirit of reciprocity and mutual benefit.”To this end, the EU plans to introduce new policy instruments in 2011 to help it attain a number of its key strategic goals, namely, to gain equitable access to the government procurement markets of developed countries and large emerging economies, to formulate a new competition policy, guidelines on supervision cooperation, a Green Book on export control regime, and a communication on facilitating small and medium enterprises’(SMEs) internationalization. Thus, the EU has launched an offensive movement against emerging countries represented by China, in such areas as market access, energy resources, and enhancing SMEs’ competitive advantages. Starting in 2011, the EU will also issue reports on the implementation of the WTO commitments made by its major trading partners at its annual spring summit, publish annual reports on trade and investment barriers, and propose appropriate measures, so as to increase its bargaining chips against the major trading partners.

III. Reasons for the EU to promote an economic and trade orientation of the China-EU Strategic Partnership

Because of the economic and social crises that the EU is now facing, it is thought that the balance of power between the EU and China is shifting toward China. In this context, the EU’s promotion of the economic and trade orientation of China-EU strategic partnership is a significant reflection of the pragmatic adjustments of the EU’s policy towards China. A number of internal and external policies force the EU to define select economic and trade issues as top priorities among its core interests with regard to its China policy.

First, given the changes in the power configuration between China and the EU, the newly established economic and trade orientation of the China-EU strategic partnership is a result of the EU’s reassessment of its foreign relations strategy. Simultaneous to the increase of China’s overall strength and the continuous heightening of its international status, the EU’s sense of crisis has also witnessed consistent intensification. Coupled with setbacks in its internal economic and social policy reforms, the EU’s policy toward China has become increasingly realistic, hard-lined, and focused on economic and trade conflicts and frictions. As mentioned above, under the conditions of the crisis, the EU has introduced an institutional innovation, issued a new development strategy, reassessed its foreign policy, and redefined its identity and strategic interests. From such a reevaluation of its external relations, the EU drew an important conclusion that states that“the recent economic and financial crisis has dramatically shown the extent to which the well-being, security and quality of life of Europeans all depend on external developments. The emergence of new players with their own worldviews and interests is also an important new feature in the international environment.” As a result of the perception of emerging countries and clarification of its own objectives and means, the EU is pushing for an economic and trade orientation of the China-EU strategic partnership so that it can bring into play its power and comparative advantages as the world’s largest trading entity.

Second, the economic and trade orientation of the China-EU strategic partnership stems from the external requirements for the EU to implement its reform strategy. The new EU reform strategy, which seeks primarily to achieve economic growth and job creation, is basically a continuation of its previous reform and development strategy in which economic growth was a high priority. In order to achieve its reform objectives, the EU needs to address the issue of competitiveness, namely, to increase its labor productivity and innovation capability. However, the economic and debt crises have encumbered the labor market reform and there is no momentum for either reform or innovation within the EU. As the external dimension of the EU reform strategy, external relations formally appeared on the EU reform agenda in 2008, with the main objective being “to create opportunities for EU companies to gain access to third country markets through multilateral and bilateral trade negotiations and to enhance strategic dialogues with key third countries.” While the crises exacerbated its internal reform environment and aggravated its concerns over its competitiveness, the EU maintained that the emerging powers such as China, who will shape the international system in line with their own ideas and interests, will pose a growing challenge to its competitiveness. All of these factors drive the EU to adopt more expansionary external policies. Under the circumstances of high interdependence between China and the EU in the field of trade, the EU has recognized the potential value of its market size as the world’s largest trading entity. Moreover, given the huge potential of the Chinese market, the EU’s endeavors to push forward the economic and trade orientation of the China-EU strategic partnership constitute a crucial external condition for the EU to mitigate the crises, boost economic growth, and stimulate employment. The EU’s list of issues concerning China presented a clear reflection of such aspirations.

Third, negative perceptions among European companies of China led to an increase in the weight of economic and trade issues in China-EU relations. As the most important lobbying group on Chinese policy, they once played an active role in China-EU relations. In recent years, however, along with the loss of their super-national treatment, their negative perceptions of China have increased. According to a Business Confidence Survey conducted in 2010 by the European Union Chamber of Commerce in China, “36% of respondents consider PRC government policies to have become less fair towards foreign-invested enterprises (FIEs) over the past two years, while 39% of respondents believe that policies will continue to discriminate against FIEs in some capacity.” The main negative perceptions include that the discretion is too large when the Chinese law is implemented, resulting in a lack of due certainty with regard to the legal framework; protection of local enterprises by local governments on such issues as environmental and labor standards, being objectively an act of government subsidy; compulsory technology transfer, mandatory certification mechanisms, and restrictive licensing systems obstruct their entry into the Chinese market; discriminatory government procurement provisions to restrict access to its market, etc. At the policy level, the above negative perceptions of EU companies are being translated into the EU policy goals and strategic priorities toward China.

Fourth, the economic and trade orientation of the China-EU strategic partnership is also an expression of the “lowest common denominator” of different actors’ interests toward China in the process of transformation of EU institutions. The enforcement of the Lisbon Treaty did not come along with a simultaneous clarification of the competences and responsibilities of different EU actors. New institutional innovations coexist with preexisting institutional inertia. In other words, the European Commission, Permanent President of the European Council, and the High Representative for Foreign Affairs and Security Policy still share, to some extent, the EU’s external relations competences. The above state of affairs further complicates China-EU relationship, which is dominated by large and diversified EU member states. As a low politics area in foreign policy, economy and trade have always been major components of China-EU relations. So, it is evident that the EU countries could most easily reach a consensus on these issues when the EU, from within, identifies its common objectives toward China.

IV. Cooperation, Competition and Regulation: Main Themes of Future China-EU Relations

With the change in the balance of power between China and the EU, the EU’s perceptions of China vary notably and have begun to be framed from the perspective of “competition” and “challenge.”All these contribute to the EU’s promotion of the economic and trade orientation of the China-EU strategic partnership. After a period of friction and reflection since 2006, China-EU relations have basically completed their transformation from a honeymoon period to a pragmatic cooperative partnership. The EU’s promotion of the economic and trade orientation of the China-EU strategic partnership will inevitably affect the development of future China-EU relations. According to the above analysis on the trends of EU policy toward China, although cooperation will continue to dominate the future of China-EU relations, pressure and regulation will also emerged as main themes.

First, with regard to the strategic and developing direction of China-EU relations, cooperation will continue to be a main theme. Creating a green economy, the top priority set by the EU reform strategy, will be a major area of China-EU cooperation. Like the EU, China has also drawn up a strategy on achieving a transformation to a low-carbon economy and will develop its low-carbon economy through three dimensions: adjustment of the industrial structure, improvements on energy efficiency, and development of clean and renewable energy. The convergence between China’s development strategy and the EU’s transformation strategy on a low-carbon economy lays a foundation for their bilateral cooperation. China needs the EU’s technology in its transformation to a low-carbon economy, while the EU needs China’s vast market.

The traditional China-EU economic and trade relations have developed from a stage in which “China exchanges its market for technology” to a new stage in which “China and the EU compete with each other for market-share.” However, in the field of green economy, bilateral cooperation will remain in a stage of “market for technology” over a very long period of time. Some research shows that almost all innovative technologies in the field of green economy are concentrated in the OECD countries, a majority of which are EU member states. Europe’s new, high technologies are now particularly popular in China in the energy, electric power, and transport industries. As a result, Europe’s technical support will play an important role in China’s transformation to a low-carbon economy. A realistic consideration pressuring the EU to push forward the issue of climate change is its desire to utilize its own technological advantages to grab the green technology market and exploit its competitive advantages, with China as its biggest potential market. More importantly, the EU needs the cross-border flow of low-carbon products, services and technology, and an expansion of the market of key technologies to further promote innovative investment in this area in an effort to accelerate the transformation of the EU and the enhancement of its international status.

Of course, the frictions that might occur in this field between the two sides cannot be neglected, especially with regards to issues related to technology transfer. Former European Commissioner for the Environment once said that “the EU will only offer financial support rather than technological transfer to help China cope with climate change.” Such a viewpoint reflects the EU’s fear that China will take advantage of the economic crisis to transform into a low-carbon economy and enhance its industrial chain and productivity, thus posing a threat to European companies. On the other hand, it also reflects the demands of major interest groups pushing for a green economy within the EU. The protection of intellectual property rights will also undoubtedly become points of friction between the two sides. The EU proposes to strengthen the mechanisms of intellectual property protection while promoting innovation in the field of green technology, but such a policy collides with the views of China, who advocates adopting a more flexible policy and enhancing technology transfer to developing countries.

Second, regulatory pressures and frictions in economic, trade and technological cooperation will increase. Along with the EU’s promotion of the economic and trade orientation of the China-EU strategic partnership, issues pertaining to the economy, trade and technological cooperation will once again become dominant factors in their bilateral relations. Frictions and regulatory pressures will also be concentrated in this area. As a result of China’s huge market potential, the high level of China-EU economic interdependence, and the increasing competitive pressures on the EU by China, the EU’s goals to regulate globalization and increase its access to third party markets are to a large extent directed at China. The China-EU frictions in the field of economy, trade and technology will continue to focus on such issues as trade deficit, the RMB exchange rate, market access, and intellectual property protection. Of course, frictions in the various issue areas mentioned above vary from one to the other. Trade deficit, a constant in China-EU trade, will in most cases be instrumentalized: the EU will use it to further open the Chinese market. In addition, as China is gradually shifting from low-skilled and low-cost manufacturing and assembly industries to high-tech products, the sensitivity of intellectual property protection in China-EU technological cooperation will further increase. Moreover, within a short period of time, the EU’s pursuit of open markets will be at odds with the protectionist tendencies of the EU member countries, bringing dual pressures on China-EU economic and trade relations.

With regards to regulation, the EU will promote social, environmental and health standards conducive to the EU’s growing competitiveness. They will use such regulations to exert regulatory influence upon China through the following three channels. First, a variety of formal and inter-governmental multilateral fora, especially the WTO and climate change negotiations that are closely tied up with EU interests, will provide the main platforms for the EU to regulate China. Europe 2020 has explicitly stated that the EU should push forward its fundamental principles in the G20 and other international forums. Second, in bilateral negotiations and agreements, the EU will impose regulatory influence on China by emphasizing a convergence of various rules and standards. Finally, a number of informal and non-governmental multilateral forums will offer a third channel. With an increase in China’s influence in various formal multilateral mechanisms, the EU will further strengthen its efforts in numerous informal multilateral mechanisms and promote some non-binding norms so as to achieve a kind of soft regulation. For example, the EU and its member states, as the main driving force, will promote standards of global social responsibility through the International Organization for Standardization (ISO).

Third, although the China-EU relationship is becoming increasingly pragmatic, the value factor will continue to exist. The EU believes that respect for human rights, democracy, and the rule of law are the main features of its power model, the most important goals of its external relations, and even part of its“core interests.” Dr. Michael Schaefer, German Ambassador to China, said in a recent speech at the Chinese Academy of Social Sciences (CASS) on May 6, 2011 that “Europe has always been pursuing a policy of values, that successive German governments would do as such,” and that “values are an integral part of the China-EU partnership and comprise Germany’s core interests.”Therefore, while the EU promotes making the China-EU strategic partnership focus more on economic and trade issues, values will continue to play a role in China-EU relations, and of course, their manifestations will continue to change. Over the past three years, the prominence of values in China-EU relations largely came from the specific contexts and events in which the EU tried to serve the needs of its internal politics by transferring contradictions encountered in reform and instrumentalizing these values. The EU’s reform practices in the past ten years and the current debt crisis have, to a large extent, significantly strengthened the public’s will to engage in reform. In the meanwhile, the EU has reached a consensus to enhance its global competitiveness. The elections in the European Parliament and the major powers in 2009 also revealed, to some degree, the public’s support for the idea of “economy first” that was advocated by right-wing parties. Therefore, the pressure on the European political elites to use value diplomacy to transfer contradictions in domestic reform will diminish considerably, but the instrumental importance of values will continue to exist. Under the drive of the idea of reciprocity, values might well become a powerful tool for the EU to put pressure on China in order to achieve reciprocity.

Jin Ling is PhD and Associate Research Fellow at China Institute of International Studies.