Trade has been the cornerstone of the relationship between the European Union (EU) and China since diplomatic ties were first established in 1975.

Back then, Deng Xiaoping’s economic reforms were still three years away and the EU was made up of just nine Member States. Ten years later, the EU and China defined the framework of the bilateral economic and commercial cooperation that has shaped their relationship up to the present day. The EU supported China’s access to the World Trade Organisation (WTO) and an agreement on trade and economic cooperation was signed in May 1985,[1] both to promote China’s right to WTO membership and to monitor its level of compliance. In the following article Rosanna Terminio of AsecorpChina, traces the development of the increasingly interdependent EU-China relationship within the context of the WTO.

Relations between the EU and China developed rapidly in a relatively short space of time. Since the initial EU-China agreement was established in 1985, it has developed and been added to with informal political dialogues and sectoral and multilateral agreements, moving towards a ‘strategic partnership’ in 2005. China’s accession to the WTO on 11^th December, 2001, further boosted the development of EU-China relations: since then China has gone on to become the world’s second largest economy and the world’s largest exporter; by 2004, the EU had become China’s largest trading partner, and China is now the EU’s second largest after the United States (US). Since 2008, the High-level Economic Trade Dialogue (HED) has engaged both the EU and China with the aim of addressing market access, intellectual property rights (IPR) and other trade-related issues. On 21^st November, 2013, during the EU-China Business Summit, both sides adopted the EU-China 2020 Strategic Agenda for Cooperation, which included “key initiatives in the area of trade and investment policies”[2] with a special focus on the negotiation of a Comprehensive Agreement on Investment (CAI). The development of a reciprocal trade dialogue is clear indication of the EU’s recognition of China’s ever-expanding economic clout and its desire to strengthen relations with such a strong partner, yet the EU still doesn’t recognise China as having market economy status.

The EU had anticipated that China’s WTO membership would provide an opportunity for increased access to China’s growing market for foreign direct investment (FDI) and export in a plurality of sectors, including those for services and finance. On a deeper level, China’s accession was seen as an important step towards its integration into the global, market-ruled system, with its uniform application of the economic rule of law.[3] In reality, the journey has not been so smooth.

The bumpy road to cooperation

China’s WTO accession represented a turning point in the ongoing process of harmonising Chinese laws with the global legal system. Generally speaking, China has demonstrated serious commitment to achieving conformity with WTO requirements. By successfully implementing tariff reductions and launching an ambitious programme of reforms China has positioned itself as an international player, yet the World Bank’s report Doing Business 2015 only ranks China 90^th place for ease of doing business out of a total of 189 countries. And while China may increasingly use trade dispute instruments (TDIs) against protectionism from other WTO members, it remains the most-targeted country for anti-dumping and anti-subsidisation investigations launched by other WTO member countries.

Many countries hold grievances against China’s implementation of WTO rules. These include: lack of transparency and the use of non-tariff barriers, like trading licensing; restrictions to FDI in some sectors; IPR violations; restraints on export of strategic raw materials reserved for domestic firms; and unwritten rules applied to foreign-invested enterprises (FIEs) to protect domestic ones, mainly SOEs. Many foreign firms, especially multinationals, have the feeling that they have been invited to enter the market just to teach China their valuable technology. China’s increasing protectionism is even considered by some to be a contributing factor towards the failure of Doha Development Agenda, the objectives of which are to further strengthen the WTO legal and trade framework.

While the EU has accused China of anti-competitive practices it is the EU’s remedies for Chinese producers’ dumping practices that remain China’s biggest export concern. They pose the biggest challenge to bilateral relations and have resulted in disputes before the European Court of Justice and the WTO, yet China’s barriers to global trade have often been exaggerated and used as an excuse for protectionist measures. In fact many non-official restrictions to FIEs in China, although unwelcome, are not so different from those that can be found in other developing countries. In the case of the EU and China market openness should be based on reciprocity and compliance with their obligations as WTO members.

The future: EU-China CAI

The launch of negotiations for the EU-China CAI was announced in Beijing on 21^st November, 2014. According to the European Commission, “The Agreement will provide for progressive liberalisation of investment and the elimination of restrictions for investors to each other’s market. It will provide a simpler and more secure legal framework to investors of both sides by securing predictable long-term access to EU and Chinese markets respectively and providing for strong protection to investors and their investments.”[4] The main focus of the CAI is to release untapped potential – the services and finance sectors, the increase of EU FDI in to China (now accounting for just two to three per cent of all EU investment abroad) and an increase of China FDI into Europe. As the EU and China prepare to celebrate 40 years of diplomatic relations the negotiations for this ambitious agreement have already entered the fifth round.

To make these negotiations worthwhile both parties need to assume responsibility for reducing potential sources of conflict. For China’s part, it must address the lack of transparency that arises from the responsibility for approval processes being split between multiple agencies; it needs to provide information translated into one of the EU’s official languages; and it should cease the practice of enforcing temporary bans without any notification and reasonable evidence. What we have seen since 2001 until the present is actually ‘rule of law’ with Chinese characteristics, which is not globally harmonious and remains limited to secure trade areas or special economic zones.

For the EU: China desires market economy status recognition and to receive a fair application of WTO rules for the import of made-in-China products. Furthermore, China would like to see a modification of EU TDIs, particularly the anti-dumping instrument that has been applied to some Chinese products. No less important is that the Chinese Government currently recognises that full unity among EU Member States is yet to be fully realised. To be accepted by China as a real bilateral actor and as a necessary third-party mediator to reduce US-China frictions, a politically united EU—willing to act as a strategic player in world affairs—is a prerequisite.

AsecorpChina is a strategic consultancy firm specialised in the Chinese market. Since 2006 we have partnered European companies looking to succeed in China, providing tailor-made solutions. Our specialties are the forecast and management of cross-cultural challenges in all stages of interaction within the Chinese business environment. AsecorpChina-ZhongDao HRS division applies this same perspective to the scouting, development and retention of key talent.

[1] EU-China Relations: Chronology, European Commission, viewed 5^th May, 2015, <http://eeas.europa.eu/china/docs/chronology__2014_en.pdf>

[2] Countries and Regions>China, European Commission, viewed 5^th May, 2015, <http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/>

[3] Snyder, Francis, The EU, the WTO and China: Legal Pluralism and International Trade Regulation, Hart Publishing, Oxford, Series: China and International Economic Law, 2010, pp 2 to 7

[4] Countries and regions>China, European Commission, viewed 4^th May, 2015, <http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/>