To the new EU leadership: How to proceed on China

Two weeks ago we saw a deluge of new investments following Li Keqiang’s visit to the UK and Greece whilst the third round of negotiations on the EU-China International Investment Agreement (IIA) were underway in Beijing. Li’s visit follows Xi Jinping’s tour through the Europe last April, announcing the need for closer EU-China ties. As of this writing, the new EU leadership is starting to take shape, the question is if they will be able to capitalise further on China’s shift toward Europe. The EU will need to present a unified policy, which requires an understanding of why China is focusing on Europe and an accompanying long-term approach.

In Europe, the Chinese Communist Party (CCP) sees massive opportunities for trade, a chance to diversify currency holdings and new technologies. Trade is a no-brainer, the EU-China trade amounted to over $420bn in 2013 making it the second-largest economic cooperation in the world. Chinese investors are eager to expand into Europe due to the recovery of the euro and growing distrust in the US. Currently, China holds massive reserves of USD. This over-dependency on American capital is problematic for Beijing and the euro is the most viable alternative. China is currently faced with challenges in urbanisation, agriculture modernisation and IT implementation that are apparent to all those who have spent time there. China sees deeper cooperation with the EU as an avenue to acquiring the necessary technology and innovation to combat many of these challenges.

It is this need for more technology that the EU countries fear. The idea of China taking European technology, repackaging it and flooding the European market is not an irrational fear. But things do not have to play out like that. The EU and China should not become technology competitors but co-operators. It is projected that by 2018 China will surpass the EU in R&D spending. More and more companies are also moving their R&D departments to China due to a well-educated workforce and lower wages. Instead of walling off our technological advances, we need an agreement that will allow us to mutually benefit from one another. The EU has already set a precedent with its Horizon 2020 program that allows certain third countries to participate, albeit that China is not a part of this. For something like that to be feasible there needs to be mutual trust.

The EU will need a long-term strategy in order to capitalize on the progress of the last few months. The first and most important step is to ease the CCP’s collective mind that the EU is not America’s “lackey”. From experience we have learned that China makes all its foreign policy decisions based on its competition with the US. The Transatlantic Trade and Investment Partnership (TTIP)  and the Trans-Pacific Partnership (TPP) trade initiatives are seen as attempts to isolate China and the EU is seen as an accomplice of the US. One option to change this perception would be for the EU to suggest granting China observer status in the TTIP process. Seeing how China is the EU’s second largest trading partner, it would be a valid request. But realistically, the US would never allow this.  The best way for both sides to build trust would be by agreeing on the EU-China International Investment Agreement (IIA). This would achieve two things. First, it would show the Chinese leadership that the EU does not simply follow the US. Investment regulations have been a contentious issue in the TIPP negotiations and reaching an IIA with China before the TTIP is finalised would be a boon for EU-China relations. Second, it would show a more unified EU. China views the EU as a fragmented and weak actor. This is the reason why China chooses to engage EU Member States individually instead of Brussels. An IIA would be the first step to changing that perception whilst simultaneously unifying the agreements China has with individual Member States.

In order for the IIA to become a reality though, the EU will need to maintain realistic expectations. Western investors will tell you they are plagued by the various Byzantine rules and regulations that make up China’s FDI environment but they find even more obstacles due to corruption and the need for domestic reforms. The IIA should not be seen as a tool that will allow European investors to immediately have full access to China but as a starting point that will allow them to capitalise as soon as profound reforms become a reality.

Keeping firmly in mind the strategic value of the IIA for the development of the bilateral relations with China, the EU can create a relationship not based on the competition and trade rows of the past but on profound cooperation and mutual benefit. The initial steps have already been taken through initiatives such as the EU-China Cyber Taskforce, EU-China High Level Strategic Dialogue and increased Human Rights Dialogue and others. These gains must be solidified and it falls to the new EU leadership to ensure it does.

About the author

Turi Fiorito
Turi Fiorito

Turi Fiorito is an expert on Asia and EU policy. He has spent time in India, China and Taiwan. He has worked for the Dutch Foreign Service in India where he drafted reports on the regional issues and liaised with the European Representation in New Delhi. Turi expresses his own views and is looking forward to hearing your thoughts on EU-China relations, trade and cyber security.

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