The EU-China trade relationship going forward—building confidence

Catherine Ashton

University of International Business and Economics, Beijing

9 September 2009

Introduction

It is a great pleasure to be here today at one of China’s leading business and economic universities and have the chance to meet with you.

The University of International Business and Economics holds a special importance for the European Union – China’s largest trading partner – because it hosts the EU-China Managers Exchange Training Program, which is designed to promote closer links between business managers on both sides.

I welcome this program because it highlights a very important aspect of the EU-China relationship– confidence in one another. Building that confidence will be key if we are to continue to develop a deep and lasting EU-China trade partnership.

And confidence is vital because I firmly believe that the future of international trade lies in relationships rather than in the mathematical formulae used to crunch tariffs in the past.

Building those relationships today is vital if we are to promote the mutual understanding we will need if we are to keep tomorrow’s trade flowing and generating the wealth our economies need.

Enhancing the EU-China link

Relations between the EU and China have come a long way since bilateral ties were established over thirty years ago. Our trade relationship in particular has expanded from virtually nothing to one of the most important in the world.

Inevitably, a relationship such as ours needs constant attention if we are to maintain and build confidence. We need to communicate– to speak frankly – to exchange ideas and to recognize there have been and will be some difficult moments as our relationship matures.

So, I came to Beijing this week, to continue to build the unique relationship that exists between the EU and China – a partner that is more important than ever in the current economic turmoil, as the last few months have demonstrated.

The High-level Economic Dialogue that I chair with Vice-Premier Wang Qishan has proven itself invaluable in allowing us to think more strategically about our relationship and our common goals, and allowing us to coordinate our policies more closely in response to the current global economic and trade challenges.

A partnership of equals

It has often been said that the 21^st Century will be Asia’s century. That may be true but I believe that, above all, it will be the global Century. The world is now more economically interdependent and the threats and challenges we face do not respect borders or even continental boundaries.

Nowhere is the interdependence more visible than in the field of trade and investment. At the moment Asia is recovering faster from the economic downturn than other regions, in part thanks to China’s gravitational pull.

Recent data suggests that China’s economy is edging closer toward 8% growth again. Hong Kong, Singapore and South Korea, whose economies are closely entwined with China’s, have also surged towards recovery.

But sustained recovery depends on recovery of consumer demand elsewhere in the world. Our shared future prosperity is inextricably linked.

Strengthening the bilateral relationship

The EU-China trade and investment relationship must continue to be a motor for sustainable growth. Trade between the EU and China reached EUR 326 billion in 2008, making the EU-China trade relationship one of the most valuable in the world.

Given its importance we need to coordinate closely our policies, especially during a time of crisis, I mentioned the High Level Economic and Trade Dialogue between the EU and China, which has quickly become one of the major avenues to deepen our partnership and build mutual confidence.

The HED was initiated by Premier Wen Jiabal at the 2007 EU-China Summit, because trade imbalances between China and Europe were not sustainable and needed to be addressed in a more strategic fashion.

Last May in Brussels Vice-Premier Wang and I chaired its 2^nd session, with the participation of 12 Chinese Ministers and 13 Commissioners and senior officials.

The HED also ensures that the many bilateral dialogues that exist between the EU and China operate coherently and when needed receive greater political impetus. But more than this, it provides an opportunity for me–as EU Trade Commissioner- to get to know my Chinese counterpart to build a relationship based on mutual respect and shared understanding.

And linking back to what I said earlier, this relationship is essential because the obstacles to EU-China trade are increasingly intangible- they are non tariff barriers arising from different traditions and standards. There are harder to identify and solving them requires mutual trust, cooperation and understanding.

The HED provides a platform to tackle the regulatory issues that risk obstructing trade and investment flows. This includes cooperation on trade in food and consumer products, but also dialogue on streamlining regulation in areas such as technical standards and certification procedures. Differences here often mean lost business opportunities.

The HED also provides the opportunity to create a more favorable investment climate, by achieving legal certainty, equal treatment and removing unnecessary obstacles to investors.

And, the HED gives both sides a means of working towards more effective protection of intellectual properly rights, especially patents- as there are crucial for innovation, investment and the transfer of technology. We are also working on strengthening our customs cooperation, which is vital in the fight against IPR infringement, as well as streamlining administrative and legal procedures in IPR protection.

These issues, rather than tariffs, are now the big issues of EU/China trade relations. The honest, open relationships that the HED facilitates are the best way of tackling them and of ensuring that the EU-China economic relationship becomes ever more stable and sustainable for the long term.

The trade relationship

The European economy is already very open to Chinese exports. The fact that the EU is China’s main export destination and China is the EU’s largest source of imports speaks volumes of our openness. On the other hand, the EU still exports more to Switzerland, which has less than 10 million inhabitants, than to China. While some degree of imbalance is inevitable, our economies are complementary and a more harmonious balance should be our shared objective.

I have seen reports in Chinese media that protectionism is on the rise in Europe. Let me assure you that Europe stands firm in opposition to protectionism. We have resisted any “buy local” provisions in rescue packages. Our stringent rules have been applied to any state support for industries, making sure these are targeted, specific and temporary. Above all, we have kept our markets open, not raising tariffs or lowering quotas.

It is true that some Chinese exports are subject to anti-dumping duties in Europe or are currently the subject of investigations, but this affects less than 1% of our imports from China. It is a normal part of a trade relationship as large as ours. China also investigates dumping and imposes duties, including on the EU.

The investment relationship

While the trade relationship remains strong, investment flows between the EU and China are still modest, and have actually been decreasing in recent years. This is a shared problem that we both need to tackle to underpin our future growth.

The EU is an attractive investment destination- yet China only invested EUR 2.2 billion in 2006 and a fraction of that in 2008. For its part, the EU invested EUR 4.5 billion in China in 2008, down from EUR 7 billion in 2007.

The EU is China’s most important sources of high-tech investment, yet in absolute terms China receives only 1% of the EU’s overall outward investment. China is and will be an important investment destination for EU companies- and I certainly sensed a lot of interest when I attended the Xiamen Investment Fair yesterday. But it is in strong competition with other emerging economies, such as Brazil and India, which are becoming increasingly attractive destinations for European investment.

The interdependence of the Chinese and European economies requires a better understanding on both sides of the impact of our respective investment and stimulus policies. Neither side can afford to believe that domestic investment is somehow better than foreign investment, that jobs with a foreign investor are less desirable than those with a domestic investor.

It has been right, in the current economic climate, for governments to support their economies and to invest in order to help create structural change, through training, through research and innovation. China has introduced a big state investment plan backed by massive bank lending.

However where lending is focused on sectors that suffer from overcapacity, concerns about unfair trade may arise. Overcapacity becomes an issue of international concern because the output that cannot be absorbed domestically in China will seek outlets on global export markets, which due to the financial crisis have shrunk considerably.

That course of action would also be inconsistent with Premier Wen’s call to create a development model for China based on more sustainable growth. That will mean reducing China’s propensity to save, and relying more on private consumption and service industries rather than on exports to power growth.

Creating a more sustainable path for development will be a huge challenge.

Making the relationship work for global good

As I’ve highlighted, the EU/China relationship is a partnership based on shared interest and values. Both the EU and China have the opportunity to put it work in the world. Together we can show global leadership on two huge global priorities: completing the Doha Round and tackling climate change.

The Doha round- a much-needed boost to the global economy

Most analysts still warn that global recovery is not yet on solid footing and the possibility of a double dip recession cannot be rules out. To prevent that from happening and to promote a quick and smooth world economic recovery we need to turn our attention to trade.

I have just come from New Delhi, where a key group of trade ministers discussed the way forward for the Doha Round of world trade talks for the first time since July 2008. Together, I believe we have given the negotiations renewed momentum.

Minister Chen and I shared the view that a swift and satisfactory outcome to the Doha round would be the ideal boost to the world economy, especially for developing countries. Conservative estimates suggest that a deal would add around 150 billion U.S. dollars to the world economy per year, every year and recent study indicates that gains could be twice that.

If we are to get a deal in 2010 we need to pick up the discussions on agriculture and industrial goods where we left them in 2008, and give our negotiators the necessary flexibility to close the outstanding issues. Importantly, we must also move on a wide range of issues in order to give an idea of what a final deal might look like.

We must also clarify how WTO members will use their “flexibilities”, the margin allowed to WTO Members to exclude certain products from their schedule of liberalization. This is not to go back on what has been agreed, but to be able to objectively weigh up what is on offer.

We also need to test what industrial sectors might be ripe for greater liberalization in so-called “sectoral” agreements, which would lead to deeper cuts in some areas as part of the broader talks. Initiatives on chemicals, machinery and textiles would supplement the gains already on the table substantively and China, which is already highly competitive in such areas, would stand to benefit. Negotiations will be contentious, but sectoral agreements will greatly improve the quality of the final Doha package and it is important that all the largest economies, developed and developing, participate in them.

In services, the fastest growing sector of world trade, current proposals would create litter or new market access. Our negotiators need to do more work to produce real gains. In July 2008 WTO members indicated that they would be willing to liberalize further, but we need to see real progress. China, which has vowed to develop further its service sector as part of a more sustainable development model, has much to gain here.

China and the EU have a common interests in completing this Round, and have already worked together effectively in the DDA context, for instance on trade facilitation. In a more general sense, the EU and China, which have both benefited from openness in the world economy, have a common interest in strengthening the WTO’s multilateral rules-based system.

Boosting the green economy

Moving towards a more sustainable economic model also implies adjusting to the challenge of climate change. The EU and China have both recognized that, because of this challenge, our longer-term prosperity can only be assured by ensuring high-growth through the development of a low carbon economy.

This conviction motivated EU leaders to agree in 2007 what remains the most ambitious package of cuts in greenhouse gas emissions, energy efficiency and use of renewables of any developed economy. And it is striking how closely the EU’s targets mirror China’s own domestic targets.

The European and Chinese economies are at different stages of development. We recognize that China- while transforming fast- still has some catching up to do. That’s why we take seriously the principle of common but differentiated responsibilities.

But, for all that, we face many common challenges in unlocking the potential of renewable energy sources, developing clean energy technologies, and using energy more efficiently. So it makes overwhelming sense for the EU and China to work together more closely to maximize the trade potential and thereby help to deliver the economies of scale in low carbon goods and services that will form a key part of global efforts to tackle climate change.

Trade in environmental products and a service is one important area where the EU and China can achieve concrete results.

The EU is committed to freeing up trade in this sector, which is the fastest way to diffuse clean technologies, especially in developing countries. To this end a contribution from China, a major exporter and importer of green goods in nearly every category, would be vital. The Doha Round of trade talks offers an opportunity to make deep tariff cuts on environmental goods.

I hope that China will open further public procurement in renewable energy, for instance in wind and solar panels farms, areas where China has rapidly become a world leader. Government purchases represent a significant share of the global environmental goods and services market, which is worth EUR 470 billion every year.

The prospect of a bigger potential market through the liberalization of trade, investment and government procurement can only induce additional investment and economies of scale that should translate into lower costs, making it possible for more and more countries to have recourse to these new energy sources.

Streamlining intellectual property rights protection and investment rules will also facilitate the growth of clean technologies in developing countries. While direct investment is the most important means of transferring technology, weak intellectual property rights protection may inhibit the transfer of clean technologies.

There is also a potential role for us to co-develop global standards for the technologies that will underpin the low carbon economy. This is not about creating barriers but rather about sharing information on the needs of our respective markets and mapping our requirements. In this way, we can move forward to a new future based on low carbon prosperity.

Conclusion

We are entering a new era in global trade where relationships and co-operation are central to identifying and to unlocking the economic gains of the future. Those relationships are able the cornerstone of the international co-operation we all need to tackle the global challenges we all face.

The EU/China relationship is a central part of that co-operation. Together we can not only identify and remove the barriers to our mutual trade and investment, increasing prosperity for our citizens. But we can also put our relationship to work by jointly leading the world on concluding the Doha Round and on making the transition to a low carbon future.

The basis for the relationship is mutual confidence in each other and in our common potential. You here at UIBE clearly have the right idea, and I hope you will contribute as we move forward.

Thank you.

ENDS