“The EU and China: Addressing the Systemic Challenge” by BusinessEurope

Presentation of China Paper

On January 23, EOS has participated in the presentation of BusinessEurope's China Paper: “The EU and China: Addressing the Systemic Challenge. The event was hosted by the German MEP Reinhard Bütikofer (European Green Party).

The paper states that today, the EU is China’s most important trading partner, while China is the EU’s second most important trading partner. Total bilateral trade flows in goods grew to EUR 604.7 billion in 2018, while total trade in services amounted to almost EUR 80 billion in 2017. And there is still plenty of untapped economic potential for both sides.

The Chinese and European economies have benefitted tremendously from China’s accession to the WTO in 2001. This showcases that rules-based multilateral trade is the best enabler for economic development. The WTO was created as a body governing multilateral rules-based trade that would evolve in parallel to the needs of the modern economy. The lack of WTO reform in recent years, however, coupled with emerging signs of a slowdown or reversal in market-oriented reforms in China has led to level-playing field issues the impact of which has grown as China’s share of global economy increased.

This is why the European business community now advocates for a stronger and fairer economic relationship between the EU and China. The paper shows the potential that closer economic engagement would bring but also acknowledges and explains the obstacles that undermine this potential. The consolidation of China’s state-led economy presents systemic challenges that lead to market distortions within China, the EU and on third markets. This undermines the level playing field between European and Chinese businesses. China’s state-led system includes direct government control over major parts of its economy including key industries, financing institutions, state-owned enterprises, and softer influence through party cells and the corporate social credit system (CSCS) that will apply to all enterprises. This unique and extensive system of state control and coordination through top-down economic planning increasingly blurs the boundaries between the public and private sector and has given rise to “China Inc.” – a structure in which the state dominates all aspects of the economy.

The EU should take the lead together with like-minded partners to create comprehensive rules that reign in industrial subsidies and discipline the behaviour of state-owned enterprises. In this regard, the EU and China should also further intensify discussions in the EU-China joint working group on WTO reform. Other reforms include amongst others introducing flexibilities into the system – both in terms of the negotiating method as well as in the decision-making process – and improving trade policy monitoring and notification procedures for example by introducing penalties for members that fail regarding notification requirements. Lastly, China should take the responsibility it has according to its real level of economic development which means that China can no longer simply be regarded as a developing country.

With respect to standardisation in China. A first concern is that mandatory Chinese (national, sectoral or local) standards may be used to establish de facto barriers to trade. Second, for most standards it is the government who determines which stakeholders, if any, may provide input to the standard. A third concern relates to China’s ambition for global leadership in standardisation. The unilateral imposition of Chinese national standards in third countries would result in an unlevel playing field. Combined, these concerns mean that European companies do not enjoy the same access to the Chinese market as Chines companies to the European market, with possible similar consequences on third markets.

European companies should have full reciprocal access to participate in Chinese standardisation on the same footing as Chinese companies can participate in standardisation in the EU (CEN/CENELEC, ETSI or at national level).

To achieve our ambition of climate neutrality by 2050, we urgently need international convergence of climate ambitions. For this reason, it is essential that China, being the leading global GHG emitter (28% of the global emissions), takes its responsibility together with the EU and other signatories of the Paris Agreement. While the EU has adopted relatively far-reaching climate policies, there exists a lack of equivalent climate policy measures for industries in China and on third markets – in particular in Africa. The cost burden of climate and environmental policy to China’s manufacturing sector is far lower than to the EU’s. The EU and EU Member States must fully apply all existing measures within the EU ETS to minimise the risk of carbon and investment leakage. A toolbox of targeted instruments is needed to shield the EU from distortions caused by free riders.

China provides various forms of government support to its industries, particularly in the context of industrial policies such as Made in China 2025. Subsidies can take on several forms, including direct subsidies, government grants, tax benefits and export credits. Direct and indirect subsidies to State Owned Enterprises (SOEs) have for example amounted to 1.3-1.6% of annual GDP in recent years. The figure of total subsidies is even higher as, in addition to SOEs, private sector firms received about a third of total direct subsidies in 2018. These problems increasingly spill over into the global trading system, including the EU market.

The EU should pursue multilateral, plurilateral and bilateral efforts to develop new disciplines on industrial subsidies and SOEs. In this regard, the EU, Japan and the USA should deliver concrete outcomes in their trilateral discussions and consider launching negotiations on a plurilateral agreement on tackling government-induced market distortions. The EU should also intensify discussions on industrial subsidies and SOEs in the EU-China joint working group on WTO reform.

The EU should reverse the burden of proof for foreign state-owned enterprises within its internal market and instead let them prove that they do not receive distortive subsidies on their home market. This would be WTO-compliant, and the additional transparency would allow the EU to effectively use its instruments to address the impact of subsidies within its single market. The ultimate goals are for the EU business is to secure a level playing field between the EU and China, mitigate the impact of China’s government-induced market distortions, reinforce the EU’s own competitiveness, and ensure fair competition and cooperation on third markets.

Moreover, the EU should reinforce its own single market. Businesses continue to experience regulatory and administrative hurdles when doing business in the EU and in the EU Member States. At the same time, China is catching up with the EU in terms of fostering a conducive regulatory business environment. Although the EU ranks higher than China in terms of the overall ease of doing business, on some indicators it is nowadays easier to do business in China than in the EU. In 2018 for example, it was easier (for local companies) to start a business in China than in the EU. To maintain its competitiveness the EU must:

Deepen the single market: Regulatory asymmetries make it challenging for companies, in particular start-ups, to develop economies of scale. National regulations must be harmonised as much as possible, while keeping in mind proportionality and necessity principles. This is essential to help provide the domestic base from which new companies can develop economies of scale and compete globally.

Develop a strategic industrial policy: Instead of developing a dirigiste industrial policy like China, the EU must develop a strategy that aims to improve the framework conditions that incentivise companies of all sizes to invest, innovate and grow.

Regulation at EU and national level should follow better regulation principles to minimise regulatory and administrative burdens. This will contribute to maintaining our regulatory competitiveness vis-à-vis China, who is steadily catching up.

For the European businesses, the ultimate goals are for the EU to secure a level playing field between the EU and China, mitigate the impact of China’s government-induced market distortions, reinforce the EU’s own competitiveness, and ensure fair competition and cooperation on third markets.

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