EUCCC President Davide Cucino on China-EU Economic Relations

Q:     As President of the European Chamber of Commerce in China, what is your opinion about the China-EU economic relations today?

A:     Europe is the largest market for Chinese exports and China represents the EU’s second largest export market. Together, the EU-China trade relationship constitutes the second largest economic cooperation in the world, with mutual trade in goods and services in 2010 totaling over EUR 430 billion. By simply looking at these trade figures, the colossal importance of this economic relationship becomes immediately apparent. In the midst of the sovereign debt crisis in Europe, the interdependency in this economic relationship is additionally revealed. The crisis in Europe, which has led to a severe downturn in consumption, has produced a major knock-on effect in China’s largely export-based economy. With European orders for Chinese goods falling sharply in the second half of 2011, we witnessed China’s PMI index dropping below 50 in November. China needs Europe; and Europe needs China. Both need a well-functioning and smooth relationship.

The debt crisis in Europe is the result of a misallocation of resources. It is a crisis of sovereign debt, not of private debt. We see that, by and large, European companies remain strong and still hold large amounts of capital. This means that European companies are still in a strong position to invest. At the same time, China is the biggest driver of global growth post the 2008 financial crisis. Yet, although the importance of growth markets, like China, become increasingly important in times of crisis, we have seen a 3.6% reduction in the amount of capital invested by European companies into China over the first eleven months of 2011. This reflects a seemingly increasing amount of caution on behalf of the Chinese government in terms of attracting FDI as well as a perception that the Chinese regulatory environment does not provide a fair deal for European companies.

China should see the current debt crisis as an opportunity for investment. The crisis presents an opportunity to attract further FDI; and it presents an opportunity to expand ODI. The contribution of European companies in terms of investments, jobs and the transfer of technology cannot be underestimated when viewing China’s astounding economic development over the last few decades. His Excellency, Ambassador of China to the European Union, Song Zhe, told us in Brussels that the EU is the largest contributor of technology to China, totaling 36,730 items of technology worth USD 139 billion of contract value. Likewise, China’s rapidly growing market has provided many opportunities for European companies and has been highly beneficial for the EU’s own growth and economic development. In the European Chamber’s annual Business Confidence Survey of 2011, the European Chamber’s 600 respondent member companies informed us how important the Chinese market has become, with a significant rise in the proportion of companies stating that China’s market has become more important in their global strategies. During an export slowdown in China, boosting FDI would increase jobs, assist growth, and attract high-tech, advanced and green technology as well management know-how. 

As a creditor country, the crisis also presents China with an opportunity to increase ODI into Europe, to acquire EU firms cheaply and to diversify its currency portfolio and spread risks. Historically, Chinese ODI to Europe has been relatively low compared to European investment into China. However, over the first eleven months of 2011, there was a 94% year-on-year increase in the growth rate of Chinese ODI to Europe, demonstrating both the increasing ability of Chinese firms to ‘go global’, as well as the increasing importance of the European market to Chinese firms. The Chamber, as a proponent of freer trade and investment, welcomes this, so long as similar access is granted in China and the ability to invest and acquire companies in the same sectors in China is offered to European firms.

This is the major sticking point for EU-China relations. Europe welcomes Chinese investment and this is evidenced by deals such as Geely buying Volvo. However, when taken in the context that such an acquisition would not be possible were it the other way around because China requires that foreign automobile manufacturers form a joint venture limited to a maximum 50% share to operate in China, this is wherein the problem lies. Whereas Europe remains resiliently open during the crisis, many market access and other barriers still exist for European firms in China. While the public procurement market in Europe is one of the most open in the world, European firms meet massive barriers in China’s public procurement market. For example, while Huawei is increasing its investment into the telecoms market in Europe, European companies are effectively restricted from providing telecoms services in China.

Although there have been a number of cases of trade defense instruments being used between Europe and China, this can to some extent be taken as par for the course; however the lack of a level playing field for European companies in China is a source of real friction. Ten years after China’s accession to the WTO, China has become the world’s second largest economy and its firms have become increasingly competitive on a global scale. The European Union and other countries are looking to China to follow up further on its WTO commitments and to more speedily carry out the process of further reform and opening up. Not doing so could lead to increased frictions and would risk moves to restrict and close markets. Doing so would bring China massive benefits at a time when it aims to shift its economy to new drivers of sustainable and green growth and carry out industrial upgrading. The EU-China economic relationship is already massively important, and is becoming increasingly more so. Mutual opening of markets would bring about increased competition and would lead to increased efficiencies and innovation and greater economic development, ultimately at the benefit of the consumer. This is the key question at the heart of the EU-China relations at the moment, and one which will have a huge impact on how this relationship continues.

Q:     Both sides express interest in further developing our bilateral economic relations. What should China do? What should the EU do?

A:     Europe and China have both recently issued medium-term development strategies. Importantly, in all of the most important respects, these two strategies are very similar. At the core of both the EU’s 2020 Strategy and China’s 12th Five-Year Plan is the drive for green and sustainable growth based on an innovative economy. As China aims to rebalance its economy through increasing domestic consumption, relying less on exports and opening its economy, this process will bring the economies of the EU and China closer. This will bring synergies, but will also put China and the EU into greater competition together in some areas. It is of requisite importance that short-term trade irritants are addressed and solved in a spirit of mutual trust and cooperation so as not to jeopardise the strong potential of the future EU-China economic relationship. By maintaining an eye to the long term and the potential and significant mutual benefits which it could entail, it should be possible for both parties to amicably solve and make progress on the current issues which affect the EU-China relationship in the knowledge that this will bring huge benefits in the future. However, this is easier said than done and will require foresight and compromise on behalf of both governments. 

Without the open global trading system safeguarded by the WTO, China’s remarkable economic development would not have been possible. Nor would it be possible for China to continue its further economic development without such continued openness of markets. China itself has contributed to this process of market opening. As a result of China’s membership in the WTO, China undertook a huge process of liberalisation in the 1990s prior to accession and committed to further liberalisation post accession. In many major respects, China’s compliance to the WTO Accession Protocol has been fulfilled. For example, China has carried out a massive reduction in tariffs, import quotas have been abolished, most trading rights are in place, most price controls have been removed and many technical standards have been aligned with global standards. However, as the European Chamber’s members told us in the annual Business Confidence Survey of 2011, most members believe that China is not implementing changes in line with its WTO commitments. For example, discriminatory subsidies, equity restrictions, licensing difficulties and export quotas remain. Now that China’s economy has grown so strong and so many of its companies are directly competing with advanced European and foreign firms all around the world, China must realise that it cannot take the open markets which it needs so much for granted. The WTO is a multilateral agreement that works as a result of mutual trust developed through each signature country’s unilateral compliance. Open markets should thus be viewed as two-way streets, and systematic market access and discriminatory treatment issues continuously heap pressure on governments to tackle these problems. It is in no-one’s interest for this pressure to lead to a closing of markets.

To this regard, the EU is still correct in maintaining that Europe’s open investment regime remains the strongest argument to attain similar access abroad. The European Chamber does not want to see a race to the bottom as a result of uneven market access policies. There are many people in Europe and in other countries around the world that increasingly see Chinese investment and market access as a danger. The EU has been correct to keep its market open and strive for mutual opening. However, as time goes on and if access in China does not increase, pressure mounting in the EU’s constituencies for change will make it much more difficult to use the same arguments to resiliently maintain open markets. 

The EU must continue to work with China to push for mutual opening. This would be best done through the multilateral system and through convincing the Chinese to fulfill obligations in the WTO to remove barriers and to submit a comprehensive GPA offer that reflects public procurement realities; in particular the reality that the vast proportion of China’s public procurement is carried out at local levels and through State-Owned Enterprises projects financed with State money. To do so, the EU must demonstrate how this process would actually be beneficial for China.

As a result of many factors, including a steeply increasing average real wage, an ageing population, an over-reliance upon fixed-capital formation as a component of GDP and a continued reliance upon exports of low-end manufactured products, China has correctly identified the need to shift to new drivers of growth in order to escape the middle-income trap which has snared many countries in South America and in the Commonwealth of Independent States. China’s 12th Five-Year Plan identifies industrial upgrading and a shift towards greater domestic consumption, as well as the development of the services and private sectors, as these new drivers of growth. To achieve these, the 12th Five-Year Plan identifies particular industrial goals. These include the development of advanced and green technology and a modern services sector. Unsurprisingly, these targets match the strengths and practical experiences of European companies; and importantly, the key trait needed to realise these is innovation.

History has taught us that competition in the marketplace is the greatest driver of productivity and innovative products and solutions. Therefore, the European Chamber believes that China’s identification of ‘further reform and opening up’ as the so-called ‘driving force’ of the 12th Five-Year Plan hit the problem squarely on the nail. In a capitalist system, increased competition in the marketplace stimulated by further reform and opening up is truly the only mechanism which has proven to lead to high levels of innovation and productivity. The identification of further reform and opening up in the 12th Five-Year Plan was thus correct and was taken to be reflective of a reformist and progressive market-oriented philosophy. However, we tend to see two major schools of thought in China: the reformist approach based on market principles; and one that remains more traditionally focused on the principles of the planned economy and industrial policies.

Since the 12th Five-Year Plan was released, implementation of policy has worrying reflected a leaning towards more traditional modes of development and a disinclination to faithfully alter policy to give full play to the forces of further reform and opening up. The European Union not only needs to be resolute and present a united voice to push China to further open its markets to European firms, it also needs to work with China to continually exhort the benefits which further liberalization would bring to China in terms of invigorating healthy competition and increasing transparency and predictability in the market place. Fully putting this school of thought into practice would not only fuel the forces of efficiency and innovation in China, but would also assist greatly in the development of China’s private and SME industries.

The EU’s best argument for this process still remains the maintenance of Europe’s own open investment regime. China has demonstrated that in basically all sectors of the economy it is now able to compete with mature multinational companies. This rise in competitiveness is largely due to the technology transfer which has been brought into China through investments made by foreign companies based on promises given of plans to create a fair and equitable marketplace in China. As Chinese companies are beginning to ‘go global’, the importance of the ‘two-way street’ of open markets will become increasingly apparent for China; and must lead to increased openness and healthy and fair competition in China’s own marketplace for all enterprises, both domestic and foreign, state-owned and private alike.

Q:     In implementing its “going global” strategy, China has now opened an eye to Europe. How can China succeed in going to Europe in the investment area?

A:     Chinese investment into Europe could bring benefits to both parties. The debt crisis in Europe means that the European marketplace is geared towards creditors. A large number of opportunities exist for relatively cheap mergers and acquisitions with European companies; and Europe is looking to infrastructure building as a way to spur growth. Both offer substantial opportunities for Chinese companies to ‘go global’ and establish themselves in the mature European market.

At a central and strategic level, increased investment in Europe, be it through bonds or as parts of the EFSF package, or through M&As and other direct investment, would allow China to employ its foreign reserves and would enable China to diversify its currency portfolio and spread risk. Moreover, as China is deeply exposed to world trade, a further decline in the EU could profoundly damage China. Investing in Europe holds the double advantage of supporting the European economy, the biggest importer of Chinese products; and European bonds still present an attractive opportunity to invest in a secure marketplace and in a currency which still has strong long-term growth prospects.

At an industrial level, Europe presents a significant opportunity not only to gain technologies, brands and supply chain knowledge, but also the ability to increase international management and competition experience to better equip companies with the strengths to compete in China’s own domestic market. China and its companies will not invest in the EU simply to assist Europe’s recovery, but will weigh up these advantages and invest where it makes strong economic sense.

However, despite these strong incentives and advantages towards investment, success is certainly not guaranteed. As when investing in any foreign country, the essential element necessary to thrive is the ability to understand the target market. The European Union is a mature and transparent market with a relatively fair and open regulatory environment in which a prudent and well-managed company with an attractive product should be able to successfully compete.  However, the mature and highly competitive nature of the EU market means that any Chinese firm looking to thrive cannot simply transplant its Chinese business model into Europe. To succeed in any market, a company must adapt to the marketplace.

As the differences in the regulatory environment, the culture and language and the management of marketing, distribution and supply channels pose significant barriers for European companies investing in China, the same will be said for Chinese firms investing in Europe. Although many European and a number of Chinese companies have already shown that it is possible to prosper in the other’s home market, the learning curve and adaptation of these companies has generally been a gradual and time-consuming process. When European companies started entering the Chinese market, many chose a slow and gradual entry through joint venture agreements with a Chinese partner. This allowed many European firms to get to grips with the different business and regulatory models in China. Rushing into a market is never a good idea. That is why I would suggest that Chinese companies should consider the substantial value that a well-identified partner in Europe could bring when entering the market. This will not only provide the necessary and specific skill set to efficiently operate in Europe, it will also bring an important element of market knowledge and understanding that will considerably increase the chances of success.

Q:     In 2016, China will be granted the so-called market economy status.  What would you see for the China-EU economic relations after 2016?

A:     As determined in China’s WTO accession agreement, China will automatically attain market economy status in 2016. Of course, China could be granted market economy status prior to this date; and this has proven to be quite a thorny issue in recent EU-China economic relations.  The EU has set out five criteria that it considers constitute a market economy and has remained steadfast in requiring China to fulfill these in order to be recognised as a market economy prior to 2016. However, it does not seem likely that Chinese officials will vastly alter China’s current industrial policies to allow significantly greater market access to European industry, nor to significantly reduce state influence or to bring its banking sector under market rules, which are two of the EU’s five criteria, in exchange for market economy status. Therefore, it would not appear likely that China will gain market economy status from the EU prior to 2016, when China will receive market economy status whether or not it fulfills the EU’s recognised criteria.

It must be noted that, despite all of the press and indeed political attention that the question of market economy status has garnered, its only practical implication is simply on the methodology used to calculate margins when investigating an anti-dumping case. Moreover, all of the anti-dumping cases that the EU has activated against China cover just 1.03% of bilateral trade, and the effective duties collected amount to only 0.15% of Chinese exports into the EU. Furthermore, even if the EU granted China market economy status, this does not mean that the EU would necessarily levy less anti-dumping cases on China, nor would it necessarily mean that evidence of dumping would not be found in future anti-dumping cases. As an example, India enjoys market economy status, yet the EU has as many anti-dumping cases with measures imposed against India as it does against China. Indeed, many argue that recognition of China as a market economy would actually have the effect of spurring the number of anti-subsidy cases charged against China under the WTO; and indeed China has become quite adept in recent years at following the launch of anti-dumping cases against its own products by applying its own anti-dumping cases on similar European products in China.

With all this in mind, the friction that this issue has created seems to be more political in nature and not necessarily one made simply on economic grounds. That being said, if China was to fulfill Europe’s five criteria of a market economy, doing so would not only expedite the granting of market economy status, it would also send a clear signal that China is a fair and competitive economy and would bring about healthy competition in its marketplace, thus hastening China’s innovation and movement up the value chain.

By 2016, irrespective of the question of market economy status, we know that the EU-China economic relationship will remain one of, if not the, largest economic cooperations in the world. Although the EU is currently struggling, we expect that the four strands of actions adopted by Europe during the last EU Summit will have lifted Europe out of its crisis. Meanwhile, EU-China economic integration will likely be amplified as a result of China’s potential achievement of full RMB convertibility and internationalisation, as China’s 12th Five-Year Plan period will have come to an end and as bilateral investment will have increased. This does not even mention that China is expected to become the world’s largest economy in the next decade and that one-third of global growth is expected to be generated by China alone by 2015.

To achieve all of these, China will have had to have taken bold steps to open up its marketplace, to have made reforms towards a more market-led and flexible financial system with greater capital account liberalization and the removal of controls on savings and interest rates.  Doing so will not be easy, but it is imperative that China and the EU work together in a spirit of mutual trust and openness to both make the moves necessary to overcome short-term trade frictions and to avoid protectionist measures by keeping focus on the potential massive mutual future economic gains that will come with continued economic cooperation as their economies and market drivers come closer together.

(Date of interview: January 23, 2012)