Prof. Zhang Yong'an on China-European Economic Relations

Prof. Zhang Yong'an is Chairman of the Department of International Economy and Trade of the Shanghai Institute of Foreign Trade.  This interview was conducted when he was attending an academic event at the Institute of European Studies, CASS, in October 2012.

Q:  The frequent anti-dumping measures launched by the EU against China have provoked many people to think that trade friction will be a major issue in the bilateral relations between China and Europe. Some people however also maintain that the proportion of products affected by the European anti-dumping measures is so small (about 1% ) that trade friction will not be a stumbling block in the Sino-US relations. What’s your viewpoint about this question?

A: Yes, trade friction is an important issue worthy of our attention, but it deserves a fair and objective analysis before we can really find out whether it is the reason that leads to the tension or major setbacks of bilateral relations between China and Europe. The EU has always been a major export destination for Chinese products even in the depth of the European debt crisis. Take the statistics of January to June of 2012 for example, the volume of China’s export to the 27 countries of the EU accounted for 17.06% of the total exports (which is the lowest in recent years).  The amount of export affected by the European anti-dumping is 1%, totaling 1.631billion dollars. Is it a sizable amount if we take into consideration the total value of all the exports (9.543 billion dollars) affected by antidumping in the world? The key point is what line of products and what sectors are most seriously affected.

Generally speaking, the major lines of products exported to the EU are mostly mechanical, electrical and new high-tech products.  According to The Harmonized Commodity Description and Coding System, the Sixteenth Category is the major area in which China has obtained a favorable trade balance in its export to Europe, but it is also the area most susceptible to the European anti-dumping investigation. The recent tide of European anti-dumping and anti-subsidy investigations against Chinese solar products has brought about adverse impact on the industry though the volume of export in such products amounted to only a negligible proportion of the total. What is noteworthy however, most of the products under EU’s anti-dumping and anti-subsidy investigations are those with distinctive competitive advantages, which actually involves the employment of millions of Chinese workers and should merit our attention with regard to its the far-reaching influence on China.

Q:  How can China tackle the issue of Europe’s repeated anti-dumping against China?

A: We should consider this problem at least from two perspectives: first of all, it has something to do with our own enterprises. They should abide by the market rules and make sincere efforts to boost the non-price competitive advantage instead of simply resorting to price competition; second, governments at all levels, while helping our enterprises penetrate into the foreign markets (including the European markets), should take the initiative to alleviate the tax burden of the enterprises, tighten supervision over the market order by law, strengthen protection of intellectual property rights with an emphasis on sharpening the competitive edge through innovation instead of simply giving support to exports. And as for the guilds and trade unions, they should shoulder more responsibility to rendering service to our enterprises so as to help them learn more about the overseas markets.

On the other hand, as for trade protectionism of Europe such as the anti-dumping against China, we cannot afford to indulge ourselves in illusions, since each nation will always uphold its own interests and will not easily give up its own interests to help its trade partners especially when it is caught in the depth of economic depression. Besides, there is a high degree of dependence upon their own internal markets among the 27 member countries of the EU. In order to maintain the internal cohesion among them the EU will resort to every means possible to protect its market, therefore it is unlikely to expect the EU to relax its trade protectionism against China. In spite of that there is no denying that trade liberalization is still the mainstream of current world trade

Q:  When China obtains the market economy status in 2016 automatically, does it mean that our export products will have free access to the European market? What kind of measures will the EU take to protect their market?

A: According to the WTO protocol China will automatically obtain the full market economy status after its accession to the WTO for 15 years. What is most significant about it is that, if cases of anti-dumping and anti-subsidy arise, the EU cannot justify their investigations on the basis of the price of a surrogate country. But a country or a bloc does not simply rely on these means to protect its own market. Other means such as the erection of technical trade barriers (which I am more inclined to call them technical trade practices) can also be effectively used to block the entry of some foreign products.

The EU is a trading partner that has set up the largest number of technical measures (or barriers). However, this does not constitute violations against the WTO protocols and is justified to a certain extent. Even though China is accorded full market economy status after 2016, our products will still have to meet with many trade barriers before making it to the European market.

With such a clear understanding of the situation we should also realize that it can also help improve the quality of our products, and will definitely enhance the competiveness of our products in the overseas market.

Q:  As China is increasing its investment in Europe, what problems do you perceive should be addressed? What needs to be done for China as well as for Europe to increase this kind of capital flow?

A: Any economic entity, in order to maintain continuous development, has to rely on investment especially foreign investment. As China’s economy develops rapidly, it has become an attractive destination for FDI and also an important capital export country. But China’s investment in Europe is still in its infancy attributable to a number of factors, such as an ignorance of the European market rules and practices and the complex regulations with regard to market access etc.

It’s my point that the main impediments to China’s direct investment in Europe is a result of prejudice and mistrust against China from some of the EU member countries, accusing Chinese enterprises of harboring ulterior motives in their overseas investment. Sometimes they turned down the Chinese projects on the ground of security reasons—a reflection of European ambivalent attitudes toward China, which is unfair to Chinese enterprises and harmful to European interests. Being a highly open market as the EU claims itself to be, it should adopt an open and tolerant attitude toward China’s investment as long as we abide by the laws and regulations of the host country. Of course, making investment in conformity with the laws and achieving mutual benefits through win-win cooperation should always be a guiding principle for Chinese enterprises.

Q：How about European investment in China?
  
A: China boasts a huge market, which cannot afford to be neglected by the EU if it intends to invest in China. Such investment is surely beneficial to China’s economic development. The question of attracting foreign investment (including European investment) needs to be guided by China’s industrial policy as well as an upgrading of law enforcement level and protection of intellectual property rights in China. At the same time an appraisal and evaluation of environmental protection should be made about the overseas investment projects in China so that they will be compatible with the overall goal of industrial structure adjustment in China. 
 Another notable issue for our bilateral investment is an emphasis on ways to enhance cooperation between the small- and medium-sized businesses of the two sides. It is indeed a valuable subject that can be explored in our bilateral economic cooperation.

Q:  Most of the China’s investment in Europe has been flowing into //channeled to Luxemburg, is it something that should be encouraged?

A: Luxemburg is not an ideal place for FDI but an appropriate bridge for foreign investment to enter the European market, which can dispense with many unnecessary hindrances and hence make possible much of the investment in Europe that is otherwise unlikely to happen. But the negative effect is also inevitable, such as the groundless accusations of money laundering against Chinese firms. In fact all these negative cases can be avoided in an investment market that is open, mature with sound legal norms. The key point is to differentiate between the good and evil and handle cases in conformity with laws and eliminate errors as a result of biases. After all it is helpful to the economic recovery of Europe if it opens market especially when it is now seriously plunged in economic recession.
  
Q: Can the economic and trade cooperation between China and European countries like Germany be called a successful case of “market for technology swap”?

A: Looking back on the history of the bilateral economic and trade relations between China and Europe, we can see the cooperative relationship between China and the EU member states can be best depicted as a win-win situation. The Shanghai Volkswagen auto project, a Sino-German joint venture launched in the 1980s, has propelled Chinese auto industry into a new stage of development, making it one of largest auto productions bases in the world. Such kind of development is of course inseparable with the so-called “market for technology swap” strategy. But as time elapses, the notion of “market for technology swap” strategy has to be redefined in accordance with China’s economic transition and upgrading of industrial structure. Some of the cooperative projects, under which we have ceded the market share without obtaining the technology in return, have failed to achieve the intended technological spillover and therefore is against the principle of fair deal.

Q:  As academic research frequently draws on theories, what theory do you often use to undertake your research work on Sino-EU trade relations?

A: To put it simply, the question of bilateral or multilateral economic and trade relations is not purely an economic one. My view is that doing research on Sino-EU economic and trade relationship should proceed from political cooperation based on equitable sharing of the benefits, political mutual trust, and providing reciprocal conveniences so that a firm foundation would be laid giving economic benefits to each other. Drawing on my own experience of scholarship I think it is useful to have a sound knowledge of the theories of international economic cooperation based on economic theory so as to have an in-depth analysis and observation of the problems we have.