Redesigning the EU trade strategy towards China

The 2008 April EU-China “high level trade talks” achieved little, despite the fact that the EU sent its largest joint mission to a foreign country for a single meeting in its 50 years of existence. Such talks can be successful only if the trading partners are ready to make choices, which requires that the EU rethink its strategy (see for instance, Evenett 2007).1 This column suggests a EU trade strategy towards China that takes fully into account the fact that each trading partner is the other’s largest source of imports.2

First, a “small bargain” in trade in goods

After a year of acrimonious EU complaints against China, there is a need to relaunch serious negotiations by concluding a small bargain in trade in goods. Such a bargain would merely aim at both parties better enforcing their WTO commitments. Because it is the richer and larger trading partner, the European Union should take the initiative and offer to grant the market economy status (MES) in antidumping to Chinese firms. This move would eliminate the most outrageous biases against Chinese firms in EU antidumping procedures. It may cut EU antidumping duties by half, from an average of 40 percent to roughly 20 percent.

The EU could reasonably argue that this offer improves its WTO commitments with respect to China. Hence, it could request a similar move from China in the form of a clarification (customs procedures) and/or a better enforcement of China’s tariffs (such as on auto-parts) included in its WTO Protocol Accession.

The small bargain would include no new concessions (which may be left to the WTO negotiations). But it would eliminate, reduce, or prevent present and future trade conflicts. As it would also be a public recognition by the EU of China’s amazing liberalisation, which has driven its tariffs close to the EU level (Table 1), it would restore a climate leading to more positive and substantive negotiations.

Table 1. EU and China trade barriers, 20053

	Tariff rates (%) in agriculture	Tariff rates (%) in manufacturing	FDI restrictiveness index
	average	maximum	average	maximum	average	maximum
EU	17.8	427.9	3.8	50.0	9.2	32.0
China	15.3	65.0	8.8	50.0	40.5	75.0

Note: FDI restrictiveness index ranges from 0 (most open) to 100 (closed). EU-wide figures are derived from GDP-weighted figures by EU member states.

Second, a “grand bargain” in services-related FDI and norms

The small bargain should open the door to much more important negotiations on “behind-the-borders” issues. Here, the first task for the EU would be to cut down its endless list of requests by adopting a crucial rule – to push only for those EU export interests that bring clear benefits to Chinese consumers. This rule is economically sound, and it makes a lot of political sense since the Chinese economy is now too big to be successfully influenced by pressures from the outside.

This rule eliminates intellectual property rights (IPRs) as a core topic for negotiations because IPRs tend to increase prices in the importing country without bringing clearly tangible benefits to its consumers. Only the few IPRs – if any – where Chinese consumers would clearly benefit from EU requests should be part of the EU IPRs bilateral agenda. The other cases should be left to private negotiations and dispute settlements (better IPR enforcement in China will essentially be driven by Chinese forces).

By contrast, the above rule prioritises negotiations on services, particularly foreign direct investment in services where the two trading partners, especially China, have high barriers (Table 1). What should the EU concede if it wants to get substantial concessions from China on inward FDI in services? Of course, the EU should be ready to offer more market access in services (there is a lot to be done). But such an offer would be of limited interest to China, because not many Chinese services providers would benefit from such an opening in the short- or medium-term. The EU might also offer to renounce, in an early and progressive way, the use of the special safeguard included in Section 16 of China’s WTO Accession Protocol. This offer has a clear value in the narrow context of the EU-China bilateral trade. But it is also critical in the broader context of the multilateral trade regime, as this special safeguard breaches key WTO principles.

The grand bargain could also include norms as a topic of common interest for both parties. The EU is concerned by the norms ruling China’s Sovereign Wealth Funds, while China is concerned by EU norms and standards on imported products. Both cases raise the same key problem – the use of non-trade related regulations in a truly non-discriminatory way.

From trade policy to domestic and foreign policies

Such an ambitious EU trade policy towards China would have major implications for EU domestic affairs. First, a powerful way to minimise the concerns raised by China’s competition is to improve the functioning of the EU Single Market, which is still very fragmented. The larger and the more competitive the Single Market, the lower the risks of distortions generated by Chinese firms (a symmetrical observation could be made for China).

Second, negotiations on the behind-the-border agenda deeply involve EU member states because they require regulatory reforms. As a result, the current EU negotiating machinery – with its almost exclusive reliance on the Commission’s negotiating capabilities – is inefficient. There is a strong need to review this machinery to find a way to involve the EU Member states in the negotiating teams dealing with behind-the-border issues.

An ambitious trade policy towards China would also have broader international consequences. China’s huge potential raises a problem not faced since the late 19th century – how to influence the evolution of an emerging giant in a way that is positive for the multilateral trade regime. Aligning with US positions, as done by the Commission since early 2007, is not useful for the EU (nor for the US), and it is counter-productive to the extent that it almost inevitably reinforces the protectionist camp in Beijing.4

Since China’s key problem is building the domestic institutions required for a sustainable market economy, the European Union (with the United States and Japan) should seriously consider involving medium-size countries – from Australia to Korea to Chile, for instance. Medium-size countries are often among the best in domestic governance: they tend to innovate faster and better in terms of economic regulations. Their experiences would be useful guides, and Chinese interests eager to establish the institutions required by a well-functioning market economy may find them politically easier to import.

---

1 Evenett, Simon, 2007. “The trade strategy of the EU: time for a rethink”, CEPR Discussion Paper No. 6283.
2 This column draws from Joint ECIPE-GEM Working Paper No. 4/2008 “Redesigning the European Union’s trade policy strategy towards China,” April 2008.
3 OECD, 2006. OECD’s FDI regulatory restrictiveness index: revision and extension to more economies. Working Paper ECO/WKP(2006)53. OECD, Paris.
WTO, 2005. Trade Policy Review, WTO Geneva.
5 Dreyer, Iana and Fredrik Erixon, 2008. ‘An EU-China trade dialogue: a new policy framework to contain deteriorating trade relations’, ECIPE Policy Brief. No. 3/2008.