EU-China Report on Trade and Investment - Peel

Brussels, 23 June 2017

15th China-EU Round Table

28-29 June, 2017

Beijing, China

Cooperation and win-win outcomes:

Trade and investment liberalisation and facilitation –

Belt and Road

______

Rapporteur:Jonathan Peel

______

1.Introduction – trade and investment

1.1The EU – China Round Table last discussed trade and investment issues at its 13th meeting, held in Chengduin November 2013. That wasimmediately before the EU – China Summit in Beijing, whichlaunched negotiations for a bilateral investment agreement. These negotiations are still in progress.

1.2At that time the Round Table noted “that the two-way investment between the EU and China remains at a low level: less than 2% of the EU's FDI goes to China (although this represents about 20% of all FDI in China), and China accounts for less than 0.5% of total FDI in the EU”.By 2015, the most recent statistics available, EU FDI in China had reached a total of €168.4bn, still only 2-3% of the EU total, and inward FDI from China to the EU was €34.9bn. Levels of EU investment into China remain low: the European Union Chamber of Commerce in China (EUCCC) state that in 2016, China invested four times more in Europe than EU companies invested in China.

1.3For trade flows, the figures are significantly higher. Total trade between the EU and China in 2016 reached €514.5bn, up from €428bn in 2013. In 2007, when the Round Table first met, this figure was €305bn, that coming after several years of exponential growth starting from a very low base in 1978. However China’s exports in 2016 were double those of the EU, giving a negative trade balance for the EU of some €174.4bn, a trade deficit comparable to that of €162bn in 2007.Both China and EU have become increasingly interconnected, with each now importing more from the other than from anywhere else, although the US remains first for both China and the EU in terms of total trade.

1.4Trade in services between the EU and China reached €63.7bn in 2015, with a surplus for the EU of €10.9bn. This compareswith a total of €48.5bn in 2013 (€42.6bn in 2012).

2.EU – China Investment Agreement

2.1In its Joint Declaration[1]issued after the Chengdu meeting, the Round Table declared that it “recognises that the EU and China enjoy an important and dynamic tradingrelationship and welcomes … increased cooperation of trade issues”.

2.1.1The Joint Declaration went on to state that “the Round Table stresses the need for the agreement to bring added value and substantiallyupgrade EU-China economic relations, increase integration and strengthen the EU–ChinaComprehensive Strategic Partnership, as stated in the 2012 EU–China Summit”. This statement remains equally valid today.

2.1.2The Round Table also called “for EU and China to investigate thoroughly the causes of underinvestment and promote mutual investment” and stressed “the need to fight against trade and investment protectionism and to solve frictions through dialogues and negotiations”.

2.1.3The Joint Declaration continued: “The Round Table believes a China-EU Investment Agreement will promote and facilitate two-way investment, and will enhance EU-China economic cooperation. The Round Table welcomes the negotiations to include issues of common concern such as market access, measures against protectionism and protection of intellectual property rights”.

2.2The main purpose of a EU – China Investment Agreement is to provide for a progressive liberalisation of investment and the elimination of restrictions, backed by a simpler and more secure legal framework supporting essential long-term predictability and investment protection. The EU states that “the aim of this agreement is to remove market access barriers to investment and provide a high level of protection to investors and investments in EU and China markets”, based on reciprocity, and replace 26 existing Bilateral Investment Treaties with one single comprehensive investment Agreement.

2.2.1Such an agreement would send a strong anti-protectionist message, reinforcing President Xi’s powerful message given at Davos last January and echoing the promise offered by the Third Plenum in 2013, at a time when protectionism is gathering force elsewhere.

2.2.2However, a recent survey of its Members by the EUCCC has shown[2] that nearly half of EU firms have said it has become harder to conduct business in China in the past year. It states that the “top regulatory barriers faced by European business remain the same, and there is a lack of confidence that this situation will improve over the next five years”.

2.2.3It points out that “there is a disproportionate enforcement of environmental legislation against foreign-invested enterprises, state-owned enterprises and Chinese privately-owned enterprises”. However, it is positive both about the anti-corruption campaign and the incremental improvements to the IPR protection regime in China. The EUCCC repeat their call for the Investment Agreement to be completed.

2.3The EU – China 2020 Strategic Agenda for Co-operation, also agreed in 2013, put such an agreement at the heart of the EU China relationship, followed by the possibility of a wider EU – China Free Trade Agreement (FTA).

2.4Progress in the negotiations has been steady, but slow. It was hoped that the 19th Summit, held in Brussels in early June, would speed that up. There have been 13 negotiating rounds, the most recent being held in Beijing in mid-May. In January 2016 agreement was reached for an ‘ambitious and comprehensive scope’ for the negotiations, which established a joint negotiating text to be worked on, backed by continuing technical level discussions.

2.4.1Topics for agreement include market access, investment, investment protection and sustainable development, but as yet individual sectors have not been covered, nor have any specific market access commitments been made.

2.5As the EESC paper[3] prepared for the Chengdu meeting set out, “the opening up of key sectors in China need to include financial services (where equity restrictions readily apply), telecoms, railways and health care services (such as hospitals). Previously these have been the domain of State - Owned Enterprises (SOEs). The aim should as well be for the agreement to cover all private investments, as opposed to ‘private domestic investments’. A level playing field for public and private companies is essential, especially where distortive high levels of public subsidization are to be found. It will also be essential that licenses should not be unfairly withheld and that any Standards to be applied are both non discriminatory against outside investors and are compatible internationally. Above all IPR protection will be a key part of any agreement, where it will be essential to differentiate clearly between knowledge transfer and technology transfer, the latter of course covering those areas where high R&D costs need to be recovered to maintain an investor’s viability and profitability”.

2.5.1This paper went on to state “despite China having little offensive interest in the negotiations (the EU market is an established and stable investment environment, and access comparatively easy), China also appears interested to ensure that any investment agreement with the EU enables it to move readily and easily to the next phase of liberalisation, to avoid the so-called “middle income trap” and fully take its place as a developed country. Such an economy would depend less on state activity and much more on a vigorous private sector driving a constant process of innovation. State-led capitalism needs to become market-led capitalism, with the state playing a much reduced role”.

2.6It is instructive to compare issues highlighted by our2013 Joint Declaration and the much wider Joint communiqué of the Leaders Round Table of the Belt and Road Forum, issued in Beijing on 15 May 2017, which echoes many points made in the earlier document.

2.6.1For example, the reference to small and medium enterprises (point 9) compares with our 2013 comment that “the Round Table also sees a future investment agreement as offering important and increasingopportunities for Small and Medium size enterprises (SMEs) in both China and the EU andcalls for specific programmes to be developed in this area”.

2.6.2Likewise, references to sustainable development and specifically the UN 2030 Agenda for Sustainable Development and the Paris Agreement[4] (point 6), enhancethe Round Table statement that it “recognises the need to negotiate an ambitious and moderninvestment agreement that includes sustainable development provisions taking into accountthe impact that business operations could have on social and environmental protection,including corporate social responsibility”.

2.6.3Followingtoo the Round Table call in Chengdu “on the Chinese and European authorities to hold regular information and consultation with civil society organisations during the negotiation and theimplementation of the agreement”, there is a very welcome echo found in point 13 of the Belt and Road Forum communiqué.

3.Developments since the start of negotiations

3.1There have been a number of significant developments in recent EU trade and investment policy, most notably thosecovering transparency and investor protection, both arisingout of the negotiations for a Trans Atlantic Trade and Investment Partnership (TTIP) with the US.

3.1.1Trade and Investment have become a matter for widespread public debate and concern across the EU. Arising fromthat, the EESChas welcomed the pledge, made in the EU2015 Communication ‘Trade For All’[5], that “no EU trade agreement will lead to lower levels of consumer, environmental or social and labour protection”. The Committee’s Opinion on ‘Trade for All’[6] went on to state “Trade policy must be seen to be in line with sustainable development, including long-term economic sustainability”, with a “high level of well informed debate”. Relevant moves by the Commission included a greatly enhanced level of transparency backed by regular briefings during negotiations.

3.2With specific regard to investor protection, a key part of any investment agreement, the EU looked to regularise and update investment protection and arbitration, following the controversy over Investor State Dispute Settlement (ISDS)procedures, through itsrevised proposals for the TTIP and CETA (the EU-Canada Comprehensive Trade and Economic Agreement) negotiations. These includeda stronger emphasis on enshrining in FTA texts the right of the state to regulate, together with moves to transform the old system "into a public Investment Court System composed of a Tribunal of first instance and an Appeal Tribunal operating like traditional courts"[7]. The Commission’s proposals also include a code of conduct and independent judges with tough technical and legal qualifications.

3.2.1The Commission’s proposals remain controversial, as was seen from the initial moves to ratify CETA. A balance needs to be maintained between host country responsibilities and investor obligations, as well as between the defensive and offensive investment interests of both countries and companies.

3.3E-commerce and digital trade are likewise becoming increasingly important in world trade and investment. This includes telecommunications and information and communication technologies (ICT), and promises to be a key issue at the forthcoming WTO Ministerial meeting in Buenos Aires. The overarching importance of the WTO is rightly emphasized in both “Trade For All” and in the Belt and Road Forum communiqué (point 15).

3.4The exponential growth in Global Value Chains (GVCs) and Global Supply Chains (GSCs) is another key area where EU and China should look to work closely together. The concept of GVCs emerged in the mid-90s in order to describe "the full range of activities that are required to bring a product from its conception, to its design, its sourced raw materials and intermediate inputs, its marketing, its distribution and its support to the final consumer"[8].

3.4.1A GSC is made up of the interrelated organisations, resources and processes that create and deliver products and services to end customers. As such, it is a part of GVC dedicated to the sourcing and not to the conception, or distribution of the goods or the services.In its Opinion[9] on the issue, the EESC stated that it is the aim “to put in place gradual, consistent and sustainable policy in the responsible management of GSCs”, and “to promote practical and suitable, risk-based approaches that will take into account the specific nature of the global value chain and the GSC (linear or modular, simple or complex, short or long organisation)”.

3.5Trade and investment will also need to play a core role if the 2030 United Nations Agenda, in particular its Sustainable Development Goals (SDGs), is to be implemented over the next 15 years, together with the Paris Agreement.[10] The BRI will be important here too.

3.6In any trading and investment relationship there are bound to be points of friction, where the WTO and its Disputes Settlement Mechanism (DSM) can play a critically important role in resolving disputes. The references to the WTO and the multilateral trading system in point 15 of the Belt and Road Forum communiqué are welcome, not least due to threats emerging from other quarters, notably to the Paris Agreement.

3.6.1Areas where such friction can arise include issues surrounding security related to investmentin or possible takeovers of strategically sensitive businesses, companies orkeyinfrastructure assets and utilities. The EU remains an open investment environment, and openness to two-way FDI has been of great benefit, but issues of monitoring and reciprocity, such as are covered by the Investment Canada Act, and by the US Committee on Foreign Investment CFIUS), can emerge from time to time.

3.6.2Another area where friction arises is that aroundanti-dumping and trade defence mechanisms. Here the EU is currently proposing legislationthat would involve a new, ‘country-neutral’ (covering all WTO Members) method for assessing significant market distortions when conducting anti-dumping investigations. These are distortions that can result from state intervention in other countries affecting domestic price or costs, where a state may have a pervasive influence on its economy and where domestic prices and costs would not provide a reasonable basis to determine the normal value. The objective is to ensure that the EU has effective trade defence instruments that can deal with issues such as overcapacities, while fully respecting the EU's international obligations in the WTO legal framework.This was an issue of course that was discussed at the 19th EU China Summit this month.

4.Belt and Road Initiative (BRI)

4.1As reference above to the Belt and Road Forum communiqué shows, there will be linkage withthe Belt and Road Initiative (BRI), although the EESC understands that this Initiative does not form any part of thecurrent negotiations for an EU China Investment Agreement.

4.2The BRI (formerly One Belt One Road/OBOR) was discussed in depth by the Round Table at its 2016 meeting in Brussels. The BRIwas first launched by President Xi in 2013 as the"Silk Road Economic Belt", backed by a fund of US$16.3 billion. Aimed at building closer links with Europe, it was also part of a broader vision to expand regional co-operation between China and Central Asian countries, to enhance regional connectivity, deepen trade and economic relations and expand people-to-people ties. This has now been extended towards Africa and even Latin America. Like traditional Chinese painting, it relies on broad-brush strokes. As the Vice President of the European Commission, Jyrki Katainen, has said, it could unleash huge growth potential with benefits for all.

4.2.1Based on trade and connectivity and to be “win-win”, the BRIneeds to be open and inclusive, to be based on a principle of cooperation and to work in both directions. The BRI aims to build trade, investment and infrastructure links towards some seventy countries through both land and sea based routes, to include development and financial and people-to-people connectivity– a clear signal that China is looking for greater global responsibility, despite the reservations expressed by others (including India).

4.3Nevertheless, it will be a major challenge to achieve effective coordination and a coherent approach. At the Leaders Round Table of the Belt and Road Forum for International Cooperation in Beijing last month, Mr Katainen pointed out that the EU has been working with China on BRI since 2014.

4.3.1In his remarks[11], Mr Katainen recalled that connectivity “is about transcending borders. It is about openness and the opportunity that brings”, as well as responding to“concernsthat people have.” He stressed the need now to channel “globalisation into improving our lives”,and the need to extend the concept of connectivity to Asia as a whole, pointing out that economic prosperity “is deeply interdependent – both ways”.

4.3.2Mr Katainen also set out a series of principles to be followed, including

• anopen initiativebased on market rules and international standards.

• involveall modes of transport,as well as digital and energy and people-to-people contacts.

• complement existing networks and policies. European and Asian infrastructure should not be designed in isolation: atrue network and not a patchwork.

• Interoperable infrastructure networks: bring down barriers, not create new ones.

• Transparency: all partners should have a fair say about where the priorities lie. Multilateral frameworks like ASEM, should be used wherever possible.

• Sustainability: projects must be economically viable, fiscally and socially responsible, as well as climate and environment-friendly.

• wisdom of the multilateral banks, whose experience makes them an invaluable partner for new institutions such as the Asian Infrastructure Investment Bank.

• ensure thatthere are real benefitsfor all stakeholders. Not only for countries, but also for economic operators, who should have a fair chance to compete for business through open, transparent and non-discriminatory procurement procedures.

• A level-playing field for trade and investment: critical to maintain the political momentum and support for better connectivity between Europe and Asia.

4.4The EUCCC in turn have stressed the importance that the BRI should be a two-way vehicle, saying its future “depends on trade and investment flowing equally in both directions, which will require China to open its markets”.

4.4.1The EUCCC believes that the success of BRI“will largely be predicated on open markets, balanced trade, transparency and reciprocity”[12]. It points out that “Asia, and the rest of the world, have a great need for sound infrastructure, and improved connectivity can be a major contributor to economic growth, so such an approach is in the interests of all participants in this ambitious project”.