China’s imperative to stronger ties with EU

To hedge against punitive actions from the US, Beijing will likely seek to deepen its ties with the European Union; the resolution of reciprocity concerns is the key.
Nathan Chow08 May 2018
  • Reaching consensus between China and the US is challenging…
  • …given the intense geopolitical rivalry and battle for technological supremacy
  • To hedge against the punitive actions from US, Beijing is likely to deepen cooperation with Europe
  • European economies have a wide range of technological assets…
  • …appealing to the long-term strategic interest of China
Photo credit: AFP Photo

Two days of trade negotiations between Beijing and the US trade delegation led by Treasury Secretary Steven Mnuchin ended with no tangible agreements. We have long argued that the chance for a deal is slim given the intense rivalry in all strategic spaces. At the core of the rivalry is the “Made in China 2025” blueprint that aims at making China a global superpower in 10 strategic industries, namely: robotics, new-energy vehicles, biotechnology, aerospace, high-end shipping, advanced rail equipment, electric power equipment, new materials (such as those used in screens and solar cells) and new generation information technology and software (including integrated circuits and telecommunications devices), as well as agricultural machinery.

From the US perspective, this 2025 blueprint violates the pledges China made for the accession to the WTO. The practice of forced intellectual property transfers, such as industrial designs and patents alongside the extent of state subsidies, do not constitute a level playing field for US companies. On the other hand, it is difficult for China to cede any ground because the shift into higher-tech manufacturing is a crucial part of the nation’s development strategy.

To hedge against actions by the Trump administration, Beijing may deepen cooperation with Europe in key areas such as investment and connectivity. Reasons are plenty. First and foremost, European Union is a common market built on the spirits of free trade and open markets. Regulators are less likely to bar bids or investments. Take 5G network as an example. While US policymakers are considering to nationalise the country’s planned 5G network over China-related security fears, Chinese companies have already owned some of the sensitive companies in Europe. Denmark’s mobile phone network, for example, is operated by Huawei. The company also provides mobile telephony infrastructure in Germany, Spain, and the UK.

China and Europe already have strong trade ties. Chinese Inc.’s investment in Europe amounted to USD335bn in 2005-17, roughly 95% more than the US. In Western Europe, China has set its sights on the acquisition of strategic assets such as high-tech companies. Its interests in the periphery countries, by contrast, lie primarily in privatization opportunities, particularly in energy and port infrastructure.

Even so, if Beijing wants to deepen its “strategic relationship” with the EU at the economic and political levels, certain degree of concession is warranted. Otherwise the protectionism and political backlash in Europe will only increase. China’s lack of reciprocity is by far the biggest concern - it remains very difficult for European companies to gain access to the mainland markets. As chart 4 shows, China is vastly more restrictive compared to EU economies in virtually all industries. The discrepancies are especially large in financial services, construction, and power generation. Such barriers have led to visible imbalances in the foreign direct investment (FDI) flows. In 2017, Chinese FDI flows to the EU were more than three times higher than EU FDI in China.

Thus, the resolution of reciprocity concerns is the key. Beijing is addressing some of these issues. Measures have been announced to ease market entry restrictions. These include eliminating approvals for foreign acquisitions and further opening up the financial services sector. Policymakers have also vowed to “guarantee post-entry national treatment” for foreign companies in taxation, foreign exchange, and intellectual property areas. Given that China’s top leaders have promised to “exceed expectations of the international community” with further pushing forward reforms in 2018, we should see more of these pledges being converted to reality.

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  Nathan Chow
Strategist - China & Hong Kong

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