China and the European Union hope to edge closer to a trade agreement
Xi Jinping is the first Chinese president ever to visit the EU headquarters in Brussels
EU hopes to gain better access to Chinese middle class consumers
When the European Council President Herman Van Rompuy welcomes Xi Jinping to Brussels on Monday, it will be the first time a Chinese president has visited European Union headquarters.
But the trip isn’t about making history – it’s about closing business deals with European firms. Xi will be accompanied by more than 200 Chinese business leaders, several of whom signed multi-billion agreements to buy airplanes and cars as the contingent swept through France and Germany on their way to Belgium.
China’s ultimate goal on the trip is to reach a wide-ranging trade agreement with the EU. In turn, the EU hopes to persuade China to open its markets to foreigners and attract more direct investment.
The first round of the talks took place in January, but the Chinese seem eager to advance the negotiation much further this time around. Before embarking on the tour, Chinese Foreign Minister Wang Yi told the National People’s Congress that he hopes to “speed up the negotiation toward the investment agreement.”
Here is what the two sides want from the deal:
More than $588.6 billion worth of goods are traded between the EU and China every year – $1.6 billion every day, according to the latest data from European Commission. But Europe sells a lot less to the Chinese than it buys from them – last year, its trade deficit with China was $180 billion.
European investors want to take advantage of China’s growing middle class and export more.
“Every year, 20 million Chinese households pass the threshold of household income of $13,500 at which middle class families become able to afford key consumer goods and services, like cars,” the EU Commission’s Trade department says.
To achieve this, the EU is pushing for less regulation in the Chinese market.
More direct investment
Despite the large volume of trade, mutual direct investment is still relatively low, with just over 2% of EU foreign direct investment being in China, according to the European Commission.
For years, European companies sought to benefit from cheap labor by building factories in China, but today that trend is reversing. Chinese investors are now eyeing Eastern Europe and the Mediterranean, where the eurozone crisis has pushed labor costs down and created hunger for foreign investment.
China has announced an ambitious plan to invest $100 billion per year into Eastern European countries by 2015. It opened its first factory – a Great Wall Motor assembly line – in Bulgaria in 2012, giving the Chinese automaker duty-free access to the European market.
Experts say Chinese money will help Europe out of the economic slowdown. Take the port of Piraeus as an example - although the Greek economy has been devastated by the global financial crisis, the Chinese-run port has stayed afloat and is becoming one of Europe’s main shipping hubs.
Europe’s trade relationship with China suffered several setbacks over dumping accusations last year. The EU tried to hit Chinese solar panels producers with high import duties, accusing China of dumping solar panels way below a fair price.
In a tit-for-tat move, China then launched anti-subsidy probe into European wine imports. Although both disputes have now been resolved, only 1% of imports from China are covered by EU’s anti-dumping measures.
Removing barriers in China
The EU says that China still imposes way too many barriers on foreign investors, who do not have access to sectors China deems as strategic, including transport, telecommunication and healthcare.
Michał Król of the EU investment think tank ECIPE says this part of a potential trade agreement will be critical: “It is an attempt to establish symmetric market relations – meaning that European and Chinese firms should have equivalent access to each other’s’ markets.”
Compulsory joint ventures and limits on foreign ownerships mean European companies find it hard to fulfil China’s rules. The EU Commission says that a recent EU survey found that nearly half of EU companies operating in China reported “missing business opportunities due to regulation.”
“China’s reforms seek amongst other to expand the list of sectors that are open to foreign investment and allow overseas investors to be treated like national ones,” says Marie Julie Chenard, an expert in the field of Europe’s economic relations at the LSE Ideas think tank.
But she says the investment treaty is unlikely to cover what might be much more important to foreign investors in China: “Concerns about bribery and corruption, the reliability of business partners and the enforcement of intellectual property rights.”
How important is EU’s trade with China?
China is EU’s second biggest trading partner, trailing only behind the U.S. Trade of goods between the two has quadrupled since China joined the World Trade Organization in 2001, reaching nearly $590 billion in 2013.
The EU is China’s biggest source of imports and its biggest export destination. European companies are fulfilling Chinese hunger for cars, planes, chemicals and luxury goods, while Europe imports $385 billion worth of textiles, electronics and other goods from China.
With some expecting China to become the world’s biggest economy by 2030, there will be a lot more for grabs.