The European Council on Foreign Relations

EU-China: will there ever be a level playing field?

Date: 11th July 2012  |  Author: François Godement,

Categories: China, Europe and the world,
Tags: , bo xilai, euro crisis, euro crisis , trade, china, beijing

As the euro crisis charges on, every other European priority has taken a back seat. Catherine Ashton and Dai Binguo, China’s foreign policy boss, have just met in Beijing, and their joint statement broaches the economy: but only to mention blandly China’s support for European integration and the euro.

The fixation on the euro crisis holds even more true when intergovernmental decisions prevail over Commission initiative. The Commission may be stovepiped, but it has the technocratic resources to pursue policies. Twenty-seven governments talking  together create politics, not applied and enforceable policies.

We have already seen this with the EU summits on the euro crisis. But another example is appearing around EU-China economic relations.  

EU trade commissioner Karel de Gucht has a reputation for tenacity and even a strong temper.  He has identified key issues that plague the relationship: the lack of mutual opening in public procurement, China’s attitude to intellectual property rights, and the issue of indirect subsidies through credit financing for Chinese exporters and investors. These problems are far more important for balancing Chinese and European interests than the carbon tax that the EU wants to levy on air passengers. De Gucht also wants to move to a mutual investment treaty that would consolidate existing agreements with individual member states.

And so, the European Union has announced it would challenge Huawei and ZTE – China’s duopoly of telecom giants – for the easy financing terms they allegedly receive from Chinese banks. The hand of the Chinese state is only too visible there. The EU’s action is as bold a move as when the EU took action against Microsoft. Huawei and ZTE make hardware, not software, but that’s precisely the heart of China’s economic machines – making nuts and bolts, machines and wiring, not ideas or services.

But China is not the US. According to a Financial Times report (August 8, 2012), the response from Chinese trade officials has been furious – threatening to take wide ranging action against agricultural, auto and telecom firms in Europe.  The Commission already had got a taste of what was coming when China, after the Europeans began talking about reciprocal opening of public procurement, delisted Audi and BMW from the approved list for government purchases – cars, and especially those sleek German premium makes, were about the only sector where public procurement is open in China.

It made sense for China to hold German car manufacturers hostage over this EU policy issue. They make large profits on the China market, and are not likely to sacrifice this on a European altar. To their credit, they have remained publicly mum about this Chinese decision.

But the ball keeps rolling. We understand, for example, that another major European auto manufacturer does not dare to come out openly in Brussels when his usual European subcontractors are suddenly replaced by Chinese competitors in China. Europe’s telecom firms are too afraid for their (dwindling) share of the China market to take a public stand on the issue of subsidies to their Chinese competitors. The same has already happened in the wind power sector, where Europe’s leading manufacturer preferred to hang on to its small but increasing slice of the China market, and to shut up about technology theft and boomerang use of these technologies by Chinese firms on the global market.

Worse, with the euro crisis European governments are increasingly acting on their own. Much public attention was focused last year on the public borrowing issue. But investment, and China’s new outward strategy, have proven to be even more important. France in 2010-2011 was often talking about reciprocity in Brussels. But the country has made the largest existing deals with Chinese firms in 2011 – including a €3.2 billion stake in GDF-Suez, the gas and utility concern. Areva, which has a contract to supply Nigerian uranium to China (thus happily shielding Chinese buyers from Al-Qaeda and Aqmi kidnappings in the region) now wants to supply the UK’s future nuclear plants in tandem with Chinese suppliers. France’s new minister of Foreign Affairs, Laurent Fabius, has made a quick trip to Beijing , and on the official list of issues is aerospace and nuclear energy.

France is not alone in doing this, although it is probably the country that, according to the FT, EU trade officials single out for persistent double talk. Germany has only given very lukewarm support to EU action on trade. While Mrs Merkel is strong in principles, the Ministry of Economy roots for German business contracts, not for a longer term vision. In fact Germany probably was among the countries that delayed the opening of free trade talks with Japan – because German industry is not amused by the improved access this would give to Japanese firms. Yet cracking open Japan’s public procurement markets, pursuing with Japan the same policy that has resulted in a EU-Korea free trade pact, well ahead of the United States, would be in Europe’s long term strategic interest, and would bolster our case with China.

But can Europe think strategically, and does it exist at this point, when our euro basement is on fire?  Every day brings a new deal whereby a Chinese firm takes over a key European asset, often in sensitive sectors. Yesterday, it was Spain’s share of Eutelsat, the European satellite network. Today, it is Alcatel’s mobile phone relay business, formerly shared with a Shanghai firm.  Eastern Europeans are falling over themselves for the chance to get a Chinese investment – even more so when they see the recession deepening over Southern Europe. The UK itself is explanation enough why we can’t get a working EU policy on investment with China. London’s role for offshore capital – including from China – has been highlighted rather crudely by the Bo Xilai scandal – where two minor consultants (one British, one French) were helping the family settle its interests in London. London lives with the dream to be the key renminbi offshore market – pretty much a remake of the eurodollar story of the 60s and 70s, except that the Chinese Party-state will never allow its currency to become the dollar, with all the loss of domestic control this would entail.

But dreaming is enough, for instance with local officials in Chateauroux (France) who have traded NATO’s former air base (and Europe’s longest runway) to Chinese investors against promises of local assembly-line jobs (at last news, that part of the deal probably won’t happen…).

Getting Chinese money and investments in Europe is a good thing, especially when there is a large trade imbalance in favour of China (another EU dream is the vanishing Chinese trade deficit: but in June 2012 China recorded a $32 billion trade surplus against the rest of the world). The way things are happening, without any capacity for gaining concessions in China and with free-for-all competition between suitors for the Chinese groom, looks more like Mexican provinces searching for foreign investors than any 21st century superpower.

Unabashed free traders, who want to believe all stories have happy endings, will say that this is all money for growth, whatever form it takes. But our leverage to gain Chinese concessions is steadily diminishing, the opacity of financial transactions from China is increasing. Worst of all, the leaders of China’s state-led economy, looking at Europe in disarray, may rightly conclude the last thing they need to do is to change their ways.