Elements for a new EU strategy on China (continued series on China)

Even though the EU is criticised a lot after the Brexit, the EU Council and the EU Parliament have presented a new EU strategy on China that is worthwhile to be closely looked at, and this is the reason why we bring it to TextileFutures readers. Here follow the details, these are not only political, but take into account all aspects of China

I.  INTRODUCTION

I.1  Executive summary

This Joint Communication proposes elements for a new EU strategy on China. It is intended  to constitute the China dimension of implementing the Juncker Commission’s political guidelines, contributing to the jobs, growth and investment agenda and to reinforcing the EU as a global actor. It dovetails with the European Commission’s “Trade for All” Strategy and takes into account the views of the European Parliament in its December 2015 report on the EU’s relations with China, aiming to set out a policy framework for EU engagement with China for the next five years.

The EU and China are two of the three largest economies and traders in the world1. Both have changed considerably since the Commission’s previous Communication on China a decade ago2. The rise of China has happened with unprecedented scale and speed. Not only is China different internally than it was before the current leadership took over in 2013, but China’s increased weight and a renewed emphasis on “going global” mean that it is seeking a bigger

role and exerting greater influence on an evolving system of global governance.

The EU-China 2020 Strategic Agenda for Cooperation fulfils an important role as the highest- level joint document guiding the EU-China Comprehensive Strategic Partnership. But the EU needs its own strategy, one which puts its own interests at the forefront in the new relationship; which promotes universal values; which recognises the need for and helps to define an increased role for China in the international system; and is based on a positive agenda of partnership coupled with the constructive management of differences.

1 According to the World Bank, in 2014 the EU-28 accounted for 22.6 %, the US 22.3 % and China 13.3% (in total 58.2%) of global GDP measured at market exchange rates. In purchasing power parity terms the EU accounted for 17.1% of global GDP in 2014, the US 15.9%, and China 16.6% (IMF World Economic Outlook, April 2016). According to Eurostat, in 2014 the EU-28 accounted for 15.5% of world imports and exports, the United States 16.6%, and China 13.5%, making together 45.6% of world trade.

2 European Commission Communication of October 2006: “EU-China: closer  partners,  growing responsibilities”.

I.2  The China context

China is at a critical juncture. It has declared its old economic and social model to be “unsustainable”, and aims to shift to a more balanced pattern of development which requires a strengthening of the institutional basis required for a market-led economy. This transition is complex and may not always be smooth. Moreover, economic reform has to take place  against the background of competing political and economic interests. At the same time,  stable economic growth and employment creation are important for domestic political legitimacy. China is witnessing rapid ageing of the population and rising regional and socio- economic disparities which create domestic tensions.

Internal change in China has external impact. Economically and financially, in trade and investment flows, strategically, increasingly militarily and in other areas, China is seeking space and a voice. As a consequence, the decisions China makes about its political, economic and social development matter to the EU more than ever.

The EU will have to deal with a number of emerging trends:

• China’s policy of “going global” is accelerating. Its companies are being encouraged to trade, invest abroad, and find resources as never before. China’s growing connection to global capital markets can generate benefits for all, provided that the right framework conditions are in place.
• China’s growing global influence and interests lead to a corresponding demand for a greater say in global economic governance. In international relations, China is also engaging more (e.g. on development, climate action, and international security hotspots). In its region, it is becoming more assertive.
• China is facing a structural economic slowdown that will generate challenges and opportunities both within and outside China. China’s transition to a more sustainable pattern of development is complex and may lead to bouts of turbulence within China and more widely.
• The latest Five Year Plan is designed to accelerate economic, social and environmental re-balancing and a shift to consumption-driven growth, as well as continuing rule of law reform and anti-corruption efforts.
• There has been a lack of progress in giving the market a more decisive role in the economy in the key areas of concern to the EU. Recent legislative initiatives have introduced new restrictions on foreign operators in China, which go against market opening and the principles of equal treatment and a level playing field. They also deprive China of the best solutions to enhance economic activity.
• At the same time, China’s authoritarian response to domestic dissent is undermining efforts to establish the rule of law and to put the rights of the individual on a sounder footing.

II.   PRINCIPLES OF ENGAGEMENT

Given the rapid pace of change in the EU and China over the past decade, it is time to re- assess and reaffirm the principles underlying the relationship.

The EU expects its relationship with China to be one of reciprocal benefit in both political and economic terms. There should be genuine implementation of the Chinese slogan “win- win co-operation”. The EU also expects China to assume responsibilities in line with the benefits it draws from the rules-based international order.

The EU must project a strong, clear and unified voice in its approach to China. When Member States conduct their bilateral relations with China – whether one-on-one or as groups of countries such as the 16+1 format – they should cooperate with the Commission, the EEAS and other Member States to help ensure that aspects relevant to the EU are in line with EU law, rules and policies, and that the overall outcome is beneficial for the EU as a whole.

The EU’s external action is governed by the principles which have inspired its own creation: democracy, the rule of law, human rights and respect for the principles of the UN Charter and international law. These principles are reflected in the Chinese constitution and in the international instruments that China has signed. The protection of human rights will continue to be a core part of the EU’s engagement with China. The EU believes that treating human beings with dignity and respect is essential if citizens are to fulfil themselves and flourish creatively, and is good for the stability and security of Chinese society and the world order.

China’s crackdown on defence lawyers, labour rights advocates, publishers, journalists and others for the peaceful exercise of their rights, with a new and worrying extraterritorial dimension, calls into question China’s stated commitment to the rule of law and its respect for international obligations. The recent adoption of a number of restrictive national security laws and regulations is also a matter of concern. The EU is particularly worried that China’s newly promulgated Law on the Management of Foreign Non-Governmental Organisations’ Activities could hamper the development of civil society in China and have a negative impact on people-to-people exchanges between the EU and China.

The EU and its Member States will continue to work with China and its people to promote human rights and to foster the rule of law, civil society, political accountability and freedom of expression, association and religion. This will require the full range of diplomatic, advocacy and other tools at both bilateral and multilateral level. The EU should also continue to urge China to release political prisoners, ensure fair trial, and fulfil its international commitments in terms of protecting the rights of people belonging to minorities, not least in Tibet and Xinjiang.

The EU confirms its “One China” policy.

The EU commits itself to maintaining its strong links with Hong Kong and Macao and to promoting respect for the Basic Law and the “One Country, Two Systems” principle.

The EU confirms its commitment to continuing to develop its relations with Taiwan and to supporting the shared values underpinning its system of governance. The EU should continue to support the constructive development of cross-Strait relations as part of keeping the Asia- Pacific region at peace. Accordingly, the EU will use every available channel to encourage initiatives aimed at promoting dialogue, co-operation and confidence-building between the two sides of the Taiwan Strait. The EU should promote practical solutions regarding Taiwan’s participation in international frameworks, wherever this is consistent with the EU’s “One China” policy and the EU’s policy objectives.

EU policy-making on China should take place in the context of a broad and rounded policy approach to the Asia-Pacific region, taking full advantage and full account of the EU’s close relationships with partners such as Japan, Korea, the ASEAN countries, Australia and others. Above all, given the fundamental importance of transatlantic links, EU-US co-operation and co-ordination in this regard should be reinforced.

III.            The prosperity and Reform Agenda

At China’s Party Plenum in 2013, President Xi Jinping announced a comprehensive reform of China’s economic and social model by 2020. These longer term objectives have run up against short term worries over GDP growth, employment and stability, slowing the pace of reform, possibly to the detriment of longer term economic health. Chinese priorities create opportunities for the EU, for example greater potential for co-operation and exports in priority fields such as the environment and service industries. Yet “opening up” is focused more on helping Chinese companies go abroad than improving access to China’s market. There are also challenges, for example intensified direct competition in some sectors or in third country markets where China hopes to establish its State-owned Enterprises (SOEs) as global champions. The EU wants a China which is economically more open and stable, with significantly improved market access for foreign companies as well as a level playing field and fair competition for business and investment, benchmarked at the level of openness provided for all companies operating in the EU market.

III.1  1 The EU as a partner in China’s reforms

The EU’s prosperity is linked to sustainable growth in China. The EU therefore has a significant stake in the success of China’s economic and governance reforms. As China’s biggest trading partner, representing about 15% of China’s trade, and an attractive and   secure destination for its outward direct investment, China needs the EU as much as the EU needs China.

China is managing a difficult structural transition towards a lower but more sustainable growth rate. This adjustment is essential to China’s long term growth prospects but may itself generate short term volatility and risks. China has made significant strides in areas such as tax reform, broadening social security coverage, and reform of financial markets. In other areas, such as reform of the state owned sector or service sector opening, progress has been slower.

A top EU priority is to promote reform and innovation in support of transforming China’s growth model into a more sustainable one, based on greater domestic consumption, an expanded service sector, and openness to foreign investment, products and services. This should be on the basis of mutual benefits and transparency, including safeguarding intellectual property. The EU’s economic strengths are complementary to the priorities of China’s 13th  Five Year Plan, such as innovation, services, green growth and balancing urban and rural

development. It is also in the EU’s interest to support China’s transition to a more sustainable and inclusive social and economic model by promoting core labour standards and decent work, welfare reform, and a shared commitment to responsible global supply chains.

As China takes steps to try to avoid the middle income trap by moving up the value chain, Chinese firms will continue to become stronger competitors in cutting-edge sectors. Indeed, the Chinese Government’s industrial policies aim to create national champions able to compete globally in sectors such as civil aircraft, new materials, the digital economy, banking, energy and infrastructure. It is important for the EU to work with China to promote open and fair competition in each other’s markets and to discourage China from underwriting its companies’ competitiveness through subsidisation or the protection of domestic markets.

III.2  Boosting trade and investment

A Comprehensive Agreement on Investment is the EU’s immediate priority towards the objective of deepening and rebalancing our relationship with China. The conclusion of such an agreement, as well as progress in China’s reforms towards liberalising its economy and therefore creating a level-playing field for business, would open new market opportunities and allow both sides to envisage broader ambitions such as a Free Trade Agreement.

Any future FTA should be deep and comprehensive and aspire to a high level of ambition based on the benchmarks set by the EU’s negotiations with partners such as Canada, Japan  and the United States. Furthermore, with a view to helping EU investors operating in an increasingly integrated regional supply chain, the EU should envisage a broader network of investment agreements in the region. Building on the investment provisions under negotiation with China, the EU will explore launching negotiations on investment with Hong Kong and Taiwan.

Geographical indications also matter economically and culturally as they create value for local communities. Both sides would benefit from the conclusion of an agreement on geographical indications based on the highest international standards of protection.

Deepening cooperation on customs and trade facilitation, over and above the commitments taken under the WTO Trade Facilitation Agreement, would be beneficial to both the EU   and

China and should cover risk management and the security of supply chains, as well as border enforcement of intellectual property rights.

The EU welcomes productive Chinese investment in Europe provided it is in line with EU law and regulations. We expect EU investment in China to be equally welcome. Mutually beneficial co-operation on all aspects of investment should be increased, including by finding practical ways for China to contribute to the Investment Plan for Europe. China should limit the scope of security-related reviews of EU investments in China solely to issues that constitute legitimate national security concerns. Similarly, the EU expects Chinese Overseas Direct Investment in Europe to be based on free market principles, and will use all the means at its disposal to address the potential market distortions and other risks of investment by enterprises which benefit from subsidies or regulatory advantages provided by the state. The possibility of establishing a common minimum definition of what constitutes critical national infrastructure in the context of inward investment in the EU should be examined in conjunction with Member States.

Reform of China’s financial system is critical to China’s economic transformation. As its capital markets become increasingly open, China’s influence on the global economy will increase further. This growing interdependence has been demonstrated by the spill-over from Chinese stock market volatility to world markets, and puts a premium on co-ordinated and transparent economic and monetary policies. Since the risks arising in Chinese financial markets may become systemically important, the EU has a strong interest in maintaining and developing positive and effective cooperation with China in the area of financial regulation.

A more globally integrated Chinese economy should also mean that China acknowledges interdependence and adheres to domestic economic policies that do not distort international markets and trade relations. The EU is seriously concerned about industrial over-capacity in a number of industrial sectors in China, notably steel production. If the problem is not properly remedied, trade defence measures may proliferate, spreading beyond steel to other sectors such as aluminium, ceramics and wood-based products.

Although this problem is being given increasing political attention in China, the scale of the challenge remains considerable. Overcapacity in China’s steel industry has been estimated at around 350 million t, almost double the EU’s annual production. While China’s aim to cut 100-150 million t of crude steel production by 2020 is welcome, it should engage constructively with its trading partners at international level (e.g. via the OECD Steel Committee) and put in place a more ambitious, measurable and transparent restructuring plan to reduce capacity. Subsidies and other government support measures that contribute to expanding or exporting steel capacity or to maintaining structurally loss-making operations should be eliminated as soon as possible. China should also honour its WTO commitment to notify subsidies, starting with those granted to the steel sector. In the medium term, China needs to reform its state-led economy and let market forces naturally address the problem.

In the light of the upcoming expiry of certain provisions in China’s Protocol of Accession to the WTO, the Commission is analysing whether, and if so how, the EU should change the treatment of China in anti-dumping investigations after December 2016, and will revert to this issue in the second half of 2016. Further strengthening the effectiveness of the EU’s Trade Defence Instruments notably through the swift adoption of the Commission’s Trade Defence Instruments modernisation proposal of April 2013 is key. A global approach to addressing the underlying causes of over-capacity will be essential.

Legal reform and strengthening the rule of law in China are preconditions for the overall success of China’s reforms. A transparent and impartial legal system is an essential part of the

institutional bedrock for a market-based economy and would provide effective guarantees for EU and Chinese businesses alike. The EU should build on the launch of the new Legal Affairs Dialogue which first took place in June 2016 focussing on e-commerce and consumer protection online.

The EU should continue to pursue dialogues with China on standards, regulation and conformity assessment procedures in key sectors in order to reduce costs and entry barriers, and to promote the primacy of international standards in areas such as health and safety, pharmaceuticals, environmental protection, food and consumer product safety, climate action and data protection. Co-operative research can be deployed to promote the use of common standards in the future. In the sanitary and phytosanitary field the EU is committed to working with China to promote the highest food safety standards. The modernisation of China’s food safety model currently underway will, if implemented in a proportionate and transparent manner, make it more compatible with that of the EU. This in turn will increase opportunities for growth and jobs in both the EU and China, create mutual benefits for consumers, and improve market access for agricultural commodities. To this end, the EU encourages China to adhere to international scientific standards and to act reciprocally to recognise the EU as a single entity.

While strengthening the EU-China partnership, the EU should continue to deepen its engagement in Asia and elsewhere with a view to multiplying and diversifying economic opportunities and sources of growth.

• The EU aims to ensure reciprocity and a level playing field in all aspects of its trade and investment relationship with China. To that end, it will step up its monitoring of access to Chinese markets and to China’s R&D support schemes by European companies.
• A Comprehensive Agreement on Investment is the EU’s immediate priority towards the objective of deepening and rebalancing our economic relationship with China.
• The EU puts a high priority on the rapid conclusion of an agreement with China on Geographical Indications for the protection of food names, based on the highest international standards.
• The EU is developing a new generation of modern, high standard trade agreements, and could consider broader ambitions such as a deep and comprehensive FTA with China, when the conditions – including implementation of the necessary economic reforms in China – are right.
• The EU expects China to make significant and verifiable cuts in industrial over-capacity based on a clear timeline of commitments and an independent monitoring mechanism.
• The EU welcomes productive Chinese investment in Europe provided it is in line with EU law and regulations. In return, the EU expects improved market access for foreign companies in China and a level playing field for business and investment. China should reduce the number of protected sectors and minimise national security reviews.
• Co-operation on the rule of law, competition enforcement, as well as standards, rules and regulations in key sectors, should be reinforced.

III.3  Research, innovation and the digital economy

China is moving fast towards a knowledge-based and innovation-driven economy. The EU, as a world leader in this area, has a strong interest in working with China to achieve EU

objectives in line with the Digital Single Market strategy. Co-operation on the digital economy should harness growth through open markets, common standards and joint research on the basis of reciprocity in areas such as 5G mobile communications and the Internet of Things.

Ambitious initiatives such as “Made-in-China 2025” and the related “Internet +” action plan underline the importance that China attaches to the digital economy as well as its transformative potential for sectors such as manufacturing. However, Chinese policy and regulation have increasingly been marked by protectionism. European information and communications technology companies face market access problems all along the  value chain, including technologically biased standards, complex and discriminatory licensing and certification requirements, disproportionate restrictions arising from security-related legislation, lack of fair access to standardisation bodies, and closed public procurement. The EU should redouble its efforts to improve access to China’s growing market for digital products and services, and to achieve a level playing field. The EU should also promote stronger privacy and data protection rights in China, and insist that EU data protection rules  be respected in all personal data exchanges with China.

Protection and enforcement of intellectual property rights (IPR) are crucial for the promotion of innovation. Relevant dialogue and cooperation should intensify and address growing challenges, such as online counterfeiting and piracy. While recognising that governments have a legitimate interest in the security of the digital market, the EU opposes generally applicable policies that require access to or transfer of software source code as a precondition for market access. The EU should seek a political agreement with China on combatting cyber-enabled theft of IPR and trade secrets.

The EU stands to gain from strengthening research and innovation cooperation with China by jointly developing knowledge and technology, tapping into China’s talent pool, promoting the EU as an attractive location for research and innovation, and finding solutions to shared social and environmental challenges. Ensuring a level playing field for research and innovation, including reciprocal access to research and innovation programmes and resources, remains essential. Cooperation through the EU’s Horizon 2020 and Euratom programmes should be further developed and expanded on that basis. Co-funding mechanisms and flagship initiatives in the context of Horizon 2020, as well as agreements between respective research institutes, should help develop long-term partnerships in science and technology.

III.4  Connectivity and people-to-people links

Improving infrastructure links between the EU and China would boost the economic  prospects for all concerned. The EU-China Connectivity Platform should create synergies between EU policies and projects and China’s “One Belt One Road” initiative, as well as

between respective sources of funding, in the field of transport and other kinds of infrastructure.

China will need to fulfil its declared aim of making its “One Belt, One Road” initiative an open platform which adheres to market rules and international norms in order to deliver benefits for all and to encourage responsible economic behaviour in third countries. Co- operation in this field should be based on full respect for relevant policies, and applicable regulations and standards, including with regard to public procurement, and guarantee a level playing field for economic operators from both sides. This should also apply to those countries outside the EU which have pledged to apply EU standards. The aim should be to help build sustainable and inter-operable cross-border infrastructure networks in countries and regions between the EU and China. Joint work on a pipeline of priority investment projects should involve close co-ordination with the countries concerned, not least to ensure compatibility with their fiscal constraints. EU-China co-operation on connectivity should fully benefit Asian partners, including Afghanistan, Pakistan and countries in Central Asia, by contributing to their integration in international trade flows.

People-to-people engagement should support opportunities for EU sectors such as higher education, creative and cultural industries, and tourism. This would also contribute to  fostering inter-cultural dialogue and promoting cultural diversity and civil society participation. People-to-people contacts should be mainstreamed throughout EU-China relations. Full use of existing channels fo