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CESC CONTRIBUTION
for the
3rd China-EU Round Table
on "Trade and Investment"
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Rapporteur: XiaYoufu
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Development of Trade and Investment between Chinaand
European Union and Prospects

June 11, 2008

Youfu Xia, Research Center for China-EU Economic Cooperation(CCEEC), University of International Business & Economics(UIBE), Beijing, China

Since the establishment of diplomatic relations between China and European Union in 1975, substantial progress has been achieved in the bilateral economic and trade relations. Its scope has extended from a singular form of trade in goods to an all-round collaborative structure encompassing trade in technology, service and reciprocal investments. EU has already become China’s largest trading partner, important investor and the biggest source of technology transfer, while on the other hand China steps up to the position of the second largest trading partner to EU. With the objective to form a framework of a overall strategic partnership, negotiation is underway aiming at Partnership Cooperation Agreement and improvement over the Trade and Economic Cooperation Agreement of 1985. An all-round cooperation will push forward an outcome of mutual benefits and thereby contributes positively to the construction of a harmonious world.

1. The rapid development and mutual benefit of the bilateral trade and investment cooperation

1.1 Rapid development in bilateral trade

Since 1990, merchandisetrade between China and EU has registered an annual growth rate well over 20%. In 2004, EU became China’s largest trading partner while China became EU’s second largest trading partner next tothe United States. In 2006, outstripping the US, China became the largest source of imports to EU. In 2007, EU leapt to the position as the largest export market to China.

In 2007,the bilateral trade reached US$356.2 billion at a 27% increase, among which China’s export was US$245.2 billion while import was US$111 billion, increased by 29% and 22% respectively. In the first four months of 2008, the bilateral tradeincreased by 25.4%, reachedUS$129.9 billion, among which China’s export was US$87.9 billion while import was US$41.9 billion, a respective increase of 25.4% and 25.3%.

According to statistics from EU, EU’s commercial service export and import to China were US$12.34 billion and $96 billion in 2005 while in 2006 the revenue increased to US$12.75 billion and US$11.33 billion respectively.

With the different economic structures between China and EU, respective advantages and strong synergy exist in the bilateral trade of goods and services. Currently, a great potential in the field of commercial service trade remains untapped considering the advantages of EU.

1.2 Deepeningbilateral investment cooperation

EU has become China’s forth largest investment partner. Up to the end of April, 2008, EU already had 27,139 investment projects in China with US$58.5 billion actual investment. These projects exhibit characteristics of scaled and high-tech content and concentration in the manufacturing sector. Currently, investment to China just constitutes 1% of EU total overseas investment which means a huge potential for further cooperation.

Recent years, along the “stepping out” strategy, China has made progress in making investment to EU. In 2007, the direct investment to EU was US$500million among the total investment of US$1.4 billion on accumulative basis.

1.3 Achievements in technological cooperation

EU has become China’s largest source of technology transfer. The high-tech projects introduced from EU occupied around half of China’s total projects imported. In 2007, there were 2,603 technology transfer contracts in China with a total value of US$9.1 billion. Up to the end of March, 2008, the accumulativevalue of the 270,000 contracts reached a total of US$112 billion.

With the development of China’s technological innovation, the bilateral technological cooperation reaches such a vast field that extended from the single form of import to a new stage of joint research and cooperative development. During the technological cooperation, EU’s need for China is increasing. The two sides ought to make full use of their own advantages to advance the high-tech cooperation to a new height.

EU has a lot of smalland medium-sized enterprises with their proprietary technologies and expertise while Chinese SMEs are increasing rapidly with strong urgefor cooperation. Therefore, the pace of exchange and cooperation are becoming more and more frequent for the past few years which is indicative of huge development potential.

Besides, the policy dialogues and exchanges have made encouraging progress between China and EU in agriculture, finance, social welfare, health, culture, energy, environmental protection and other fields. The development of trade and economic relations has laid a solid foundation for the overall strategic partnership between China and EU.

1.4 Mutual benefit from China-EU economic and trade cooperation

The rapid development of China-EU economic and trade relations has stepped onto a new track of mutual benefits and brought about solid gains to both sides.

(1) Bilateral cooperation making contributions to economic growth of both sides

China’s export to EU occupies over 20% of its total export, which has made big contribution to the sustained and rapid growth of China’s economy. Especially in this year, in addition to the slowing down of the global economic development, China’s export to EU had increased by 25.4% which exceeded the total export increased rate by 3.9 percentages.

Except for the year of 2002 and 2005, the annual growth rate of EU’s export to China remained over 15% in the seven years from 2000 to 2008, among which it remained over 21% in six years. Except for 2005, the annual exportgrowth rates toChina were well overEU’s total export growth rate in eight years, among which the rates in seven years were well over by six percentages and ten percentages in six years. In the first four months of 2008, it was at a 25.3% increase. The high growth of exports to China is a strong engine to the long time slow growth of EU economy.

(2) Promoting employments and consumers’ welfarefrom bilateral cooperation

China’sexport to EU and EU’s investment to China have created a large quantity of job opportunities for Chinese people. Many kinds of products from both EU and EU investedenterprisesenrich Chinese people’s life.

The rapid development of China’s import from EU has also created great amount of jobs for Europeans. By rough estimate, only China’s imports in 2007 could offer 2.2 million jobs for Europeans. Moreover, Chinese products have brought huge benefit to European consumers by their good quality and low price. It is estimated that Chinese products save nearly US$60 billion for European consumers’ expenditure every year.

(3) Tremendous potential for investorsand the optimization and development of China’s industrial structure from bilateral cooperation

China’s development has created big development opportunities for EU investors. In 2006, in China’s domestic market,the sales revenue of the enterprises invested by EU reached US$163.4 billion and their exports reached US$43.2 billion, meaning that every hour they earned respectively US$20 million and US$5 million by sales revenue and export. They received generous profit in China. According to the investigation of EU-China Chamber of Commerce, there were 73% of the EU enterprises hopeful to their business in China. EU’s investment has brought China advanced management experiences and technology, trained Chinese staffs, promoted research and development and contributed directly to China’s economic development. EU won Chinese market and large technology transfer fees throughout bilateral technological cooperation, while China promoted optimized its industrialstructure by receiving technology appropriate to its economic development.

Under the guide of China’s “stepping out” strategy, Chinese enterprises intensified investing to EU and also received well profit. EU has become a most important destination of Chinese enterprises’overseas investment and cooperation.

2. The problems and challenges that faces the trade and investment cooperation between China and EU

The China and EU bilateral relationship is well as a whole, but also there are series of factors restricting the deeply development of the trade and investment cooperation. Nowadays the China and EU economic cooperation is at a challenged stage.

Now let’s focus on several important issues, such as trade imbalance, EU trade remedy, technical barriers to trade(TBT)and fullmarket economy status(MES), market access, the protection of intellectual property rights(IPR).

2.1 Merchandisetrade imbalance

Merchandisetrade imbalance gets more and more serious and is concerned by the two sides in recent years. According to statistics from China, China had a trade surplus of US$37 billion to EU in 2004 and increased toUS$70.1 billion in 2005. In 2007, it even stepped to US$134.2 billion. According to WTO’s statistics, EU’s trade deficit in 2006 nearly tripled to that in 2001, increasing from US$45.2 billion to US$162.7 billion.

There are many reasons for this problem, which mainly are below:

(1)It’s the consequence of the complementality and the differences of economic structures.

The trade imbalance reflects their differences on economic development, industrial structure, consumption ability and the international division of labor pattern. An economic mutual complement is the main reason of the trade imbalance. EU is mainly formed by developed countries and it has stepped into the post-industrialized society. Its service trade occupies 70% of its GDP while manufacturing and agriculture sector occupy 30%. Most of its industries produce high-end finished goods. EU requires a mass import of labor intensive and resource-based goods. In addition to that, China’s tertiary-industry only occupies less than 40% of its GDP while its primary industry and secondary industry occupy 12% and nearly a half respectively. Therefore, China still belongs to the developing countries under the industrializing process.

Being implementing balanced foreign trade development, China do not chase the trade surplus. Actually, the oversize surplus has had a negative influence on China.

(2) It’s the consequence of the international industries shifting to China.

China’s trade surplus mainly comes from the foreign invested enterprises. Their surplusincreased from US$2.1 billion in 2000to US$136.1 billion in 2007 while their proportion in national total trade surplus also rose from 8.7% to 51.9%. During the first four months, the foreign invested enterprises trade surplus ran up to as much as US$76.9 billion which exceeded above the national total trade surplus by US$18.9 billion.

There are something must be mentioned that, in 2006, the China’s domestic sales revenue of EU invested enterprises was US$$163.4 billion, export was US$43.2 billion and totally was US$206.6 billion, higher than the total trade surplus of China to EU.

(3) It’s the consequence of EU’s restricting high-tech export to China.

EU still prohibits many high-tech and high-tech products with great comparative advantage to China. This is obviously self contradiction to emphasizeand solve the issue of trade imbalance.

The trade imbalance is a normal issue for certain economic entity in different development stages, especially in view of the widening economic development gap between developing and developed countries. Members in EU also have trade imbalance issues. For example, Germany’s trade surplus rose from US$69 billion in 1999 to US$268 billion in 2007. China has massive tradedeficit with Taiwan Province, South Korea and Japan. In 2007, China’s trade deficit with them reached US$157.1 billion. We believe that this kind of phenomenon adapts to each benefit and the economic development stage.

2.2 EU frequently takes trade remedy measures and creates technical barriers to trade

In recent years, influenced by its economic low growth, especially the low down situation recently, EU tended to put more punch into trade protectionism to against competitions presented by new economic entities such as China. The situation is worse on trade problems towards China.

(1) Anti-dumping issues

During the period of anti-dumping towards China from 1979 to April, 2007, EU had totally started 139 investigations on the cases of trade remedy, among which there were 136 anti-dumping cases, 2 safeguard cases and 1 special safeguard case. Among WTO members, EU is among the most aggressive in anti-dumplingcases against China while the US initiated 129 and India 109 cases. Since September, 2007, EU Committee put the goods imported from China on record so frequently that there were 9 investigationswithin half year involving a value ofUS$$3.657 billion.

From the cases judged by EU, we found some kinds of tendencies: firstly, Market Economy Treatment (MET) washardly given and it seemed that enterprises invested by EU in China were more likely offered MET while China’s enterprises were refused based on minor issues. Secondly, when handling the qualifications and treatment of the anti-dumping cases, EU treated their funded enterprises or affiliated enterprisesin China with double-standards, which violated WTO anti-dumping Agreement. Thirdly, when EU enterprises fail to acquire Chinese enterprises in low price by means of normal economic measures, they pressure them by anti-dumping investigations. Finally, EU tends to politicize the cases and artificially interfere with the investigations and judgments.

(2) The issue of China full Market Economy Status(MES)

In the current economic relationship between China and EU, China is paying serious attention to the issue of MES which is affinitive to anti-dumping.

In June, 2003, China officially presented an application for MES. The two sides had many consultations in the past five years. In June, 2004, after presented China’s initial appraisal report, EU Committee considered China unmet four standards out of five. In the same time of 2007, EU Committee updated the appraisal report and they thought China still out of the four standards although it had made big progress in market economy transfer process.

We found EU to treat the problem with double standards. After entering WTO, China has made obvious progress of market economy and many of EU’s statements don’t conform to the practice. Actually, EU Committee has the tendency to complicate the problem. China never has any discriminatory policies or behaviors to EU in trade and investment, but EU’s “non-market-economy status” to China has made Chinese enterprises suffer unfairness. China and EU have definitely established an overall strategic partnershipsince 2003 and a real, equivalent overall strategic partnership will never based on the unfairness and discrimination.

Besides, the issue must have a limit time, for it’s quite meaningful for EU whether it will be settled soon or not. It’s almost eight years since China’s entering WTO, EU’s delaying strategy is not only a block of establishing bilateral strategic relationship but also an unwise decision.

(3) The issue of EU technical barriers to trade(TBT)

EU has the most frequent and strict systemof technical barriers to trade in the world, which containing more than 300 legally enforceable directives and over 100,000 technical standards. Some of them are reasonable while others lack scientific basis, which tend to be a new kind of trade protectionism, being a substitute for the traditional tariff and non-tariff barrier. In recent years, many of Chinese export enterprises and their products have been affected more or less by EU’s TBT, such as to mechanical and electrical products there are WEEE and ROHSand to chemical products there is REACHwhich influencessignificantly on the development of Chinese relative industries.

Investigation Report on Foreign Technical Barriers to Trade’s Influences to Chinese Foreign Trade in 2005, issued by Ministry of Commerce, in Dec. 2006, states clearly that foreign TBT in 2005 influenced 15% of Chinese export enterprises with a direct economic losses of US$$69.1 billion of 18 out of 22 major types of export products, which accounted for 9% of yearly export value; US$$21.7 billion spent by the enterprises to increase production cost, which occupied 2.85% of national export; indirect trade opportunity cost reached up to US$$147 billion, occupying total export by 19%; 57.7% of Chinese enterprises complained the effects of EU’s TBT. The industries that have been worst hit by the technical barriers are mechanics and electrics, foods, light manufacturing products, clothing industries, medicals and chemicals.

2.3 On Market Access

China has set a vast reduction in tariff and non-tariff-barriers after accession to WTO. As a new member, among all of WTO developing members, China’s tariff, from agricultural products to industrial products, is the lowest while the service trade is opened to the best possible extent.

In agriculture, compared with average duty of 15.2% of China’s agricultural product, EU’s currently reaches up to 22.9%. There are many peaks among EU’s product duty items, in these peaks, eight duty items were over 100% eight-digit tariff, and 187 items were over 65% (which is China’s highest tariff rate). The highest rate is 407.8%, over six times of China’s highest tariff rate. EU has 85 kinds of products with customs quota while China only has 9. China has clearly canceled subsidize exports but EU still has it in more than 20 kinds of products. As the most advanced economic entities with U.S.A., EU received the most benefit in the multilateral trading system throughout the past 50 years while it took many steps to twist the agricultural trade. EU ought to have taken the most responsibility and contributed the most in Doha Round negotiation.

In the industrial products, China’s 9% average import tariff rate is the lowest among all the developing members’.

In the field of services, China opens most in all the developing members. During Doha Round negotiation, China’s seven new sectors, such as highway passenger transportation, sports and other entertainment services, have committed to open, and also seven other opened sectors, such as translation and interpretation, data processing, real estate and management consulting service, have committed to a wider liberalization. Compared to all the other commitments after Doha Round, China will be the most opened member.

EU has currently asked for many offers on the issue of Market Access in bilateral relationship, hoping that China can open its service market further, broaden investment field and cancel technical barriers to trade, etc, many of which are over China’s commitment to WTO. China will take an active part in WTO multilateral negotiations and will open its market progressively. Meanwhile, as a developing country, China cannot ever make commitment beyond its own ability. By completing China-EU Economic and Trade Agreement Negotiation in 1985, China would certainly like to deepen bilateral economic relation and create more opportunities for both sides to invest and trade.

2.4Onthe protection of intellectual property rights (IPR)

China has definite standpoints on this issue. To protect intellectual property right is not only required by China’s open strategy, but also in the need of encouraging national innovation and the development of national economy and social science. Chinese government considers innovation development as the key to national strategy aiming to be one of world top 20 innovative countries before 2020. China has a sincere attitude towards intellectual property right protection and it has been working on it seriously. Since the first patent law came into being, China has established fairly complete law system of intellectual property right protection in the short 20 years. China has come through what suffered the developed countries for hundred years by holdingwild scaled propaganda campaigns, increasing public consciousness, intensifying law enforcement and punishment. China Custom has captured 12,000 cases of goods infringing on the patents, and 90% of them were captured when being exported from China. Chinese government has drawn up a yearly plan of intellectual property right protect action. China is willing to strengthen cooperation in the protection of intellectual property right along with EU.