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European Economic and Social Committee

REX
Brussels, 22 October 2008
4th EU-China Round Table
Trade and Investment
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Rapporteur: Jonathan Peel
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REX - CESE 1631/2008 EN/o

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Summary

The Round Table in June examined the very close and deep economic, trade and investment links between the EU and China, and agreed to look further at this area at its next meeting - including outstanding problems and differences.

Two key problems faced by China – the EU ban on high-tech exports, and the EU’s decision not to grant China Market Economy Status (MES) would appear to be closely linked to key EU concerns arising out of a lack of transparency or a level playing field for foreign investors in China, including IPR. This paper, looking to maintain the same spirit of constructive and harmonious co-operation, therefore looks at these issues in particular, including problems faced by foreign owned small and medium sized companies operating in China.

1.Introduction

1.1At the meeting of the Round Table last June, the importance of the economic interdependence combined with the strong trade and investment links between the EU and the People's Republic of China were celebrated in two discussion papers followed by a wide ranging debate.

1.2As those present fully appreciated, in an increasingly interdependent and now financially uncertain world the interaction between the world's fastest growing economy with the world's largest single market is of fundamental importance. Both the EU and China hold increasingly important stakes in each other’s economies and increasingly in their respective social and environmental wellbeing. The increasing depth in EU-China co-operation finds a ready echo in the Chinese concept of harmonious development.

1.3The timing could not be better for discussing our trade and investment relationship again as we mark the 30th anniversary of the opening up of China by Deng Xiao Ping in 1978, as we celebrate the success of the recent Olympic Games, but also as global economic and financial uncertainties – from which no country is immune – multiply.

1.4Trade and investment lies at the core of our relationship. These offer the most effective, deepest and most enduring means of building contact between countries and regions, from which other contacts and ties will most readily develop and grow. Investment is a key driver in developing further trade.

1.5In 2007, EU-China trade reached 300bn - more than double that of four years ago. China is the EU's second largest trading partner (after the US), with over 10% of its trade, its leading source of imports, and its fourth largest export partner. For China, the EU is its largest trading partner with some 20% of its trade.

1.6The growth of China - EU trade by more than 70 fold since 1978 has been matched by foreign investment in China. The EU is now the largest source of foreign direct investment in China. More than half of China's foreign trade is now conducted by multinational companies, many EU based. China too is a major source of foreign investment - including in the EU.

1.7Investment in China has enabled many European companies to remain competitive by gaining access to lower cost inputs, thereby helping them to maintain jobs and investment in Europe in key activities such as design and research in face of ever tougher global competition. Partly as a result of such pressures many lower-skilled jobs have disappeared from Europe, leading togreater demands for protectionist measures, notably in the south. Protectionism needs to be guarded against: it remains a major threat to EU-China relations - as to all trade and investment.

1.8China in turn needs to ensure that its economic growth remains sustainable in the long term, with major implications both for how future investment into China is best channelled. This includes opening up internal markets in those parts of China distant from the more prosperous coastal regions. Pump priming low-cost production through state funding has been relatively easy – but it is the sheer size of the Chinese workforce and the need to create jobs that presents the main longer term challenge for its authorities.

2.Outstanding issues

2.1It is perhaps surprising that, with trade and investment having reached their current levels, not more problems and difficulties have arisen between the EU and China - especially when compared with the number of major EU/US trade disputes and given our very different historical and cultural backgrounds, mirrored in our political and administrative systems. Hitherto, in order to develop a lasting relationship between the EU and China, emphasis has inevitably been placed on the bigger, more strategic goals whilst detail, problems and other irritants (even where longstanding) have been overlooked and ignored.

2.2As mutual trade and investment have become more open and sophisticated, and with a mature relationship now firmly established, this is the time to start to develop a solid framework to tackle such issues and problems and deal with them fairly, on an overall win-win basis. No longer brushing them aside will help prevent future crises and other disruption of the main strategic agenda.

2.3Given its strong spirit of constructive and harmonious co-operation the Round Table will now want to look at some of these issues in greater depth.

In June the key EU China differences highlighted by Mr Xia's paper were:

  • The current trade imbalance
  • EU market access – notably differences in agricultural duties – and EU trade "remedy measures" / Technical Barriers to Trade, notably on anti-dumping
  • EU decision not to grant China full Market Economy Status
  • EU ban on the export of high-tech (and military sensitive) products
  • Intellectual Property Rights, where he said China was "willing to strengthen co-operation".

In turn EU concerns were highlighted as follows:

  • Standards – where the EU and China appeared to operate on different sets of standards and where one international set of rules, especially with regard to public, animal and plant health, was recommended
  • Market Access obstacles faced by EU companies, notably non-tariff barriers and licensing issues, especially variations in different parts of China
  • Lack of a Level Playing Field for EU companies operating in China – in particular IPR, differing local interpretations of Chinese legislation, as well as local subsidies
  • Overall transparency in dealings with Chinese authorities at each level.

2.4Of the points raised by Mr Xia, that part of the current trade imbalance which is directly affected by the lack of a level playing field for EU owned companies in China is particularly important[1]. Agricultural duties are more appropriate for trade negotiations at the multilateral/ WTO level, despite the DDA negotiations meeting their impasse here in late July.

2.5Chinese concerns about EU trade "remedy measures"andTechnical Barriers to Trade, notably anti-dumping, are closely mirrored by EU concerns arising from dumping by Chinese companies, notably in footwear, textiles and ceramics. As we enter a more uncertain economic climate together with the real threat of reduced consumer activity worldwide, problems in this area could foster the growth of protectionist sentiment both within China and particularly in Europe – specifically against Chinese goods, which would be counterproductive for China’s export drive. These protectionist concerns are never far below the surface among some EU Member States, as was shown by the 2005 crisis over Chinese textile imports, and their growth would be of real concern, especially at this uncertain time.

3.Standards

3.1Standards remain a key issue. The ongoing crisis over melamine contamination of milk in China is an example of the type of crisis experienced by the EU in recent years involving human, animal or plant health issues (e.g. dioxins, BSE, Para Red). Awareness of these issues has grown as a result of ever more advanced technology, as already seen with lead in paint on toys (through the use of chemicals banned in the EU) and pet-food. All this has led to the very high standards now rightly demanded by European consumers.

3.2China in turn imposes complicated and costly labelling and packaging requirements for imported goods, where regulatory overlap and where inconsistent implementation by customs can be a major problem and cause unnecessary technical barriers to trade.

3.3It is impossible to prevent or anticipate such crises, but we can build trust in each other’s ability to deal with such problems without resorting to unilateral action. Mutual trust is essential: unilateralism in such issues should be a matter of last resort. Harmonisation of standards offers the opportunity to increase trade whilst ensuring both safety and quality: it must be in the interests of both China and the EU to participate in each other’s, and international standard setting bodies as far as possible. Closer cooperation in standard setting will be an important topic for discussion by the Round Table in Paris.

4.High-tech ban, Market Economy Status (MES) and related issues

4.1Therefore, very much wishing to maintain the constructive and harmonious spirit of our previous meetings, this paper will now turn to examine China’s concern at the EU ban on high-tech exports[2] and its decision not to grant China Market Economy Status (MES), together with EU concerns arising out of transparency and a level playing field for foreign investors in China, especially in IPR. These problems are very closely linked and need to be tackled jointly in order to resolve them.

4.2We would urge the Round Table to call for a combined high-level, in depth commitment between the EU and China to examine these outstanding issues urgently and in a harmonious manner.

4.3As discussed by the Round Table in June, MES sounds like an important judgement on the sophistication of the Chinese economy. It is in fact a highly technical issue related solely to anti-dumping cases and arises from China’s WTO accession agreement. China agreed to be considered a non-market economy until 2016 as a result of issues arising from its economy that make it impossible to ascertain the true price of goods, critical for anti-dumping investigations.

4.4Political pressures increase to change this. Indeed, before leaving office Commissioner Mandelson hinted at a possible change of policy here. The EU has welcomed the real progress China has made, notably in new accountancy and bankruptcy legislation, but its position has remained that China has not fulfilled the criteria needed and that any decision to give China MES in the near future must be made on economic, not political, grounds. It remains willing to discuss outstanding technical requirements.

4.5Increased openness, transparency and consistent, even-handed treatment of foreign investment by China, as set out in the many problems and issues detailed below, could bring early benefit to China and help resolve this issue.

4.6There would also appear to be a strong and direct link between EU concerns over the wide ranging problems faced in China by EU (and other foreign) businesses over Intellectual Property Rights (IPR), notably over insufficient patent protection, and the EU’s clear reluctance in turn to export high-tech and other sensitive products to China, not least to avoid meeting such risks in those areas.

5.Transparency and a level playing field for foreign investors in China

5.1Both China and the EU look for the rule of law, including for Intellectual Property Rights (IPR) so outwardly there do not seem to be major differences. Rather it would appear that many of the problems for European businesses operating within China occur beyond that point, when recognisable similarities start to disappear.

5.2The lack of transparency, even implementation and enforcement of new laws across China present fundamental problems to European companies investing there. After a new law is passed through the Chinese legislative processes problems start to arise when this is not followed by any clear, centralised, readily accessible or uniform information or set of guidelines as to how the new law is be implemented; what information that may become available may also only arrive through obscure channels.

5.3In many cases there will be no regular or even implementation or enforcement across China as the country is subject to local variations which are then perceived as inconsistencies. In some cases implementation and enforcement may vary within the same province or even within the same district or city. Other problems arise when more than one government Ministry is involved, as each Ministry will pursue its separate implementation policy and these may not converge to any great degree. New regulations may appear at very short notice, or even retrospectively – and may likewise be published through obscure websites.

5.4Draft implementation rules can appear unofficially, or on obscure websites, and definitions can be unclear or inconsistent. For example, technical import and export regulations may aim to cover what is allowable, restricted or even forbidden in these areas, but nowhere are basic concepts (such as the meaning of 'technical') clearly or consistently defined.

Other problems faced by European companies in China include

  • Not all laws are published
  • Time to adapt to incoming legislation is not always sufficient – and laws can be implemented retrospectively
  • Foreign law firms can only be represented in court by Chinese law firms
  • The courts system is not consistently open to foreigners
  • There is no right of appeal or appeals mechanism
  • Difficulties in gaining access to Government Procurement opportunities on an equal or comparable basis to local firms: here early Chinese accession to the WTO GP Agreement would be most welcome.

6.Particular problems faced by small and medium sized companies (SMEs)

6.1The problems listed above are often exacerbated for SMEs investing in China. Many of these are highly innovative, form a notable proportion of EU based investment in China, and bring with them specialities and opportunities from which major growth can follow, not least the development of Chinese SMEs. With necessarily limited resources and small numbers of staff such investment is comparatively complex and risky for such companies, especially for those without adequate support resources (in some cases provided by European industry bodies). Problems of particular concern for SMEs in China, in addition to those wider issues already listed above, include:

  • Lack of a safe and predictable operating climate exacerbated by insufficient transparency in legislation and its operation, inadequate enforcement and insufficient time to adapt to new legislation
  • Enforcement of taxation rules, and often lack of adequate notification
  • IPR protection – not least as small companies do not have sufficient means or muscle to pursue successful enforcement
  • Randomness of relevant websites – critical information can all too easily be missed – together with difficulties in gaining authoritative translation of key legislation/ regulation, and the need to interact with so many local institutions
  • Hiring and retention of quality local, Chinese staff (foreign experts are costly and may defeat the original reasons for investing in China).

7.IPR (Intellectual Property Rights) – closely linked to the EU ban on the export of high-tech and sensitive products

7.1Such problems as those mentioned above can be intensified when it comes to issues connected with Intellectual Property Rights.

7.2As previously mentioned, there is a strong and direct connection between the EU’s clear reluctance in turn to export high-tech and other sensitive products to China and EU concerns over the wide ranging problems faced in China by businesses over Intellectual Property Rights (IPR). This will be another very useful area for the Round Table participants to explore together in Paris and where the EU and China need a high-level, in depth commitment to examine these issues together both harmoniously and urgently.

7.3Welcome progress has been made by China in setting up an IP regime, dating from 1983, reformed in 1993, and again in 2001/02 following China’s WTO accession. A third revision of IP legislation is now proposed through the current draft Patent law.

7.4As with other problems faced by EU businesses in China, the major issues and difficulties over IPR occur below the surface, notably through the absence of effective and consistent implementation and enforcement of IPR legislation across China, where a coherent approach between central, provincial, district and local authorities is often lacking, and where courts’ judgements may not always be actually implemented.

7.5Applications for patents are just as problematical. Understandably Chinese authorities want to stimulate local innovation and development, but this is perceived in turn by many foreign companies to mean that the system is mainly designed to promote and protect Chinese patents, technologies, trademarks and copyright and that foreign companies cannot compete on equal terms.

7.6This is particularly so for the Utility Models (a sort of second rate patent)as mentioned previously at the Round Table. Here the problem is that Chinese companies tend to file hundreds of Utility Models that, for a large part, are invalid because they are based on existing technology that has been either acquired legally (but the fact that the technology is already known makes it impossible to file another identical patent) or that has been obtained by other means. It happens that, when going through compulsory certification of their equipment or products,companies may then have to supply detailed and sensitive information – often going well beyond what is strictly relevant (e.g. details of the overall chemical process as opposed that part for which the patent is actually being sought) - to the Panel in charge of the certification, which may often include a representative from a local competitor. The overall lack of adequate protection for foreign companies of confidential or commercially sensitive information in these circumstances is a major problem, despite high level assurances to the contrary by the Chinese authorities.

7.7There is also a widely held perception that judges, judicial authorities and judicial committees may not be totally independent either – another factor which is in turn reflected in the EU's reluctance to grant China Market Economy Status. Notable difficulties for such firms here arise through the lack of precise definitions, especially in legal procedure, which in China can be very obscure, lengthy and complex.