Turning point in bilateral trade

China and European union expected to make considerable progress on investment agreement in Beijing summit

The current round of negotiations between China and the European Union in Beijing will have a far-reaching impact on bilateral trade ties and pave the way for an investment agreement between the two sides, experts say.

Premier Le Keqiang hosted the 16th China-EU Summit on Thursday with visiting President of the European Council Herman Van Rompuy and President of the European Commission Jose Manuel Barroso.

Li indicated China's keenness on such a treaty, saying he hoped the talks would be thorough and yield concrete results.

Though better business ties are at the core of the discussions, analysts and stakeholders feel that the discrepancies in current investment patterns may delay an investment deal that is acceptable to both sides.

Speculation about whether the summit will deliver concrete results has been rife in recent weeks, but reforms flagged by the Third Plenum, a top Party meeting held Nov 9-12, particularly greater market access and a more level playing field, had bolstered optimism that the meeting would lead to more mutual, strategic gains.

Leaders and stakeholders on both sides, including EU Ambassador to China Markus Ederer and his counterpart Ambassador Wu Hailong, have both trumpeted the benefits and necessity of improving political and economic ties.

China, keen to upgrade and develop its economy and avoid becoming mired in the middle-income trap, could be given help to achieve this ambition through closer economic ties with the EU.

Conversely, the EU stands to gain greater market access in China. The prospect of a new investment agreement paving the way for a EU-China free-trade agreement has not been ruled out, but cautious analysts and stakeholders say it is early days.

The impetus for the current round of negotiations came during the 14th EU-China Summit held in February last year in Beijing, after discussions between then premier Wen Jiabao and the presidents of the European Council and the European Commission, Herman Van Rompuy and Jose Manuel Barroso.

The Beijing negotiations also seek to replace individual bilateral investment protection agreements between China and the 26 EU member nations with a single, comprehensive agreement.

Zhao Junjie, a researcher on European studies with the Chinese Academy of Social Sciences, says a breakthrough with the EU could transform China's economy.

"The treaty will offer a good opportunity for China to attain international standards on trading and investment and get more involved in the global economy," Zhao says.

Greater European investment in China, Zhao says, will help in the development of more high-tech industries. Coupled with an influx of specialized, skilled people, this could prove pivotal in helping China upgrade its economy to a higher, more sustainable level, quicker than it would without closer ties to the EU.

Ederer says any agreement reached will result in benefits for both sides.

Current trade numbers show the extent of the current, mutual reservations, and perhaps more importantly, the potential scope for gains if differences can be surmounted.

Last year, EU-China bilateral trade in goods reached 433.6 billion euros, a figure that helped China edge closer to supplanting the US as the EU's No 1 trading partner.

The problem area though, for both sides, is FDI and ODI.

In 2012, EU's FDI in China amounted to 17.8 billion euros, while China's FDI in the EU was 3.1 billion euros.

"When you look at our trade relationship, which is really big, and our investment relationship, which is still relatively small, both sides only invest about 2-3 percent of their ODI into each other," Ederer says.

He believes this largely boils down to a mutual lack of trust, which could be overcome by one of the key deliverables expected to be generated by the summit, a dialogue in rule of law.

"What companies need on both sides of the equation, in Europe and in China, is rule of law, which is if you have a business dispute you cannot settle amicably, there needs to be either an arbitration court or there must be a judge who in an unbiased way hears your case and actually decides in your favor if you are right."

China's double-digit growth over the past decade has transformed the nation into the manufacturing hub of the world, but Chen Mingming, former Chinese ambassador to Sweden, says it is impossible to ignore the fact that the industries driving the boom have traditionally been located at the lower end of the global value chain.

"To further implement the reform and opening-up policy, China needs a better investment environment overseas," Chen says.

Ederer is also optimistic.

"In addition to the traditional issue of investment protection, it (any treaty) will have components on market access and national treatment," he says. "We will establish across the board a simpler and more predictable legal and political environment for mutual investment. The uniformity and certainty on the investment conditions will grow on both sides."

Julia Rarie Ewert, author and research fellow at the EU-Asia Center in Brussels, says the plenum's resolution to perfect mechanisms to guarantee lawyers' professional rights is "music to European ears".

"Much will depend on the interpretation and implementation of new procedures," she says.

Ewert says other flagged reforms such as including a commitment to give the market a decisive role in the economy and a move toward better protection of intellectual property rights, would bring the EU a step closer to disavowing its contentious refusal to grant China market economy status.

"It looks like a solution is in sight," she says.

While both the EU and China will come to the table with similar goals for economic growth, inclusive prosperity and more environmentally sustainable societies, differences will be marked in the perceived obstacles each side thinks it needs removed to attain those goals.

In the first half of this year, China and the EU clashed over a series of tit-for-tat trade disputes dominated by anti-dumping allegations.

"This trade friction showed that there are some problems that the present cooperative mechanisms cannot thoroughly resolve, so leaders from the two sides need to upgrade outdated mechanisms," says Cui Hongjian, director of European studies at the China Institute of International Studies.

Chen holds high hopes any treaty that results from the summit will provide those mechanisms.

"The treaty can contribute to avoiding trade disputes and protectionism," he says.

To maintain dynamic economic growth, China has launched a series of measures to boost foreign trade, including establishing historic free trade agreements with Iceland and Switzerland in the first half of this year.

Chen says experts who are keen to see the much-touted EU-China free trade agreement become a reality should not get excited, just yet.

"It is not practical for China and the EU to reach a free trade agreement at present. An investment treaty, will, however help improve bilateral investment and inject new energy into both economies," he says.

This year also marks the 10th anniversary of the establishment of the China-EU comprehensive partnership. Tian Dewen, a researcher of European studies with the Chinese Academy of Social Sciences, says the summit and the subsequent, expected negotiations present an opportunity for a much-needed overhaul of the systems and mechanisms in place between China and the EU.

With both sides keen to develop and put in place a strategic plan for cooperation towards 2020, the majority of analysts and stakeholders are optimistic.

With goods and services worth over $1.34 billion traded between China and the EU every day, the incentive for continued cooperation is high. The lucrative potential in bringing the bilateral investment figure up to a level comparable with trade, makes the incentive for even closer cooperation, even higher.

Contact the writers through zhouwa@chinadaily.com.cn

Above: Chinese President Xi Jinping (center) meets European Council President Herman Van Rompuy (left) and European Commission President Jose Manuel Barroso, in Beijing for the 16th China-EU Summit on Nov 20. Below: An Irish official takes part in the China-EU Exhibition on Urban Development in Beijing on Nov 21, which was held on the sidelines of the summit. Pang Xinglei / Xinhua

(China Daily Africa Weekly 11/22/2013 page16)