Renegotiating Europe’s trade links with China

The race is on to establish new trade rules and standards that will govern the “third wave” of globalisation

The French historian Fernand Braudel, in his seminal “Civilisation matérielle, économie et capitalisme”, described how, even before the industrial revolution, shifting trade links shaped the development of the western economy between the 15th and 18th centuries. This was, he wrote, “modernity on the march”.

In our own time, for at least two decades now, western capitalism has been experiencing a dramatic reconfiguration in trade patterns, this time globally. Willem Buiter, chief cconomist of the American banking giant Citigroup, has described this trade-driven transformation as a “third wave of globalisation”.

A sign of these changed dynamics is that trade ministers from the European Union’s member states are being lined up (18 October) to give the European Commission a mandate to negotiate the first ever EU investment and market access deal with China, Europe’s second biggest trade partner.

The failure of the long-running Doha trade round of world talks – at best we are now looking at the possibility of a “Doha-lite” deal in Bali at the end of the year – is symptomatic of the passing of a period during which the dominant advanced economies of the transatlantic region could shape world trade rules to their needs. This was the era of the Kennedy (1964), Tokyo (1973) and Uruguay (1986) multilateral trade “rounds”, which were inclusive deals involving, by the end, more than one hundred of the globe’s trading nations.

Much of the pressure behind a new wave of deepening trade links surges out of emerging market economies, particularly in Asia. Buiter predicts that by 2030 these Asian countries will have a bigger share of world trade than western Europe.

Such rising trade powers as China, India, Brazil and Indonesia have been insisting on a bigger say in designing trade rules. Hence the proliferation of regional and one-on-one trade deals and the stalling of the Doha global trade round.

Last month (17 September) the European Parliament, which was given new trade powers by the EU’s Lisbon treaty, conditionally approved the opening of one-on-one talks with China.

An EU-level investment and market access agreement with China would replace the bilateral agreements that most individual member states currently have with China. It would tackle “behind the border” issues – including regulatory impediments prejudicial to foreign investors. These are important not least because of the expanding role of cross-border supply-chains and services, including financial services in international trade.

If the EU were to reach a bilateral deal with China it would be less far- reaching than, say, the comprehensive, “deep integration” free-trade deal between the EU and South Korea implemented in 2011.

That EU member states are prepared to pool their negotiating power to try to achieve their trade objectives with China at a time when “Europe” is so toxic to so many of their voters, especially in the United Kingdom, reflects new realities. Crucially, each recognises that China is already too powerful to negotiate with separately.

In July, the United States led the way with an announcement that China had agreed, for the first time, to open talks about a US-China Bilateral Investment Treaty. It would include China’s sensitive, but troubled, financial services sector.

That follows an American decision earlier this year to launch two so- called mega-regional free-trade talks, the Pacific Partnership Initiative, which involves over a dozen countries, but, specifically and significantly, excludes China, and the EU-US Transatlantic Trade and Investment Partnership (TTIP).

Klaus Deutsch, an economist at Deutsche Bank, has argued that with the Doha round faltering, as early as 2006, EU trade policymakers were forced onto the defensive. The EU had hoped, a decade ago, to use its clout as the world’s largest trade and investment power, to “assume leadership of the global trading system”, and so shape it on traditional, multilateral foundations, he argues. As Doha foundered these hopes were dashed.

Deutsch sees the EU/US TTIP as particularly significant. “Two of the three largest trade powers in the world [the third is China] are choosing to try to deepen their bilateral economic relations with the explicit aim of strengthening existing world trade rules, by creating new rules with a global scope, and, if possible, in a second step anchoring [their new rules] multilaterally in the World Trade Organisation,” he writes.

Put more bluntly, the US and the EU are trying, with as many of their allies and partners as possible, to beat China to the punch in establishing new trade rules and standards for the advancing “third wave” of globalisation.

The European Union Chamber of Commerce in China has just published a hard-hitting position paper about commercial relations between the EU and China.

A few minutes’ perusal are all that is needed to understand why European companies are so keen on an investment and market access deal with the Middle Kingdom.

Many European companies are frustrated by the Chinese government’s treatment of their operations in China – businesses in which they have invested more than €100 billion. Profits are falling and profit margins narrowing as discrimination against foreign investors remains entrenched.

The European Chamber’s report talks of the “vast contrast between market access for European companies in China and Chinese companies investing in Europe”, where Chinese corporate investment has risen sharply in the past few years to at least €15 billion.

The report highlights the pernicious conflicts of interest between the Chinese government’s role as a regulator and its role as the owner or major shareholder in many of the nation’s biggest companies. These “national champions” benefit from “a plethora of interventionist measures [which] often function in practice as protectionist measures”, the chamber complains.

State-owned enterprises “often yield high profits simply by relying on partisan treatment…their ability to suppress competition and their control over resources and monopoly positions in a range of non-public sectors”, the report observes.

It points out that regional or “local” champions also enjoy preferential treatment under local, industrial policies, which are often politically driven.

The state-controlled banking and “shadow” banking system is a particular problem, inefficient, badly managed and, along with local government financing vehicles, regarded by many as a catastrophe waiting to happen. China’s development policy has focused on channelling cheap funds to (often inefficient) government-dominated Chinese companies at the expense of Chinese consumers and foreign competitors.

It can be read as a plea to the reformist wing of a divided Chinese government to recognise that their national and global ambitions will be frustrated if they do not act.

The transatlantic partners must hope that, just as the Chinese government used its bid to join the World Trade Organization a decade ago to push through domestic economic reforms, the cadre of reformists amongst China’s leaders will use bilateral trade talks to undermine vested interests that are blocking vital changes.

Stewart Fleming is a freelance journalist based in London.