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THE EU

AND CHINA

ADDRESSING

THE SYSTEMIC

CHALLENGE

A comprehensive EU strategy

to rebalance the relationship

with China

WWW.BUSINESSEUROPE.EU

JANUARY 2020

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

WHO ARE WE ?

BusinessEurope is the leading advocate for

growth and competitiveness at the European

level, standing up for companies across the

continent and campaigning on the issues that

most influence their performance.

A recognised social partner, we speak for all-

sized enterprises in 35 European countries

whose national business federations are our

direct members.

FOR FURTHER INFORMATION

International Relations Department

Luisa Santos, Director

Maurice Fermont, Adviser

Tel : +32 (0)2 237 65 04

E-mail : [email protected]

With thanks to Frederik van Til for his contribution.

BUSINESSEUROPE

Av. de Cortenbergh 168 – 1000 Brussels

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

FOREWORD

The European business community has long been part of China’s success story. We have encouraged China’s

market-oriented reform path, invested in China and championed closer economic engagement with China

for years. The EU and China officially established diplomatic relations in 1975, and signed their first trade

agreement during the same year that China began its policy of ‘reform and opening-up’ (

) in 1978.

Business engagement followed swiftly since then. Today, the EU is China’s most important

trading partner,

while China is the EU’s second most important trading partner. Total bilateral trade flows in goods grew to

EUR 604.7 billion in 2018, while total trade in services amounted to almost EUR 80 billion in 2017. And there

is still plenty of untapped economic potential for both sides.

The Chinese and European economies have

benefitted

tremendously from China’s accession to the WTO in

2001. This showcases that rules-based multilateral trade is the best enabler for economic development. The

WTO was created as a body governing multilateral rules-based trade that would evolve in parallel to the needs

of the modern economy. The lack of WTO reform in recent years, however, coupled with emerging signs of a

slowdown or reversal in market-oriented reforms in China has led to level-playing field issues whose impact

has grown as China’s share of global economy has increased.

This is why the European business community now advocates for a

stronger and fairer economic relationship

between the EU and China. In this paper we outline the potential that closer economic engagement would

bring but we also acknowledge and explain the obstacles that undermine this potential. The consolidation of

China’s state-led economy presents

systemic challenges

that lead to market distortions within China, the EU

and on third markets. This undermines the level playing field between European and Chinese businesses. A

fairer economic relationship is therefore urgently needed and would best be achieved if China created a true

level playing field between domestic and foreign firms and addressed the systemic issues that lead to market

distortions.

Recent developments, however, have generated a

renewed sense of urgency

among the European business

community that these issues cannot remain unaddressed in anticipation of hopeful improvements. With

the objective of a stronger and fairer relationship in mind,

the EU should continue to engage China, while

simultaneously taking its own measures to address these challenges.

Our ultimate

goals

are for the EU to secure a level playing field between the EU and China, mitigate the impact

of China’s government-induced market distortions, reinforce the EU’s own competitiveness, and ensure fair

competition and cooperation in third markets.

Pierre Gattaz

President

Markus J. Beyrer

Director General

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

EXECUTIVE SUMMARY

...............................................................................................................................3

INTRODUCTION

.........................................................................................................................................18

1. CHINA: A SHIFT IN THE BALANCE OF OPPORTUNITIES AND CHALLENGES

..................................20

1.1. Reciprocal trade, investment and competition offer economic potential

.......................................

1.2. This economic potential is undermined by the systemic challenge of China’s state capitalism

...

1.3. ‘China Inc.’ leads to market distortions and an unlevel playing field

..............................................

1.4. Recent profound changes in China generate a new sense of urgency for redress

........................

1.5. China holds the cards for a better bilateral relationship

................................................................

2. HOW THE EUROPEAN UNION SHOULD ENGAGE CHINA

...................................................................36

2.1. The EU must reconsider the way in which it engages China

...........................................................

2.2. The EU should act simultaneously on all levels

...............................................................................

2.3. The EU should act unitedly

...............................................................................................................

2.4. The EU should act coherently

...........................................................................................................

2.5. The EU should act strategically

........................................................................................................

2.6. The EU should act confidently

..........................................................................................................

3. SECURE A LEVEL PLAYING FIELD BETWEEN CHINA AND THE EU

..................................................46

3.1. The World Trade Organisation (WTO)

...............................................................................................

3.2. Trade

..................................................................................................................................................

3.3. Investment

.........................................................................................................................................

3.4. Procurement

.....................................................................................................................................

3.5. Intellectual property rights

...............................................................................................................

3.6. Forced technology transfer

...............................................................................................................

3.7. Standardisation

.................................................................................................................................

3.8. E-commerce

......................................................................................................................................

3.9. Climate and energy

...........................................................................................................................

4. MITIGATE THE IMPACT OF CHINA’S GOVERNMENT-INDUCED MARKET DISTORTIONS

................96

4.1. State-owned enterprises (SOEs)

......................................................................................................

4.2. Subsidies

.........................................................................................................................................

106

4.3. Overcapacity

....................................................................................................................................

110

4.4. Competition and state aid

...............................................................................................................

118

5. REINFORCE THE EU’S OWN COMPETITIVENESS

............................................................................

122

5.1. A competitive Single Market and ambitious industrial strategy

...................................................

123

5.2. Research and innovation

.................................................................................................................

127

5.3. Digital economy and cybersecurity

................................................................................................

134

6. ENSURE FAIR COMPETITION AND COOPERATION ON THIRD MARKETS

.....................................

142

6.1. EU Connectivity Strategy

.................................................................................................................

143

6.2. The Belt and Road Initiative

............................................................................................................

149

6.3. Competition on third markets

.........................................................................................................

153

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

EXECUTIVE

SUMMARY

BusinessEurope’s paper

The EU and China: Addressing the Systemic Challenge

sets out a strategy on how the

EU and China can build a stronger and fairer economic relationship. The paper first demonstrates that there

is a shift in the balance of opportunities and challenges in our economic relationship with China (chapter 1).

This means that the EU should reconsider how it engages China (chapter 2). As a result, we advance four

key objectives that the EU should pursue in order to seize the opportunities within the economic relationship

and to address the systemic challenges that China’s state-led economic system poses to the EU. Each key

objective is also elaborated upon in a dedicated chapter (chapters 3-6). The four key objectives are as follows:

Secure a level playing field between China and the EU

Mitigate the impact of China’s government-induced market distortions

Reinforce the EU’s own competitiveness

Ensure fair competition and cooperation on third markets

This executive summary captures the main messages and recommendations of the paper. The paper’s

chapters and subchapters include a detailed analysis of the opportunities and challenges and recommends

130 actions on how these four objectives can be achieved.

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

CHINA: A SHIFT IN THE BALANCE OF

OPPORTUNITIES AND CHALLENGES

EUROPEAN BUSINESS WANTS A STRONGER AND FAIRER ECONOMIC PARTNERSHIP WITH CHINA.

A stronger relationship with China offers enormous opportunities to European and Chinese businesses.

China is already the EU’s second biggest trading partner and the EU is China’s biggest trading partner. Fair

competition between European and Chinese firms would furthermore lead to greater innovation and new

opportunities.

NEVERTHELESS, THERE EXIST SEVERE CHALLENGES THAT OBSTRUCT A STRONGER ECONOMIC

RELATIONSHIP.

These challenges harm the economic prospects of European businesses and employment

in the EU. This is due to the systemic challenges posed by China’s state capitalism.

WHAT ARE THEY?

China’s state-led system includes direct government control over major parts of its

economy including key industries, financing institutions, state-owned enterprises, and softer influence

through party cells and the corporate social credit system (CSCS) that will apply to all enterprises. This

unique and extensive system of state control and coordination through top-down economic planning

increasingly blurs the boundaries between the public and private sector and has given rise to “China Inc.”

– a structure in which the state dominates all aspects of the economy.

WHY IS THIS A PROBLEM?

This state-led system produces a number of discriminatory outcomes and

market distortions, including amongst others a disparity in market access between Chinese and foreign

firms, financing advantages for Chinese firms in strategic sectors, cheap land and energy and state

guidance and preferential support for selected Chinese industries. The Chinese government often uses

measures that promote ‘indigenous innovation’ to achieve the declared goal of global industrial and

technological leadership in key sectors by 2049.

WHY IS IT IMPORTANT NOW?

Profound recent developments have led to a growing awareness among the

European business community that these systemic problems are worsening, that we are moving away from

their resolution, and that their impact on European business is increasing. This has led to

a renewed sense

of urgency

that these problems need to be addressed as a matter of the highest priority.

First, instead of reforming its state-led economy into a market economy, signs emerging about China’s

economic trajectory point to a further consolidation of its state-led economy. The European business

community is increasingly concerned that the question is not when China will converge with the global

market economy, but if it will converge. A lack of convergence raises serious questions about whether

the current rules-based multilateral system can secure a level playing field.

Second, China is re-introducing political ideology into its economy instead of sustaining economic

reform and liberalisation. The expansion of (the role of) party cells undermines the independence of

private companies. The introduction of the corporate social credit system (CSCS) could also in the future

undermine the independence of private companies and their commercial decisions.

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

Third, China is for the first time exporting its domestic policy mix because it has the capital and

companies to do so, and both are motivated to go overseas. Besides affecting European businesses in

China, these distortions increasingly spill over into the European market and third markets and affect

fair trade, investment, procurement, competition, and thereby undermine the global liberal economic

system.

Fourth, China’s immense economic growth in recent years means that the impact of these distortions

on European businesses is far larger today than when it joined the WTO in 2001. China’s share of global

GDP grew rapidly from 4% in 2001 to 15.2% in 2017.

Similarly, its share of global merchandise trade

grew from 4.2% in 2001 to 12.7% in 2018.

Fifth, the United States are attempting to force through a resolution of the systemic problems posed by

China’s state-led economy through a trade conflict with China that is both economic and geopolitical in

nature. This also has an impact on the European business community.

WHY IS IT DIFFICULT TO ADDRESS?

Alongside European political stakeholders, the EU business

community has for years encouraged China’s market-based reform path and championed closer economic

engagement with China on this basis. The EU has for the same reasons been supportive of China’s

integration into the global economy. China’s transformation into a market economy would by and large

address the systemic drivers of its market distortions and result in a greater level playing field. Conversely,

China’s current consolidation of its state-led economy will likely worsen the systemic problems and their

impact on European business.

OUR BILATERAL PROSPECTS DEPEND LARGELY ON CHINA.

While our bilateral relationship depends

on the engagement of both the EU and China, the prospects for a stronger and fairer relationship which

the European business community sees as an ultimate end goal depend largely on whether China can

successfully address the growing challenges that European companies face when doing business on

the Chinese market or when competing with Chinese companies on the European market and on third

markets.

The Global Economy,

“China:

Percent of world GDP”,

2019.

Own calculations based on

UNCTAD data.

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

HOW THE EU SHOULD

ENGAGE CHINA

The EU needs to reconsider how it engages China in order to achieve the four key objectives we have outlined.

In the past, the EU’s means of engagement have not produced the desired results. Recent changes within

China also prompt the EU to rethink its toolkit. Due to the difficulties outlined above, the EU must reconsider

its

modus operandi

towards China and put more emphasis on reciprocity and conditionality.

THE EU MUST RECONSIDER ITS

MODUS OPERANDI

TOWARDS CHINA.

With strong signs of China moving

away from market reforms and towards a consolidation of its state-led economy, the European Union

cannot wait and see whether China will address these issues and needs to act to defend its interests.

WHY SHOULD THE EU RECONSIDER ITS

MODUS OPERANDI?

In the past, the means through which the EU

aimed to achieve its goals vis-à-vis China have often not yielded the desired results. For example, China

is still the EU’s most restrictive major trading partner, there are still numerous investment barriers and

joint venture requirements and China’s procurement market is still closed. Consequently, the EU should

reconsider the means through which it aims to achieve its

end goals

vis-à-vis China.

WHICH LEVELS OF ENGAGEMENT?

The EU should pursue its objectives simultaneously (not sequentially)

on the following

three levels,

which will lead to a situation of policy complementarity and enhance the EU’s

leverage at home and abroad:

1. THE MULTILATERAL AND PLURILATERAL LEVEL:

Reforming the WTO and engaging China at WTO

level would ideally be the best way to achieve the EU’s objectives. The current multilateral rulebook

is designed for market economies and does not adequately address the implications of a state-led

economy. Unfortunately, attempts to reform the WTO have thus far produced little result, partly due

to unanimous decision-making. The EU should also cooperate closely with likeminded partners in

plurilateral initiatives to strengthen and reform multilateral economic governance and to restore a

global level playing field.

2. THE BILATERAL LEVEL:

Engaging China bilaterally is an essential cornerstone in building a stronger

and fairer economic relationship between the EU and China. The EU and China should focus on

resolving trade and investment barriers through bilateral agreements with the consultation of key

stakeholders amongst which the business community. The EU should also encourage China to pursue

market-based reforms.

3. THE UNILATERAL LEVEL:

If China does not intend to become a liberal market economy, long-standing

as well as new economic barriers and market distortions will remain unaddressed through the

multilateral and bilateral approaches. As there is frequently a lack of progress on the multilateral and

bilateral level,

the EU should simultaneously strengthen its own capabilities

to seize the opportunities

and to safeguard our market economy from the negative spill-over effects of government-induced

market distortions from China.

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

HOW TO ENGAGE?

The EU should engage China in a much more

reciprocal

and conditional manner, based

on our

values, principles,

and

interests.

The problems highlighted in this paper are much more structural

than issue based and addressing them requires a

comprehensive

and

whole-of-government approach

opposed to an ‘issue-based’ approach in which problems can be addressed separately. The EU needs to

equip itself with the right toolbox to engage China and needs to

update its

modus operandi

in at least five

different ways.

The EU should:

1. ACT SIMULTANEOUSLY:

No single approach will allow the EU to achieve the objectives required to

address the systemic challenges presented by China’s state capitalism. Therefore, the EU needs to

act simultaneously on multilateral, plurilateral, bilateral and unilateral levels as opposed to acting

sequentially. Such a strategy will lead to a situation of policy complementarity and enhance the EU’s

leverage.

2. ACT UNITEDLY:

European companies and Member States often face a collective action problem.

While we would benefit from standing together to achieve maximum leverage, China frequently uses

asymmetrical openness and economic diplomacy as tools to undermine our collective action. The

EU Member States should find ways to

address China with ‘one voice’ and act united

for example by

moving towards qualified majority voting (QMV) on foreign policy matters in the future. The EU and its

Member States should also set up a

mechanism to invest in knowledge sharing and capacity building

on China to achieve information parity and informed decision-making across the EU.

3. ACT COHERENTLY:

The EU can only achieve its objectives if its policy goals are tailored towards

these goals and act in support of and not contrary to them. The EU should elevate its China policy

to the highest political priority and adopt a

whole-of-government approach

in which policies are

benchmarked on the extent to which they contribute to or undermine our objectives. The EU should

also systematically review the implications of the rise of China on the EU through regular and

consistent studies.

4. ACT STRATEGICALLY:

The EU’s strategic autonomy and economic sovereignty are being challenged

as both China and the USA increasingly mix economics with geopolitics. The EU’s current instruments

are not designed for a world in which economic, security, and strategic considerations are increasingly

intertwined. To stimulate and facilitate a more strategic approach towards China, European business

calls on the EU and its Member States to set up an

annual strategic dialogue on China

between the

EU, its Member States, the European business community, academia and other key stakeholders.

Inspiration could be drawn from the European Commission’s Task Force 50 on Brexit.

5. ACT CONFIDENTLY:

The EU should not shy away from leveraging its economic strength to achieve

its objectives. The EU should defend its values, its successful liberal economic system and European

interests proactively, enhance the EU’s economic diplomacy, and deflect China’s sharp power. While

the EU has its weaknesses, it wields enormous soft-power and discursive influence. It should better

employ these in areas where other means fall short, even if it amounts to making public statements.

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

SECURE A LEVEL PLAYING FIELD

BETWEEN CHINA AND THE EU

In order to secure a level playing field between China and the EU, reforming the WTO remains a paramount

goal. Unfortunately, given the difficulty in achieving reform in recent years, the EU should take complementary

measures in the sphere of bilateral trade and investment, in the area of procurement, IPR protection and

forced technology transfer, standardisation, e-commerce and energy and climate.

World Trade Organisation (WTO)

While China’s accession to the WTO helped to foster the economic development of China and world trade,

China has not changed into an open market economy and there is a list of commitments from China’s WTO

accession protocol that have not been sufficiently addressed. The gaps and lack of rules in some areas of the

WTO trading system mean that the WTO requires urgent modernisation.

WTO REFORM:

The EU should take the lead together with like-minded partners to create comprehensive

rules that reign in

industrial subsidies

and discipline the behaviour of

state-owned enterprises.

In this

regard, the EU and China should also further intensify discussions in the EU-China joint working group on

WTO reform. Other reforms include amongst others introducing flexibilities into the system - both in terms

of the negotiating method as well as in the decision-making process - and improving trade policy monitoring

and notification procedures for example by introducing penalties for members that fail regarding notification

requirements. Lastly, China should take the responsibility it has according to its real level of economic

development which means that China can no longer simply be regarded as a developing country.

CHINA SHOULD JOIN EXISTING WTO AGREEMENTS AND THE EU AND CHINA SHOULD COOPERATE IN

ONGOING NEGOTIATIONS.

China should first deliver on its longstanding promise to join the Agreement

on Government Procurement (GPA). The EU and China should furthermore cooperate to successfully

conclude an ambitious plurilateral agreement on e-commerce. Moreover, the EU should engage other

WTO members to reprioritise the negotiations on the Trade in Services Agreement (TiSA), and take efforts

to strengthen the aspect of sustainability in the WTO context.

Trade and investment

The potential of a stronger bilateral trade and investment relationship is undermined by numerous

trade and investment barriers. The market access barriers that European companies face include both

pre-establishment (border measures) restrictions and post-establishment (behind the border) restrictions. In

2018, China surpassed Russia as the EU’s most trade-restrictive partner as it now holds the highest stock of

recorded trade and investment barriers.

A RECIPROCAL TRADE AND INVESTMENT RELATIONSHIP:

China should make further market access

improvements that resemble the enormous advantages China has gained on the European market. These

should include trade in goods and services as well as digital trade. At the same time, the EU must take

further action to mitigate the negative impact of Chinese state support to Chinese companies by eventually

further strengthening the EU’s trade defence instruments (TDIs) amongst others.

European Commission,

“Report

from the Commission to the Parliament and the Council on Trade and Investment Barriers”,

2019.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

COMPREHENSIVE AGREEMENT ON INVESTMENT (CAI):

Concluding the negotiations on the CAI before

the end of 2020 is a key priority for European business. However, substance should prevail over timing. It

is essential that the scope of the agreement is as ambitious as possible. The agreement should remove

substantially all investment barriers and effectively protect bilateral investment.

Procurement

While Chinese companies are often allowed to bid on public procurement tenders in the EU, European

businesses are often prohibited to bid on procurement opportunities in China. Several

de jure

and

de facto

barriers hinder European businesses in their access to the Chinese procurement market.

WTO AGREEMENT ON GOVERNMENT PROCUREMENT (GPA):

To achieve balanced market access on

public procurement markets, China should join the WTO Agreement on Government Procurement (GPA) as

soon as possible on the basis of an acceptable and ambitious accession offer.

AN INTERNATIONAL PROCUREMENT INSTRUMENT (IPI) WITH FURTHER MODIFICATIONS:

The

EU should continue to work on the creation of an IPI. The 2016 International Procurement Instrument

(IPI) proposal aims to pursue the right objective of encouraging third countries such as China to uphold

the principle of balanced market access enshrined in the GPA. However, the proposal requires further

modifications, amongst others, to avoid complex price adjustment mechanisms and negative effects on EU

companies with international supply chains.

FULL IMPLEMENTATION OF EU PROCUREMENT RULES:

Foreign companies that participate in the

EU public procurement market must respect our rules. The European Commission should therefore

ensure that contracting authorities and Member States apply the EU 2014 directives more consistently.

Additionally, the deletion of Article 85 and 86 of Directive 2014/25/EU should be avoided.

Intellectual property rights and forced technology transfer

The protection and enforcement of intellectual property rights (IPR) and elimination of forced technology

transfers have become a growing priority for European businesses. While some improvements are taking

place in selected areas of China’s IP landscape, the overall situation remains worrying. The problem is

two-fold: on the one hand the Chinese IP framework is still insufficiently developed, and on the other hand

existing measures are insufficiently enforced. European businesses therefore call for the creation of a level

playing field through adequate IPR protection and eliminating all

de jure

and

de facto

forced technology

transfer practices.

IMPROVED ENFORCEMENT WITHIN CHINA:

The EU should strengthen exchanges with Chinese patent

and IP offices with a view to securing greater commitments to enforce the stringent IP standards set out at

WTO level. China still has important steps to take in improving and enforcing its IP system.

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

IMPROVED AWARENESS AND ENFORCEMENT WITHIN THE EU:

The EU should also raise awareness

among its business community on the common IPR problems within China and address the growing

problem of counterfeited and pirated goods entering the EU market. National authorities should have

strong and intelligent means to secure effective enforcement of EU IPR law.

TACKLE

DE JURE

AND

DE FACTO

FORCED TECHNOLOGY PRACTICES IN CHINA:

The EU’s WTO case on

forced technology transfer is an important step in this regard. Litigation matters. But the EU should employ

a comprehensive strategy tackling all ways in which forced technology transfers take place. The EU should

consider all policy options that could contribute to this objective, including the implementation of the EU

Cyber-Diplomacy Toolbox to combat ICT-enabled IP theft.

THE ONUS IS ON CHINA TO TAKE BOLD STEPS:

China should be pressed to eliminate forced technology

transfer practices through a mix of legislative, administrative and judicial changes to create a real level

playing field. This includes removing discriminatory practices for foreign companies and removing

requirements to disclose IP or sensitive business information.

Standardisation

There are three concerns that may arise with respect to standardisation in China. A first concern is that

mandatory Chinese (national, sectoral or local) standards may be used to establish

de facto

barriers to trade.

Second, for most standards it is the government who determines which stakeholders, if any, may provide

input to the standard. A third concern relates to China’s ambition for global leadership in standardisation.

The unilateral imposition of Chinese national standards in third countries would result in an unlevel playing

field. Combined, these concerns mean that European companies do not enjoy the same access to the Chinese

market as Chines companies to the European market, with possible similar consequences on third markets.

CHINA SHOULD ADHERE TO INTERNATIONAL STANDARDS.

Although China participates proactively in

the standard-setting bodies that formulate standards, China often does not implement them. Moreover,

Chinese standards should not be used as a trade barrier by establishing a

de facto

mandatory requirement

for EU companies when selling their products and services in China.

EUROPEAN COMPANIES SHOULD HAVE FULL RECIPROCAL ACCESS TO PARTICIPATE IN CHINESE

STANDARDISATION

on the same footing as Chinese companies can participate in standardisation in the

EU (CEN/CENELEC, ETSI or at national level).

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

E-commerce

E-commerce has the potential to offer more choice to European consumers as well as to offer new tools

for European manufacturers to reach consumers. In 2018, the majority of e-commerce-related parcels

circulating in the EU already originated from China.

To date, an unacceptable number of Chinese products

and services that enter the European market do not fully comply with EU law and safety regulation - most

notably but not only in the area of e-commerce.

THE EU MUST ENSURE THAT ONLY EU-COMPLIANT PRODUCTS ENTER THE UNION MARKET:

The EU

market surveillance capabilities should be reinforced, and the EU Safety Gate must be further tailored to

address these challenges – in particular but not only in the area of e-commerce. EU Member States and

the EU should ensure that national authorities are provided with strong and intelligent means to secure

effective enforcement of EU law at the European border.

THE EU AND CHINA SHOULD COOPERATE TO CONCLUDE NEGOTIATIONS ON A PLURILATERAL

AGREEMENT ON E-COMMERCE:

A future plurilateral agreement on e-commerce should establish binding

rules for free, secure and reliable cross-border e-commerce.

Energy and climate

To achieve our ambition of climate neutrality by 2050, we urgently need international convergence of climate

ambitions. For this reason, it is essential that China, being the leading global GHG emitter (28% of the global

emissions

), takes its responsibility together with the EU and other signatories of the Paris Agreement. While

the EU has adopted relatively far-reaching climate policies, there exists a lack of equivalent climate policy

measures for industries in China and on third markets – in particular in Africa. The cost burden of climate and

environmental policy to China’s manufacturing sector is far lower than to the EU’s.

STRONG BILATERAL AND MULTILATERAL COOPERATION BETWEEN THE EU AND CHINA IN

ACCORDANCE WITH THE PARIS AGREEMENT:

In this regard, the EU and China should for example

continue their cooperation in the EU-China Partnership on Climate Change.

SAFEGUARD THE COMPETITIVENESS OF EUROPEAN INDUSTRY FROM ‘FREE RIDERS’ AND CARBON

AND INVESTMENT LEAKAGE:

The EU and EU Member States must fully apply all existing measures within

the EU ETS to minimise the risk of carbon and investment leakage. A toolbox of targeted instruments is

needed to shield the EU from distortions caused by free riders.

THE EU MUST MINIMISE ITS DEPENDENCY ON CHINESE RAW MATERIALS, IN PARTICULAR RARE

EARTHS AND PRECIOUS METALS:

The EU must consider additional measures that proactively mitigate

the distortions in competitiveness inflicted by ‘free riders’ and international regulatory asymmetries.

Wik Consult,

“Assessment

of EU Parcel Delivery Markets”,

2018.

Emissions include CO

emissions from fuel combustion only. Data available on the

webpage

of the International Energy Agency (2016).

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

MITIGATE THE IMPACT OF CHINA’S GOVERNMENT-

INDUCED MARKET DISTORTIONS

It is of key importance that the EU takes measures to mitigate the impact of government-induced market

distortions on European businesses. The EU should aim to discipline the role of state-owned enterprises,

take proactive steps to address the issue of industrial subsidies, engage internationally to try and eliminate

overcapacity and take steps in the area of competition policy and state aid.

State-owned enterprises (SOEs)

Although Beijing announced that the market should play a “decisive” role in allocating resources

. President

Xi Jinping’s statement that SOEs should become “stronger, better and bigger” stands in sharp contrast to

the rhetoric of market-based reform. The conduct of SOEs is growing more problematic because there is

a reversal of market-based reforms, an increase of influence of the party on the corporate governance of

SOEs,a hike in SOE mega-mergers and a continuation of preferential treatment of SOEs.

THE EU SHOULD DEVELOP AN ‘SOE PRINCIPLE’ TO MITIGATE THE IMPACT OF GOVERNMENT-

INDUCED MARKET DISTORTIONS:

An SOE principle entails that EU policies should be designed in such a

way that it addresses the market-distortive effects of foreign SOEs. The SOE principle could, for example,

be applied in the areas of subsidies, investment and procurement. The EU should also investigate whether

this principle could be applied to further policy areas. The Comprehensive Agreement on Investment (CAI)

and a potential international procurement instrument should include special provisions on SOEs.

ENSURE ‘COMPETITIVE NEUTRALITY’:

The EU should advocate for the creation of multilateral rules on

the competitive neutrality of SOEs. The EU should also encourage China to create a competitive neutrality

instrument. Additionally, the EU should study whether and how a European ‘competitive neutrality

instrument’ could ensure the competitive neutrality of foreign SOEs on the European market.

Subsidies

China provides various forms of government support to its industries, particularly in the context of industrial

policies such as Made in China 2025. Subsidies can take on several forms, including direct subsidies,

government grants, tax benefits and export credits. Direct and indirect subsidies to SOEs have for example

amounted to 1.3-1.6% of annual GDP in recent years. The figure of total subsidies is even higher as, in

addition to SOEs, private sector firms received about a third of total direct subsidies in 2018. These problems

increasingly spill over into the global trading system, including the EU market.

THE EU SHOULD PURSUE MULTILATERAL, PLURILATERAL AND BILATERAL EFFORTS TO DEVELOP

NEW DISCIPLINES ON INDUSTRIAL SUBSIDIES AND SOEs.

In this regard, the EU, Japan and the USA

should deliver concrete outcomes in their trilateral discussions and consider launching negotiations on a

plurilateral agreement on tackling government-induced market distortions. The EU should also intensify

discussions on industrial subsidies and SOEs in the EU-China joint working group on WTO reform.

THE EU SHOULD REVERSE THE BURDEN OF PROOF FOR FOREIGN STATE-OWNED ENTERPRISES WITHIN

ITS INTERNAL MARKET AND INSTEAD LET THEM PROVE THAT THEY DO NOT RECEIVE DISTORTIVE

SUBSIDIES ON THEIR HOME MARKET.

This would be WTO-compliant, and the additional transparency would

allow the EU to effectively use its instruments to address the impact of subsidies within its single market.

Central Committee of the Communist Party of China,

“Decision

of the Central Committee of the Communist Party of China: The Significance of and Guiding Thoughts on

Deepening the Reform Comprehensively”,

2014.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

Overcapacity

While overcapacity is a global problem, China’s industrial policies within the framework of state-led economic

planning have been the single largest driver of this problem. A range of policy instruments, including subsidies,

contribute to and exacerbate the problem. Although China has acknowledged the problems of overcapacity and

initiated plans to tackle them, the results to date have not yet led to a meaningful reduction in overcapacity.

CHINA SHOULD CONTINUE TO TAKE BOLD STEPS TO ELIMINATE OVERCAPACITY.

Reducing

government intervention and enhancing reciprocal market access for European and other foreign business

would greatly enhance China’s ability to overcome problems of overcapacity.

THE EU AND LIKE-MINDED PARTNERS SHOULD PRESS CHINA TO TAKE FURTHER STEPS TO SET AND

PUBLISH GOALS TO REDUCE EXCESS CAPACITY THROUGH LEGAL AND MARKET-BASED METHODS

AND TO ELIMINATE DUMPING

its overcapacity on foreign markets. The G20 and OECD are excellent fora of

engagement and could be an opportunity to explore plurilateral negotiations on eliminating government-

induced market distortions.

THE EU SHOULD ALSO MAKE GREATER USE OF ITS TDI TOOLBOX.

The details are covered in the chapter

on trade. This includes strengthening TDIs, enhancing transparency tools, ensuring sufficient in-house

staff and resources to conduct TDI investigations, as well as a regular fitness check to ensure our TDIs are

up to date in addressing the latest types of trade distortions.

Competition policy and state aid

The EU must find

solutions to mitigate external disturbances

and ensure fair competition in the global

context. The EU must use all existing platforms to mitigate the disturbances in competition caused by policies

and practices in third countries, including China.

THE EUROPEAN COMMISSION SHOULD IDENTIFY WHETHER THERE ARE SITUATIONS WHERE IT

SHOULD PUT MORE WEIGHT ON THE GLOBAL MARKET ENVIRONMENT WHEN ASSESSING MERGERS.

At the same time, the Commission should bear in mind overall market developments as well as competition

within the internal market.

THE EU NEEDS TO BETTER ASSESS THE MARKET POWER OF (LEGALLY INDEPENDENT) COMPANIES

THAT ARE ASSOCIATED WITH EACH OTHER AND/OR OPERATE IN A COORDINATED MANNER (SINGLE

ECONOMIC ENTITY).

A major risk is posed by Chinese acquisitions conducted by formally and legally

independent investors who, however, act in a coordinated manner within the framework of the Chinese

government’s central economic planning. The EU should analyse the risks to competition from increasing

Chinese market concentrations and from coordinated action of formally independent undertakings (single

economic entity).

THE EU SHOULD STRENGTHEN EU STATE AID RULES TO ADDRESS MARKET-DISTORTING SUBSIDIES

OUTSIDE THE EU:

The EU needs to advocate for stronger state aid rules at WTO level and needs to integrate

ambitious state aid rules in trade and investment agreements. The EU should also analyse whether it is

appropriate to revise EU state aid rules to address market-distorting subsidies outside the EU.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

REINFORCE THE EU’S

OWN COMPETITIVENESS

With technologies being increasingly able to influence economic, societal and political outcomes, we are

witnessing a clear acceleration of the global innovation race. Despite its many assets, Europe falls behind in

this race. The EU’s share of the world gross expenditure on R&D has decreased from 25.8% in 2000 to 20% in

2018. Over the same period, China’s share has increased from 5% to 21% .

The EU must deepen the Single

Market, develop an ambitious industrial strategy, invest more in R&D and stimulate digitalisation to maintain

its competitive edge.

A competitive Single Market and ambitious industrial strategy

Businesses continue to experience regulatory and administrative hurdles when doing business in the EU and

in the EU Member States. At the same time, China is catching up with the EU in terms of fostering a conducive

regulatory business environment. Although the EU ranks higher than China in terms of the overall ease of

doing business, on some indicators it is nowadays easier to do business in China than in the EU. In 2018

for example, it was easier (for local companies) to start a business in China than in the EU.

To maintain its

competitiveness the EU must:

DEEPEN THE SINGLE MARKET:

Regulatory asymmetries make it challenging for companies, in particular

start-ups, to develop economies of scale. National regulations must be harmonised as much as possible,

while keeping in mind proportionality and necessity principles. This is essential to help provide the

domestic base from which new companies can develop economies of scale and compete globally.

DEVELOP A STRATEGIC INDUSTRIAL POLICY:

Instead of developing a dirigiste industrial policy like

China, the EU must develop a strategy that aims to improve the framework conditions that incentivise

companies of all sizes to invest, innovate and grow.

REGULATION AT EU AND NATIONAL LEVEL SHOULD FOLLOW BETTER REGULATION PRINCIPLES

TO MINIMISE REGULATORY AND ADMINISTRATIVE BURDENS.

This will contribute to maintaining our

regulatory competitiveness vis-à-vis China, who is steadily catching up.

Research and innovation

China is becoming a powerhouse in some key areas of research, development and innovation (RDI) and

has surpassed the EU in terms of government expenditure on R&D. In 2017, the EU RDI expenditure was

equivalent to 2.07% of GDP, while China spent 2.13% on RDI. This figure is even poorer when compared to

other third countries such as South Korea (4.55%), Japan (3.20%) or the USA (2.79%).

SCALE UP R&D BUDGETS:

The EU must more ambitiously support private-sector RDI investment in order

to reach the EU 3% target and increase the budget of Horizon Europe to at least EUR120 billion.

CREATE THE SKILLS AND JOBS OF THE FUTURE:

Qualified specialists are needed to maintain and

improve Europe’s competitiveness and its ability to innovate. Currently, there is a shortage of skilled

workers, inhibiting the economic growth of the EU in the world economy.

European Commission,

“Science,

Research and Innovation Performance of the EU”,

2018.

World Bank,

“Doing

Business 2019”,

2019.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

CREATE A ‘FIT-FOR-INNOVATION’ REGULATORY ENVIRONMENT TO OVERCOME THE ‘VALLEY OF

DEATH’:

Regulatory efficiency and an industry-friendly Horizon Europe will contribute to overcome the

‘valley-of-death’ between research and the commercialisation of research.

ENHANCE INTRA-EU COLLABORATION:

Because of the rising complexity and interdisciplinary nature

of technologies, companies need to collaborate more. The EU must stimulate European partnerships and

make them more attractive for companies.

MAINTAIN OPENNESS WHILE REQUIRING RECIPROCAL ACCESS TO FOREIGN RDI PROJECTS AND

WHILE PROTECTING SENSITIVE AND CRITICAL RESEARCH DATA:

To achieve the greatest potential

societal and economic benefits, research is an area that needs international collaboration to thrive. At

the same time, the EU should demand fair access to Chinese RDI projects and more caution is needed to

protect sensitive and critical information.

Digital economy and cybersecurity

Key principles for a healthy digital economy include openness and avoiding protectionism while upholding

a global level playing field, protection of intellectual property, privacy and personal data as well as high

cybersecurity measures. China’s digital strategy presents opportunities but also enormous challenges

for European business as China adopted digital protectionist measures and as it is the most restrictive

major economy in the area of digital trade.

The EU therefore needs to take bold steps to address digital

protectionism, to unleash our own digital competitiveness and to enhance our cyber-defence and security

capabilities to safeguard our innovations and technologies.

ENHANCE AND INVEST IN THE EU DIGITAL COMPETITIVENESS:

To keep up with the large and dynamic

digital markets in China and the USA, EU institutions and Member States need to further develop the

European digital market and adapt the legal and regulatory frameworks in the Single Market. The EU and

the Member States should invest in key enabling technologies (KETs).

THE EU EFFORTS SHOULD AIM AT ADDRESSING CHINA’S DIGITAL PROTECTIONISM, RESTORING A

LEVEL PLAYING FIELD INTERNATIONALLY, AND ADDRESSING THE CYBER-RELATED RISKS AND

ABUSES

companies experience within the EU as a result of government-sponsored cyberattacks. Any EU

approach, however, should combine pro-competitive policies with tools to address unfair behaviour.

CHINA SHOULD BE HELD TO INTERNATIONAL NORMS AND AGREEMENTS:

While all countries have

legitimate concerns about privacy and national security, digital policy measures should be narrowly

tailored, reflect international norms, be non-discriminatory and consistent with WTO agreements to which

China is a party.

China is the most trade restrictive country on the

‘Digital

Trade Restrictiveness Index‘

that is composed by the European Centre for International Political Economy (ECIPE).

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

ENSURE FAIR COMPETITION AND

COOPERATION ON THIRD MARKETS

Besides achieving a level playing field in the bilateral economic relationship, extending this level playing field

to third markets is of paramount importance for the long-term opportunities of European businesses. The

EU Connectivity Strategy is an important step in this regard, and emphasis should be placed on its proper

implementation. At the same time, the EU should also try to engage China to ensure its Belt and Road

Initiative meets international standards. Securing fair competition on third markets by upholding multilateral

economic governance practices is vital.

EU connectivity

Ambitiously improving the connectivity between the EU and Asia should be a key priority of the EU. Connecting

transport, digital, energy and human networks will facilitate bilateral trade for example by cutting transportation

costs. This will benefit businesses and consumers in both the EU and China.

THE EU BUDGET FOR CONNECTIVITY MUST BE INCREASED AMBITIOUSLY UNDER THE 2021-2027

MULTIANNUAL FINANCIAL FRAMEWORK (MFF):

In order for the EU to remain competitive globally, the

EU must increase the budget available for connectivity programmes such as TEN-T, InvestEU and the EU

Strategy on Connecting Europe and Asia.

THE EU AND CHINA SHOULD CONTINUE TO EXPLORE POSSIBLE SYNERGIES BETWEEN THE EU

CONNECTIVITY STRATEGY AND THE BELT AND ROAD INITIATIVE (BRI):

The EU should for example

further analyse the BRI in its TEN-T Corridor Studies and collaborate with China to conduct studies to

determine priority corridors to prevent possible bottlenecks and transport constraints.

THE EU SHOULD BETTER PROMOTE THE EU CONNECTIVITY STRATEGY:

The EU’s substantial financial

contributions in Asia should be better promoted and the EU should consider rebranding its Connectivity

Strategy with a more attractive name such as the

‘Marco Polo Strategy’

to complement the existing name.

The EU should share expertise and opportunities on connectivity related issues with Member States, and

vice versa, so that they can take it into account in their foreign economic diplomacy at national and EU level.

ENSURE RECIPROCAL ACCESS TO THE BRI:

This means that Chinese and other foreign companies are

welcome to bid on tenders related to the EU-Asia Connectivity Strategy, but only as long as European

construction companies have equal access to Chinese-funded infrastructure projects such as the BRI.

INTENSIFY CONSULTATION AND DIALOGUE WITH BUSINESS AND OTHER STAKEHOLDERS THROUGH

THE CREATION OF A BUSINESS ADVISORY COUNCIL:

A structural stakeholder platform should be

created that is easily an openly accessible to discuss the implementation of the strategy and to receive

valuable input from stakeholders.

The Belt and Road Initiative

The BRI offers various opportunities for European companies. Besides opportunities for the construction and

transport sectors, other sectors such as the banking, consulting and insurance services sectors may also

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

benefit from BRI. However, these opportunities have by and large not been realised to date because European

businesses struggle to become involved. China’s rhetoric of a more open, clean and green BRI now needs

concrete action.

EUROPE SHOULD ENGAGE CHINA AT EUROPEAN LEVEL AND SPEAK WITH ‘ONE VOICE’:

Member

States should call on China to increase reciprocity, especially in the infrastructure sector, to improve

transparency, to prioritise high labour and environmental standards and to ensure debt sustainability.

PROMISES FOR A MORE OPEN, TRANSPARENT, GREEN AND RULES-BASED BRI NOW NEED TO

DELIVER CONCRETE RESULTS:

In order to thrive, companies require fair competition and predictable

rules surrounding tenders and procurement.

CHINA SHOULD CONSISTENTLY BE URGED TO APPLY INTERNATIONAL STANDARDS IN RELATION TO BRI.

Fair competition on third markets

European companies welcome international competition as it fosters development and innovation. All

European companies compete internationally within the multilateral governance frameworks established

through the WTO, OECD, and other institutions. However, China has engaged in

selective multilateralism.

This means for example that China often deviates from multilateral financing practices and flouts the OECD

guidelines, which contributes to the tilting of the international playing field.

THE EU SHOULD WORK TOGETHER WITH PARTNERS TO AIM TO INTEGRATE CHINA FULLY WITHIN

THE EXISTING MULTILATERAL FRAMEWORKS:

This includes for example the OECD arrangements on

export credits (in particular the International Working Group on Export Credits), the Paris Club and several

WTO agreements.

THE EU AND EU MEMBER STATES SHOULD ENCOURAGE CHINA TO CONTRIBUTE TO, IMPLEMENT

AND ADHERE TO:

All decisions, recommendations and guidelines of the

OECD Development Assistance Committee (DAC).

All obligations determined by the

OECD Arrangement on Officially Supported Export Credits.

THERE IS AN URGENT NEED FOR THE EUROPEAN UNION TO DRAW LEVEL WITH FOREIGN

DEVELOPMENT INSTITUTIONS.

The EU needs to come par with for example Asian and US development

finance institutions (DFIs) in terms of both volume and management capacity for infrastructure finance on

third markets, and specifically in Africa.

EU DELEGATIONS ACROSS THE WORLD NEED TO PLAY AN INCREASED ROLE IN CONDUCTING

EFFECTIVE ECONOMIC DIPLOMACY.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

INTRODUCTION

The European business community wants a

stronger and fairer economic relationship

between the European

Union (EU) and China that would make it possible to preserve and increase the current level of partnership

between our two economies. We believe that reciprocal trade, investment and competition will unleash

substantial economic potential.

This potential remains untapped due to the systemic challenges

that

China’s state capitalism poses to the level playing field between the EU and China, and between European and

Chinese firms. Recent profound changes in China generate a new sense of urgency amongst the European

business community to redress this issue.

Signs emerging from China about its economic trajectory point towards a further consolidation of its state-led

economy over market-oriented reform. This means that the European business community is increasingly

concerned that the question is not

when

China will converge with the global market economy, but

it will

converge. A lack of convergence raises serious questions about whether the current multilateral rulebook

can secure a global level playing field.

A lack of World Trade Organisation (WTO) reform over many years has exacerbated this problem. The WTO

was created as an institution that would create a global level playing field and evolve in parallel to changing

economies. But while national economies and business environments have seen radical change over the past

25 years, the rulebook governing them has remained largely the same.

These simmering issues have reached a boiling point with the eruption of a trade dispute between two of the

world’s largest economies: the United States (USA) and China. The degree of integration of the world economy

means that the trade dispute could have far-reaching consequences for other trading partners, including the EU.

It is against this background that the European business community supports the European Commission’s

Strategic Outlook on China that the balance of opportunities and challenges presented by China has shifted in

recent years.

Although the European business community has championed closer economic engagement on

the basis of reciprocity for years, this shift leads us now to call on the EU to pursue a strategic reorientation

in its relationship with China in order to defend our values, principles and interests.

The purpose of this strategy paper is:

to raise awareness and explain how and where the level playing field between the EU and China is distorted

due to China’s state-led economy; and

to outline concrete recommendations and demands that would lead to a more level playing field in our

economic relationship.

European Commission,

“EU-China:

A Strategic Outlook”,

2019

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

From a European business perspective, the best way to address the issues outlined in this paper is for

the Chinese government to adopt a more hands-off approach and place clear limits to market-distortive

interventions that undermine the level playing field. China ought to return to market-oriented reforms and

re-embark on the path of convergence with the global market economy in order to preserve and enlarge the

benefits of globalisation. The EU and China should work together constructively and with other countries to

establish new rules for global market-based governance at multilateral level.

Since progress on these issues is currently stagnating, we advance

four key objectives that the EU should

pursue

in order to seize the opportunities within the bilateral relationship while addressing the systemic

challenges posed by China’s state-led economic system. Each key objective is elaborated in a dedicated

chapter. The EU should:

Secure a level playing field between China and the EU

Mitigate the impact of China’s government-induced market distortions

Reinforce the EU’s own competitiveness

Ensure fair competition and cooperation on third markets

The EU should pursue these objectives simultaneously

across the following three levels,

which will lead to a

situation of policy complementarity and enhance the EU’s leverage at home and abroad:

1. The multilateral and plurilateral level:

Reforming the WTO would be the best way to achieve these

objectives. The EU should also cooperate closely with likeminded partners in plurilateral initiatives to

strengthen and reform multilateral economic governance and to restore a global level playing field.

2. The bilateral level:

Engaging China bilaterally is an essential cornerstone in building a stronger and fairer

economic relationship between the EU and China.

3. The unilateral level:

The EU should simultaneously strengthen its own capabilities to seize opportunities

and mitigate the challenges.

Since the challenge presented by China’s state-led economy is a systemic one, there is often no single

‘smoking gun’ or policy to which distortions to the level playing field can be attributed. Rather, China’s

state-coordinated and controlled economic governance structure of top-down economic planning has a

cumulative impact. As such, there are few ‘silver bullet’ solutions that could singlehandedly achieve these

four objectives.

This strategy paper advances

130 detailed recommendations

that, when pursued simultaneously, would

contribute to achieving these key objectives. While comprehensive, these recommendations are by no means

exhaustive, and are the result of a scoping process that took place across the European business community.

This paper and its recommendations are addressed to policy-makers across the European Union and its

Member States, though several of them are directly relevant to China.

The paper is structured along six different chapters. The first chapter defines the shift in the balance of

opportunities and challenges in the relationship with China. The second chapter advances a comprehensive

approach through which the EU should engage China. The third, fourth, fifth and sixth chapters are each

dedicated to one of our four key objectives, each with several subchapters that analyse the problems and

recommendations that affect these goals.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

CHINA: A SHIFT IN

THE BALANCE OF

OPPORTUNITIES

AND CHALLENGES

European business wants a stronger and fairer economic

partnership with China. A stronger relationship with China and

improved market access would offer enormous opportunities

to European and Chinese businesses. China is already the EU’s

second-biggest trading partner and the EU is China’s biggest

trading partner. Nevertheless, systemic challenges obstruct

a stronger economic relationship and harm the economic

prospects of European businesses and employment in the EU.

The prospects for a stronger and fairer relationship depend on

whether the EU and China can successfully address the severe

challenges that European companies face when doing business

on the Chinese market or when competing with Chinese

companies on the European market and on third markets.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

1.1. RECIPROCAL TRADE, INVESTMENT AND COMPETITION

OFFER ECONOMIC POTENTIAL

European companies strive for a stronger and fairer economic partnership with China because a closer

relationship spurs bilateral trade and investment and stimulates competition, a key driver of innovation.

Spurring bilateral trade and investment

China offers significant opportunities to European businesses, and vice versa. Bilateral trade and investment

flows have been soaring over the last two decades. Total bilateral trade flows have increased from EUR

397.4 billion in 2010 to EUR 604.4 billion in 2018 (see trade chapter for more detailed analysis).

European

investment flows into China have increased steadily after China’s accession to the WTO, from EUR 1.7 billion

in 2000, peaking in 2012 at EUR 12.5 billion and gradually declining to EUR 6.1 billion in 2018. Chinese

investment flows into the EU have increased from an annual average of EUR 5.76 billion between 2009-2013

to an annual average of EUR 23.5 billion between 2014 and 2018 (see the investment chapter 3.3. for more

detailed analysis).

These figures illustrate the opportunities that an even stronger trade and investment relationship would offer

to both European and Chinese businesses. Because of these opportunities, European companies are eager

to further strengthen economic ties with China and to further open up to rules-based competition with China.

After all, free and fair trade stimulates innovation and fosters prosperity.

EU-China bilateral trade in goods

Figures in billion EUR

EU goods

exports to China

400

EU goods

imports from China

EU-China trade

in goods balance

300

200

100

2009

-100

2010

2011

2012

2013

2014

2015

2016

2017

2018

-200

Source: Eurostat, 2019

Eurostat,

“International

trade in goods – a statistical picture”,

2019.

Own calculations based on Rhodium Group data.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

EU-China bilateral trade in services

In billion euros (data excludes Hong Kong)

EU services

exports to China

EU services imports

from China

EU-China trade in

services balance

2010

Source: Eurostat, 2019

2011

2012

2013

2014

2015

2016

2017

2018

EU-China bilateral FDI flows

After hitting a record high in 2016, Chinese FDI flows to the EU have declined in 2018 (figures in billion EUR)

Chinese FDI in the EU

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

EU FDI in China

Source: Rhodium Group, 2018

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

China’s healthcare sector is a case in point of such opportunities. Healthy China 2030 underlines the

importance of the healthcare sector in China’s evolving society, as it disrupts and changes over 200 laws and

regulations in the field of intellectual property (IP) laws, regulatory approval, market access, procurement as

well as tax and customs. It is a market projected to be worth USD 2.4 trillion by 2030 and currently benefiting

from double digit growth. This provides many opportunities for innovative European companies and could also

lead to EU-Sino partnerships.

The European business community has for years been encouraging China’s market-based reform path and

we have been championing closer economic engagement with China on the basis of these reforms. The EU

has for the same reasons been supportive of China’s integration into the global economy.

Besides economic

growth, the positive effects of China’s successful integration into the world economy would entail welfare

and consumer benefits, create important societal linkages, meaning that China could become an anchor for

global stability.

Competition with China as a driver of innovation

China aspires to become the global industrial and technological superpower by 2049. As China is moving

up the value chain and becoming one of the world’s most innovative high-tech countries, the competitive

landscape between the EU and China is changing rapidly. In the past, China produced low-cost consumer

goods and low-tech manufacturing goods, whereas the EU produced high-tech industrial goods and services.

Today, European and Chinese companies are increasingly becoming direct competitors as China’s Tier 1

and 2 cities are highly developed and more akin to developed countries. As a result, China today cannot be

considered as simply a developing country anymore – as a matter of fact, it is well en route to becoming a

technological power in the near-term.

In the 2018 Global Competitiveness Index of the World Economic Forum (WEF), China ranked 28

out of

135 countries in terms of the strength of the competitive landscape, an increase of 2 places compared to

2008, and 11 places compared to 2001 when it ranked 39

The sheer size of China’s market, the growing

economy, increasingly qualified labour force, high rate of information and communications technology (ICT)

adoption, infrastructure and rising technological innovativeness are the main contributors to China’s strong

competitiveness.

In an earlier report, the Joint Research Centre (JRC) estimated that the EU lost 11.4 percentage points of global

share in manufacturing value chains between 2000 and 2014 while China’s share in global value chains (GVCs)

increased by 13.7 percentage points in the same period (see charts). Controlling for demand factors related to

the growth of the Chinese market shows that around 40% of the loss of the EU’s share in manufacturing GVCs

can be attributed to the declined competitiveness of the EU vis-à-vis its main competitors such as China.

EEAS,

“Commission

Working Document: Country Strategy Paper on China”,

2002-2006.

World Economic Forum, “Global

competitiveness Index 2017-2018”,

2018.

Joint Research Centre, “China:

Challenges and Prospects from an Industrial and Innovation Powerhouse”,

2019.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

China’s increased share in global manufacturing value chains

Change in global share in manufacturing value chains (change in percentage points between 2000 and 2014)

Demand factors

Competitiveness factors

13.7

Total

7.3

-5

-5.9

-10

-11.4

-15

USA

-3.8

Japan

China

Rest of the world

Source: Joint Research Center, "China: Challenges and Prospects from an Industrial and Innovation Powerhouse", 2019.

China’s growing technological competitiveness gets European competitors excited about new opportunities.

In China, European business perception of China’s innovation ecosystem has improved significantly. In 2019,

38% of respondents to the European Union Chamber of Commerce in China (EUCCC) Business Confidence

Survey rated China’s innovation and research and development (R&D) environment as more favourable

than the worldwide average, compared to just 15% in 2016. One of the main drivers of Chinese innovation is

the significant sums spent on R&D.

Chinese companies are also perceived as becoming more innovative,

with 62% of respondents rating Chinese firms as equally or more innovative in 2019. Rather than feeling

threatened, many European firms in China regard China’s strength in innovation as an opportunity. European

businesses welcome healthy competition, as it spurs them to deliver high quality goods and services to

consumers, while maintaining the best possible prices. Another reason for their enthusiasm is that European

businesses benefit from having more and more innovative Chinese firms in their supply chains.

To fully realise the potential that our bilateral relationship has to offer, it is important that the relationship is

reciprocal – that European firms enjoy the same benefits in China that Chinese firms enjoy in the EU, and that

European firms are able to compete equally and equitably with Chinese firms on a level playing field. China’s

emergence in technology is both a source of opportunity for our businesses, and a growing challenge for

the future when viewed through the lens of the systemic challenges posed by China’s state capitalism – and

one which the EU needs to start addressing now. The EU is currently lagging behind in terms of investments

in innovation and digitalisation. In order for the EU to maintain its competitiveness, increasing funds and

supporting investment to bolster research and innovation and the digital economy should be key priorities

for the new European Commission.

One important step in that direction is to further develop the European

Single Market and eliminate market fragmentation within the EU.

European Union Chamber of Commerce in China, “Business

Confidence Survey”,

2019, p. 15. Government incentives, low research costs and R&D teams’ productivity are

all areas in which European businesses feel China compares favourably to other countries. In other areas, such as Internet access and intellectual property rights (IPR)

protection, China still has a long way to go. See chapter ‘5.2. Research and Innovation’ in this paper for more detail on R&D spending.

Ibid,

pp. 16-17.

See chapter ‘5.2 Research & Innovation’ and chapter ‘5.3 Digital Economy’ for more information.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

1.2. THIS ECONOMIC POTENTIAL IS UNDERMINED BY THE

SYSTEMIC CHALLENGE OF CHINA’S STATE CAPITALISM

The nature of the challenges that prevent a stronger partnership with China are mostly systemic and include

inter alia

the following elements:

state-coordinated and controlled economic governance structure

with formal and informal

mechanisms to steer economic outcomes.

China’s state-led system giving rise to

market distortions

and an

unlevel playing field

within China, and

increasingly within the EU and within third markets.

Profound recent changes within China amounting to a

backsliding of market reform efforts,

as well as a

growing impact of market distortions

on European businesses.

When China joined the WTO in 2001 the working hypothesis was that China would reform its state-led economy

and eventually become a market economy. This hypothesis was founded,

inter alia,

on China’s commitments

in its protocol of accession to “allow prices for traded goods and services in every sector to be determined by

market forces”.

In choosing between moving toward becoming a market economy and retaining its state-led

economy, China recently opted for greater centralised political control. Signs emerging about China’s economic

trajectory point to largely decelerated progress towards — or a reversal from — becoming a market economy.

The Asia Society Policy Institute’s China Dashboard tracks the reform progress of ten policy areas of China’s

economic reform programme announced in 2013. Data as recent as from autumn 2019 show that reform in five

of ten policy areas has regressed since the 2013 plenum (labour, land, cross-border investment, competition

and reform of state-owned enterprises), two areas have stalled (innovation and trade) and three areas marked

a slight positive trend (fiscal affairs, environment and the financial system).

This change in trajectory is highly

worrying for European businesses, and requires a major change in working hypotheses when engaging with

China. The implementation of China’s WTO commitments as well as holding China to account on these have

been insufficient. Instead, China’s still largely state coordinated and controlled economic governance system

has evolved to a system which can be termed as ‘China Inc.’

The features giving rise to ‘China Inc.’

‘China

Inc.’

refers to China’s state-coordinated and controlled economic governance structure of top-down

economic planning in which the boundaries between the public and private sector are blurred.

Features of

‘China Inc.’ include:

The Communist Party and state entities, such as the State-owned Assets Supervision and Administration

Commission (SASAC), the National Development and Reform Commission (NDRC), the Ministry of Commerce

(MOFCOM) and the Ministry of Industry and Information Technology (MIIT) control key components of the

Chinese economy. SASAC for instance coordinates all state-owned enterprises (through different SASAC

entities at national and local level) while the NDRC, MOFCOM and MIIT control key sectors such as the

aerospace, energy, railway, steel, shipbuilding and telecommunications sector. This could be compared to

European and national-level authorities that would control and steer all European companies in strategic

sectors and their key strategic divisions.

World Trade Organisation,

“Accession

of the People’s Republic of China”,

2001, section 9.1.

Asia Society Policy Institute,

“The

China Dashboard”,

2019.

Ted Fishman,

“China Inc.: How the Rise of the Next Superpower Challenges America and the Rest of the World”,

Scribner, 2006; Mark Wu,

“The “China Inc.” Challenge to Global

Trade Governance”,

Harvard International Law Journal 57:2, 2016.

For a full and detailed explanation of the key features of the concept of ‘China Inc.’ and its implications, see Mark Wu,

“Testimony before the US-China Economic and Security

Review Commission: Hearing on US Companies in China”,

2019, pp. 6-7.

See chapter ‘4.1 State-Owned Enterprises’ for more information.

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Beijing applies top-down economic planning which is coordinated and implemented by powerful state

entities such as the NDRC and the Central Financial and Economic Affairs Commission of the Communist

Party. As China is increasingly active on the international market, this top-down dirigiste economic

planning increasingly causes market distortions in the global market economy.

The Party-state also has control over a vast amount of China’s financing institutions and the state makes

excessive use of subsidies and state-directed investment via Special Purpose Vehicles (SPVs). Through

various means and structures of ownership and control, the state can direct credit or tighten credit lines to

influence the market and support the implementation of economic objectives in a way that creates unfair

advantages for Chinese players. The types of channels used for ‘preferential financing’ include credit,

direct subsidies, and new forms of financing such as government-guided funds.

Chinese entities such as SASAC and the Organisational Department control high-level appointments

to state-owned enterprises (SOEs), the performance of individual contesters for high-level positions is

not only measured by their ability to create economic growth, but also their ability to deliver on Party

objectives. This can have an impact that might be difficult to detect on the business decisions of SOEs,

particularly regarding procurement or the pursuit of “Buy China” requirements.

China’s state-capitalism is also evolving in novel ways. The creation of party cells in businesses is a new

feature of ‘China Inc’. The statement by President Xi Jinping during the 19

National Congress of the

Communist Party of China in 2017 that the Chinese Communist Party should be deeply integrated within

all parts of society has led to an increased politicisation of the business environment. The party cells and

the soon-to-come corporate social credit system are part of this view and mark a concerning development

for business operations within China.

While party cells are not an entirely new idea, their expanded

and required role within companies is concerning. Although developments are still at an early stage,

companies report being asked to give internal Communist Party cells an explicit role in decision-making.

This could undermine the ability of private and foreign companies to make independent decisions in their

best interest, and increasingly blurs compliance with Chinese law with political interference.

These formal and informal mechanisms through which the Chinese government can influence economic

outcomes mean that problems are much more structural than issue based. For example, China can enter

into commitments to prevent forced technology transfer and change its law, but without bringing the entire

economic governance system in line in a way that prevents the incidence of technology transfer, forced

technology transfer can continue. Without binding and enforceable commitments, it will be very difficult for

China’s trading partners to verify compliance simply because it is hard to tell which of the many pressure

points within China’s system of economic governance have led to a specific case of discrimination. This

presents significant challenges for European policymakers negotiating agreements that touch only one or

few of the elements of China’s economic governance, as some outcomes might be difficult to guarantee or

enforce.

Financial Times,

“China

to include businesses in credit score database plan”,

2019.

Washington Post,

“Command

and control: China’s Communist Party extends reach into foreign companies”,

2018.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

1.3. ‘CHINA INC.’ LEADS TO MARKET DISTORTIONS

AND AN UNLEVEL PLAYING FIELD

The setup of China’s system of economic governance produces numerous market distortions and undermines

the level playing field between European and Chinese, and state and private enterprises. The origin of this

friction lies within the way in which China’s state-led economy distorts markets, with a first impact on the

Chinese economy, but increasingly also the EU market and other third markets as Chinese companies and

capital expand abroad. European businesses are affected in all three domains, as distortions within China

also increasingly distort global markets.

Market distortions in China

The Chinese government’s continued heavy intervention in its economy despite its declared objective of

transitioning to a more sustainable, market-driven economy means that there are still significant distortions

that affect China’s economy and foreign businesses alike. While there are numerous specific distortions

within the Chinese economy, a recent paper by the Mercator Institute for China Studies (MERICS) and

Rhodium Group summarises them into four broad categories.

1) COMPETITION-DISTORTING ASYMMETRIES IN TRADE AND INVESTMENT MARKET ACCESS:

the

disparity in access between Chinese and foreign firms remains enormous. The consequence of these

asymmetries, including post-market entry barriers, serve domestic firms and the state at the expense of

Chinese consumers and foreign producers, including those from the EU.

2) FINANCING ADVANTAGES:

China’s heavily state-led financial system combines political objectives with

market considerations. Markets are not the dominant factor in allocating the flow of capital, and by design,

China’s financial system allocates more weight to the interests of state-favoured borrowing.

3) INPUT AND OPERATIONAL COST ADVANTAGES:

China’s system also distorts the cost of other inputs.

These include cost advantages from under-priced intermediaries (due to subsidies or overcapacity), land and

energy, unnaturally low research, development and innovation (RDI) costs thanks to low levels of intellectual

property rights (IPR) protection, subsidies, or residual laws encouraging technology transfers, etc.

4) STATE GUIDANCE AND PREFERENTIAL BACKING:

a consequence of China’s economic system, its

commercial policies and industrial policy designs is the avoidance of ‘unhealthy’ or ‘unnecessary’

competition. This is particularly made clear in the Made in China 2025 strategy, which promotes selected

Chinese industries and players.

Made in China 2025

A key example of government-driven market distortions that lead to unfair competition is the Made in China

2025 (MiC 2025) policy. This top-down industrial policy involves hundreds of billions of euros of funding in

the form of subsidies, funds and other channels of support to stimulate the development of ten strategic

industries. While MiC 2025 could potentially evolve into a project with mutual gains for both Chinese and

foreign companies, the current trend appears to go into an opposite direction and European companies are

currently deeply concerned about what they see as a ‘ringfencing’ of China’s manufacturing base.

Rhodium Group and Mercator Institute for China Studies,

“Beyond

Investment Screening: Expanding Europe’s Toolbox to Address Economic Risks from Chinese State

Capitalism”,

2019.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

European businesses are concerned because of MiC 2025’s ambitions to promote “indigenous” innovation

and facilitate the preferential treatment of domestic companies at the expense of foreign companies.

MiC

2025 sets semi-official targets regarding the desired market share of Chinese companies. State documents

regarding the implementation of MiC 2025 in the “new energy vehicle” (NEV) sector for example aim at a 70%

domestic market share in 2020 and 80% in 2025.

Some European businesses therefore regard MiC 2025 as

a “ringfencing” of China’s manufacturing base.

A survey conducted amongst European businesses active in China by the EUCCC in 2019 demonstrated that

47% of the respondents that operate in industries covered by the initiative cannot participate in the MiC 2025

initiative.

As such, many European businesses perceive the MIC 2025 project as mostly promoting domestic

firms to become more competitive at the international level by often restricting foreign companies from

participation.

Beijing has employed a variety of policy tools to pursue the MiC 2025 goals, ranging from forced technology

transfers in exchange for market access and financial policy, to technology-seeking investments abroad

and public-private partnerships. Premier Li Keqiang for example promoted public-private partnerships

as a means to raise private funds for the MC 2025 agenda. According to the China PPP Center (the

Chinese government agency for public-private partnership), only 0.7% of all PPP projects included foreign

enterprises.

This number illustrates the market access obstacles that European businesses face when

investing in China.

Made in China 2025

Semi-official targets for domestic market share of Chinese products in some sectors (in percentage)

2020

2025

New energy vehicles

High-tech ship components

New and renewable

energy equipment

Industrial robots

High-performance

medical devices

Mobile phones

Wide-body aircraft

Source: MERICS, 2016.

100

Mercator Institute for China Studies,

“Made

in China 2025”,

2016.

Ministry of Industry and Information Technology,

“Interpretation

of “Made in China 2025”: Promoting the Development of Clean and New Energy Vehicles”,

2016.

European Union Chamber of Commerce in China,

“Business

Confidence Survey”,

2019. For further information on the implications of MiC 2025 for European business,

consult European Union Chamber of Commerce in China,

“China

Manufacturing 2025”,

2017.

Data by the China PPP Center, processed by China Policy,

“Embracing the Market on the State’s Terms”,

2019.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

Market distortions impacting the EU

While previously the implications of China’s state-led system were mainly noticeable within China’s domestic

market, as Chinese firms and financing increasingly go abroad and enter the EU, the distortions they are

subject to within China also affect the European market. Although not exhaustive, four broad policy areas

stand out in which these are increasingly felt within the EU:

1) TRADE DISTORTIONS:

distorted prices within China means that a number of products are exported at

below market prices, leading to anti-dumping and anti-subsidy measures within the EU.

2) INVESTMENT DISTORTIONS:

the acquisition of European companies by Chinese SOEs using subsidised

capital or with the explicit objective of commercialising their technology within China.

3) PROCUREMENT DISTORTIONS:

when Chinese companies can benefit from subsidised finance, cheaper

inputs, and preferential backing from the Chinese state, they are able to tender procurement bids at below

market prices.

4) COMPETITION DISTORTIONS:

mega-mergers between Chinese SOEs within China and the economic

support they receive affect the competitive environment within the European market.

Market distortions within third markets

The rise of China means that the contradictions between China’s system of economic governance and global

market-based governance are increasingly felt across borders, particularly in case of overcapacity being

pushed into global markets and affecting global prices and the dumping of products below market prices.

China’s expansion into third markets also means that the contradictions are felt increasingly in areas that go

beyond trade and investment.

While many of the challenges first became obvious in trade-related areas, the growing presence and

activity of Chinese companies in third markets means that the challenges emanating from China’s state-led

economic model increasingly spill over into other areas such as investment, procurement, research, defence

and security. This is for example the case regarding the Belt and Road Initiative. While the initiative serves

a high variety of interests and policy fields, from facilitating trade to stimulating development, the BRI is an

important conduit for exporting overcapacities.

China’s ‘Going Global’ strategy is aimed at equipping domestic companies to compete better internationally,

as well as at home. Indeed, the consequence of China’s strategy of going global means that Beijing’s vision

of a state-led economic model — alongside the challenges that this poses — is increasingly pushed into

other markets. This means that the issues related to China Inc. are being felt more directly outside China and

raises important concerns. The chapter on competition on third markets includes an overview of the types of

distortions coming from China that affect European businesses in third markets.

Although it is essential that the EU continues to try to solve the trade-related problems that occur in the

bilateral relationship with China, it is important that policy-makers understand that there are limits to this

strategy given that there are issues that need to be addressed far beyond the trade domain. European business

therefore emphasises the urgent need for a comprehensive, multi-faceted and whole-of-government

approach to mitigate market distortions and enable European businesses to compete successfully with

Chinese companies.

See chapter ‘3.2 Trade’ for more information.

See chapter ‘3.3 Investment’ for more information.

See chapter ‘3.4 Procurement’ for more information.

See chapter ‘2. How the EU should engage China’ for more information.

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How China’s opaque legal system and lack of transparency inhibit a level playing field

While China’s legal system has developed during the past years, there are several challenges inherent in the

legal system that can lead to unfair treatment, a lack of enforcement, or discriminatory outcomes for European

business. China’s legal system is unique as it represents what its leaders have termed the ‘socialist rule of

law’. The most striking difference with the Western concept of the rule of law lies in the matter of judicial

independence, which is denied in China but essential to the Western concept of the rule of law. China’s judicial

system is not independent because establishing it implies making the court system a competing authority,

which would undermine the supremacy of the Party’s authority over the state. Judicial independence is thus

regarded as incompatible with the Party-state structure. While the adjudicative independence of China’s

courts allows them to exercise rulings without interference by other state institutions, the Party’s authority

is above the state, which allows the Party leadership to generate concerted actions from different branches

of the state on issues that are of primary importance to the party.

This presents challenges in trying to hold

the state accountable due to local protectionism and the court’s lack of power vis-à-vis many agents of the

Party-state.

The lack of an independent judiciary to enforce the rule of law is a major obstacle for companies to ensure

fair and equal treatment before the law. Courts ultimately report to the Central Political and Legal Affairs

Commission of the Chinese Communist Party.

A second frequent remark on China’s laws is their lack of clarity, or vagueness in wording, that creates

confusion among stakeholders over their exact scope and application.

This vagueness, however, appears to

provide for a degree of flexibility in application that can lead to inconsistent or discriminatory outcomes, not

only at the national level but also at local level.

A third issue that is frequently raised by European companies is the insufficient enforcement of existing laws

and regulations. This is particularly prevalent in areas in which foreign companies have prevailing interests,

such as protecting their intellectual property.

The main question in IP protection is: how China can improve

its record of enforcement or that adequate compensation is forthcoming in case of violation, so that the law

is of consequence? China has made numerous piecemeal improvements in the area of enforcement, though

this is still well below adequate.

Finally, the lack of transparency within China’s legal system, particularly regarding local regulations, makes

it difficult to navigate and understand. A lack of transparency makes it difficult to understand how the legal

system works, how predictable it is, and whether the outcomes are the result of a fair process. For example,

not all legal rulings are published, which makes it very difficult to detect any formal discrimination between

foreign companies and domestic ones (see the graph below).

All this is not to say that China’s legal environment is entirely impossible to navigate. Or that foreign companies

are unable to do business in China. The number of foreign companies present within China highlights that this

is not the case. What it does say, however, is that it provides China with the possibility to marshal resources

to facilitate the business environment for companies in sectors in which investment is welcome, or to let

companies struggle without guaranteed tools to pursue their rights.

A transparent and clearly structured legal environment would be highly advantageous - first and foremost

for China and its economy. It would make doing business in China more efficient and more predictable, and

it would also help resolve tensions with its trading partners that emerge from (perceived) discriminatory

treatment. There is also a need for China’s legal system to evolve more quickly, particularly in view of China’s

fast evolving economy that sometimes leads to legal gaps.

Ling Li,

“Chinese Characteristics of the “Socialist Rule of Law”: Will the Fourth Plenum Cure the Problems of the Chinese Judicial System?”,

Asia Policy 20, 2015, p. 17.

China’s Cybersecurity Law, National Intelligence Law and Foreign Investment Law feature prominently in this regard.

See chapter ‘3.5 Intellectual Property Rights’ and ‘3.6 Forced Technology Transfer’.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

Attempts to remedy complaints by foreign companies should not lead to ad hoc or anecdotal improvements.

Recourse under the law cannot depend on the good will of particular officials. The fact that some foreign

companies do extremely well in China and do not face the same set of problems, means that it should be possible

for all foreign companies to be treated equally well. Chinese companies in Europe do not face these issues.

As highlighted by the EUCCC in their Business Confidence Survey in 2019, “Chinese firms operating in the EU

are afforded equal treatment and have clear mechanisms for seeking recourse under the rule of law if they

feel they are discriminated against. As China enters its fifth decade of reform and opening up, it is high time

that European companies are afforded reciprocal treatment in this respect.”

The EU has an active role to

play in facilitating this and encouraging China to take ambitious steps forward.

China’s judicial transparency

Number of court cases

Number of cases on competition

and intellectual property

350,000

300,000

250,000

200,000

150,000

100,000

50,000

2011

2012

2013

2014

2015

2016

2017

2018

Number of cases on competition

and intellectual property disclosed

Source: Rhodium Group, 2019

European Union Chamber of Commerce in China,

“Business Confidence Survey”,

2019, p. 7.

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1.4. RECENT PROFOUND CHANGES IN CHINA GENERATE

A NEW SENSE OF URGENCY FOR REDRESS

While the existence of market distortions, problems of market access, an unlevel playing field, intellectual

property violations, forced technology transfers and others are not new, there has always been a positive

agenda of trying to address these issues against the backdrop of integrating China more broadly into the

world economy. The accompanying reform that China’s integration would bring about would address many

of the systemic issues underlying many of these problems. The results of this approach have been mixed,

with both positive and negative developments over the years. Recently, however, a number of profound

changes in China have led to a greater sense of urgency among European businesses around the need for a

comprehensive policy response from the EU that levels the playing field with China, mitigates the effects of

market distortions, and enhances our competitiveness, and ensures fair competition and cooperation on third

markets. These include,

inter alia:

Difficulty in implementing the next-generation phase of reform in China means that European business is

increasingly concerned that the question is not when China will converge with the global market economy

but if it will converge. A lack of convergence or even divergence raises serious questions about whether the

current rules-based multilateral system can secure a level playing field.

China’s immense economic growth means that systemic differences in economic policy-making have a

growing impact on European business. China’s share of global gross domestic product (GDP) grew rapidly

from 4% in 2001 to 15.2% in 2017,

while its share of global merchandise trade grew from 4.2% to 12.7%

between 2001 and 2018. Its share of global services trade grew slower, from 2.9% to 4.5% between 2005

and 2018.

China is re-introducing political ideology into the economy instead of sustaining economic reform and

liberalisation. The expansion of (the role of) party-cells and introduction of the corporate social credit system

are two important developments in this regard that could impact decision-making at business level.

China is for the first time exporting its domestic policy mix because it has the capital and companies to do

so and both are motivated to go overseas.

The US Administration is attempting to force a breakthrough on these issues through a trade conflict with

China that is both economic and geopolitical in nature. Attempts by both sides towards decoupling and

reducing mutual dependence will also affect European business, and any solution in the US-China trade

conflict could result in preferential treatment of US companies over EU companies. The EU cannot afford

to sit by idly and needs to formulate its own policy.

Consequently, a renewed sense of priority and urgency has taken hold among European businesses over the

past few years that if China will not become a market economy, it should at least be held accountable to the rules

and principles of a multilateral rules-based system which it joined on that premise. This means that existing

multilateral and European rules need to be reformed and new rules should be created that are both binding

and enforceable in order to capture all the distortions and level playing field issues that arise from ‘China Inc.’

The Global Economy,

“China:

Percent of world GDP”,

2019

BusinessEurope calculations based on

UNCTAD data.

See chapter ‘6.3 Competition on Third Markets’ for more information.

Specific recommendations on the EU policy response are formulated in chapter 2.

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The problem of the Corporate Social Credit System

China’s corporate social credit system is now moving into a decisive stage, with full implementation expected

by the end of 2020. The system will collect and interpret Big Data using real-time monitoring and processing

mechanisms, and the mega-database will then be used to steer business behaviour according to government

criteria. Compliance – or lack thereof – with government-defined requirements will increase or decrease a

company’s rating: higher ratings leading to greater opportunities in public procurement, more favourable

credit conditions, shorter waiting times for administrative procedures and/or lower taxation; with lower

ratings potentially leading to blacklisting.

As the Chinese government seems to move away from hard market access constraints such as investment

catalogues, its ability to influence companies appears now to be greater: indeed, the corporate social credit

system will create strong incentives for business not merely to comply with legislation but also to fulfil the

industrial objectives fixed by the government. While the pros and cons of the system are still up for debate,

the risk for companies is clear: on the one hand, the system may increase transparency and induce business

to adopt socially and environmentally responsible behaviour; on the other hand, the system – prone as it is

to data manipulation and faulty technology – will reduce business autonomy, hinder the success of disruptive

models, and threaten proprietary data.

Importantly, foreign companies will be integrated within the system and be treated in the same way as their

Chinese counterparts. This could lead to a more level playing field: automated data processing can reduce

arbitrariness and limit discriminatory practices; moreover, European business – which possess more

advanced internal compliance structures – may gain an advantage in relation to Chinese companies. However,

the system does mean that foreign companies will be subject to China’s industrial policy guidance, which is

a point of concern. Furthermore, Chinese companies might be better able to navigate the intricacies of this

complex system via their contacts with governmental entities.

Another point of apprehension is the detail of some rating requirements, such as the State Administration

for Market Regulation’s blacklisting mechanism for ‘heavily distrusted entities’, which makes the system

vulnerable to be used for political purposes in trade conflicts. Of great concern, too, are the data elements

that will be used to score companies, as well as the weight given to them and the degree of transparency

companies will have on the composition of their credit score. It will be difficult to levy complaints against

mistakes or wrongdoings within the system without transparency. The scope for abuse and margin of error

will likely be huge, and the implications of the corporate social credit system will be enormous regardless of

how the system is implemented.

European Union Chamber of Commerce in China,

“The Digital Hand: How China’s Corporate Social Credit System Conditions Market Actors”,

2019.

Mercator Institute for China Studies,

“China’s

Social Credit System”,

2017.

European Union Chamber of Commerce in China,

“The Digital Hand: How China’s Corporate Social Credit System Conditions Market Actors”,

2019.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

1.5. CHINA HOLDS THE CARDS FOR A

BETTER BILATERAL RELATIONSHIP

From a European business perspective, the best way to address the issues outlined in this chapter is for

the Chinese government to adopt a more hands-off approach and place clear limits to market-distortive

interventions that undermine a level playing field between state and private and domestic and foreign

businesses. In practice, this means that China should work constructively with other countries to establish

new rules for global market-based governance at WTO level. The direction since at least 2013, however, signals

clearly that the Chinese economy is becoming more state-led and features more, not less intervention. At the

same time, ‘China Inc.’ is becoming more sophisticated, making it more difficult to present clear evidence of

official breaches of China’s commitments at the WTO.

If China does not re-embrace economic liberalisation, marketisation and opening as priorities, its GDP growth

will continue to fall and there will be shrinking opportunities for domestic and foreign firms alike. A drop in

GDP growth could lead to a reflex towards protectionism and indigenous innovation in order to benefit Chinese

firms over foreign firms. China’s enormous economic success during the past 40 years, however, is inherently

linked to its policy of opening up to the world. Consequently, doubling down on its state-led economy and

upending the level playing field for perceived short-term economic gain will only speed up the deceleration of

China’s economic growth and generate tensions with its trading partners.

It is therefore of utmost importance that the EU continues to engage China in order to try and secure a level

playing field within China and globally. This is not least because China’s growing international economic

engagement means that Chinese companies are able to compete on third markets and within the EU market

without any of the restrictions and issues highlighted above, which leads to an unlevel playing field for

European business within our home market and on third markets. Areas where there are strong common

interests, such as health and health care, should be used as a lever for more market opening on the Chinese

side. Both the EU and China have much to gain from increased economic engagement, if this is pursued on a

reciprocal basis and on a level playing field.

The prospects for a positive way forward in the EU-China relationship also depend largely on China. Actions

that China could undertake that would lead to a fairer and stronger economic relationship with the EU include

the following:

Create a true level playing field.

China can contribute to a level playing field by eliminating market access

barriers for foreign businesses, abolishing joint venture requirements and discriminatory treatment,

removing policies of indigenous innovation and ‘Buy China’ provisions and improving intellectual property

protection.

Return to market-oriented economic reform.

As the Chinese government outlined in its State Council

documents no. 5 and 39,

China should eliminate the various market distortions that European companies

face within China, on third markets, and increasingly within the EU itself. This would include eliminating

market-distorting industrial subsidies and curbing overcapacity.

Uphold the rules-based multilateral trading system and engage in meaningful WTO reform.

China’s

rhetoric of supporting the rules-based multilateral trading system should now be followed by concrete

action. China should fully commit and adhere to multilateral economic governance rules and practices by

for example joining more WTO agreements and by committing to multilateral financial practices. It should

also commit constructively to the creation of new WTO rules and disciplines on industrial subsidies and

SOEs.

People’s Republic of China,

“Notice

on Several Measures on Promoting Further Openness and Active Utilisation of Foreign Investment (State Council Document No. 5)”

and

“Notice

on Several Measures for Promoting Foreign Investment Growth (State Council Document No. 39)”,

2017.

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THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

HOW THE

EUROPEAN UNION

SHOULD ENGAGE

CHINA

The EU needs to reconsider how it engages China in order to

achieve the four key objectives we have outlined. In the past,

the EU’s means of engagement have not produced the desired

results. Recent changes within China also prompt the EU to

rethink its toolkit. Due to the difficulties outlined in the previous

chapter, the EU must reconsider its

modus operandi

towards

China and put more emphasis on reciprocity and conditionality.

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

2.1 THE EU MUST RECONSIDER THE WAY

IN WHICH IT ENGAGES CHINA

For a long time, the EU has engaged China based on the theory of convergence. The policies and instruments

that the EU used and the means through which the EU interacted with China were based on the assumption

that China would gradually move towards a liberal open market economy. As China is not converging towards

a liberal market economy model and instead consolidating its own economic, social and political model, the

EU needs to adapt its means of engagement to this new reality. The recent movement towards more state

interference in the Chinese economy has furthermore sparked a renewed sense of urgency (see chapter

1.4) and requires a

strategic reorientation

on how to engage China. The European Commission’s ‘Strategic

Outlook’ on China that was published in March 2019 is a good first step in this regard.

The European business community has set four end goals (levelling the playing field; mitigating the impact

of government-induced distortions; reinforcing the EU’s own competitiveness; ensuring fair competition and

cooperation on third markets) that could achieve a fairer and stronger relationship with China. None of these

goals can be achieved, however, without a broader reform of the EU’s means of engagement with China. A

reciprocal and conditional

approach towards China that is based on our

interests, principles

and

values

essential to seize the opportunities of a tighter economic relationship while off-setting the negative effects of

China’s state capitalist system.

In order to achieve the four

‘end goals’,

the EU needs to employ the right

‘means’

to achieve these four

objectives. In the past, the means through which the EU aimed to achieve its goals vis-à-vis China have often

not yielded the desired results. China is still the EU’s most restrictive trading partner, there are still numerous

investment barriers and joint venture requirements, China’s procurement market is still closed, and there are

still major concerns about intellectual property (IP) protection and the number of reported cases of forced

technology transfers are on the rise. Consequently, the EU should reconsider the way in which it engages

China and revisit the policy tools through which the EU aims to achieve its goals vis-à-vis China.

The EU should update its

modus operandi

to ensure a successful and effective China strategy. There are

five

means of engagement

that would enable a successful and effective China strategy and that will contribute to

achieving the four ‘end goals’ that are set out in this paper (levelling the playing field; mitigating the impact

of government-induced distortions; reinforcing the EU’s own competitiveness; ensuring fair competition and

cooperation on third markets).

The five means will jointly create the necessary (institutional) framework conditions that will enable the

EU to address the existing opportunities and challenges meaningfully. These five enabling factors are not

exhaustive, but they will allow the EU to better promote and defend its interests in its economic relationship

vis-à-vis China.

modus operandi

embedded in five means of engagement:

THE EU SHOULD ACT SIMULTANEOUSLY ON ALL LEVELS

THE EU SHOULD ACT UNITEDLY

THE EU SHOULD ACT COHERENTLY

THE EU SHOULD ACT STRATEGICALLY

THE EU SHOULD ACT CONFIDENTLY

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

2.2 THE EU SHOULD ACT SIMULTANEOUSLY ON ALL LEVELS

To address the consequences of China’s move towards a more state-led economy, there is no ready-made

strategy or single solution that will likely persuade China to abandon the most problematic aspects of state

intervention in the economy. The EU should therefore pursue its objectives simultaneously (not sequentially)

through

three levels.

This strategy will lead to a situation of policy complementarity and will enhance the EU’s

leverage at home and abroad:

1. THE MULTILATERAL AND PLURILATERAL LEVEL:

Reforming the WTO and engaging China at WTO level

would be the best way to achieve the EU’s objectives. The current multilateral rulebook is designed for

market economies and does not adequately address the implications of a state-led economy. Nevertheless,

attempts to reform the WTO have so far produced little result, partly due to unanimous decision-making.

The EU should also cooperate closely with like-minded partners in plurilateral initiatives.

2. THE BILATERAL LEVEL:

Engaging China bilaterally is an essential cornerstone in building a stronger

economic relationship between the EU and China. On bilateral level, the EU and China should focus on

resolving trade and investment barriers in bilateral dialogues on all levels with the participation of key

stakeholders such as the business community. The EU should also encourage China to pursue market-

based reforms.

3. THE UNILATERAL LEVEL:

If China does not intend to become a market economy, long-standing as well as

new economic barriers and market distortions will remain unaddressed through the multilateral and bilateral

approaches. As there is often an absence of progress on the multilateral and bilateral levels,

the EU should

simultaneously strengthen its own capabilities

to seize the opportunities and mitigate the challenges.

The EU should act simultaneously on all three axes – multilateral, bilateral and unilateral – in order to create

opportunities and remedy problems as best as possible. While the multilateral and bilateral approaches

remain the preferred course of action for European business, these avenues do often not yield the desired

outcomes. As there is often an absence of progress on the multilateral and bilateral level,

the EU should also

primarily strengthen its own capabilities

to seize the opportunities and mitigate the challenges.

Certain WTO members follow neither the letter nor the spirit of WTO rules and there is an absence of concrete

rules in several areas. This requires that the EU bolster its own capabilities to promote and defend an open,

fair and market-based world trade system. At the same time, the principle of non-discrimination should be

fully respected and promoted.

In the past, the EU has not always followed a strategy of simultaneous engagement on these levels in parallel

to achieve its objectives. In the area of international procurement, the EU has for example encouraged China

to join the WTO Agreement on Government Procurement (GPA), mostly at WTO level. Since this has not

yet materialised and China’s public procurement market still remains closed to European companies, the

EU should create its own capabilities to encourage third countries to join the GPA and open global public

procurement markets (see chapter ‘3.4 Procurement’).

An area in which the EU has pursued action on parallel levels more successfully is industrial subsidies (see

chapter ‘4.2 Subsidies’). At WTO level, the EU engages China in the context of the Agreement on Subsidies and

Countervailing Measures (SCM) and in the EU-China bilateral working group on WTO reform. Internationally,

the EU also discusses the matter of industrial subsidies at the trilateral meetings with the USA and Japan.

Within the EU, the European Commission has recently updated its trade defence instruments to prevent and

mitigate the negative effects of foreign state subsidies. The EU should continue to pursue parallel levels

simultaneously to achieve its objectives in this area and should also apply this strategy of parallelism in other

policy areas.

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

2.3 THE EU SHOULD ACT UNITEDLY

The EU has the largest single market in the world in terms of GDP and is the largest trader of manufactured

goods and services. The EU should better

translate Europe’s economic strength into political unity and

assertiveness.

Only a strong and united Europe can promote its interests and values in the face of a rising

world power such as China and growing protectionism.

European companies and European Member States are nevertheless caught up in a

collective action

problem.

European companies and EU Member States would benefit from standing together and encouraging

China to make necessary reforms. China uses various instruments of leverage such as asymmetrical market

openness and selective procurement to undermine our collective action. It is therefore of critical importance

for the ability of the EU to act in the face of foreign pressure on individual Member States that the European

Council moves from unanimous decision making on foreign policy issues towards

qualified majority voting

(QMV).

For instance, EU positions regarding a more transparent, open and greener Belt and Road Initiative (BRI) have

been watered down as many EU Member States have now endorsed the project. Several EU Member States

such as Italy, Portugal and Luxembourg have signed ‘memoranda of understanding’ with China to cooperate

on the initiative. This illustrates the EU’s internal divisions and the uncoordinated approach towards China

more generally.

The EU will remain vulnerable to Beijing taking advantage of internal divergences as long as a united and

coordinated European approach vis-à-vis China is missing. The challenges posed by China’s economic and

political system cannot be met by any Member State alone. Only a

united and strong Europe

can provide the

economic and political leverage to successfully engage and compete with China.

Member States should

invest in knowledge sharing and capacity building on China

at EU and Member State

level and

set up an information-sharing mechanism.

One of the drawbacks that undermines unity of action

is a disparity in available expert information at different levels of policy and across Member States. A clear

understanding of the opportunities and challenges in the relationship with China will help inform better

decision-making at all levels.

The EU’s

research capacities on China

should also be increased significantly to support informed, intelligent

and effective policy-making. Whereas the United States have established a dedicated US-China Economic

and Security Review Commission, which publishes comprehensive annual reports and detailed monthly

bulletins, comprehensive European studies on China remain scarce. Therefore, resources and research

capacities should be enhanced to adequately and systematically analyse the economic, political and security

implications of Chinese policies on the EU at regular intervals. The study ”China: Challenges and Prospects

from an Industrial and Innovation Powerhouse” published by the Joint Research Centre serves as an example

of a comprehensive study that should be performed more regularly and systematically.

EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20

THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE

2.4 THE EU SHOULD ACT COHERENTLY

Currently, the policies and instruments of the European institutions are not always tailored to the same

objective and not always coherent. To leverage and reinforce our strengths and achieve better outcomes,

it is essential to

improve coherence and complementarity between EU policies and instruments

in their

application vis-à-vis China and other state-centric economies.

One of the key challenges for the next European Commission, which was also highlighted in the Commission’s

strategic outlook, relates to action point 8 – identifying

how to fill existing gaps in EU law

in order to fully

address the distortive effects of foreign state ownership and state financing on the internal market.

In this regard, one important horizontal principle that the EU should develop in order to remedy market

distortions across policy domains is an

‘SOE principle’.

This could for example mean a reversal in the burden

of proof for foreign SOEs—that they would need to prove compliance with Single Market rules before obtaining

market access, that in the future the EU’s investment screening mechanism could include special provisions

on SOEs and that a future international procurement instrument should also consider a differentiated

approach towards SOEs.

Synergies between different policy areas are necessary to create the

leverage

required for EU policies to have

the desired impact. This means that a

whole-of-government approach

is needed to tackle the challenges

emanating from the pressures that currently threaten global market-based governance. Within the European

Commission, the Secretariat-General or the relevant Executive Vice-Presidents have a special responsibility

to ensure coherence amongst the relevant EU policy areas. In this regard, the European Commission’s

Strategic Outlook on China provides a strong foundation for further evolution towards a whole-of-government

approach towards China.