Europaudvalget 2019-20
EUU Alm.del Bilag 452
Offentligt
2161611_0001.png
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
2161611_0002.png
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
2161611_0003.png
1
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
2161611_0004.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
2
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
.......................................
21
1.2. This economic potential is undermined by the systemic challenge of China’s state capitalism
...
25
1.3. ‘China Inc.’ leads to market distortions and an unlevel playing field
..............................................
27
1.4. Recent profound changes in China generate a new sense of urgency for redress
........................
32
1.5. China holds the cards for a better bilateral relationship
................................................................
34
2. HOW THE EUROPEAN UNION SHOULD ENGAGE CHINA
...................................................................36
2.1. The EU must reconsider the way in which it engages China
...........................................................
37
2.2. The EU should act simultaneously on all levels
...............................................................................
38
2.3. The EU should act unitedly
...............................................................................................................
39
2.4. The EU should act coherently
...........................................................................................................
40
2.5. The EU should act strategically
........................................................................................................
41
2.6. The EU should act confidently
..........................................................................................................
42
3. SECURE A LEVEL PLAYING FIELD BETWEEN CHINA AND THE EU
..................................................46
3.1. The World Trade Organisation (WTO)
...............................................................................................
47
3.2. Trade
..................................................................................................................................................
54
3.3. Investment
.........................................................................................................................................
64
3.4. Procurement
.....................................................................................................................................
72
3.5. Intellectual property rights
...............................................................................................................
78
3.6. Forced technology transfer
...............................................................................................................
82
3.7. Standardisation
.................................................................................................................................
85
3.8. E-commerce
......................................................................................................................................
87
3.9. Climate and energy
...........................................................................................................................
91
4. MITIGATE THE IMPACT OF CHINA’S GOVERNMENT-INDUCED MARKET DISTORTIONS
................96
4.1. State-owned enterprises (SOEs)
......................................................................................................
97
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
2161611_0005.png
3
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:
1
2
3
4
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
2161611_0006.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
4
01
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.
1.
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.
2.
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
2161611_0007.png
5
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
3.
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.
4.
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.
1
Similarly, its share of global merchandise trade
grew from 4.2% in 2001 to 12.7% in 2018.
2
5.
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.
1
The Global Economy,
“China:
Percent of world GDP”,
2019.
2
Own calculations based on
UNCTAD data.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0008.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
6
02
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
2161611_0009.png
7
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
as
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
2161611_0010.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
8
03
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.
3
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.
3
European Commission,
“Report
from the Commission to the Parliament and the Council on Trade and Investment Barriers”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0011.png
9
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
2161611_0012.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
10
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
2161611_0013.png
11
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.
4
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
5
), 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.
4
Wik Consult,
“Assessment
of EU Parcel Delivery Markets”,
2018.
5
Emissions include CO
2
emissions from fuel combustion only. Data available on the
webpage
of the International Energy Agency (2016).
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0014.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
12
04
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
6
. 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.
6
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.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0015.png
13
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.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0016.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
14
05
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% .
7
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.
8
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.
7
European Commission,
“Science,
Research and Innovation Performance of the EU”,
2018.
8
World Bank,
“Doing
Business 2019”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0017.png
15
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.
9
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.
9
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).
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0018.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
16
06
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
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0019.png
17
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.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0020.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
18
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
if
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.
10
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.
10
European Commission,
“EU-China:
A Strategic Outlook”,
2019
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0021.png
19
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:
1
2
3
4
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.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0022.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
20
01
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.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0023.png
21
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).
11
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).
12
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
0
2009
-100
2010
2011
2012
2013
2014
2015
2016
2017
2018
-200
Source: Eurostat, 2019
11
Eurostat,
“International
trade in goods – a statistical picture”,
2019.
12
Own calculations based on Rhodium Group data.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0024.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
22
EU-China bilateral trade in services
In billion euros (data excludes Hong Kong)
EU services
exports to China
50
EU services imports
from China
EU-China trade in
services balance
40
30
20
10
0
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
40
35
30
25
20
15
10
5
0
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
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0025.png
23
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.
13
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
th
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
th
.
14
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.
15
13
EEAS,
“Commission
Working Document: Country Strategy Paper on China”,
2002-2006.
14
World Economic Forum, “Global
competitiveness Index 2017-2018”,
2018.
15
Joint Research Centre, “China:
Challenges and Prospects from an Industrial and Innovation Powerhouse”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0026.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
24
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
15
Competitiveness factors
13.7
Total
10
7.3
5
0
-5
-5.9
-10
-11.4
-15
EU
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.
16
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.
17
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.
18
One important step in that direction is to further develop the European
Single Market and eliminate market fragmentation within the EU.
16
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.
17
Ibid,
pp. 16-17.
18
See chapter ‘5.2 Research & Innovation’ and chapter ‘5.3 Digital Economy’ for more information.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0027.png
25
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:
A
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”.
19
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).
20
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.’
21
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.
22
Features of
‘China Inc.’ include:
1.
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.
23
19
World Trade Organisation,
“Accession
of the People’s Republic of China”,
2001, section 9.1.
20
Asia Society Policy Institute,
“The
China Dashboard”,
2019.
21
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.
22
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.
23
See chapter ‘4.1 State-Owned Enterprises’ for more information.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0028.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
26
2.
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.
3.
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.
4.
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.
5.
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
th
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.
24
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.
25
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.
24
Financial Times,
“China
to include businesses in credit score database plan”,
2019.
25
Washington Post,
“Command
and control: China’s Communist Party extends reach into foreign companies”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0029.png
27
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.
26
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.
26
Rhodium Group and Mercator Institute for China Studies,
“Beyond
Investment Screening: Expanding Europe’s Toolbox to Address Economic Risks from Chinese State
Capitalism”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0030.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
28
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.
27
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.
28
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.
29
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.
30
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
0
Source: MERICS, 2016.
10
20
30
40
50
60
70
80
90
100
27
Mercator Institute for China Studies,
“Made
in China 2025”,
2016.
28
Ministry of Industry and Information Technology,
“Interpretation
of “Made in China 2025”: Promoting the Development of Clean and New Energy Vehicles”,
2016.
29
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.
30
Data by the China PPP Center, processed by China Policy,
“Embracing the Market on the State’s Terms”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0031.png
29
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.
31
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.
32
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.
33
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.
34
31
32
33
34
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.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0032.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
30
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.
35
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.
36
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.
37
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.
35
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.
36
China’s Cybersecurity Law, National Intelligence Law and Foreign Investment Law feature prominently in this regard.
37
See chapter ‘3.5 Intellectual Property Rights’ and ‘3.6 Forced Technology Transfer’.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0033.png
31
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.”
38
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
0
2011
2012
2013
2014
2015
2016
2017
2018
Number of cases on competition
and intellectual property disclosed
Source: Rhodium Group, 2019
38
European Union Chamber of Commerce in China,
“Business Confidence Survey”,
2019, p. 7.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0034.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
32
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:
a.
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.
b.
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,
39
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.
40
c.
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.
d.
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.
41
e.
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.
42
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.’
39
40
41
42
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.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0035.png
33
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
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.
43
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.
44
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.
45
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.
43
European Union Chamber of Commerce in China,
“The Digital Hand: How China’s Corporate Social Credit System Conditions Market Actors”,
2019.
44
Mercator Institute for China Studies,
“China’s
Social Credit System”,
2017.
45
European Union Chamber of Commerce in China,
“The Digital Hand: How China’s Corporate Social Credit System Conditions Market Actors”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0036.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
34
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,
46
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.
46
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.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0037.png
35
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0038.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
36
02
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
2161611_0039.png
37
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
is
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.
A
modus operandi
embedded in five means of engagement:
1.
2.
3.
4.
5.
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
2161611_0040.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
38
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
2161611_0041.png
39
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
2161611_0042.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
40
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.
47
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.
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.
47
See chapter ‘4.1 State-owned enterprises’ for more information on this proposal.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0043.png
41
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
2.5 THE EU SHOULD ACT STRATEGICALLY
Europe’s
strategic autonomy and economic sovereignty
are being challenged as the USA and China increasingly
combine economics and geopolitics. The US National Security Strategy of December 2017 for example includes
economics for the first time as part of US national security.
48
Economic and security dimensions have become
increasingly interlinked in the strategic rivalry between the EU’s two main trade partners. Both China and the
USA do not shy away from using their economic power to pursue security and geopolitical objectives.
The linkage between economic and security spheres and the linkage across policy areas are deeply destabilising
for the EU as European policies and instruments are not designed for a world in which economic, security and
strategic objectives are increasingly blurred.
49
The EU also risks being caught up in the cross-fire between the
USA and China and pushed by both partners to choose sides. The geopolitical rivalry between the USA and China
therefore poses serious challenges to the EU’s strategic autonomy and economic sovereignty. The EU should
assess the effects of the blurring of the economic and security dimensions more systematically.
To stimulate and facilitate a more strategic approach vis-à-vis China, European business calls on the EU and
EU Member States to set up a
strategic dialogue on China
between the EU Member States, EU institutions and
business, with the support of academia and key stakeholders. Inspiration could be drawn from the European
Commission’s Task Force 50 on Brexit, which allowed the EU to maintain a unified and coherent approach in its
negotiations with the United Kingdom. Annual meetings should take place that facilitate greater information
exchange between different levels of policy-making and parts of civil society that help underpin
a whole-of-
government approach
at EU and Member State level. These could take the form of a high-level dialogue,
with specific coordination or working groups that focus on particular issues. This strategic dialogue may also
bolster European Commission resources with the information required from business in order to take greater
enforcement action. This information is often lacking as companies fear that providing information may lead to
retaliation within China.
European Commission President Ursula von der Leyen emphasised in her ‘agenda for Europe’ that there is
an urgent need for a stronger Europe in the world that is “ambitious, strategic and assertive”. To realise this
objective,
the Multiannual Financial Framework (MFF)
should devote significant resources to the policy areas
that ensure a strong geopolitical Europe. In this regard, the MFF should amongst other allocate significant
financial resources to research and innovation, to digitalisation and to the EU Connectivity Strategy.
48
The White House,
“National
Security Strategy of the United States of America”,
2017.
49
Bruegel,
“Redefining
Europe’s economic sovereignty”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0044.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
42
2.6 THE EU SHOULD ACT CONFIDENTLY
The EU should act more confidently and should not shy away from
leveraging
its economic strength to achieve
its economic objectives. The EU should adopt a
reciprocal and conditional
approach towards China that is
based on our
interests, principles and values.
China has become a more assertive international player. In recent years, China has begun deploying a
strategy of
sharp power,
which exemplifies the unprecedented and increasingly sophisticated efforts to
influence and intimidate stakeholders outside its borders.
50
This can have the effect of suppressing open
debate and influencing policy outcomes. Different from traditional diplomacy, sharp power uses a forceful
combination of carrots and sticks to wield influence. Mechanisms of transparency that expose this behaviour
as well as mechanisms that foster greater exchange and unity at European level are urgently needed to resist
this challenge.
The EU can be more successful in competing internationally by
branding and promoting
its policies better,
both on the European market and on third markets. China launched an impressive campaign to promote its
policies such as Made in China 2025 and the Belt and Road Initiative. China for example ambitiously promotes
the Belt and Road Initiative at Belt and Road Forums that are widely attended by world leaders. While the Belt
and Road Initiative and Made in China 2025 are widely known amongst stakeholders and the general public,
European policies such as the Connecting Europe Facility and the EU Connectivity Strategy deserve better
promotion and branding.
The EU should not hold back in deploying a more self-confident rhetoric both internally and externally and to
pursue a coherent presentation of what the EU does.
European interests must be given a clearer voice.
In
order for its Connectivity Strategy to be effective, for instance, the EU will have to make sure its strategy and
approach are well understood by partners in target regions. A soft launch of the Connectivity Strategy and
public diplomacy outreach in third countries are essential in this regard.
The European Commission and other relevant EU bodies should also enhance the EU’s
economic diplomacy.
Economic diplomacy has so far mostly been performed by EU Member States. Better European coordination
in economic diplomacy would contribute to the promotion of European products and services. In this regard,
the EU should for example aim to continue and expand joint business and trade missions. As companies in
different European Member States often offer complementary products and services, trade and business
missions could for example allow consortia of European business to offer complete ‘packages’ to foreign
clients. Trade and business missions should be organised in close cooperation with businesses and business
federations.
How to move forward
The EU would most likely be more successful at engaging China, strengthening multilateral economic
governance, levelling the playing field, remedying market distortions, enhancing its competitiveness and
ensuring fair competition and cooperation internationally if the challenges outlined above could be properly
addressed. There are a number of key recommendations that, if implemented, would enhance the EU’s ability
to deliver on these objectives.
As discussed in this chapter, the EU requires a comprehensive, whole-of-government approach in its
engagement with China to address the market distortions that flow from its state-led system. It needs to
be comprehensive insofar as it should address a range of issues that give rise to market distortions, so that
we do not push problems from one part of the ‘China Inc.’ spectrum to another instead of resolving them. At
50
The Economist,
“What
to do about China’s “sharp power”,
2017.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0045.png
43
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
the same time, the EU can only do so by bringing different strands and levels of policymaking together in a
coordinated whole-of-government approach.
This is not an easy challenge to address, and the EU should therefore act simultaneously on all three axes
– multilateral, bilateral and unilateral – in order to create opportunities and remedy problems as best as
possible. While multilateral and bilateral negotiations remain the preferred course of action for European
business, the EU should use all existing policy options and simultaneously strengthen its own capabilities in
the absence of progress on the multilateral and bilateral level.
To engage China successfully, the EU should
update the
modus operandi
of engagement
from negotiating
agreements with provisions that aim to address the legal framework, to one that addresses the challenge of
‘China Inc.’ more comprehensively. This should include clear outlines of what the road to a better bilateral
relationship looks like, with
clearly defined and measurable outcomes
and clear enforcement provisions on
what remedies and steps can be taken in the event that these outcomes do not materialise. It is important to
regularly take stock of progress made and to elevate discussions to a political level in case progress in this
area is not forthcoming. In essence, the EU should move into a
conditional and reciprocal relationship
with
China so that it can be held to account and we can each engage on our own terms.
This means that the EU should also improve its existing instruments (such as trade defence) and design
new instruments to mitigate the effects of market-distortive practices that are inherent to China’s state-led
economic system.
In addressing issues related to China’s state-centric system, it is an important priority for European business
that the EU does not begin emulating the distortive effects of China’s policies as a way of counterbalancing
them. It is therefore crucial for the EU to
preserve and strengthen market-based governance
within the EU.
This paper offers a multitude of recommendations on what should be done to achieve this as well as how this
may be achieved.
RECOMMENDATIONS
1
THE EU SHOULD ACT SIMULTANEOUSLY ON ALL THREE LEVELS
1.1
The EU should pursue parallel tracks to engage China.
As there is no single solution or single
path that will allow the EU to achieve its objectives in its relationship with China, the EU should act
simultaneously on multilateral, plurilateral, bilateral and unilateral levels to complement efforts
and create leverage.
1.
The multilateral and plurilateral level:
Reforming the WTO and engaging China at the WTO
would be the best way to achieve the EU’s objectives, but is also the least likely to yield concrete
results in the short term. The EU should also cooperate closely with likeminded 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.
3.
The unilateral level:
As there is often an absence of progress on the multilateral and bilateral
level,
the EU should simultaneously strengthen its own capabilities
to seize the opportunities
and mitigate the challenges.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0046.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
44
2
THE EU SHOULD ACT UNITEDLY
2.1
The EU Member States should address China with ‘one voice’ and act unitedly.
The EU must
also better leverage its economic unity and strength in its relationship with China. Specifically,
the European Council should move from unanimous decision-making towards
qualified majority
voting (QMV)
on foreign policy matters.
2.2
Invest in knowledge sharing and capacity building at EU and Member State level.
One of
the drawbacks that undermines unity of action is a disparity in available expert information
at different levels 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. In
terms of capacity building, the United States have established a dedicated US-China Economic
and Security Review Commission. Such an approach is lacking in the EU.
2.3
Define and negotiate clear and measurable outcomes
in the bilateral relationship with China.
Although these outcomes are usually defined in terms of legal provisions, a lack of transparency
as well as the unique features of the Chinese legal system make a reliance on legal provisions per
se a navel-gazing contest. It is therefore important to define the EU’s interests in terms of clear
outcomes and ensure that any legal provisions are built around them.
3
THE EU SHOULD ACT COHERENTLY
3.1
Ensure policy coherence and a whole-of-government approach towards China.
A whole-of-
government approach can for example be facilitated by establishing an inter-institutional working
group on China.
3.2
Design a horizontal ‘SOE principle’.
The EU should apply an ‘SOE principle’ in order to remedy
market distortions across policy domains. This could for example mean that the burden of proof
is reversed for foreign SOEs, regardless of nationality, that would require additional information
to ensure they operate on the basis of market conditions. Policy areas for which this could be
considered are amongst others investment screening, public procurement, and subsidies.
3.3
Develop and publish an annual tracker or scorecard with key indicators that supports an open
and fact-based discussion on the state of play in EU-China relations.
This annual stocktaking
exercise would allow the EU and key stakeholders to review the implications of the rise of China
more systematically and at regular time intervals and to objectively monitor key developments.
This is ever more important in an environment in which transparency and progress within China
are increasingly difficult to measure.
4
THE EU SHOULD ACT STRATEGICALLY
4.1
Secure strategic autonomy and economic sovereignty.
Economic and security dimensions
are becoming increasingly interlinked in the strategic rivalry between the EU’s two main trade
partners. The EU should more systematically assess the linkage between the economic and
security dimensions of the EU’s relationship with China and act proactively to promote and
safeguard the EU’s strategic interests.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0047.png
45
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
4.2
Create a strategic dialogue on China with Member States, EU institutions and key stakeholders.
This could take the form of a high-level dialogue, with specific coordination or working groups
that focus on particular issues. This strategic dialogue may also bolster European Commission
resources with the information required from business in order to take greater enforcement
action. This could take a similar form to the European Commission’s Task Force 50 on Brexit.
4.3
The Multiannual Financial Framework (MFF) should devote significant resources to the policy
areas that ensure a strong geopolitical Europe.
In this regard, the MFF should amongst other
allocate significant financial resources to research and innovation, to digitalisation and to the EU
Connectivity Strategy.
5
THE EU SHOULD ACT CONFIDENTLY
5.1
Improve the EU’s economic diplomacy.
So far economic diplomacy has mostly been performed by
EU Member States. Better European coordination in economic diplomacy would contribute to the
promotion of European products and services. It should for example be considered to organise EU
trade missions.
5.2
Act more assertively in protecting market-based governance.
The EU should revisit and enhance
its economic diplomacy and make greater use of ‘signalling’ – identifying and highlighting
problems by means of public statements. It is important not to remain silent on important
infractions on global market-based governance. This is an important soft-power tool available to
the EU that can bolster public debate.
5.3
Promote EU flagship initiatives with more vigour.
A more ambitious promotion of the EU
Connectivity Strategy is key in this regard.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0048.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
46
03
SECURE A LEVEL
PLAYING FIELD
BETWEEN CHINA
AND THE EU
In order to secure a level playing field between China and the
EU, WTO reform remains a paramount goal. The EU should
also take measures to level the playing field in the sphere of
bilateral trade and investment, in the area of procurement,
intellectual property protection and forced technology
transfer, standardisation, e-commerce and energy and
climate.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0049.png
47
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
3.1. THE WORLD TRADE ORGANISATION (WTO)
The WTO is vital in ensuring free and fair trade, providing the basis for the growth of economies and serving
as the backbone of the international system of economic trade governance. While China’s accession to the
WTO helped to foster the economic development of China and world trade, it has not transformed China into
an open market economy. There is also a list of commitments from China’s WTO accession protocol that China
has not (fully) undertaken. It has not yet acceded to the Agreement on Government Procurement (GPA), still
controls prices (e.g. in the area of electricity, raw materials and water) and does not notify trade measures in
a full and timely manner.
The current economic asymmetries that exist as a consequence of China’s unfulfilled WTO commitments,
the WTO’s inability to sufficiently enforce existing rules such as those on subsidies, and the deadlock in
rulemaking since China joined the WTO have a substantial adverse impact on market economies, including
the EU. China’s lack of convergence towards the global market economy also raises serious alarms among
the European business community since this means that the existing economic asymmetries can only be
resolved through WTO reform. Nevertheless, the deadlock in multilateral rulemaking has contributed to
doubts on whether WTO reform is possible in the near future, which in turn raises concerns on whether the
WTO can ensure fair competition and a global level playing field.
In the meantime, a new wave of protectionism has taken hold across the world. In the WTO’s 20
th
monitoring
report on trade-restrictive measures taken by G20 countries, the WTO notes a significant increase in the
number and coverage of trade-restrictive measures.
51
The United States government is currently one of the
most vocal WTO members questioning the viability of the multilateral trading system it once helped to create
and has taken unilateral measures to attempt to bridge these gaps. As a result, the multilateral trading
system is currently facing its deepest crisis since its inception due to these enduring problems and the
pressure from the USA to achieve a breakthrough in resolving them.
More than two decades after the organisation was created, it is clear that the multilateral system needs to
be renewed and made relevant again. While national economies and business environments have evolved
substantially during this period, the rulebook governing them has remained largely the same. The pledges
that the EU made to safeguard and promote the multilateral rules-based system and the reassurances that
President Xi Jinping made at the 2017 World Economic Forum in Davos now need to be followed by concrete
action.
Reforming the WTO
To strengthen the multilateral trading system, it is essential to achieve progress in terms of negotiating new
rules that are adapted to today’s global trading environment. This requires exploring possibilities under
existing rules as well as updating and reinforcing the rulebook of the WTO.
In June 2018, in the context of the 7
th
annual EU-China high-level economic and trade dialogue, the EU and
China decided to establish a working group to discuss and cooperate on proposals to reform the WTO in
a way that is able to meet challenges and develop rules to ensure a global level playing field, such as on
industrial subsidies. The first meeting took place in October 2018. This joint working group should be actively
used to discuss key issues such as industrial subsidies, state-owned enterprises and reform of the dispute
settlement pillar of the WTO.
51
World Trade Organisation,
“Report
on G20 Trade Measures (Mid-October 2018 to Mid-May 2019)”,
24 June 2019. In terms of the number of measures introduced, G20
economies implemented 20 new trade-restrictive measures during the period, including tariff increases, import bans and new customs procedures for exports. The
trade coverage of import-restrictive measures during the period is estimated at USD 335.9 billion. This is the second highest figure on record, after the USD 480.9 billion
reported in the previous period (mid-May 2018 to mid-October 2018). Together these two periods represent a dramatic spike in the trade coverage of import-restrictive
measures. The stable trend identified up to July 2018 has been replaced with a steep increase in the trade coverage of import-restrictive measures.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0050.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
48
China published a position paper on WTO reform, covering for example industrial subsidies, special and
differentiated treatment of developing countries and dispute settlement.
52
European business shares the
same principles that China touches upon but does not share how China ‘translates’ these principles into
practical reform proposals. The following paragraphs set out the key priorities for European business
regarding WTO reform and discuss how the WTO should be updated to take into account the implications of a
state-centric economy such as China.
Industrial subsidies and SOEs
Currently, there is a lack of coherent and comprehensive rules in the area of subsidies – beyond export
subsidies – and the role of SOEs. Regarding subsidies, the major challenge in disciplining government
support comes from the fact that government support can take a wide variety of forms and that there
is currently a lack of transparency in the way that government support programmes are implemented.
Therefore, anti-subsidy rules should be reformed to become stricter while also being sufficiently flexible to
address the extremely diverse forms of government support and the lack of transparency in implementation.
The concept of prohibited subsidies should be expanded to cover the most fundamental trade and competition
distortions, including all subsidies to a sector benefitting from systemic state support. WTO subsidy rules
need to address systemic state-led promotion of domestic industries and effective remedies must be created
to enforce new anti-subsidy rules.
Means of government support that currently are poorly addressed in WTO rules:
• State support granted through intermediate state-owned enterprises and semi-private operators.
There is currently a lack of comprehensive rules on state-owned enterprises and semi-private operators
that grant state support on behalf of the state or that channel state subsidies to the end beneficiaries at
their own discretion.
• State support granted to establish or invest in new operations in third countries.
Mergers and acquisi-
tions by Chinese companies on foreign markets that are backed by government (financial) support distort
the market.
• State guarantees.
Explicit and implicit financial guarantees by the state for companies distorts the
market. Companies that have a state guarantee can often offer products below the market price, leading
to market distortions.
• Systemic state support programmes.
WTO subsidy rules do not address state-led plans that promote an
array of domestic industries, or even single sectors. Current WTO rules generally only address subsidies to
specific producers of a single product. This needs to change as it does not reflect the magnitude of today’s
distortions.
53
Secondly, the growth and influence of SOEs in recent years is not yet sufficiently matched by equivalent
regulatory disciplines to capture market-distorting behaviour. Some subsidies granted to SOEs are already
captured by the WTO Agreement on Subsidies and Countervailing Measures (SCM). When SOEs themselves
grant subsidies, the SCM Agreement captures them through the concept of a “public body”. However, the
concept of a public body has been interpreted too narrowly, allowing a number of SOEs to avoid application of
the agreement. Therefore, it is necessary amongst others to clarify what constitutes a public body and how to
assess whether a member exercises meaningful control over the given enterprise.
52
Ministry of Commerce,
“China’s
Position Paper on WTO Reform”,
2018.
53
AEGIS Europe,
“Reform
of the WTO for a global level playing field”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0051.png
49
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
BusinessEurope calls on the EU to address this issue through multiple channels. Firstly, as agreed at the
21
st
EU-China summit, both sides should discuss the issue of industrial subsidies in the EU-China joint
working group on WTO reform. While this is a reassuring initial step, the discussions need to lead to concrete
deliverables which can be enforced.
Simultaneously, the EU should further intensify the trilateral meetings with the USA and Japan on the issue
of industrial subsidies and SOEs. The EU should also strive to open the discussion to like-minded countries,
for example by considering integrating these topics into broader negotiations on a plurilateral agreement on
government-driven market distortions under the framework of the WTO.
Notification of subsidies and technical barriers to trade
The shortcomings of the current system are evident when it comes to the notification of subsidies and
technical barriers to trade (TBTs). Although the WTO Agreement on Subsidies and Countervailing Measures
(SCM) requires members to notify their subsidies, the poor level of compliance has led to situations where
many WTO members have provided incomplete notifications. Although China has progressed from making
no notification at all to making some notifications, the 2018 WTO Trade Policy Review on China demonstrated
that notifications remain incomplete – e.g. official expenditure figures of support programmes and subcentral
data are often missing.
54
Within the current WTO notification system, it is impossible to oblige Member States to submit comprehensive
and complete notifications in a timely manner. For this reason, rule-making should focus on creating
incentives for WTO members to comply with their notification obligations and on promoting regulating
transparency in subsidies and TBTs. An improved process for notifications would be a stepping stone to
creating better rules defining the use of legitimate and illegitimate subsidies in pursuit of fairer global trade.
In this regard, the EU should amongst others promote its joint communication to the WTO General Council,
dated 27 June 2019, on ‘procedures to enhance transparency and strengthen notification requirements under
WTO agreements’.
Trilateral discussions held between the EU, the USA and Japan explore ideas to address this issue. European
business suggests considering the reversal of the burden of proof, meaning that it should lie with the WTO
member that fails to notify a subsidy. Another option would be the introduction of penalties for WTO members
that fail to notify measures that have an impact on trade.
Dispute settlement system
The dispute settlement pillar of the WTO is vital to check and correct the implementation and enforcement of
rules by all WTO members. The current blockage of Appellate Body appointments undermines the operation
of the WTO dispute settlement system as a whole.
The dispute settlement system has provided major benefits to business and consumers and is an essential
element of the WTO. While imperfect and in need of reform, it should be improved as opposed to destroyed.
Behind every trade dispute there are companies that rely on clear, stable and enforceable rules. All WTO
members should therefore act responsibly and find a solution that can prevent ‘the law of the jungle’ in inter-
national trade.
Until an agreement in the WTO is reached, countries should also look at alternative dispute settlement
solutions, as the European Commission is currently proposing. To safeguard the Appellate Body, a coalition
of WTO members, including the EU and China, have submitted a joint proposal to the General Council of the
WTO with concrete changes to overcome the current deadlock in the Appellate Body.
55
54
World Trade Organisation,
“Trade
Policy Review: China”,
2018.
55
For further information about the joint proposal, please consult: World Trade Organisation,
“Communication
from the EU, China, Canada, India, Norway, New Zealand,
Switzerland, Australia, South Korea, Iceland, Singapore and Mexico to the General Council”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0052.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
50
Special and differentiated treatment
European business believes that development is a core priority of the WTO and that special and differential
treatment for developing countries should be safeguarded. At the same time, this also means that further
developed WTO members have to take the responsibility they have according to their real development status.
This is particularly applicable to China which, despite being the world’s second largest economy and one
of the largest trading powers globally, often demands a special and differential treatment that is normally
reserved for the developing and least developed economies.
European companies support the European Commission’s assessment that “China can no longer be regarded
as a developing country.”
56
China has become “a key global actor and leading technological power. Its
increasing presence in the world, including in Europe, should be accompanied by greater responsibilities
for upholding the rules-based international order, as well as greater reciprocity, non-discrimination, and
openness of its system.”
57
The EU should therefore cooperate with China to reform the WTO, while insisting
that China complies with its commitments and actively contributes at a level that is proportional to its current
economic and technological development as this is not a black-and-white issue. For this reason, objective
criteria should be implemented to assess the developing country status.
An analysis of the perceptions of Chinese scholars of country positions on WTO reform
Among Chinese commentators, the EU,
Japan and Canada are frequently talked
about in a bundle when discussing
country strategies in WTO reform.
The USA
The EU, Japan, Canada
Subsidies, technology, transfer,
transparency of member
countries’ trade policy-making
China
Dispute settlement body mechanism
Analysis
Chinese scholars believe that the EU, Japan and Canada share
the same common ground as the USA in almost all WTO reform
issues except for the dispute settlement mechanism.
Despite these three countries’ overall support for constructive
WTO reform, Chinese commentators believe that the three might
lower their ambition for WTO reform to a targeted discussion on
subsidies out of concern that the USA might otherwise withdraw
from the WTO.
Source: PolicyCN, 2019
China’s response
Chinese scholars warn about the threat of the EU, Japan
and Canada forming an alliance with the USA to establish
a new trade order that would exclude China and means
abandoning the WTO. They base themselves on progress
between the USA and the EU in their trade negotiations.
They advise the Chinese government to join the Japan-led
CPTPP and expedite RCEP negotiations to hedge against
the risks of exclusion.
56
European Commission,
“EU-China:
A Strategic Outlook”,
2019, p. 1.
57
Ibidem.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0053.png
51
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
China and WTO agreements
Agreement on Government Procurement (GPA)
It is of utmost importance that China joins the GPA on the basis of an acceptable accession offer soon.
After China has presented several unacceptable offers in the past, it will have to be assessed whether a
new, revised Chinese offer tabled in October 2019 will overcome the shortcomings of the earlier offers. The
necessity to reach an acceptable Chinese offer should be treated as a key priority in any further contacts of
the EU with China from now on. The EU should encourage China to deliver on its promise to join the GPA as
soon as possible and work towards substantially and meaningfully opening its procurement market to foreign
bidders. See chapter ‘3.4 Procurement’ for more information.
E-commerce
A future agreement on e-commerce should establish binding rules for free, secure and reliable cross-border
data transfer. Legal localisation requirements, such as those included in China’s new Cybersecurity Law,
should be minimised, and the freedom of businesses to decide whether and what data are transferred should
not be curtailed. The transfer of or access to source codes should not be a market access requirement for
software. Here – as well as for cross-border data transfer – existing rules on data protection and security that
are in conformity with WTO law are to be respected. European companies would welcome an agreement that
facilitates electronic transactions and improves enforcement of local product safety rules. See chapter ‘3.8
E-commerce’ for more information.
Environmental Goods Agreement (EGA)
China is a world leader in the manufacture and sales of clean-energy technologies. Along with the EU,
both countries are well placed to lead support to reinvigorate discussions on the EGA. The aim of such an
agreement must be to reduce and eliminate tariffs on key environment-related products, open up markets
for environmental services, and develop common standards and labeling for environmental products. This
will help to achieve environmental and climate protection goals, such as energy and resource efficiency, and
controlling air pollution, while avoiding new bureaucratic customs procedures.
Plurilateral efforts to enhance market-based governance
While WTO reform would be the most beneficial route to restore the global level playing field, plurilateral
options to enhance market-based governance should also be considered as building blocks towards
strengthening the multilateral system.
Trade in Services Agreement (TiSA)
The EU should furthermore reprioritise and conclude negotiations on the TiSA. This is a plurilateral
agreement aiming to liberalise trade in services, and should include an annex on transparency and provisions
on data flows and data localisation. The agreement is being negotiated on a non-MFN (most favoured nation)
basis, meaning that only signatories will be able to benefit from it. However, TiSA has an open structure,
meaning that more WTO members could join the agreement in the future (see chapter ‘3.2 Trade’ for more
information).
Eliminating government-induced market distortions
While the agreement on Subsidies and Countervailing Measures (SCM) attempts to restrict the use of
subsidies, there are numerous market distortions beyond subsidies that can distort global markets. Without
a framework to restrict government-induced market distortions, government interventions in certain
economies might create distortions and trigger reactions in other economies. The EU should explore possible
frameworks on how to address these together with likeminded partners.
58
58
This recommendation is explored in greater detail in chapter 4.3 on overcapacity.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0054.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
52
DEMANDS
6
WTO REFORM.
WTO reform and the effective implementation of existing rules play a key role in
reducing activities that distort competition. In this context, the focus should be on updating the rules
on subsidies; introducing flexibilities into the system, both in terms of the negotiating method and on
the decision-making process; improving trade policy monitoring and notification procedures by for
example introducing penalties for members that fail regarding notification requirements; clarifying
the role of state-owned enterprises; strengthening the role of the WTO Secretariat; setting new rules
for clarity and transparency of export credits; and setting up joint complaints in the WTO dispute
settlement system. We support the EU proposals to address these issues by, for example, reversing the
burden of proof on notifications.
THE EU SHOULD ENCOURAGE CHINA TO JOIN THE FOLLOWING EXISTING WTO AGREEMENTS
AND ENGAGE MEANINGFULLY IN ONGOING NEGOTIATIONS:
7.1
Agreement on Government Procurement (GPA)
It is a key priority that China joins the GPA on the basis of an ambitious and acceptable accession
offer as soon as possible. Additionally, there should be a stronger role for the WTO Secretariat in
monitoring and enforcing (with penalties for non-compliance) the WTO GPA rules and in building
more structured interactions with the business community.
7.2
Negotiations on an agreement on e-commerce
Any agreement should establish binding rules for free, secure, and reliable cross-border data
transfer. Legal localisation requirements should be minimised, and the freedom of businesses to
decide whether and what data is transferred should not be curtailed. The transfer of or access to
source codes and algorithms should not be a market access requirement for software. Tariffs on
electronic transmissions should also be permanently abolished.
7.3
Negotiations on the Environmental Goods Agreement (EGA)
China is a world leader in the manufacture and sales of clean-energy technologies. Along with the
EU, both countries are well-placed to revive the discussions on the EGA.
8
NEGOTIATIONS ON THE TRADE IN SERVICES AGREEMENT (TISA):
This is a plurilateral agreement
aiming to liberalise trade in services, and should include an annex on transparency, e-commerce, and
provisions on data flows and data localisation. The agreement is being negotiated on a non-MFN basis,
meaning that only signatories will be able to benefit from it. However, TiSA has an open structure, meaning
that more WTO members could join the agreement in future.
INTENSIFY DIALOGUE IN THE EU-CHINA JOINT WORKING GROUP ON WTO REFORM:
The working
group should address key issues regarding WTO reform such as industrial subsidies, state-owned
enterprises and dispute settlement. The EU should encourage China to take up its responsibility for the
functioning of the multilateral trade system.
7
9
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0055.png
53
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
10
THE EU SHOULD EMPHASISE THAT ALL WTO MEMBERS SHOULD TAKE THEIR RESPONSIBILITIES
ACCORDING TO THEIR REAL ECONOMIC STATUS AND LEVEL OF DEVELOPMENT.
The EU should
cooperate with China to reform the WTO, while insisting that China actively contributes at a level that
is proportional to its current economic and technological development. This means that China can no
longer be considered a developing country in the same way that it has been within the WTO.
THE EU SHOULD BETTER HOLD CHINA TO ACCOUNT REGARDING COMPLIANCE WITH WTO
RULES.
59
This involves first and foremost sharing and exchanging with likeminded partners on China’s
conduct. Where possible, the EU should bring cases at the WTO in order to improve the implementation
and enforcement of China’s WTO commitments. The EU’s case against forced technology transfers is an
excellent example in this regard.
THE EU SHOULD CONTINUE TO ADVOCATE TO ENHANCE TRANSPARENCY AND STRENGTHEN
NOTIFICATION REQUIREMENTS UNDER WTO AGREEMENTS.
In this regard, the EU should
amongst others promote its joint communication to the WTO General Council, dated 27 June 2019,
on ‘procedures to enhance transparency and strengthen notification requirements under WTO
agreements’. It is essential to improve the compliance with existing notification commitments and to
agree on new ones, especially on subsidies. We would like to see these efforts further supported by
all WTO members. Sanctions for a lack of transparency or a failure to notify could be explored in this
regard.
11
12
59
See chapter 1.2. for more analysis on this issue.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0056.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
54
3.2. TRADE
Trade in goods
Trade flows between the EU and China are dominated by trade in goods. The EU exported EUR 209.8 billion
of goods to China in 2018 and imported EUR 394.8 billion of goods from China, resulting in a trade deficit
of EUR 185 billion. Exports of goods to China have grown slightly from EUR 170 billion in 2015 to EUR 210
billion in 2018.
60
China is the EU’s second most important trade partner with the value of bilateral trade flows
amounting to EUR 604.7 billion in 2018, behind the USA (EUR 674.1 billion). While China is the EU’s second
most important trade partner, the EU is China’s most important trade partner.
Nevertheless, the bilateral trade relationship is affected by numerous trade irritants. These include
inter
alia
China’s mercantilist focus on export-driven growth, state ownership and control of both state-owned
enterprises and private firms, floods of low-cost lending directed towards traditional manufacturing and
high-tech industry, lower social and environmental standards, legal and non-administrative practices to
compel foreign companies to transfer technologies. Persistent market access barriers to the Chinese market
have been on top of the list of concerns for the European business community for years. The ‘composite trade
liberalisation index’ (CTLI), which measures the change in China’s imports of a selection of highly protected
goods and services, shows that there is a lack of trade liberalisation and even some backsliding in the
manufacturing and services sectors.
61
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
0
2009
-100
2010
2011
2012
2013
2014
2015
2016
2017
2018
-200
Source: Eurostat, 2019
60
Eurostat,
“International
trade in goods – a statistical picture”,
2019.
61
Asia Society,
“The
China Dashboard: Trade Policy Reform”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0057.png
55
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
China’s Composite Trade Liberalisation Index
Import-to-GDP ratios of selected goods and services (>100=higher import levels) / By 4qma, Index value (4Q2013=100)
Agricultural goods
140
130
120
110
100
90
80
70
60
50
40
1G2014
2G2014
3G2014
4G2014
1G2015
2G2015
3G2015
4G2015
1G2016
2G2016
3G2016
4G2016
1G2017
2G2017
3G2017
4G2017
1G2018
2G2018
3G2018
4G2018
1G2019
Manufactured goods
ICT goods
Services
Composite
Source: Bloomberg, Rhodium Group, 2019
The trade relationship between the EU and China is further complicated by the escalation of the trade conflict
between the USA and China, which destabilises the world economy and international trade. A solution of the
conflict that includes the elimination of the additional tariffs imposed by the USA and China is therefore in the
interest of the EU. However, any agreement between these two parties should not alter the level playing field
to the detriment of the EU or other third countries. A deal that would include managed trade, discriminatory
rules, market distortions or breaches of WTO law would imply significant damages upon the multilateral
trading order.
Market access barriers
China is currently the EU’s most trade-restrictive partner. In 2018, China surpassed Russia as the country with
the highest stock of recorded trade and investment barriers, with 37 barriers impeding European companies
in their exporting to and investing in China. Russia is the EU’s second most restrictive trade partner with 34
barriers currently in place. Analysis also shows that overall behind-the-border measures (234) are more
important than traditional border measures (191). China also occupies the first place in terms of behind-the-
border measures (25), followed by Russia (18) and Brazil (15).
62
Many European companies report operating difficulties that remain unique to China.
63
Doubts on whether
China is truly committed to simplifying its administrative environment and creating a level playing field
continue to deepen. Cumbersome regulations and vaguely worded laws – often subject to arbitrary
interpretation – continue to pose a range of challenges.
62
European Commission,
“Report
on Trade and Investment Barriers”,
2019.
63
European Union Chamber of Commerce in China,
“Business Confidence Survey”,
2017.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0058.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
56
China resorted to four new trade and investment barriers in 2018. When estimating the economic impact of
these four new barriers, analysis shows that these barriers could affect EU exports of up to EUR 25.7 billion.
China’s Cyber Multi-Level Protection Scheme (also called Cyber-MLPS) is an example of a behind-the-border
measure that was recorded in 2018. This draft legislation, for example, increases the administrative burden
on foreign companies by requesting additional testing and certification requirements and further complicates
access to standardisation bodies for foreign companies. The European Commission Directorate-General for
Trade (DG Trade) estimates that this regulation alone could affect the entire ICT and electronics sector, in
which EU exports are valued at EUR 24.9 billion.
64
Explicit barriers such as long-held equity caps and licensing restrictions handicap foreign companies as they
seek to build market share in China. Major progress on licensing and certification is a priority for European
business as many still face unwarranted restrictions on their ability to operate in China. Even in those areas
where limited access is provided, European business finds complex procedures that in practice make business
establishment impossible. Thus, wider sectoral access for licensing and certification must be delivered, and
the process for securing them must be signposted and streamlined.
There are also many implicit barriers, from the frequent use of informal notifications of sensitive policy
changes (‘window guidance’ in banking, for example) and insufficient lead time before new policies take
effect. These practices create uncertainty about regulatory compliance and drive up costs for European
companies. Furthermore, the presence of European businesses in China is often contingent on complex and
constraining arrangements such as joint ventures with Chinese state-owned companies and many sectors
are still closed to real competition.
In 2018 alone, EUR 25 billion of EU trade flows were affected by new Chinese barriers
EU trade flows affected by new barriers reported in 2018 (in billion euros)
30
20
10
0
China
USA
India
Algeria
All other
partner
countries
combined
Source: European Commission, “Report on Trade and Investment Barriers 2018”, 2019
64
European Commission,
“Report
on Trade and Investment Barriers”,
2019, pp. 14-15.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0059.png
57
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
China is the most restrictive trade partner of the EU
Overall stock of trade and investment barriers per country in 2018
40
30
20
10
0
China
Russia
India
Indonesia
USA
Source: European Commission, “Report on Trade and Investment Barriers 2018”, 2019
Reciprocity and national treatment
In bilateral and multilateral negotiations, the EU should focus more on reciprocity in addition to national
treatment. European companies operating in China want to be treated in a similar fashion as Chinese
companies are treated in the EU. Advocating solely for national treatment for European companies in China
could entrench the lack of a level playing field.
The 2019 EUCCC Business Confidence Survey reported that 45% of the respondents experienced unequal
treatment of foreign-invested companies, with the most frequently cited areas of discrimination being
market access (43%), administrative issues (28%) and communication with the government (26%). Chinese
companies that operate in the EU are afforded equal treatment and have clear access to recourse under
the rule of law if they feel they are being discriminated against. It is high time that European companies are
afforded reciprocal treatment in this respect.
65
Trade in services
The value of bilateral trade in services between the EU and China reached EUR 80.8 billion in 2018 in terms
of balance of payments (BoP). Although total EU exports in services increased significantly from EUR 19.6
billion in 2010 to EUR 51 billion in 2018, bilateral trade between the EU and China remains dominated by trade
in goods. In 2018, only 19.5% of all EU exports to China consisted of trade in services, significantly lower than
the European average to the rest of the world (32% of total EU exports is in trade in services).
66
The relatively
low value of exports in services to China indicates that European companies experience significant challenges
when exporting services to China.
65
European Union Chamber of Commerce in China,
“Business
Confidence Survey”,
2019.
66
Own calculations based on Eurostat,
“International
Trade in Services”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0060.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
58
EU-China bilateral trade in services
In billion euros (data excludes Hong Kong)
EU services
exports to China
50
EU services imports
from China
EU-China trade in
services balance
40
30
20
10
0
2010
Source: Eurostat, 2019
2011
2012
2013
2014
2015
2016
2017
2018
Chinese policies and practices restricting trade in services
The services sector in China remains relatively closed to foreign companies. This can be illustrated by China’s
relatively low ranking on the OECD Services Trade Restrictiveness Index (STRI). Out of the 22 sectors covered
in the STRI in 2019, the level of restrictiveness in trade in services in China is relatively higher than the average
global restrictiveness in all but three sectors. Architecture services, rail freight services and engineering
services are the three sectors in which China scores relatively better than other countries. All other services
sectors are relatively more closed. The telecommunications services, postal and courier services and motion
services sectors are particularly restricted to foreign investors as they are subject to Chinese ownership
requirements or included in Beijing’s Negative List.
67
Loosening market restrictions in services is a key priority for European companies. In addition to legal
restrictions on foreign entities,
de facto
barriers, such as low regulatory transparency and visa restrictions,
are also impeding foreign companies when operating in China’s services sector.
67
Organisation for Economic Co-operation and Development,
“Services
Trade Restrictiveness Index: The People’s Republic of China”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0061.png
59
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Chinese services sectors are often restricted to foreign companies
China’s score on the OECD’s Services Trade Restrictiveness Index (per sector)
(0 = open; 1 = closed)
1
0.8
0.6
0.4
0.2
Distribution
Broadcasting
Engineering
Computer
Legal
Logistics cargo-handling
Logistics freight forwarding
Logistics storage and warehouse
Sound recording
Maritime transport
Road freight transport
Logistics customs brokerage
Rail freight transport
Source: OECD 2018
Positive developments but also backsliding
China has made some progress in terms of opening up domestic services markets and making reforms. State
Council Documents No. 5 and State Council Document No. 39 included pledges to improve market access
for foreign companies in the services sectors. Additionally, the revision of the Negative List (see chapter ‘3.3
Investment’) in June 2018 included timelines for gradually lifting equity caps in certain financial services.
At the 2019 G20 summit in Osaka, Xi Jinping furthermore announced that the 2019 revision of the Negative
List will further loosen market access restrictions in services.
68
This new Negative List has become effective
in July, but the reduction in restrictions has not met the expectations. Nevertheless, European business
applauds China’s efforts to open up the services sector and calls on China to continue opening its services
market to foreign enterprises and to deliver tangible improvements that also tickle down to the lower levels
of government.
Several negative developments have however diminished some of the progress that has been made regarding
removing market access restrictions. Despite some positive reforms, European companies have therefore
not necessarily experienced significant progress in operating in China’s services sector. Even within the same
sector, market openings in some areas can be diminished by tightening in a different area. For instance,
within the legal services sector 23% of European business experienced market openings. This opening was
diminished as an equal amount of European business in the legal services sector (23%) experienced market
closing.
69
Moreover, these industries provide services to other companies operating on China’s market,
thereby indirectly having a negative impact on the operations of other foreign companies.
68
China Daily,
“Xi
unveils plans for greater opening-up”,
2019.
69
European Union Chamber of Commerce in China,
“Business
Confidence Survey”,
2019.
Commercial banking
Motion pictures
Construction
Architecture
Accounting
Air transport
Insurance
Telecom
Courier
0
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0062.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
60
Higher emphasis on services
In future dialogues with China, the EU should emphasise the need for stronger liberalisation of China’s
services sector. European companies call on the EU to highlight services at all relevant platforms, for
example at EU-China summits. The Comprehensive Agreement on Investment (CAI) should aim to liberalise
investment in the services sector, and should deliver concrete results in a timely fashion.
European business furthermore strongly calls on the EU to advocate internationally to revive negotiations on
the Trade in Services Agreement (TiSA). Revamping negotiations on TiSA is essential to strengthen rules and
improve market access for trade in services. The negotiations should cover all sectors substantially and an
agreement should include provisions on transparency, data localisation and the movement of natural persons
working in services.
70
Trade defence instruments (TDI)
Effective trade defence instruments – including anti-dumping and anti-subsidy measures – are essential
tools for Europe’s manufacturing industry. China remains one of the EU’s most market-distorting trading
partners.
71
In order to protect European companies against unfair trade practices such as illegal subsidies
and to achieve a level playing field, the EU must stand up for a reciprocal approach from China and make trade
rules more effective and enforceable. The European business community welcomes the 2018 modernisations
of the EU’s trade defence instruments but identifies a need for further enhancement of the instrument and a
need for a stronger application and implementation of its provisions, with due consideration for the various
interests of EU industry and importers.
There are several mechanisms that the EU can apply to use the trade defence instruments more effectively
and with a faster and more resolute response.
First, while in the current TDI legislation it is sufficient to prove
“threat of injury”
to initiate an anti-dumping
case, the European Commission has shown a clear preference to take action only if EU producers prove to
have suffered actual
“material injury”
in the form of a very low or negative profitability. In some situations, this
approach can come too late since industry will either have already stopped producing or will have changed its
production operations in view of the obvious risk of being undercut in prices by Chinese imports. A substantial
change in the assessment of the existence of a
threat of injury
and of
material injury
is required to ensure that
a right remedy is adopted at a right time.
Second, the EU legislation entitles the Commission to open anti-dumping, anti-subsidy and anti-circumvention
investigations cases on its own initiative (ex
officio)
without a complaint from the industry. This possibility
has only rarely been used in the EU. The Commission should therefore more often use its right to initiate
investigations
ex officio
in view of the vast evidence of Chinese dumping, subsidies and circumvention
practices. This will particularly help small and medium-sized enterprises (SMEs) who do not possess the
resources to prepare a trade defence complaint by themselves.
Third, it is crucial that the TDIs provide the same level of protection against dumped imports from third
countries as the former analogue country approach – without putting the burden of proof on the shoulders
of the European industry. The European industry is still facing non-transparent markets and regulatory
framework conditions in third countries. Given this “black box” situation, the European Commission –
together with the Members States – need to establish own information sources to gather robust and
independent market intelligence.
70
For more detail on this recommendation, see chapter 3.1 on the WTO.
71
In the last ten years, the EU has imposed 41 anti-dumping/countervailing duties on China while China has only imposed 12 on the EU. Source: World Trade Organisation,
“Summary
and Status of G-20 trade and trade-related measures since October 2008”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0063.png
61
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Fourth, the application of a new methodology in anti-dumping investigations resulted in a significant increase
in the workload of the Commission’s anti-dumping service. At the same time, the staff constraints remained
the same. It is imperative in this regard that next to market intelligence, the staff of the Directorate H, Trade
defence, of DG Trade is significantly increased as well.
Moreover, the Commission applies a very high threshold to evaluate the complaint and requires that very
detailed evidence and data are provided by private companies. This makes it very difficult, especially for
SMEs, to launch an anti-dumping complaint. Consequently, the European business community believes that
a complaint should contain prima facie evidence only, as in line with EU regulation.
Finally, TDI measures should undergo a regular fitness check to ensure that they are up to date in addressing
the latest types of trade distortions. This is necessary as there are ongoing attempts by actors to circumvent
TDI measures imposed by the Commission. Therefore, it is crucial that collaboration between the authorities
is enhanced to capture these illegal practices. In that respect, the contribution of the European Anti-Fraud
Office (OLAF) should be further sought and encouraged to identify and tackle circumvention practices.
The EU should furthermore consider to develop tools to address distortions both in the area of services trade and
in relation to trade in goods that are not ‘imported’ (e.g. means of transport such as ships) but injure EU producers.
For instance, shipbuilding is one manufacturing sector in which overcapacity, subsidisation and government
interventions lead to injurious pricing practices and other trade distortions that create unfair competition for
European shipyards. Regretfully traditional trade defence measures imposed at the border are
de facto
not
applicable to shipbuilding because ships are not ‘imported’ in the common customs sense known for most other
products (i.e. permanent entry into commerce of the affected economy) and are rarely produced in large series
(it is hence difficult to establish a ‘like product’ and calculate the related dumping margin on it). So far, there are
therefore no effective trade defence instruments to address these distortions,
72
and there are gaps in both WTO
and EU law which need to be addressed and filled.
73
The creation of new instruments should be considered here.
Digital trade
Digital trade concerns the entire economy, not only the ICT sector. It is conducive to services and e-commerce
and, at the same time, a major enabler and value-adding factor to traditional manufacturing. Data flows are
inextricably linked with digital trade. Research conducted by the McKinsey Global Institute in 2016 indicates
that global cross-border data flows have multiplied by a factor of 45 between 2005 and 2014, jumping from 4.7
Tbps to 211.3 Tbps.
74
The same report also shows the important role of data flows in the increase of global
GDP. Compared to a scenario where no digital trade takes place, econometric research indicates that global
flows of goods, foreign direct investment (FDI) and data have increased the current global GDP by roughly
10%, accounting for USD 7.8 trillion. Data flows alone account for USD 2.8 trillion of this effect.
At the same time, new trade barriers are emerging. Digital protectionism, such as investment restrictions,
restrictions on cross-border data flows and forced data localisation are a growing concern for the European
business community.
75
China is by far the most restrictive major economy in digital trade. The Digital Trade
Restrictiveness Index (DTRI) shows that “China applies sweeping regulatory measures in all aspects of digital
trade, including trade in digital goods and services, investment in the information and communications
technology (ICT) sector, as well as the movement of data and ICT professionals.”
76
On a scale varying between
0 (completely open) and 1 (virtually closed), China’s score comes in at 0.7, putting it far ahead of the number
two, Russia, with a score of 0.46. By comparison, the European Union has a score of 0.21. In order to address
the barriers as well as skewed openness to digital trade, there are several policy measures that should be
taken to address these challenges.
77
The EU should advocate for effective standards in digital trade that go
hand in hand with trade liberalisation.
72
Long running efforts to establish a legally binding global regime amongst shipbuilding nations under OECD-sponsored negotiations have so far not succeeded. Nor can
tangible results be expected in this domain in the foreseeable future despite the best efforts of the EU.
73
AEGIS Europe,
“WTO
Reform: The Business Case (Annexes)”,
2019; AEGIS Europe, “WTO
Reform: The Policy Case”,
2019; European Union Chamber of Commerce in China,
“Shipbuilding Working Group Position Paper”, 2019.
74
McKinsey & Company,
“Digital
Globalisation: The New Era of Global Flows”,
2016.
75
See chapter ‘5.3 Digital Economy and Cybersecurity’ for more detail and recommendations on how to tackle digital protectionism.
76
European Centre for International Political Economy,
“Digital
Trade Restrictiveness Index”,
2018.
77
For an overview of common barriers to digital trade as well as detailed recommendations on how to address them, see BusinessEurope,
“BusinessEurope’s
views on Digital Trade”,
2017.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0064.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
62
DEMANDS
13
THE EUROPEAN BUSINESS COMMUNITY ASKS CHINA TO MAKE SIGNIFICANT MARKET ACCESS
IMPROVEMENTS.
Market access improvement should reciprocate the enormous advantages China
has gained on the European market. China should abolish before the border barriers, for example joint
venture and localisation requirements, and behind the border barriers such as opaque licencing and
certification procedures.
CHINA SHOULD CREATE A TRANSPARENT, RULES-BASED AND PREDICTABLE REGULATORY
ENVIRONMENT AS THIS WILL ENCOURAGE INVESTMENT AND JOB CREATION.
China should abide
by the rule of non-discrimination, transparency and predictability and ensure a level playing field
for foreign companies operating on the Chinese market and on China’s export markets. Transparent
and rules-based trade helps companies trust that their decisions to invest and trade have certain
predictable consequences in any given business environment. To this end, China should for example
publicly publish legislative reforms and ensure consistent implementation at all levels of government.
FOREIGN-INVESTED COMPANIES AND TRADERS IN CHINA SHOULD BE PROVIDED RECIPROCAL
TREATMENT IN ADDITION TO PRE-ESTABLISHMENT AND POST-ESTABLISHMENT NATIONAL
TREATMENT.
Chinese companies that operate in the EU are afforded equal treatment and have clear
access to judicial process under the rule of law if they feel they are being discriminated against. It
is high time that European companies are afforded reciprocal treatment in this respect. European
companies operating in China want to be treated similarly as Chinese companies are treated in the EU,
so as to avoid competitive advantages on the part of Chinese companies.
THE EU SHOULD FULLY APPLY AND FURTHER STRENGTHEN ITS TRADE DEFENCE INSTRUMENTS
(TDIs).
A lack of subsidy transparency in China undermines a company’s ability to provide the
necessary evidence of ‘material injury’ in anti-subsidy cases. DG Trade must have sufficient staff and
stronger in-house information resources to gather robust and independent market intelligence to fill
this gap. By more accurately recording trade-distorting subsidies, the EU would be able to launch more
anti-subsidy, dumping and circumvention cases. TDI measures should undergo a regularly fitness
check to ensure that they are up to date in addressing the latest types of trade distortions.
THE EU SHOULD EXAMINE THE SCALE AND POSSIBLY DEVELOP TOOLS TO ADDRESS DISTORTIONS
BOTH IN THE AREA OF SERVICES TRADE AND IN RELATION TO TRADE IN GOODS THAT ARE NOT
“IMPORTED” (E.G. MEANS OF TRANSPORT SUCH AS SHIPS) BUT INJURE EU PRODUCERS.
So
far, there are therefore no effective trade defence instruments to address these distortions and there
are gaps in EU law which need to be addressed and filled. The creation of new instruments should be
considered here.
THE EU SHOULD ADVOCATE INTERNATIONALLY TO REVAMP THE NEGOTIATIONS ON A
PLURILATERAL TRADE IN SERVICES AGREEMENT (TISA).
Strengthening the international rulebook
on and stimulating trade in services is essential for businesses to operate smoothly in an international
trade environment in which trade in services is increasingly becoming more important.
14
15
16
17
18
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0065.png
63
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
19
THE EU FREE-TRADE AGREEMENTS (FTAS) HELP TO SECURE MARKET-BASED GOVERNANCE
AND SHOULD INCLUDE STRONG RULES AND PROVISIONS IN ISSUE AREAS IN WHICH MULTI-
LATERAL RULES ARE LIMITED.
For example, the EU should spread strong standards in digital trade
that go hand in hand with trade liberalisation. These chapters should have ambitious disciplines
that tackle barriers to digital trade and ensure cross-border data flows and limit data localisation.
Disciplines on SOEs and subsidies also pave the way for a plurilateral or multilateral consensus.
THE EU ALSO NEEDS TO RAPIDLY EXPAND WORK WITH LIKE-MINDED PARTNERS
towards
agreements on privacy, data localisation and cyber standards, as well as free and safe data flows.
IT IS IMPORTANT FOR THE EU TO START A DIALOGUE WITH CHINA ON EXPORT CONTROLS AND
IMPORT RESTRICTIONS.
In particular, there is a need to clarify China’s evolving legal framework on
export control of dual-used goods as EU companies have important legal concerns regarding their
exports from China all over the world (e.g. the notion of ‘deemed exports’ is too vague).
A POTENTIAL TRADE DEAL BETWEEN THE USA AND CHINA MUST NOT BE AT THE EXPENSE
OF THIRD COUNTRIES OR THE INTERNATIONAL COMMUNITY.
The EU should emphasise in its
dialogues with the USA and China that a potential bilateral trade agreement between the USA and
China must abide by WTO rules such as non-discrimination.
20
21
22
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0066.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
64
3.3. INVESTMENT
Over the last decade annual Chinese foreign direct investment (FDI) flows into the EU have increased rapidly
from EUR 700 million in 2008 to peaking at EUR 37 billion in 2016. Although Chinese investment flows dropped
to EUR 17.3 billion in 2018, they nevertheless vastly exceed European FDI flows into China, which amounted
to EUR 6.1 billion in 2018. China has also exceeded the EU in terms of total outstanding FDI stock. Cumulative
Chinese FDI in the EU reached EUR 149.3 billion in 2018 while the total stock of EU FDI in China equalled EUR
138.3 billion.
78
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
40
35
30
25
20
15
10
5
0
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
78
Rhodium Group and Mercator Institute for China Studies, 2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0067.png
65
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
EU-China bilateral FDI stock
Cumulative Chinese FDI in the EU has now exceeded European FDI in China (figures in billion EUR)
EU-China
160
140
120
100
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Rhodium Group. Data represents the cumulative value of annual direct investment transactions, including greenfield projects and acquisitions that result in significant
ownership control (>10% of equity).
China-EU
The five year consecutive drop of EU FDI into China can partly be attributed to the high barriers to investment
that are present in China. The restrictive market access that European businesses experience can be
illustrated by the fact that China still ranked 59
th
out of 62 countries in terms of openness to FDI in the 2018
OECD FDI Regulatory Restrictiveness Index.
79
There is currenly a lack of a level playing field in the area of
investment as the EU is open to Chinese investments, but the Chinese market is highly restricted.
Likewise, China ranked 100
th
out of 180 countries that were assessed in the Heritage Foundation’s Economic
Freedom Index. China scores particularly low on the ‘investment freedom’ indicator as Beijing applies
restrictive foreign investment policies that protect inefficient SOEs.
80
Thus, while the EU market is in essence
open to foreign investors, the Chinese market is relatively closed to European investment.
79
A score of 1 equals maximum restrictiveness. See Organisation for Economic Co-Operation and Development,
“FDI
Regulatory Restrictiveness Index”,
2018.
80
The Heritage Foundation,
“Index
of Economic Freedom: China”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0068.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
66
FDI Regulatory Restrictiveness Index
FDI restrictiveness is an OECD index gauging the restrictiveness of a country’s foreign direct investment (FDI) rules
by looking at four main types of restrictions: foreign equity restrictions; discriminatory screening or approval
mechanisms; restrictions on key foreign personnel and operational restrictions. Implementation issues are not
addressed and factors such as the degree of transparency or discretion in granting approvals are not taken into
account. The index here shows the total and nine component sectors taking values between 0 for open and 1 for closed.
0,25
0,20
0,15
0,10
0,05
0,00
United Kingdom
Luxembourg
Netherlands
Czech Republic
Germany
Slovakia
Finland
Croatia
Austria
Ireland
Poland
Denmark
Portugal
Lithuania
Romania
Hungary
Belgium
Slovenia
Sweden
Greece
Latvia
Estonia
France
China
World
2019
Spain
Italy
Source: OECD, 2019
China’s investment freedom score is barely improving
100 = total freedom, 0 = totally restricted
China
80
70
60
50
40
30
20
10
2010
2011
2012
2013
2014
2015
2016
2017
2018
Europe
Source: The Heritage Foundation, 2019
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0069.png
67
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Pre- and post-establishment restraints
When investing in China, European businesses are confronted with ‘pre-establishment’ and ‘post-
establishment’ restraints on foreign investment.
Pre-establishment restraints include amongst others market entry restrictions, burdensome approval
procedures, equity caps, and cases of forced technology transfer. Market access restraints are primarily
laid down in the National Negative List on Foreign Investment (officially called the ‘Special Administrative
Measures on Access to Foreign Investment’) and the FTZ Negative list on Foreign Investment (officially called
the ‘Free Trade Zone Special Administrative Measures on Access to Foreign Investment’) which are issued by
the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM).
In June 2018, Beijing improved market access for foreign companies when it updated the National Negative
List on Foreign Investment, reducing the number of restricted sectors on the negative list from 63 to 48.
81
These have been further cut back to 40 restricted sectors in July 2019. The FTZ Negative List was also
renewed in 2019, reducing the number of restricted sectors from 45 to 37.
82
In several sectors foreign
ownership caps were raised or removed. In the automotive sector, for example, equity caps on new energy
vehicles (NEVs) were completely removed in 2018 and foreign ownership requirements will furthermore be
lifted on commercial vehicles in 2020 and on passenger cars in 2022.
83
However, the recent market openings have been contradicted by increasing market access restrictions in
other sectors as many markets in which European companies are highly competitive remain largely closed. A
business survey by the EUCCC demonstrates that while some sectors, such as the cosmetics, automotive and
financial services sectors, have opened up, other sectors, such as the pharma and IT/telecom sectors, have also
seen partial closures. The improved market access has furthermore been diminished as some sectors that have
been removed from the Negative List for Foreign Investment remain on the Negative List for Market Access.
84
Moreover, in many of the sectors that have been opened state-run monopolies are so entrenched that it will be
difficult for foreign companies to gain a market entry and to compete (railways, power grids, etc.).
In addition to market access restrictions recorded in the Negative List, foreign investors are often obliged to
meet restrictive equity requirements or forced to establish a joint venture when entering the Chinese market.
For example, while the majority of German investors in the Chinese automotive sector were forced to invest
their capital in minority stakes, most Chinese investors in the European automotive sector have a controlling
majority stake.
85
Secondly, companies are confronted with various post-establishment restraints regarding foreign
investments in China. Post-establishment barriers include the existence of explicit and implicit policies and
practices that result in discriminatory treatment of foreign investors. In 2018, 35% of European businesses
were confronted with administrative obstacles and 30% experienced discretionary enforcement of rules and
regulations when operating in China.
86
Furthermore, European investors in China face hurdles in gaining access to funding in China. On the one hand,
European businesses are explicitly excluded from many financial support programmes as some programmes
specifically target domestic companies and indigenous innovation. On the other hand, foreign businesses that
operate in China have difficulty in obtaining financial services because they are often indirectly excluded since
local businesses are preferred as they have closer relationships with local banks.
81
82
83
84
85
86
United States Information Technology Office, “NDRC
and MOFCOM Releases New Negative List”,
2018.
Xinhua,
“China
Focus: China opens more sectors to foreign investment with new negative lists”,
2019.
Reuters,
“China
further eases foreign investment curbs”,
2018.
European Union Chamber of Commerce in China,
“Business
Confidence Survey”,
2019.
MERICS & Rhodium Group,
“EU-China
FDI: working towards reciprocity in investment relations”,
2018.
European Union Chamber of Commerce in China,
“Business Confidence Survey”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0070.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
68
The Foreign Investment Law
On 15 March 2019, Beijing furthermore adopted the new Foreign Investment Law (FIL). The law requires
foreign investments to be awarded ‘national treatment’ except when the Negative List of the Catalogue Guiding
Foreign Investment in Industry states otherwise. Additionally, the new law aims to tackle the problems linked
to forced technology transfers. The law for example prohibits Chinese authorities from using administrative
means to force foreign investors to transfer technology.
The FIL addresses some key concerns of private and foreign investors, but there remain various questions
as to what extent the FIL will lead to tangible improvements in investment conditions in China. Firstly, the
FIL contains many vaguely formulated clauses that lack detail. Moreover, it remains vague in terms of
enforcement as its enforcement will depend implementation provisions that are yet to be adopted. This is a
concern particularly regarding the regional and local enforcement of the law. The provisions banning forced
technology transfer are also unclear. Whereas the FIL prohibits authorities from using administrative means
to force investors to transfer technology, this does not prevent non-administrative means to force investors to
transfer technology. Lastly, the law still distinguishes between ‘domestic’ and ‘foreign’ companies. This does
not contribute to the equal treatment of businesses regardless of their origin.
In general, the Foreign Investment Law has the potential to contribute to creating a better investment climate
for businesses in China. For this to be true, however, it is essential that Chinese authorities enforce the law
at all levels of government and that the government delivers on its promises to provide national treatment
to foreign businesses and respect intellectual property. Moreover, as long as Chinese policies such as MiC
2025 include concrete targets for domestic market share for Chinese companies, European business remains
concerned to what extent FIL and other market openings will yield tangible improvements.
How to move forward
Comprehensive Agreement on Investment (CAI)
The best way to improve EU-China relations is by negotiating and concluding the CAI before the end of 2020.
This would give the right signal to European companies that China’s market remains open for business, and
also creates the predictability companies need to make their investment decisions. However, substance
should prevail over timing as an ambitious agreement would resolve a lot of the issues that have been raised
by the European business community. Both sides must strive to liberalise all sectors substantially, eliminate
pre- and post-establishment restrictions to investment and tackle both de jure as well as
de facto
barriers
to investments. The agreement must also include provisions on industrial subsidies and state-owned
enterprises (for example by opening up markets that are now only open to SOEs and by considering how to
handle SOEs in investor-to-state disputes related to the investment agreement). The resulting negative list
for FDI in China should be as short as possible since many sectors are still completely or partially restricted
to foreign investment.
For the CAI to deliver concrete results for business, it is essential that is does not only include ambitious
clauses on market access for goods and services, technology transfer and free movement of capital, but
also on fair and equitable treatment, investor-to-state and state-to-state dispute settlement and sustainable
development. The successful conclusion and implementation of the CAI would also give a positive incentive to
consider opening free-trade negotiations in the future if the right conditions prevail.
Investment screening
On 5 March 2019, the European Council adopted a regulation establishing a framework for the screening
of foreign direct investment into the EU. We welcome the fact that the new screening regulation clearly
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0071.png
69
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
emphasises that the EU remains an open investment environment and welcomes Chinese FDI. This point is
crucial, as FDI is a major contributor to the creation of jobs and growth in the EU.
87
Screening mechanisms can
still be improved as mechanisms currently differ between Member States. The EU and EU Member States must
therefore strive to ensure a coherent and compatible application of the EU investment screening framework and
respect minimal EU standards for their national control mechanisms.
Notwithstanding the non-discriminatory principles of the investment screening regulation, its provisions could
particularly apply to a substantial amount of Chinese investment. In a report on Chinese investments into the
EU, Rhodium and the Mercator Institute for China Studies demonstrated that the provisions of the screening
regulation to a large extent apply to Chinese investment into the EU. The FDI screening framework requires
special scrutiny for investments that: 1) have been designated as sensitive sectors, 2) have been made by state-
owned enterprises and other directly or indirectly state-controlled entities or 3) fall under a foreign state-led
programme or project. Accordingly, 83% of Chinese merger and acquisition transactions into the EU could
potentially fall under intensified scrutiny.
88
In 2018, 46% of the Chinese mergers and acquisitions into the EU fell into the designated sensitive sectors,
including for example the defence, transport and communications sectors, but also the “freedom and pluralism
of the media”. Secondly, over the past years, 50-60% of the value of Chinese investments into the EU originated
from SOEs or other Chinese companies that were directly or indirectly controlled by the Chinese government. In
2018, 41% of the value of Chinese merger and acquisition transactions into the EU were made by SOEs.
Thirdly, 58% of the number as well as the value of Chinese investment flows into the EU were directed at
sectors that are targeted by the state-led programme Made in China 2025.
89
Overview of European FDI screening mechanisms
Changes in national-level screening mechanisms since 2017
Countries with a screening
mechanism in place -
no change since 2017
Countries with a screening
mechanism in place -
strengthened since 2017
Countries that created a
new screening mechanism
since 2017
Countries officially
considering creating a
screening mechanism
N/A
Source: MERICS and Rhodium Group, 2019
87
See European Commission,
“Trade
for all: Towards a more responsible trade and investment policy”,
2015: “…inward investment is responsible for employing 7.3 million
people in the EU”, p. 9.
88
Rhodium Group and Mercator Institute for China Studies,
“Chinese
FDI in Europe”,
2019.
89
Ibidem.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0072.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
70
EU information portal on investment screening
An EU information portal on investment screening will contribute to a transparent and predictive investment
climate that facilitates and stimulates foreign investment into the EU.
The attractiveness of the EU as a destination for investment may suffer from market fragmentation as a result
of divergent national investment screening mechanisms and the lack of centrally available information about
the functioning of national screening mechanisms. While the new investment screening regulation requires
Member States to submit an annual report regarding inward FDI and to establish a national contact point in
the field of FDI, these measures do not necessarily contribute to the harmonisation of information and may
actually reinforce national divergences regarding information processing about screening mechanisms.
Additionally, the mechanism does not guarantee that information is shared publicly or that information
regarding the functioning of the FDI mechanisms is publicly accessible to foreign investors. The information
that is currently publicly available is very limited. Gaps regarding the availability as well as the quality of
information have a negative effect on attracting foreign investment. Higher transparency will contribute to a
stable and predictive investment climate.
Therefore, the EU should establish an EU information portal on investment screening, allowing the public
and foreign investors to assess the functioning of national screening mechanisms at a central European
level. An EU information portal on investment screening should contain a comprehensive overview of the
respective national investment screening frameworks and the relevant implications of screening procedures
on investment decisions.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0073.png
71
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
DEMANDS
23
CONCLUDE THE NEGOTIATIONS ON THE COMPREHENSIVE AGREEMENT ON INVESTMENT
(CAI) BEFORE THE END OF 2020.
Concluding the negotiations on CAI is a key priority for European
business. However, substance should prevail over timing and negotiations should be concluded only
if the agreement is sufficiently ambitious. Both sides should therefore strive for an ambitious and
far-reaching agreement that eliminates substantially all pre- and post-establishment market access
barriers for goods and services and ensures national treatment of foreign investors. Additionally, the
CAI should include strong enforcement measures and provisions on state-owned enterprises.
ENCOURAGE CHINA TO FURTHER ELIMINATE ALL PRE- AND POST-ESTABLISHMENT RESTRAINTS
ON FOREIGN INVESTMENT.
While Chinese investors have access to the European market, European
investors do not have equal access to the Chinese market. The EU should engage with China to level
the playing field by eliminating pre- and post-establishment restraints on investment.
ENCOURAGE CHINA TO CLARIFY THE FOREIGN INVESTMENT LAW WITH APPROPRIATE
IMPLEMENTATION AND ENFORCEMENT MECHANISMS.
The Foreign Investment Law has the
potential to improve the business environment in China for foreign investors by furthering the
prevalence of equal treatment with home-grown firms and strengthening the protection of intellectual
property rights. However, businesses require further clarity on implementation of the law to ensure
that it delivers concrete and enforceable results on the ground. The law remains vague on enforcement
and on issues with potentially broad connotations such as the national security review.
EU MEMBER STATES SHOULD IMPLEMENT AN INVESTMENT SCREENING MECHANISM, ENSURE
A COHERENT APPLICATION OF THE EU INVESTMENT SCREENING FRAMEWORK AND RESPECT
MINIMAL EU STANDARDS FOR NATIONAL CONTROL MECHANISMS IN ORDER TO AVOID MARKET
FRAGMENTATION.
This should go hand in hand with creating better market intelligence capabilities
for both the European Commission as well as the EU Member States. Moreover, enhanced collaboration
between the EU and the Members States is key.
ESTABLISH AN EU INFORMATION PORTAL ON INVESTMENT SCREENING.
Currently, there is a
lack of transparent, harmonised and publicly available information regarding national FDI screening
mechanisms. As information is collected on a Member State level, this might reinforce national
divergences and hinder inward FDI. The attractiveness of the EU to foreign investors benefits from
more transparent and centrally available information. For this reason, the Commission should
consider establishing an EU information portal on investment screening to facilitate investment into
the EU. However, information that is considered confidential by companies should be excluded.
24
25
26
27
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0074.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
72
3.4. PROCUREMENT
The value of the EU public procurement market has been estimated at EUR 2.4 trillion,
90
accounting for
approximately 14% of EU GDP in 2017.
91
The EU has globally been a strong advocate for the opening of public
procurement markets. Accordingly, the EU has significantly opened its 2.4 trillion public procurement market
through multilateral and bilateral agreements. According to data that the Chinese authorities provided to
the WTO, the total annual value of government procurement was RMB 3.11 trillion in 2016 (EUR 460 billion),
accounting for 4.2% of GDP. A total of 95% takes place at local level.
92
The relatively low total value of the
procurement market and the discrepancy between central and local procurement is explained by the fact that
some areas, such as large central infrastructure projects that are conducted by SOEs, are not covered in this
number.
While Chinese companies are allowed to bid on public procurement tenders in the EU,
93
European businesses
are often prohibited to bid on procurement opportunities in China.
94
On a bilateral level, the EU has integrated
ambitious chapters on procurement in several free-trade agreements, such as the Comprehensive Economic
and Trade Agreement (CETA) with Canada. On a multilateral level, the EU has strongly promoted the
establishment of the plurilateral Agreement on Government Procurement (GPA) through the WTO. China
promised to access the GPA ‘as soon as possible’ when it joined the WTO in 2001. To this day, however, China
has not yet acceded to the GPA. Besides the fact that China is not a member of the GPA, several
de jure
and
de
facto
barriers hinder European businesses when wishing to access the Chinese procurement market.
De jure
barriers
Whereas the EU’s public procurement market is regulated through the EU public procurement directives and in
addition through plurilateral and bilateral agreements, China is not a member of the GPA, nor has it integrated
procurement in any of its bilateral trade agreements. China’s procurement market is regulated through two
domestic laws: the Tendering and Bidding Law (TBL) and the Government Procurement Law (GPL).
Both laws include numerous de jure barriers that exclude European businesses from the Chinese procurement
market or highly limit access for European bidders. Several aspects of the GPL result in market distortions.
Article 10 of the GPL, for example, contains a ‘buy Chinese’ clause which prescribes that “domestic goods,
construction and services shall be procured for government procurement”.
95
What is more, a clear definition
of what constitutes domestic goods and companies is currently lacking. This causes uncertainty for European
businesses active in China as it is, for example, often unclear whether goods and services that are produced
locally, by foreign-invested enterprises (FIEs), qualify for consideration. Moreover, state-owned enterprises
conduct most of Chinese procurement and certain procurement projects, such as the EUR 32.7 billion Three-
Gorges dam, were excluded from TBL and GPL rules.
Likewise, FIEs who wish to participate in a bid for a procurement opportunity under the TBL are often required
to obtain a licence. Although the TBL does not explicitly state that domestic companies should receive a
preferential treatment, it is in line with the government’s general goal to enhance ‘indigenous innovation’.
Regional regulations that fall under the scope of TBL sometimes explicitly exclude foreign bidders. Article
23 of the Regulations of Tianjin Municipality on Patent Protection for example states that for “government
procurement and other procurement where financial funds are used, products with indigenous patents shall be
considered first. When indigenous innovation products with patent rights enter the market […] the government
shall begin to procure or order these products”.
96
It is imperative that these
de jure
barriers are reduced and
that Chinese and European businesses have reciprocal access to each other’s procurement markets.
90
91
92
93
European Commission,
“Factsheet
on the International Procurement Instrument”,
2019.
European Commission,
“Single
Market Scoreboard: Public Procurement”,
2018.
World Trade Organisation,
“Trade
Policy Review: China”,
2018.
However, because China is not a member of the WTO GPA and because China and the EU do not have an FTA, a Chinese bidder, as any other bidder from a third country which has neither
signed the GPA nor a bilateral FTA with the EU, does not have secured access to procurement procedures in the EU and may be excluded under Article 85 of Directive 2014/25/EU.
94
See the ‘Belt and Road Initiative’ and the ‘Competition on Third Markets’ chapters for procurement challenges that occur outside China on third markets.
95
People’s Republic of China,
“Government
Procurement Law”,
2002.
96
Standing Committee of Tianjin People’s Congress,
“Regulations of Tianjin Municipality on Patent Promotion & Protection”,
2011, article 23.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0075.png
73
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
De facto
barriers
Besides these
de jure
barriers to foreign bidders on the Chinese market, there are also
de facto
barriers
to procurement opportunities for European businesses. The European Chamber of Commerce in China
demonstrated that European businesses face several
de facto
barriers in China.
97
These include amongst
others the non-transparent procurement system and the unpredictable enforcement of regulation. The
selection and award criteria for example are often unclear. The existence of two parallel systems of
procurement (TBL and GPL) and the inconsistencies between the systems cause further confusion amongst
European businesses.
Barriers to European companies on
the Chinese procurement market
“Eur opean comp anie s f ace many
hurdles when operating on China’s
procurement market.” On the other
hand, the EU procurement market is
open to Chinese companies.
Buy Chinese
provisions
de jure
Exclusion of certain projects from
GPL or BTL
• Three Gorges Dam (USD 37.3 billion)
• China’s high-speed rail network
de facto
Existence of
two systems:
GPL and BTL
Lack of
transparency
National
establishment
Discriminatory
enforcement
Souce: European Commission, “IPI factsheet”, 2019, and own additions
97
European Union Chamber of Commerce in China,
“European Business in China 2018/2019: Position Paper”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0076.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
74
The EU’s public procurement market
Besides efforts to open third-country procurement markets for European companies, the EU should also
ensure that foreign companies that participate in the EU’s public procurement market respect our rules. The
legislative framework in the EU was updated in 2014, when Directives 2014/25/EU, 2014/24/EU and 2014/23/
EU were adopted. These directives require contracting authorities to award contracts according to the
principle of the most economically advantageous tender (MEAT), allowing contracting authorities to take both
quality and costs into account, by for example applying price-quality ratio and life-cycle costing and by setting
ambitious social and environmental standards.
European business is concerned as Member State authorities do not consistently apply and enforce these
directives. National and local contracting authorities have much discretion to apply tender criteria, and in
practice award contracts are often based on the lowest price rather than quality criteria. The EU should
ensure that contracting authorities apply the directives as consistently as possible. The European Commission
services should proactively support contracting authorities to implement the directives to facilitate the shift
towards sustainable procurement.
The ‘Guidance on the participation of third country bidders and goods in the EU procurement market’ issued
by the European Commission in July 2019 is a useful tool for contracting authorities. The guidance reminds
authorities that bidders from countries which are not part to the WTO GPA nor to an FTA have no secured
access to the EU’s public procurement market.
The 2014 directives also require contracting authorities to review and optionally reject ‘abnormally low
tenders’. This allows contracting authorities to ensure a level playing field when for example subsidised
state-owned enterprises offer an uncompetitive abnormally low tender. Contracting authorities should be
encouraged and supported to review, and when necessary reject, abnormally low tenders more consistently
in accordance with Art. 69 of Directive 2014/24 and Art. 84 of Directive 2014/25. European companies must be
prevented from being discriminated against by dumping offers from subsidised companies.
How to move forward
WTO Agreement on Government Procurement (GPA)
While China proposed to become a member of the GPA “as soon as possible” when it joined the WTO, negotiations
are still ongoing. It is of utmost importance that China joins the GPA on the basis of an acceptable accession
offer as soon as possible. China has presented six accession offers that were considered unsatisfactory by the
current GPA members, as the market access offers that the Chinese proposed were not equivalent to the level
of openness granted by the current GPA members. It will have to be examined very carefully whether the new
revised Chinese offer that was tabled in October 2019 will overcome the shortcomings of the previous offers and
whether this latest offer will grant acceptable market access to Chinese procurement markets equalling the
opening volume granted by the current GPA members.
Open public procurement markets provide a win-win opportunity for both Chinese and European suppliers.
The EU should prioritise China’s accession to the WTO’s GPA under acceptable conditions and strive for
a balanced and reciprocal access to procurement markets, elimination of substantially all barriers to
procurement markets and equal opportunities for domestic and foreign suppliers. As the accession of
China to the WTO GPA has moved forward very slowly, from now on the call for accession should become a
key priority in any future contacts of the EU with China. Although a timely accession is important, it is even
more important that there is a maximum level of ambition and that there are sufficiently strong enforcement
provisions and available resources should China’s accession not deliver in practice.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0077.png
75
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
It is important that a revised offer aims to eliminate the policies and practices that allow for the preferential
treatment of domestic suppliers such as the ‘buy Chinese’ provisions in China’s GPL. As European
procurement markets are considerably open at central and subcentral level, a Chinese GPA offer should also
cover both central and subcentral levels. Any deal should also apply to state-owned contracting authorities
(e.g. China Railways) – which are major customers for European industry. As the provisions of the GPA
contain important safeguards regarding transparency, non-discrimination and legal remedies, an acceptable
accession offer - i.e. a coverage similar to the coverage of the other GPA members - would significantly
improve current shortcomings related to transparency and administrative practices.
While details of the recent Chinese accession offer of October 2019 are not yet public, it has to be criticised
that the previous Chinese GPA offer which dated from 2014 was still limited to the procurement of goods,
works and services conducted with fiscal funds by state organs, public institutions and social organisations
(approximately 10% of the market). By contrast, it completely leaves out the procurement of large
infrastructure and public utility projects, e.g. power generation and supply, sewage, water supply and public
transportation (approximately 90% of the market).
98
It will have to be assessed very carefully whether the
revised Chinese offer will overcome the shortcomings of the previous offer.
International Procurement Instrument (IPI)
European business supports an open procurement market and welcomes EU measures that aim to open
global procurement markets and encourage more partners to join the WTO GPA. The proposed International
Procurement Instrument (IPI) pursues the right objective of enforcing the principle of balanced market
access enshrined in the WTO GPA and creating leverage to encourage partners to join the GPA by enabling the
European Commission to investigate discrimination against EU companies on procurement markets in third
countries. However, the revised proposal of the Commission of 2016 requires several amendments in order to
avoid negative implications.
Firstly, the Commission should avoid that the IPI leads to increased administrative burden and higher
implementation costs for contracting national authorities Member State who are already struggling to
consistently implement the current procurement rules such as the 2014 directives. The 2016 proposal already
provides that price adjustment measures shall only apply to contracts with an estimated value equal to or
above EUR 5,000,000 exclusive of value-added tax. Negotiating that threshold would also ensure that smaller
contracting authorities with less procurement resources and knowledge will not be impacted.
Secondly, the proposed evaluation by procurement authorities of the European content of tenders may
create some practical difficulties and uncertainties. It could even backfire and penalise EU businesses
with diversified supply chains. For this reason, the EU should abstain from establishing a mechanism that
would assess the origin of an offer by applying the proposed ‘rules of origin’ method. The proposed rules
of origin method will often lead to complex investigations and could cause new administrative burden and
new legal uncertainties for EU businesses and contracting authorities. The IPI would be more effective and
less cumbersome if the price adjustment measures would for example apply to legal entities established
in or controlled by a legal entity based in the third targeted country – removing any difficulties linked to the
calculation of the share of content from this third country (Article 8, (1)).
Thirdly, we also need an instrument that can leverage the existing rules enshrined in the EU procurement
directives. Although Article 85 and 86 of Directive 2014/25 have not often been used in practice, it is important
that these articles – enabling contracting authorities to exclude tenders with a majority of foreign content –
are maintained.
98
European Construction Industry Federation, European International Contractors and European Dredging Association,
“Joint
voting recommendations for the amended
proposal for a “market access” regulation”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0078.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
76
Lastly, the proposed price adjustment mechanism is excessively complex and it is not clear whether the
proposed price penalty for tender evaluation will be sufficiently effective to address actors such as state-
owned entities who are also driven by policy agendas. Accordingly, the proposed IPI provisions regarding the
price penalty need to be revised. It might also be reflected as to whether special provisions on state-owned
enterprises could be designed to also include a full exclusion of a state-owned enterprise from a third country
which did not sign any opening agreement with the EU and has been identified as a country with discriminatory
policies and practices in place against EU companies.
DEMANDS
28
THE EU SHOULD URGE CHINA TO SUBMIT A REVISED AND CLEARLY MORE AMBITIOUS GPA
ACCESSION OFFER.
It is essential that China joins the GPA on the basis of an acceptable accession
offer as soon as possible. While six previous offers presented over many years were clearly not
acceptable for the current members of the GPA, China recently tabled another revised offer at the
end of October 2019. It will have to be assessed very carefully whether this latest offer overcomes the
diverse shortcomings of the previous offers. The call for Chinese accession should be treated as a key
priority in any high-level contacts between the EU with China from now on. The offer must eliminate
substantially all
de jure
and
de facto
barriers that currently lead to the preferential treatment of
domestic suppliers over foreign suppliers.
IMPROVE OPENNESS IN PUBLIC PROCUREMENT MARKETS.
The draft International Procurement
Instrument aims to pursue the right objective of enforcing the principle of balanced market access
enshrined in the GPA and creates leverage to encourage partners to join the GPA. However, an
international procurement instrument must avoid negative effects such as a higher bureaucratic
burden for contracting authorities, legal uncertainties for EU companies, complex price adjustment
mechanisms and negative effects on EU companies with international supply chains. Therefore, the
2016 proposal requires further modifications and should also include special provisions on SOEs.
ENCOURAGE CONTRACTING AUTHORITIES AND EU MEMBER STATES TO APPLY THE EXISTING
EU PUBLIC PROCUREMENT RULES MORE VIGOROUSLY.
The Commission should ensure that
contracting authorities and Member States apply the EU directives more consistently and, when
necessary, proactively support contracting authorities to meet their obligations under the 2014 EU
directives. Contracting authorities should for example be further encouraged to award contracts to the
Most Economically Advantageous Tender (MEAT), which allows the contracting authority to take into
account not only price, but also quality, by for example applying life-cycle costing.
PREVENT THE DELETION OF THE PRINCIPLES CURRENTLY ENSHRINED IN ARTICLE 85 AND 86
OF DIRECTIVE 2014/25/EU.
The EU public procurement framework allows contracting authorities to
reject any offer for a supply contract where the proportion of the products originating in third countries
exceeds 50% of the total value of products constituting the tender. This article has been enshrined in
the EU public procurement framework since 2004. In the 2016 IPI proposal, however, the European
Commission proposes to delete these articles. There is a risk that if these articles are deleted,
companies from third countries that are not a member of the GPA or do not have an FTA with the EU
will have unrestricted access to the EU’s procurement market.
29
30
31
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0079.png
77
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
32
N AT I O N A L C O N T R ACT I N G A U T H O R I T I E S S H O U L D B E E N C O U R AG E D TO S C R E E N T H E
PARTICIPATION OF FOREIGN ENTITIES IN EU-FUNDED PROJECTS THAT ARE VITAL TO THE
SECURITY AND PUBLIC ORDER OF THE EU AND SHOULD BE ENCOURAGED TO CONSIDER THE
APPLICATION OF ARTICLE 85 OF DIRECTIVE 2014/25/EU IN THESE CASES.
The application of
Article 85 should for example be considered in cases when foreign entities participate in projects
related to critical and/or strategic infrastructure and technology, or in tenders that would allow access
to sensitive EU information. Similar to the investment screening mechanism, Member States should
be encouraged to share information on foreign entities bidding on EU-funded tenders in projects that
are vital to the EU security and public order.
FULLY IMPLEMENT AND FURTHER IMPROVE THE RULES ON ‘ABNORMALLY LOW TENDERS’.
The rules on ‘abnormally low tenders’ may be shaped more effectively in the future. This includes
assessing the option to place the burden of proof on the bidding candidate whose offer has been
rejected as abnormally low. Special attention could be given to tenders that are submitted by SOEs.
In particular, more stringent investigation obligations should apply to contracting authorities, with the
support of the European Commission’s services.
STRICTLY OBSERVE TRANSPARENCY REQUIREMENTS WHEN AWARDING CONTRACTS IN THE EU
AND EFFECTIVELY ENFORCE EU LAW.
The transparency requirements applicable to public contracts
under the EU law must be strictly observed. This means, in particular, that public contracts subject to
tendering requirements must not be concluded through inadmissible “direct awards”.
33
34
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0080.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
78
3.5. INTELLECTUAL PROPERTY RIGHTS
As China’s economy continues to grow and mature, the protection and enforcement of intellectual property
and forced transfer of technology have become a growing priority for European businesses. The overall
picture of the Chinese intellectual property landscape is mixed – while some improvements are taking place
in selected areas, the overall situation nevertheless remains worrying with respect to most intellectual
property rights (IPRs). The problem is twofold: on the one hand the Chinese IP framework is still insufficiently
developed, and on the other hand existing measures are insufficiently enforced. In addition, practices of
forced technology transfer are still on the rise and the spectrum through which it takes place is complex and
requires a comprehensive response. China’s economic clout and ambitious industrial policies such as Made
in China 2025 also include a strategic approach to IPR and incentivise developments in high-tech fields.
99
In
this context, European businesses urge the creation of a level playing field through adequate IPR protection,
elimination of practices of forced technology transfer and strong enforcement of the recently signed
agreement on Geographical Indications (GIs).
100
IPR violations in China
Intellectual property violations in China take place in various ways, including trade in counterfeited goods,
copyright piracy, forced technology transfer, forced patent licensing and IP infringement. Consequences are
prejudicial to European companies, result in substantial losses of revenue and diminished brand value, and
spark health and safety concerns. The Chinese legal framework possibly facilitates these violations to the extent
that Chinese laws (i) are insufficiently evolved to protect IP adequately, (ii) in some cases deliberately facilitate
technology transfer practices and (iii) still lack clear, strong and compulsory enforcement and remedies.
Despite the efforts and recent reforms, the Chinese legal framework still fails to address the pressing
situation with ongoing IP infringement, in such a way that it could effectively reduce the continuous pressure
of IP infringements. Although the European pharmaceutical industry is encouraged by recently proposed
policies and initiatives to improve IPR protection within its sector, detailed implementation rules are yet to
be published. In general, however, it is the desire of the European business community that effective IPR
protection is applied to all sectors to an equally high standard.
According to the latest data, China remains the EU’s number one priority country regarding IP violations due
to longstanding problems of protection and enforcement. More than 80% of the seizures of counterfeit and
pirated goods come from China.
101
In recent years, the digital revolution has aggravated the situation, as the
proliferation of online trading platforms provides wider and easier access to Chinese counterfeit and pirated
products at the global level. The measures taken by the Chinese government do not appear to be adequate
to face the rise of new technologies and the growing scale of infringements.
102
While the European business
community welcomes progress made to date, the Chinese IPR system is still a cause for concern and there
are areas that require further improvement and effective action.
99
European Commission,
“Report
on the protection and enforcement of intellectual property rights in third countries”,
2018, p. 7.
100
European Commission,
“Landmark
agreement will protect 100 Geographical Indications in China”,
2019.
101
Ibidem,
pp. 8-9 for a summary of the specific IPR-related problems faced by European businesses in China.
102
Ibidem,
p. 7
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0081.png
79
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Some figures on trade in counterfeit goods
IPR violations in China also create challenges within the EU. Trade in counterfeit goods is a key concern in this
regard. In 2016, international trade in counterfeit and pirated products represented up to 3.3% of world trade,
compared with an estimate of up to 2.5% of world trade in 2013. This equates to a total value of USD 509 billion
from which USD 239 billion, or 47% of world exports of fake goods, is exported from China.
103
For the EU, total
counterfeit imports amounted to 6.8% of total EU imports (versus 5% in 2013), equivalent to EUR 121 billion.
A 2019 OECD-EUIPO study also shows that more than 80% of counterfeit goods seized by customs in the EU
originated from China and Hong Kong (China).
104
In terms of the mode of transport, between 2014 and 2016, an average of 57% of all seized counterfeit goods
were sent by post and 12% by express courier services. In the same period, small parcels accounted for
69% of customs seizures of IP-infringing products, against 63% for the 2011-2013 period.
105
Small parcels,
boosted by the rise of e-commerce, is the most popular method of shipping illicit products.
106
It is essential that the EU tackles these problems. Harmonised measures specifically aimed at preventing
and combating online IPR infringements should be adopted at EU level, keeping in mind the roles of different
stakeholders in the online environment and allowing for adaptations to a rapidly developing technological
landscape.
Most fake goods originate from China
Top provenance economies of fakes, as a percentage of total seizures
80
60
40
20
0
China
Source: OECD, 2013
Hong Kong
(China)
Turkey
Singapore
Thailand
103
OECD/EUIPO,
“Trends
in Trade in Counterfeit and Pirated Goods”,
2019.
104
Ibidem.
105
Ibidem.
106
See chapter ‘3.8 E-commerce’ for more information.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0082.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
80
DEMANDS FROM THE EU
35
STRENGTHEN THE EXCHANGE AND COOPERATION WITH CHINESE AUTHORITIES TO IMPROVE
THE ENFORCEMENT OF IPR IN CHINA.
This should include strengthening international cooperation
between European and Chinese IP offices within several frameworks (i.e. within IP5, TM5 and ID5),
as well as within the EU-China customs network. Chinese IP offices should be encouraged to adopt
international standards of examination. At international meetings (such as the IP5, TM5 and ID5,
bilateral meetings, and technical cooperation programmes), the EU should press Chinese authorities
to respect and enforce the stringent IP standards set out at WTO level (in the Agreement on Trade-
Related Aspects of Intellectual Property (TRIPS)). Lastly, the EU should ensure the strong enforcement
of the recently signed
Agreement on Geographical Indications
(GIs).
RAISE AWARENESS WITHIN THE EU ON THE WORKINGS OF CHINA’S IPR SYSTEM AS WELL AS
THE MOST PROBLEMATIC ISSUES REGARDING IP ENFORCEMENT IN CHINA.
European companies
should better understand the Chinese patent and trademark system in order to successfully navigate
the Chinese market. At the same time, they should be made fully aware of the risks regarding IPR
enforcement in China, particularly the risks of trademark squatting. European consumers should also
be made aware of the consumer risks linked to the high number of counterfeit and pirated products
available online and mostly originating from China, including goods delivered in small parcels.
IMPROVE THE ENFORCEMENT OF IPR WITHIN THE UNION FOR IMPORTED PRODUCTS.
First,
national authorities should be provided with stronger and more intelligent means (as well as adequate
training) to secure effective enforcement of EU IPR law vis-à-vis goods originating from China which
arrive into the EU territory in great numbers. Second, major Chinese and other global platforms active
in the EU should be required by the EU to make commitments concerning the notice and removal of
counterfeit and pirated goods and should also provide necessary information to assist infringed parties
in cases of IP infringements. The EU should further develop a world-class IP system by promoting
strong IP protection.
36
37
RECOMMENDATIONS TO CHINESE AUTHORITIES. THEY SHOULD:
38
REVIEW, UPDATE AND IMPROVE CHINA’S LEGISLATION ON IP PROTECTION WHERE NEEDED.
First, we ask the Chinese government to introduce specific legislation on the protection of trade
secrets. Second, the Chinese government could complete the review and updating of Chinese patent
and copyright legislation. Third, it could review and update trademark legislation and practice, and in
doing so provide better protection of foreign entities against trademark squatters. Here the Chinese
government could (i) recognise the well-known establishment of a trademark outside China and (ii)
deny co-existence of trademark free riders with pre-existing foreign trademarks.
107
SIGNIFICANTLY IMPROVE THE ENFORCEMENT OF IP PROTECTION IN CHINA.
We call on the
Chinese government to strengthen their efforts to tackle IP infringement and enforcement challenges.
The current level of IP enforcement is still too weak and needs to be improved. This should include
efforts to achieve consistent and uniform IPR protection across China and eliminate existing divergent
judicial interpretations by local courts from the Supreme People’s Court.
39
107
For more information, see IAM Media,
“Case
alert – Hugo Boss Trademark Management GmbH v Britain Boss International Co Ltd”,
2018. The implication here is that Chinese
courts should begin acknowledging the well-known reputation of EU trademarks in cases where a similar Chinese mark is challenged. In other words, they should assess
the reputation of an EU trademarks having in mind its long-standing reputation in the EU or worldwide.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0083.png
81
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
40
REFORM CHINA’S UTILITY MODEL PATENT PRACTICE AND DESIGN MODEL LEGISLATION.
China
would benefit from reforming the utility model patent practice. This could be achieved by aligning the
assessment of utility model patents and invention patents as far as prior art and inventive steps are
concerned. Second, we would call on the Chinese government to reform the design model legislation to
extend the lifetime of design protection to a level similar to that of other important jurisdictions. In the EU
a design patent protection lasts for 25 years while in China this protection is only granted for 10 years.
IMPROVE RECOGNITION OF FOREIGN EVIDENCE AND INCREASE COMPENSATION IN IP LITIGATION.
The enforcement of IP rights would benefit substantially from improving the recognition of foreign
evidence and simplifying procedures for foreign companies in IP litigation. Second, increasing
compensation in litigation would also help to deter infringements. This should go hand in hand
with lowering the burden of proof for IP owners to provide evidence on IP infringements and receive
compensation, as well as a strict enforcement of the rulings regarding compensation.
HARMONISE THE CHINESE NATIONAL CLASSIFICATION SYSTEM FOR GOODS AND SERVICES
WITH THE INTERNATIONAL CLASSIFICATION SYSTEM.
This would be of dual benefit as greater
alignment would allow Chinese companies to operate more seamlessly on international markets,
while foreign companies could operate more seamlessly on the Chinese market.
41
42
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0084.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
82
3.6. FORCED TECHNOLOGY TRANSFER
European companies are increasingly subject to practices of forced technology transfer in China. The number
of reported cases of forced technology transfer in order to maintain market access has doubled from 10%
in 2017 to 20% in 2019. Alarmingly, 63% of all cases reported by European businesses highlight that this
happened within the last 2 years, with 25% of those cases currently taking place.
108
These developments
occur despite official government pledges to prohibit this type of activity.
109
Improved market access in certain
sectors in China’s revised Negative List for investment and the adoption of the Foreign Investment Law (see
chapter ‘3.3 Investment’) have not (yet) led to a more favourable situation overall regarding forced technology
transfer. Ending practices of forced technology transfer is a key priority for European businesses. These
circumstances have led the EU to lodge a WTO case against China’s measures on forced technology transfer
on 1 June 2018.
110
Forced technology transfer occurs in multiple ways. The EU’s case at the WTO outlines at least 17 laws
and measures through which China imposes technology transfer. While the EU is right in targeting China’s
legal framework, China’s ecosystem of measures that directly and indirectly induce forced technology
transfer goes beyond the legal dimension. Transfers can happen both on a legal and voluntary basis (such
as Chinese outbound foreign direct investment) and on a forced or involuntary basis. Efforts to tackle them
comprehensively must similarly include an approach that addresses this ecosystem broadly. The myriad of
ways that lead to forced technology transfer can be categorised as follows:
Soft enforcement of intellectual property rights.
Despite the efforts and the recent reforms, China’s
legal and enforcement framework still fails to address the pressing situation in China with ongoing IP
infringement by many parties. The framework is therefore still underdeveloped and not adequate. China’s
IP framework therefore continues to passively enable and facilitate IP infringement.
Market access restrictions and conditionality.
In China, access to several sectors is restricted for foreign
investors and feature joint venture requirements in which foreign companies are permitted a minority
stake only. Although they may not be directly endorsed by the Chinese government, the existence of such
joint venture requirements restricts market access and tilts the commercial playing field so that it enables
Chinese firms to include extra-commercial conditions to forming a joint venture, including technology
transfer requirements.
Technology licensing agreements.
In technology licencing agreements between non-Chinese licensors
and Chinese licensees, licensors cannot restrict licensees from making improvements to the licensed
technology or from using the improved technology as all improvements belong to the party making the
improvements. In addition, Chinese implementing regulations on Chinese-foreign equity joint ventures
permit the Chinese licensee the legal right to continue using the technology after the licensing term has
expired.
111
Government licencing requirements.
Government licencing requirements require companies to obtain
approval before they can conduct certain business activities. For instance, companies are often required to
disclose detailed product and process information as part of licensing procedures. The relatively opaque
nature of the licensing process enables the transmission of intellectual property without a clear paper
trail that could be used to challenge IP theft. Chinese legal provisions, which theoretically prohibit such
practices, are either vaguely worded or not clearly enforced.
112
108
This figure is an average across all sectors. European companies’ responses show that forced technology transfer occurs more in high-value, cutting-edge industries,
such as chemicals and petroleum companies (30%), medical devices (28%), pharmaceutical companies (27%) and automotive companies (21%). See European Union
Chamber of Commerce in China,
“Business
Confidence Survey”,
2019, pp. 30-31.
109
See People’s Republic of China,
“Foreign
Investment Law”,
2019, of which Article 22 stipulates that “no administrative department or its staff member shall force any
transfer of technology by administrative means”.
110
For a good summary of the laws and measures identified to mandate forced technology transfer, please consult European Union,
“Request
for Consultations on China:
Certain Measures on the Transfer of Technology”,
2018.
111
Mannheimer Swarteling,
“Technology Licensing Legislation in China: WTO Commitments (TRIPS)”,
2018.
112
US-China Economic and Security Review Commission,
“How
Chinese Companies Facilitate Technology Transfer from the United States”,
2019, p. 8.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0085.png
83
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Commercial espionage.
This includes cyberespionage efforts that originate from Chinese (government)
entities. These are well documented.
113
Cyberespionage typically involves digital intrusions that extract
commercially valuable business information. China’s 2017 Cybersecurity Law presents a new challenge in
the fight against forced technology transfer in China by requiring companies to store, disclose and make
their source codes and commercially sensitive data available in a way that other countries do not. This
makes them vulnerable to theft.
How to move forward
Technology transfers can be acceptable in deals with Chinese firms provided that they operate in a legal and
non-discriminatory manner and are based on voluntary, non-pressurised commercial decisions. In all other
cases, these practices prevent beneficial competition, clearly undermine multilaterally agreed rules and are
clear obstacles to enter third-country markets.
Forced technology transfer is likely to remain a major problem in the years ahead. Although China made
a political commitment in 2018 to prohibit forced technology transfer, between 2017 and 2018 the number
of reported cases of technology transfer doubled and remained equally high in 2019. European business
is concerned that activities stimulating involuntary technology transfer are likely to grow as China seeks
to further develop its high-tech industries as described in its Made in China 2025 industrial strategy.
114
Although China’s Foreign Investment Law contains provisions prohibiting forced technology transfer through
administrative measures, this law is still vaguely worded, enforcement measures still look inadequate and the
law may include loopholes as it excludes non-administrative means of tech transfer.
115
The challenge of forced technology transfer is immense. The enforcement of WTO legislation and domestic
IPR and investment laws remains key, as is the closing of other loopholes through which technology can be
transferred involuntarily or on a non-commercial basis. China’s declared industrial policy goals such as Made
in China 2025, economic incentives and the multiple avenues through which forced technology transfer takes
place mean that tackling one symptom of forced technology transfer might lead to an increase in other means.
Success in combating forced technology transfer therefore requires a comprehensive and coherent response
across the entire spectrum in which it takes place. The commercial value associated with technology transfer
makes this a key priority for European businesses.
DEMANDS FROM THE EU
43
OPPOSE ALL POLICIES AND PRACTICES THAT REQUIRE ACCESS TO OR THE TRANSFER OF
INTELLECTUAL PROPERTY.
The EU should strongly condemn Chinese policies and practices that
require access to or the transfer of intellectual property as a precondition for market access. This also
means opposing requirements to transfer source codes. The EU should work closely with China and
within the framework of the WTO to address IP concerns, and particularly the practice of forced transfer
of technology. The EU should clarify with the Chinese authorities that these practices undermine
multilaterally agreed rules and are clear obstacles for innovative companies to enter the Chinese market.
ENSURE THAT EU COMPANIES ARE REMUNERATED BY CHINESE COMPANIES FOR THE USE OF
STANDARD ESSENTIAL PATENTS.
European companies that hold patents for technologies that are
essential for the functioning of certain standards (standard essential patents) should be remunerated
by Chinese companies that widely use these technologies without paying adequate royalties. Legal
measures that permit the right to use technology after the expiry of the licensing term should be
addressed, as they worsen this problem.
44
113
European Centre for International Political Economy,
“Stealing
Thunder”,
2018, p. 14.
114
See the text box on Made in China 2025 in chapter 1.3 for more information.
115
See chapter ‘3.3 Investment’ for more information about the FIL.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0086.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
84
45
CONSIDER ALL POSSIBLE POLICY OPTIONS TO COMBAT ICT-ENABLED IP THEFT.
This should
include the implementation of the EU Cyber Diplomacy Toolbox, and should also cover the theft of trade
secrets or other confidential business information that provides competitive advantages to companies
or commercial sectors.
RAISE AWARENESS AMONG EUROPEAN COMPANIES OF THE VARIOUS RISKS THAT COULD
RESULT IN FORCED TECHNOLOGY TRANSFER WHEN THEY DECIDE TO ENTER THE CHINESE
MARKET.
The practices that result in the transfer of technology emerge from a spectrum of issues
that go beyond conditional market access. In order to safeguard their intellectual property, companies
should have access to information to prevent the forced and/or involuntary transfer of IP.
46
RECOMMENDATIONS TO CHINESE AUTHORITIES. THEY SHOULD:
47
ELIMINATE POLICIES AND PRACTICES THAT RESULT IN AN INVOLUNTARY TRANSFER OF
TECHNOLOGY.
In practice this means primarily eliminating discriminatory practices for foreign
companies. In order to achieve this, a holistic approach should be adopted that includes legislative
changes, as well as bringing administrative and judicial decision mechanisms in line. China’s Foreign
Investment Law (FIL) is a good step in this regard, though it still needs to be implemented. The
Chinese government also ought to remove restrictions on technology transfer agreements in Chinese
Contract Law (see Article 329) and the Supreme People’s Court judicial interpretation on litigation
issues relating to technology contract disputes (2004) to align them with the positive changes in the
technology import-export restrictions. European companies should also be allowed to license IP on
market-based and freely negotiated terms.
REMOVE IP DISCLOSURE REQUIREMENTS FOR FOREIGN COMPANIES.
China should remove
IP disclosure requirements and preferences based on national origin that are laid down in laws,
regulations, standards, certifications and procurement processes. At the same time, requirements to
publish sensitive business information when conducting business in China should be eliminated.
INCREASE THE QUALITY OF NATIONAL PATENTS AND UTILITY MODELS GRANTED IN CHINA BY
INSTALLING A STRICTER EXAMINATION PROCEDURE.
ALLOW EUROPEAN COMPANIES TO INDEPENDENTLY APPLY FOR AND OBTAIN ANY AND ALL
LICENCES FOR INVESTMENT AND OPERATION IN CHINA.
48
49
50
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0087.png
85
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
3.7. STANDARDISATION
Standardisation is generally understood as a voluntary consensus among industry on technical matters or
processes which allows,
inter alia,
for enhanced interoperability or safety. Standards can be set at a national,
EU or global level. At the global level, standards are set in international standardisation organisations such as
most notably the ISO (International Organisation for Standardisation) and IEC (International Electrotechnical
Commission). These standards are generally proposed on the initiative of a (national) standardisation
organisation, which receives these from its stakeholders. The Chinese government aims to actively deploy
standards as a tool to realise industrial upgrading, supporting in particular sectors included in Made in China
2025 (discussed in chapter 1.3). China also specifically anticipates standardisation leadership in the digital
area through the ‘China Standards 2035’ initiative which involves artificial intelligence, the Internet of Things,
5G and big data. China has also become very active within the ISO and IEC.
Problem
There are three concerns that may arise with respect to standardisation in China. A possible first concern is
that mandatory Chinese (national, sectoral or local) standards may be used to the detriment of non-Chinese
companies, establishing a
de facto
barrier to trade. China actively participates in the development of
international standards to facilitate access to foreign markets. Domestically, however, China often uses national
standards with national content diverging from international standards or adds additional national requirements
to the international standard. The chart below shows a clear downward trend in China’s adoption of standards
from international standards, with the figure falling from around 45% in 2008 to between 20-25% today.
National Standards in China, by origin 1990-2018
Number of standards, percent (RHS)
Standards adopted from international ones
6000
Domestically developed standards
International adoption as a percentage
of new standards issued (RHS)
1
0.9
0.8
0.7
0.6
3000
0.5
0.4
2000
0.3
0.2
0.1
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
20181H
0
5000
4000
1000
Source: Standardization Administration of China, retrieved by the Rhodium Group.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0088.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
86
A second concern relates to the governance of Chinese standardisation. While China’s new standardisation
law entered into force in 2018 with the aim of enhancing market relevance of Chinese standards, for most
standards it is the government who determines which stakeholders/companies, if any, may provide input. The
process is therefore fundamentally different from standardisation processes in the EU and the USA, which is
mainly driven by industry. Furthermore, standards in China are seldom available in English, which makes it
hard for European companies to know the requirements that they need to meet on the Chinese market. When
no public standards are available, companies are also obliged to publish their company standard, which could
lead to a potential leakage of trade secrets.
A third potential concern relates to China’s ambition for global leadership in standardisation. While the
development and use of global standards is voluntary, a less voluntary uptake of Chinese standards may
result from unilateral imposition of national standards in third countries. This seems to be the case in the
Belt and Road Initiative (discussed in chapter 6.2. of this paper), initially mainly in the transport/construction
sector, but increasingly also for example in the area of 5G (‘Digital Silk Road’).
116
This results in an unlevel playing field, where European companies do not enjoy the same access to the
Chinese market as Chinese companies to the European market. This needs to be a prioritised policy objective
for the EU to ensure that technical content in standards used on the Chinese market are consistent with the
international standard applied in the area and that the standard, if not identical to the international standard,
is easily accessible in English.
DEMANDS
51
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).
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,
especially when it relates to requirements that go beyond interoperability. There should be adherence
to international standards to the largest possible extent - which is something we also advocate for EU
standards. We fully support constructive participation of China in ISO/IEC.
IEC TESTS SHOULD BE ACCEPTED IN CHINA IF THE CHINESE GB-STANDARDS ARE IDENTICAL.
The scopes of international certification schemes could be extended, for example with the IEC
Conformity Assessment for Electrotechnical Equipment and Components (IECEE CB) scheme which
is an international system for mutual acceptance of test reports and certificates for electronics. In
addition, the principles of mutual recognition with no additional testing should be implemented as
advocated by the IECEE. We furthermore feel that no factory inspection should be necessary, when a
company is certified to ISO 9001 (2000 version).
ACCESS TO CHINESE STANDARD ESSENTIAL PATENTS SHOULD BE GRANTED ON FAIR,
REASONABLE AND NON-DISCRIMINATORY (FRAND) TERMS.
FRAND terms are general principles
that allow for licensing on reasonable terms to standard essential patents for those who do not own
the patent. Where standards are developed by Chinese standardisation organisations, access should
be granted on the basis of these internationally recognised principles.
52
53
54
116
Mercator Institute for China Studies,
“China’s
Digital Rise: Challenges for Europe”,
2019, p. 22: “China’s long-term goal is to change the global landscape of technological
competition by defining and exporting their own standards for all emerging industries, thereby ensuring that Chinese products and services are not obstructed by
standards set by another country.”
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0089.png
87
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
3.8. E-COMMERCE
Over the past years, there has been an increased presence in Europe of major online e-commerce platforms
and e-retailers from other parts of the world – from China in particular. Alibaba and its B2C platforms such
as AliExpress are gaining demand from European consumers and are building their distribution hubs in
various EU countries to reinforce their presence. In 2018, a significant amount of e-commerce-related parcels
circulating in the EU already originated from e-retailers in China as can be seen in the table below.
117
Chinese e-commerce platforms and other third-country platforms have the advantage of offering more choice
to European consumers as well as offering new tools for European manufacturers to reach consumers. As new
e-commerce platforms are investing in Europe, this will translate into the growth of jobs and the economy.
It is essential that all foreign companies – including Chinese companies - operate according to the same
rules and legal standards as European companies. This means that Chinese companies who offer their
products and services on the European market through e-commerce must comply with EU law – e.g. product
compliance, consumer rights, taxation and customs, intellectual property, waste management, etc.
E-retailer country of origin of most recent cross-border purchases
Most recent online puchases in
Denmark
The Netherlands
Sweden
Germany
Luxembourg
were ordered from an e-retailer in
Germany (22%)
China (36%)
China (24%)
China (41%)
Germany (71%)
China (20%)
Germany (18%)
Germany (21%)
United Kingdom (15%)
France (12%)
United Kingdom (15%)
United Kingdom (10%)
United Kingdom (17%)
Austria (5%)
United Kingdom (5%)
Source: WIK-Consult, “Development of Cross-border E-commerce through Parcel Delivery”, 2019. Data is based on a survey commissioned by DG GROW of over 8,000
consumers across the EU. Respondents were asked to consider the following question: “Thinking of your most recent purchase from an online shop or a seller on an online
marketplace in a country other than the one you currently live in, where was the online shop or seller located?”. The survey was conducted in every EU Member State;
however, for purposes of brevity, this table only includes the top five countries in EU27 by proportion of individuals who purchased online in 2018 according to
Eurostat.
Chinese e-commerce products are often non-compliant with EU law
EU consumer protection laws impose a number of obligations on products circulating in the EU. These include
amongst others rules related to their safety, labelling, marketing, environmental footprint and health effects.
EU law also bans a number of goods and components due to their hazardous effects. One of the similar traits
of foreign e-commerce platforms is the fact that through them millions of small packages carrying low-value
goods enter the European market. These packages are often non-compliant with EU law as they are covered
in tape, with no or little information on the goods contained herein, no return address and often ticking the
customs declaration as a ‘gift’.
With consumers increasingly ‘importing’ goods via e-commerce platforms, the risks associated with
consumer wellbeing, the environment as well as the risks on fair competition increase substantially. To date,
an unacceptable number of products and services offered through e-commerce platforms and originating
from China do not comply with EU law.
117
WIK-Consult,
“Development
of Cross-border E-commerce through Parcel Delivery”,
2019, p. 50.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0090.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
88
A simple product search in some of these marketplaces shows that much of the pre-contractual information
imposed by European consumer law (e.g. on withdrawal rights, burden of proof, delivery, guarantee periods,
remedies) is often omitted. In 2018, the Danish Consumer Council found that 21 out of 39 checked cosmetics
bought on wish.com, a US-based e-commerce giant with a majority of Chinese traders behind it, did not
contain information on ingredients or outright contained substances forbidden in the EU.
European companies invest a high amount of legal and financial resources to be able to comply with the 50+
items of EU contractual mandatory information to be given to consumers before the purchase is agreed.
European companies expect that all non-EU competitors comply with the same rules. For example, under
the Waste Electrical and Electronic Equipment Directive, European companies placing certain goods on the
EU market are under the obligation to take waste back or pay fees that cover the waste removal. Chinese
companies, who are one of the biggest exporters (41%) of computer devices worldwide, are however not
obliged to pay this fee.
118
Example: mobile phone chargers ordered from Chinese e-commerce platforms
do not comply with EU law and safety standards
In 2016, the Netherlands Food and Consumer Product Safety Authority warned consumers that 24 out of 41
mobile phone chargers that were tested on compliance with EU safety standards carried the risk of heating
up, melting or exploding. Alarmingly, all chargers that were directly imported from e-commerce platforms in
China and included in the sample proved to be non-compliant with EU law.
119
How to move forward
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. An e-commerce agreement should aim to facilitate electronic transactions for example by
recognising electronic signatures and by ambitiously removing customs duties on electronic transactions.
High and global standards of consumer protection should also be set with the aim of protecting consumers
from dangerous goods and preventing unfair competition to manufacturers that spend resources complying
with strict product safety standards. In this regard, a future plurilateral agreement on e-commerce should
ensure closer cooperation on enforcement of local products safety rules. Such provisions will provide national
authorities with a better legal basis to enforce product safety requirements towards manufacturers – most of
them located in China – that are sending non-compliant goods to customers in Europe.
Regarding data transfer, legal localisation requirements, such as those included in China’s new Cybersecurity
Law, should be minimised, and the freedom of businesses to decide whether and what data is transferred
should not be curtailed. The transfer of or access to source codes and technology transfer should not be
a market access requirement. Here – as well as for cross-border data transfer – existing rules on data
protection and security that are in conformity with WTO law are to be respected.
The agreement should establish a cooperation mechanism between the parties to solve any issues that
might come up and ensure the respect and implementation of the rules agreed. Moreover, the European and
Chinese authorities should set up a cooperation framework to control that existing rules on data protection
and security are in conformity with the WTO rules and are fully respected.
118
World’s Top Exports,
“Computer
Device Exports by Country”,
2019.
119
Nederlandse Voedsel- en Warenautoriteit,
“Onderzoek
elektrische USB-laders”,
2016.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0091.png
89
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Improve market surveillance capabilities
It is essential that the EU strengthens its market surveillance capabilities to ensure that only EU-compliant
products are made available on the Union market. Currently, diverging working methods and diverging
levels of effectiveness between market surveillance authorities make it hard to raise efficiency and efficacy
through scale effects, information exchange, orchestrated priority actions and mutual learning. This situation
reinforces exploitation of the weakest links in enforcement by rogue economic operators, legal uncertainty
and dissimilar treatment of similar cases in different parts of the Union.
While the challenges regarding market surveillance are particularly relevant in the area of e-commerce, it is
important to emphasise that these problems go beyond e-commerce and also apply to ‘traditional’ imports of
goods. This means that the EU should improve its market surveillance capabilities in general to ensure that
that all products and goods that enter the Union market are EU-compliant - no matter in what way the product
enters the market.
In this regard, BusinessEurope finds that there should be a continued focus on capacity of national market
surveillance authorities, both in terms of expertise and resources to do physical checks. It is also important
that the EU Safety Gate is further tailored to address the challenges of e-commerce. The EU Safety Gate
(formerly known as RAPEX) is designed to exchange information about goods presenting a serious risk that
are manufactured in the EU or imported from third countries and sold in the EU. It is a success story of EU
consumer protection. Notably, in 2017, 53% of the 2201 alerts of unsafe products notified in the system came
from China. In 2018, China was again the country of origin for 53% (1,191) of the alerts, an identical share to
the one registered in the previous year.
120
Products that are sold directly into the EU via e-commerce may not emerge through the Safety Gate, since
market surveillance authorities often have limited capacity to intercept and check products that are sold
to consumers via online shops. The percentage of products coming from China that present a serious risk
therefore is likely higher than the number of notifications the Safety Gate suggests.
SWEEPS, the coordinated actions taken from different national consumer protection authorities (via the ECC
network) to evaluate respect of EU law in targeted sectors has so far not been used regarding non-EU websites.
DEMANDS
55
THE EU AND CHINA MUST COOPERATE IN THE PLURILATERAL NEGOTIATIONS ON E-COMMERCE.
To this end, it is important that the EU and China contribute to delivering an ambitious plurilateral
agreement on e-commerce that facilitates electronic transactions and improves enforcement of local
product safety rules (see chapter ‘3.1 WTO’).
E U M E M B E R S TAT E S A N D T H E E U S H O U L D E N S U R E T H AT T H E R E L E VA N T N AT I O N A L
AUTHORITIES ARE PROVIDED WITH STRONG AND INTELLIGENT MEANS TO SECURE EFFECTIVE
ENFORCEMENT OF EU LAW VIS-À-VIS E-COMMERCE PACKAGES.
A comprehensive strategy
must be designed to enforce EU law and detect non-compliant packages (often originating from
China). In this regard, the EU Safety Gate could be further tailored to better address the challenges in
e-commerce but also in other areas. Market surveillance efforts should focus on products that present
the biggest risk to consumers.
56
120
European Commission,
‘Questions
and answers on the Safety Gate for dangerous products’,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0092.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
90
57
THE EU SHOULD FOCUS ON THE ENFORCEMENT OF EU PRODUCT RULES TOWARDS PRODUCTS
AND ECONOMIC OPERATORS THAT PRESENT THE BIGGEST RISK TO USERS.
This would really
harvest the risk reduction intended by EU legislation and ensure a level playing field for European
companies. Such enforcement is in the hands of national market surveillance authorities. The capacity
of national market surveillance authorities should therefore be adequate, both in terms of expertise
and resources to do physical checks.
ENCOURAGE AND ASSIST MEMBER STATES IN USING THE POWERS OF THE NEW CONSUMER
PROTECTION COOPERATION REGULATION - ALLOWING FOR THE TAKING DOWN OF WEBSITES
WHICH SEVERELY BREACH EU CONSUMER LAW.
The EU should make use of the EU SWEEP
instrument (joint enforcement action) carried by the ECC-network towards non-EU e-commerce
websites. This also means developing measures to alert against dangerous and non-compliant goods
also for consumers (bottom-up source).
58
FURTHERMORE, THE EU SHOULD:
59
INVITE MA JOR CHINESE AND OTHER GLOBAL PLATFORMS TO MAKE COMMITMENTS
CONCERNING NOTICE AND TAKING DOWN OF NON-COMPLIANT GOODS;
PROMOTE AWARENESS OF AUTHORITIES AND CONSUMERS REGARDING THE IMPLICATIONS OF
BUYING PRODUCTS ON NON-EU WEBSITES;
LOOK FOR SOLUTIONS REGARDING WASTE MANAGEMENT WHICH ALSO TAKE ACCOUNT OF
NON-EU BASED WEBSITES TARGETING EUROPEAN MARKETS;
WORK FURTHER ON IMPROVING VAT COMPLIANCE OF FOREIGN COMPANIES THAT EXPORT TO
THE EU OR ARE ESTABLISHED IN THE EU.
60
61
62
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0093.png
91
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
3.9. CLIMATE AND ENERGY
European businesses stand behind the EU ambition of net-zero greenhouse gas (GHG) emissions to
reach the objectives of the Paris Agreement.
121
Reaching climate neutrality by around mid-century, as the
Intergovernmental Panel on Climate Change (IPCC) Special Report and the European Commission’s 2050
climate strategy consider is necessary to limit average global temperature increases to 1.5°C, will fully
depend on meeting a set of crucial framework conditions and relation actions on both the European and global
level. One of the conditions that will allow European businesses to achieve the ambition of climate neutrality
is the necessary international convergence of global climate ambitions. For this reason, it is essential that
China, being the leading global GHG emitter (28% of the global emissions),
122
takes its responsibility together
with the EU and other signatories of the Paris Agreement to implement the goals of the agreement.
To work effectively towards the convergence of global climate ambitions, European business supports the
high-level EU-China Partnership on Climate Change. In this regard, we welcome the commitment made
by both sides at the 2019 EU-China summit to intensify bilateral cooperation on the basis of the 2018
joint “Leaders’ Statement on Climate Change and Clean Energy”. Continued bilateral and multilateral
cooperation in the field of climate change and clean energy is pivotal to ensure that both sides deliver on their
commitments made in the Paris Agreement. The EU and China must continue their exchanges on regulatory
best practices in the field of carbon markets and renewable energy. At the same time, both sides should
make use of the EU-China Partnership on Climate Change to converge ambitions and seek to harmonise
regulations. EU-China cooperation on developing a Chinese emissions trading system (ETS) is a positive
development in this regard.
123
The goal of climate policy convergence has not been achieved yet. While the EU has adopted relatively
far-reaching climate policies in the industrial sector, there is a lack of equivalent climate or other
environmental policy measures for industries in China. The cost burden of climate and environmental policy
to China’s manufacturing sector is far lower than the EU’s. Moreover, China’s industries are less efficient in
greenhouse gas emissions compared to the EU and several Chinese investment projects lead to uncontrolled
exploitation of natural resources and deforestation, also on third markets such as Africa.
Regulatory asymmetries
Whereas Europe’s energy-related CO
2
emissions continued to fall by 1.3% in 2018, they rose globally by
1.7% to hit a new record due to sharp increases in China (2.5%), the United States (3.1%) and India (4.8%).
124
Even with current climate pledges by major economies, which are less ambitious than Europe’s, there are
many uncertainties as to how they aim to achieve these targets. For example, whereas the EU’s Nationally
Determined Contributions (NDCs) provided comprehensive economy-wide emission targets based on
absolute reductions, the NDCs by China are based on carbon intensity (emissions per unit of GDP). This
means China’s absolute GHG emissions are still on the rise as more new coal-fired capacity is added to the
grid, and it is unclear when its absolute emissions will peak.
125
Furthermore, as the USA are currently in the
process of withdrawing from the Paris Agreement - they have submitted a formal notice of their intention to
withdraw on 4 November 2019 - and as the USA are abolishing their national Clean Energy Plan, it remains to
be seen whether the USA will reach their targets.
One field in which there still exists a lack of equivalent climate policy is carbon trading systems. The EU
emission trading system (ETS) is far wider in scope and ambition than any other system in the world. In
recent years several non-EU countries announced intentions to establish carbon pricing systems or have
already done so, in the form of either a carbon trading system or carbon taxes. However, the carbon trading
systems come in different shapes and sizes. In China, a nation-wide ETS is currently being created but it will
121
BusinessEurope,
“European
Business views on a competitive energy & climate strategy”,
2019.
122
Emissions include CO
2
emissions from fuel combustion only. Please consult International Energy Agency,
“Key
World Energy Statistics”,
2019.
123
European Commission,
“Emissions
trading: European Commission and China hold first policy dialogue”,
2018.
124
International Energy Agency,
“Global
Energy & CO2 Status Report”,
2019.
125
China also provided USD 36 billion of financing in 2018 for coal plants outside the country. Please consult Institute for Energy Economics and Financial Analysis,
“China
at a Crossroads”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0094.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
92
initially only cover its power sector. Other sectors, which unlike the power sector are subject to international
competition, will be excluded when the system starts. Therefore, even though the EU ETS includes some
provisions to protect trade-exposed energy-intensive industries from unequal international competition with
less ambitious countries, the risk of investment and carbon leakage remains a real concern.
Safeguard European competitiveness
The effects on industries and businesses of enforcing strong European climate or other environmental
policies has to be closely monitored in relation to the competitiveness situation. The best solution obviously
would be if international standards and policy measures were used globally, or if Chinese and European
policy measures were similar, but as long as that is not the case, a discussion on how to handle distortions in
competition has to be initiated. As a first step, the EU and the EU Member States must fully implement, at the
national level, the measures provided for in the reformed EU ETS in order to minimise the risk of carbon and
investment leakage. Secondly, it is pivotal that the EU continues its climate diplomacy, contributing to a global
‘race to the top’ by actively supporting and cooperating with third countries such as China to work towards
achieving the goals of the Paris Agreement. Thirdly, when third countries do not deliver on their obligations
under the Paris Agreement or if asymmetrical climate policies lead to distortions in competition, the EU must
consider additional safeguards that proactively mitigate the distortions in competition inflicted by ‘free riders’
and international regulatory asymmetries.
Better engagement of the private sector
The EU and China need to engage the private sector more actively in their bilateral cooperation to forge
synergies between private innovation and the growing demand for clean technology and products in both the
EU and China. To achieve the goals of the Paris Agreement, the EU and China need solutions to, amongst
others, improve energy, carbon and resource efficiency, waste management and environmental performance
(greenhouse gases, air, water and solid waste). In this regard, European business welcomes that the 2019
‘Joint Statement on the implementation of the EU-China energy cooperation’ has deepened and intensified
the annual EU-China Energy Dialogue. The private sector should be engaged more actively in this process for
example through facilitating complementary business interactions to exchange innovative technologies that
will contribute to achieving our respective climate goals.
Raw materials
The industrial dimension of the energy transition puts Europe in front of a potential threat: shifting the EU’s
dependency from fossil fuels to a new dependency on raw materials might lead to a new dependency on China
as the vast majority of the rare earths and precious metals are sourced from China. An assessment by the
European Commission on critical raw materials (CRMs) shows that China is the main supplier for 15 out of 38
CRMs.
126
Therefore, the EU needs to ensure that efforts towards building EU strategic value chains take these
potential threats of dependency into account.
126
European Commission,
“Study on the review of the list of Critical Raw Materials”,
2017.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0095.png
93
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Countries accounting for the largest share of global supply of critical raw materials
Russia
Palladium 46%
France
Hafnium 43%
USA
Beryllium 90%
Hellium 73%
Turkey
Borate 38%
China
Antimony 87%
Baryte 44%
Bismuth 82%
Fluorspar 64%
Gallium 73%
Germanium 67%
Indium 57%
Magnesium 87%
Natural graphite 69%
Phosphate rock 44%
Phosphorus 58%
Scandium 66%
Silicon metal 61%
Tungsten 84%
Vanadium 53%
LREEs 95%
HREEs 95%
Brazil
Niobium 90%
DRC
Cobalt 64%
Rwanda
Tantalum 31%
South Africa
Iridium 85%
Platinum 70%
Rhodium 83%
Ruthenium 93%
Source: European Commisison, «Study
on the review of the list of critical raw materials»,
2017
China is the main supplier of critical raw materials to the EU
Figure based on number of critical raw materials (CRMs) supplied out of total 37 CRMs (average from 2010-2014)
3
%
3
%
China
Finland
Nigeria
Norway
Turkey
Kazakhstan
Morocco
Indonesia
France
Brazil
Mexico
USA
Russia
3
%
3
%
3
%
3
%
3
%
3
%
3
%
3
%
3
%
8
%
62
%
Source: European Commission, "Study
on the review of the list of critical raw materials",
2017
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0096.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
94
DEMANDS
63
STRONG BILATERAL AND MULTILATERAL COOPERATION BETWEEN THE EU AND CHINA IN
ACCORDANCE WITH THE PARIS AGREEMENT.
The EU and China should continue to deepen and
intensify their cooperation in order to reach the targets of the Paris Agreement. Both sides should
engage in strong international climate diplomacy and climate advocacy to spark an international
‘race to the top’. The EU should make sure that the Chinese method of calculating greenhouse gas
emissions is comparable to enable transparent monitoring and verification.
THE EU MUST FULLY APPLY THE EU EMISSION TRADING SYSTEM (ETS) AND BETTER PROTECT
EUROPEAN INDUSTRY.
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. Additionally, sectors facing
international competition need strong protection under the EU ETS, including but not limited to free
allocation and indirect cost compensation, if other major economies do not face similar costs and
regulatory burdens.
THE EU MUST FURTHER IMPROVE ITS TOOLBOX TO SAFEGUARD THE COMPETITIVENESS OF
EUROPEAN INDUSTRY FROM ‘FREE RIDERS’ AND DISTORTIONS CAUSED BY INTERNATIONAL
REGULATORY ASYMMETRIES.
The EU must study the distortive effects of third-country climate
policies on the competitiveness of the EU and assess the possible policy alternatives, amongst which
trade-related measures, to ensure a level playing field and to prevent carbon and investment leakage.
THE EU MUST MINIMISE ITS DEPENDENCY ON CHINESE RAW MATERIALS, IN PARTICULAR RARE
EARTHS AND PRECIOUS METALS.
The EU undergoes an energy transition from a dependency on
fossil fuels to a dependency on alternative clean energy sources, such as certain raw materials. As a
vast amount of rare earths and precious metals are sourced from China, the EU should diversify its
supply of rare earths and precious metals to avoid creating an unnecessary dependency on China for
its raw materials supplies. At the same time, the EU should ensure that it has access to the Chinese
market (e.g. no export restrictions in China for raw materials for European companies).
64
65
66
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0097.png
95
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0098.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
96
04
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.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0099.png
97
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
4.1. STATE-OWNED ENTERPRISES (SOEs)
After an overall reform was initiated in 1978, Beijing drastically reformed its SOEs running up to China’s WTO
accession in 2001. China closed, reorganised, merged and privatised many of its SOEs, laying off 40 million
employees between 1998 and 2003.
127
Nevertheless, attempts to make SOEs more market-oriented have been
diminished by deeper integration within the Communist Party and a further reliance on SOEs to control the
economy and coordinate the party’s long-term strategy. China is dependent on SOEs as their dividends form a
major source of government income and as SOEs contribute to social and political objectives, employing over
60 million people.
Today, 14% of the 3,485 companies listed in China are SOEs.
128
These SOEs account for 40% of total market
capitalisation and 54% of total revenue of listed enterprises. In the industrial sector, only 5% of the total
number of industrial enterprises are SOEs, but they account for 28% of total Chinese industrial assets and for
18% of annual total industrial profit.
129
In key strategic industries, SOEs enjoy an even larger market share.
In 2018, the share of SOE revenues in key strategic industries for example accounted for around 85% of total
revenue.
130
In its latest review of the Chinese economy, the WTO said the state retained a majority share in all
but one of China’s 100 largest publicly listed companies.
131
Consequently, SOEs remain an integral part of the
Chinese economy.
Chinese SOEs have up to 90% of market share in key industries
SOE shares of revenue in normal versus officially identified special industry categories, amongst listed companies
(in percentage)
Key industries (defence, electricity, oil and gas, telecom, coal, shipping, aviation, rail)
Pillar (auto, chemicals, construction, electronics, equipment manufacturing, non-ferrous metals, prospecting, steel, technology)
Normal (agriculture, pharmaceutical, real estate, tourism, investment, professional services, general trade, general manufacturing)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
2014
Source: Asia Society, 2019
2015
2016
2017
2018
127
Clingendael,
“EU-China
Investments: Barriers to Market Access in China”,
2018.
128
SOEs are defined as having more than 20% government ownership.
129
Asia Society Northern California and Rhodium Group,
“Missing
Link: Corporate Governance in China’s State Sector”,
2018.
130
Asia Society Policy Institute and Rhodium Group,
“China
Dashboard: State-Owned Enterprise”,
2019.
131
World Trade Organisation,
“Trade
Policy Review: China”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0100.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
98
While private and foreign companies are effectively banned from many state-controlled industries, Chinese
SOEs enjoy privileges provided by the government, posing a serious threat to fair competition. While
most European industries are open to Chinese investors, many Chinese industries are dominated by SOE
monopolies and closed to foreign private companies. This causes a lack of reciprocity the consequences of
which European companies suffer from.
The lack of market-based reform and increasing party influence
Beijing has repeatedly announced market-oriented reforms of its economy. At the Third Plenum in 2013, Beijing
announced comprehensive reform plans which would allow the market to play a “decisive” role in allocating
resources.
132
These statements were welcomed by the European business community as it seemed that Beijing was
willing to tackle the underlying causes of market distortions such as the inefficient allocation of resources to SOEs.
However, the rhetoric of market-based reforms stands in sharp contrast to the reality as SOEs are growing
bigger and stronger. In 2003, the State Assets Supervision and Administration Commission (SASAC) was
established to regulate and manage the central SOEs. Instead of breaking state-owned monopolies and
improving market competition, the SASAC announced in 2006 that the state should have “absolute control”
over the armaments, power generation and distribution, oil and petrochemicals, telecommunications, coal,
aviation and shipping industries.
A key concern to European business is whether Chinese SOEs make investment and corporate decisions
based on political and strategic considerations or on commercial and market considerations. In fact, political
considerations have continued to influence SOE behaviour, threatening the ability of Chinese SOEs to act in
accordance with commercial considerations. The Party controls and influences SOEs through various means
and measures. The most obvious form of state influence is through state ownership of SOEs. In 2017, there
were around 174,000 companies in which the Chinese government, through special purpose vehicles, had a
minority or majority shareholding.
SOEs have the upper hand in most areas of doing business
Which type of firm holds the advantages in the following areas in your sector?
SOEs hold the advantage
Greater access to government contacts
Greater ability to influence policy
Greater access to cheap financing
Guaranteed access to licences
Guaranteed approval in administrative matter
Earlier access to regulatory/administrative information
Preferential treatment in public procurement
Greater lenience on compliance
Greater access to subsidies/R&D grants
Preferential treatment in legal disputes
0%
20%
40%
60%
80%
100%
Equal for SOEs and POEs
POEs hold the advantage
Source: European Chamber of Commerce in China, “Business Confidence Survey 2019”
132
Communist Party of China,
“Decision
of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform”,
2014.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0101.png
99
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Besides having ownership over the SOEs, the government also exercises control through its influence over
the corporate governance of SOEs. Central and local branches of the government’s SASAC are for example
responsible for personnel appointments. Because SASAC appoints the board of directors of central SOEs,
appointments are politically motivated. After all, the board of directors is responsible for safeguarding and
managing state assets and therefore it is problematic to ensure commercial and competitive neutrality.
Moreover, President Xi Jinping has initiated several party building efforts to further increase the influence of the
Party within SOEs. The Guiding Opinions on SOEs adopted in 2015 included provisions that embedded the Party
as the “political core” in the governance structures of SOEs. During the 19
th
Party Congress in 2017, the Party
Constitution was further amended to include a sentence emphasising that the Party Central Committee should
“play a leadership role” in SOE decision-making. Statements by President Xi, in which he calls for “stronger, better
and bigger” SOEs, illustrate the fact that SOEs will remain a fundamental element of the Chinese economy.
133
SOE organisational structure and position in China’s administrative hierarchy
Central organisation department
State Council
China Securities
Regulatory
Commission
State-owned Assets
Supervision & Administration
Commission (SASAC)
Local SASAC
Local government
department
Group company
Subsidiaries
Core central SOE
(example)
Non-core central
SOE (example)
Local SOE
(example)
Local SOE
(example)
SOE leaders
Board of directors
Listed subsidiary
Unlisted subsidiary
* Not all central and local SOEs have established boards of directors at the group company level
Souce: Asia Society, 2018
Mega-mergers leading to unfair competition
European companies increasingly experience unfair competition as a result of Chinese policies that
initiated a series of SOE mergers. In the 2013 Guiding Opinion on Accelerating the Promotion of Mergers
and Reorganisations of Enterprises in Key Industries, Beijing aimed to “foster a number of large enterprise
groups that are competitive at the international level.”
134
The rationale behind the mergers is to improve the
financial performance of SOEs, create internationally competitive ‘national champions’ and concentrate state
ownership – allowing for greater state control. Xi Jinping stated that “SOEs should keep growing bigger and
stronger, and arguments against SOEs, or for small SOEs, are wrong and one-sided”.
135
133
China Daily, “Xi
calls for furthering SOE reform”,
2017.
134
Ministry of Industry and Information Technology,
“Guiding
Opinion on Accelerating the Promotion of Mergers and Reorganizations of Enterprises in Key Industries”,
2013.
135
China Policy,
“Embracing
the Market on the State’s Terms”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0102.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
100
Annual central SOE mergers increased from an average of two mergers between 2012 and 2014 to six
central SOE mergers in 2015 and five mergers in 2016.
136
As a result of the mergers, the average asset size
of industrial SOEs increased from RMB 923 million in 2008 to around RMB 2.3 billion in 2017.
137
Beijing for
example aims to consolidate China’s fragmented steel sector so that the top 10 producers account for 60 per
cent of steel production, up from 35 per cent now. In this regard, China Baowu Steel Group plans to acquire a
majority stake in Magang Steel to strengthen its international competitiveness. The acquisition would create a
group whose combined production would have exceeded that of the entire US steel industry last year.
138
Case study: the reversal of SOE reform in the shipbuilding industry
Since ‘reform and opening-up’ was initiated in 1978, China has made significant progress in reforming
its state-owned enterprises. The government privatised inefficient SOEs and closed many unprofitable
companies. In this context, China’s shipbuilding monopoly was split between China Shipbuilding Industry
Company (CSIC) and the China State Shipbuilding Company (CSSC) in the 1990s.
However, in October 2019 this reform was reversed as China’s State-Owned Assets Supervision and
Administration Commission announced it had approved the merger of the two biggest state-owned
shipbuilders CSIC and CSSC, paving the way for a new mega-company with 21 percent of global sales.
139
The
new state enterprise will be called China Shipbuilding Group Corp.
The merger restores the previous organisational structure for China’s state-owned shipbuilding operations
and is a solid move to strengthen the earning ability of the state-owned enterprise sector. The merger aims to
allow the two companies to compete against established rivals in South Korea and Europe.
Given the fact that the sector has been listed as a “key industry” in Made in China 2025, given the two action
plans released in December 2018, and given the active participation of the government in the process, it is
evident that the merger is driven by the government and follows clear industrial policy objectives. Indeed, it
allows Beijing to better, more effectively and directly manage the sector so to achieve global dominance for
what concerns the production of liquified natural gas carriers, luxury cruise liners, icebreakers, and offshore
engineering equipment.
140
European policy-makers should be cautious about interpreting recent SOE reforms as a sign of privatisation
and liberalisation. Instead, European policy-makers should anticipate further SOE mergers and increased
political control, making it increasingly difficult for private companies to compete with Chinese SOEs across
the world.
Mega-mergers and state monopolies threaten to undermine the global market-based economy. Moreover,
the negative effects generated by these offensive policies extend beyond the Chinese border as European
businesses also face unfair competition with SOEs on the European internal market and on third markets.
Government support allows SOEs to acquire foreign businesses and foreign technology and to bid on
procurement tenders at uncompetitive prices.
141
It is essential to determine how mega-mergers – particularly
those involving state-owned corporations - should be regulated and how the EU could deal with SOE mergers
to secure fair competition.
The policies and practices behind ‘bigger and better’ SOEs undermine the principles of a market economy
that prevent high market concentrations and ensure competition. While private companies need to adhere
strictly to anti-trust laws, SOEs are exempted, creating significant market distortions both in China as well
136
European Council on Foreign Relations,
“Big is beautiful? State-owned enterprise mergers under Xi Jinping”,
2016.
137
Ross Garnaut, Ligang Song and Cai Fang (edd.),
“China’s
40 Years of Reform and Development 1978-2018”,
ANU Press, 2018.
138
Financial Times,
“China
steel groups merger set to exceed US output”,
2019.
139
The Maritime Executive,
“Beijing
Gives Green Light for CSSC-CSIC Merger”,
2019
140
China Daily,
“Two
Shipbuilders mull mergers”,
2019.
141
US-China Economic and Security Review Commission,
“SOE
Megamergers Signal New Direction in China’s Economic Policy”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0103.png
101
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
as on third markets. To ensure fair competition, China should strictly enforce its anti-trust laws on SOEs and
prevent monopolies.
A spike in central SOE mergers
Number of mergers
6
5
4
3
2
1
0
2012
2013
2014
2015
2016
Source: European Council on Foreign Relations, 2017
Subsidies and privileged access to funding
European companies also face unfair competition because SOEs often receive state subsidies and have better
access to funding. Many SOEs receive government support or have easy access to state bank loans, which
enable Chinese SOEs to offer products below market prices and causes overcapacity. This leads to unfair
competition the consequences of which private and foreign-owned businesses suffer from. Rules regulating
government subsidies can furthermore be circumvented as the Chinese government can use SOEs as an
intermediary to channel public funds and subsidies to SOE subsidiaries or other ‘independent’ enterprises.
142
Compared to private companies, former SOEs continue to benefit from government support after they have
been privatised. A study using a comprehensive dataset from China demonstrated that SOEs have easier
access to low-interest loans from Chinese state-owned banks than private companies. Moreover, privatised
SOEs continue to receive lower interest rates and more subsidies than enterprises that have never been
state-owned.
143
Politically motivated private enterprises
The EU should consider that Chinese state interference in the market goes beyond state-controlled SOEs.
Think tanks have warned against the danger of setting rigorous rules for Chinese SOEs, while leaving room
for politically connected Chinese private firms to distort the market.
144
Firstly, politically connected private
companies may receive government support which leads to unfair competition. In this way, European
companies experience a competitive disadvantage when competing with such state-aided firms.
142
Ru Ding,
“‘Public
Body’ or Not: Chinese State-Owned Enterprises”,
Journal of World Trade 48:1, 2014.
143
Ann Harrison et al.,
“Changing
the tiger’s stripes: reform of Chinese state-owned enterprises in the penumbra of the state”,
2019.
144
Bruegel,
“How
to handle state-owned enterprises in EU-China investment talks?”,
2017.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0104.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
102
Secondly, decisions by politically connected Chinese private firms risk being made on the grounds of political
motives rather than commercial objectives. This may for example be the case when the members of boards
of directors of private companies are also members of the Communist Party or closely aligned to the Party.
Thus, solely targeting SOEs in the Comprehensive Agreement on Investment and other bilateral and
international negotiations leaves room for other forms of state interference through businesses. The EU
should therefore demand broad definitions of state owned enterprises and avoid that loopholes occur. In other
words, instead of solely focusing on state ownership, the EU should carefully consider how China’s state-led
institutional framework gives some Chinese companies an unfair advantage over European companies (see
chapter ’1. China’).
145
Distortions induced by Chinese SOEs on the Single Market
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. This also has distortive effects on the European
market in the following four ways:
1. TRADE DISTORTIONS:
distorted prices within China means that several products are exported at below
market prices, leading to anti-dumping and anti-subsidy measures within the EU.
146
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.
147
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.
148
4. COMPETITION DISTORTIONS:
mega-mergers between Chinese SOEs within China and the economic
support they receive affect the competitive environment within the European market.
How to move forward
Global governance is at a crossroads to determine how industrial subsidies and SOEs should be regulated
to maintain free and fair economic growth and development. Instead of moving to a more market-based
economy, Beijing remains convinced that SOEs are an essential element of China’s socialist ‘market’ economy
and the broader development agenda. European business does not argue that all SOEs should be privatised.
Rather, state-owned enterprises should not enjoy discriminatory privileges and state-owned and privately
owned companies should both adhere to strong competition laws.
First, SOEs should not enjoy discriminatory privileges. This chapter explained how low interest rates on state
loans, favoured procurement bids and accelerated administrative approvals are just a few examples of how
Chinese SOEs enjoy discriminatory benefits at the expense of private companies. These practices hurt the
private sector and therefore the innovativeness and competitiveness of the Chinese economy. In Europe, such
discriminatory privileges are forbidden through strong state aid rules.
Secondly, SOEs should adhere to strong state aid and competition rules. A strong competition policy that
also applies to SOEs will foster innovation, stimulate the development of new technologies and lead to
cost-effective prices that benefit consumers. The current surge in mega-mergers in China is an example of
145
See chapters 1.2 and 1.3 for a description of China’s state-led economy and its impact.
146
See chapter ‘3.2 Trade’ for more information.
147
See chapter ‘3.3 Investment’ for more information.
148
See chapter ‘3.4 Procurement’ for more information.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0105.png
103
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
how the lack of strong competition rules on SOEs in China has an enormous distortive impact on competition
- not only in China, but also in Europe and on third markets.
The EU should develop an ‘SOE principle’
Since SOEs form a dominant part of China’s economy and form one of the main avenues through which
these distortions are felt within the European market, the EU should develop an ‘SOE principle’ to mitigate
the impact of government-induced market distortions through SOEs. This entails that EU policies should be
designed in such a way that they address the market-distortive effects of foreign SOEs.
Since it would be very difficult to distinguish the market behaviour of one firm from another, the EU should
reverse the burden of proof for foreign SOEs, whether from China or elsewhere. This would capture the
company segment that is most likely to benefit from or behave in distortive ways while ensuring that EU action
would be compliant with WTO rules on non-discrimination. At the same time, it would avoid unduly burdening
private enterprises and ensure the European economy remains firmly open for market-based players.
This principle can be applied in at least three ways in order to mitigate the distortive effects outlined above:
Subsidies:
the EU could reverse the burden of proof for foreign state-owned enterprises within the internal
market and instead let them prove that they do not receive subsidies on their home market. This measure
would overcome issues of transparency while being compatible with the WTO’s non-discrimination
principle.
Investment:
the EU could include additional provisions on foreign SOEs in a future revision of its investment
screening mechanism. The Canadian model already includes provisions for SOEs and serves as a good
example of how this can be implemented in practice.
Procurement:
the EU could include provisions in rules on ‘abnormally low tenders’ that devote special
attention to tenders that are submitted by foreign SOEs.
The EU should examine whether an SOE principle of this kind could be applied to more policy areas in order
to mitigate the distortive effects of foreign SOEs on the European single market.
Work with like-minded countries and consider commencing plurilateral negotiations
BusinessEurope strongly supports the trilateral meetings between the EU, the USA and Japan on the market
distortions caused by industrial subsidies and state-owned enterprises. The EU should strive to expand
working with more like-minded partners in relevant international fora, such as the G20, to tackle market
distortions created by SOEs.
European business calls on the EU to consider commencing negotiations on a plurilateral agreement under
the WTO to mitigate government-driven market distortions. Such an agreement could for example tackle
the market-distortive effects of state-owned enterprises and industrial policies. Addressing the market-
distortive practices of SOEs through negotiating a global rulebook would not only mitigate the distortive
effects of foreign-owned state enterprises but would also make European state-owned companies more
efficient. Negotiations on a plurilateral agreement should be open to all WTO members and the EU should
proactively engage all members.
Additionally, the EU and China should intensify the discussions within the EU-China joint working group on
WTO reform with the aim of discussing international rules on SOEs and industrial subsidies. It is essential
that the WTO reform addresses the market distortions caused by the practices of SOEs in the global economy.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0106.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
104
Ensure ‘competitive neutrality’
According to the United Nations Conference on Trade and Development (UNCTAD),
competitive neutrality
is the
recognition that significant government business activities which are in competition with the private sector
should not have a competitive advantage or disadvantage simply by virtue of government ownership and
control.
149
The EU should advocate internationally for the creation of rules on the competitive neutrality of state-owned
enterprises. The EU should in particular encourage China to create and implement measures to ensure the
competitive neutrality of state-owned enterprises. UNCTAD conducted a study on competitive neutrality in
China.
150
UNCTAD concluded that Chinese SOEs receive preferential treatment. As a result, private companies
face disadvantages and imbalances in economic terms both in industries in which there exists a natural
monopoly as well as in competitive industries. The report by UNCTAD recognises that SOE reform is complex
and difficult to achieve and made recommendations on how the Chinese government can improve competitive
neutrality. Accordingly, China should amongst others:
1.
Further deepen political and economic reform. In this regard, it is important that the boundaries between
the market and the government are redefined;
2.
Implement a stronger competition policy that also applies to state-owned enterprises;
3.
Apply a high level of anti-monopoly enforcement in the field of administrative monopolies.
The EU should furthermore study whether, and if so how, it should create a ‘competitive neutrality instrument’.
A competitive neutrality tool should aim to offset unfair advantages and market distortions resulting from
government ownership and ensure a level playing field between private and foreign state-owned companies
on the European internal market.
A competitive neutrality instrument could for example allow stakeholders to file complaints with a dedicated
agency in the event that ‘neutral’ competition is suspected to be breached. When the foreign SOE’s behaviour
is found to distort ‘neutral’ competition, consultations should be held with the goal of rectifying the market-
distortive practices of the state-owned enterprise in question.
151
If consultations do not lead to the required
reforms, SOEs that do not operate in accordance with competitive neutrality principles should be disciplined
through an enforcement mechanism. Australia has a competitive neutrality instrument which could be
used as a source of inspiration for a potential European neutrality tool.
152
A competitive neutrality tool could
potentially contribute to bolstering a market-based economy and a level playing field between foreign state-
owned companies and privately owned companies.
Ambitious provisions on SOEs in the CAI
The Comprehensive Agreement on Investment should include ambitious provisions on curbing the market-
distortive effects of SOEs. The investment agreement with China should for example contain provisions on
SOEs on at least the following dimensions: a clear definition and broad scope; removal of market access
barriers in industries and sectors that are dominated by SOEs; general obligations and rights; specific
disciplines on trade-distortive practices by SOEs; provisions to improve transparency; and rules regarding
enforceability and dispute settlement.
149
See definition provided by United Nations Conference on Trade and Development,
“Competitive
Neutrality”.
150
United Nations Conference on Trade and Development (UNCTAD),
‘UNCTAD
Research Partnership Platform. Competitive neutrality and its application in selected developing
countries’,
2014.
151
Mercator Institute for China Studies,
“Evolving
Made in China 2025”,
2019.
152
For more information, see United Nations Conference on Trade and Development,
“Competitive
Neutrality and its Application in Selected Developing Countries”,
2014.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0107.png
105
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
DEMANDS
67
ALL FUTURE INVESTMENT AND TRADE AGREEMENTS, INCLUDING THE COMPREHENSIVE
AGREEMENT ON INVESTMENT, MUST INCLUDE AMBITIOUS PROVISIONS ON STATE-OWNED
ENTERPRISES.
The EU should be careful not to limit the scope of provisions covering SOEs
to ownership thresholds or the number of members of the board of directors appointed by the
government. SOEs should be defined broadly to include all enterprises that are owned, controlled, or
influenced, directly or indirectly, by a foreign government. The EU should avoid a narrow definition of
SOEs as private companies or hybrid forms of SOEs may also be benefitting from state assistance or be
influenced by political motives. The CAI should aim to remove substantially all market access barriers
in sectors and industries that are dominated by SOEs.
THE EU SHOULD DEVELOP AN ‘SOE PRINCIPLE’ TO MITIGATE THE IMPACT OF GOVERNMENT-
INDUCED MARKET DISTORTIONS THROUGH SOES.
This is because SOEs form a dominant part of
China’s economy and form one of the main avenues through which these distortions are felt within
the European market. This entails that EU policies should be designed in such a way that they address
the market-distortive effects of foreign SOEs. One step would be to demand increased accounting
transparency for state-owned enterprises in order to determine whether they operate based on
market conditions and identify instruments to enforce this obligation. By increasing transparency,
this would enable the EU to effectively apply its state aid and anti-subsidy rules. The SOE principle
could, for example, be applied in the areas of subsidies, investment and procurement. The EU should
investigate whether this principle could be applied to further policy areas.
THE EU SHOULD PROMOTE AND STIMULATE ‘COMPETITIVE NEUTRALITY’.
The EU should advocate
internationally for the creation of rules on the competitive neutrality of SOEs. The EU should also
encourage China to create measures to ensure the competitive neutrality of SOEs. Additionally, the
EU should study whether, and if so how, a European ‘competitive neutrality instrument’ should be
created to ensure the competitive neutrality of foreign SOEs on the European market. A competitive
neutrality tool should aim to offset market distortions and unfair advantages resulting from foreign
state ownership and ensure a level playing field between foreign state-owned companies and private
companies on the European market.
T H E E U S H O U L D C O O P E R AT E W I T H L I K E - M I N D E D C O U N T R I E S T O TA C K L E M A R K E T
DISTORTIONS CREATED BY SOE.
The trilateral discussions between the EU, the USA and Japan
on industrial subsidies and state-owned enterprises are a welcome first step in this regard. The EU
should furthermore strive to open the discussion to like-minded countries, for example by considering
commencing negotiations on a plurilateral agreement on government-driven market distortions under
the framework of the WTO.
THE EU AND CHINA SHOULD INTENSIFY DISCUSSIONS ON INDUSTRIAL POLICIES AND STATE-
OWNED ENTERPRISES IN THE EU-CHINA JOINT WORKING GROUP ON WTO REFORM.
The EU
and China should for example cooperate to address the market-distortive effects of SOEs in the WTO
reform.
68
69
70
71
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0108.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
106
4.2. SUBSIDIES
China provides a range of government support for its industries, particularly in the context of its 5-year plans
and industrial policies such as Made in China 2025. State subsidies are an important part of China’s industrial
policy, which it employs not only to stimulate innovation in key sectors, but also to achieve objectives such as
sustaining unprofitable industries.
Subsidies can take several forms, including direct subsidies, government grants, tax benefits, cheap access to
land and capital below market prices. And while the scale and value of China’s subsidies is hard to measure
in full, one analysis of publicly available data shows that direct and indirect subsidies to SOEs have amounted
to 1.3-1.6% of annual GDP in recent years. This includes direct subsidies (+/- 0.3% of GDP), artificially cheap
credit (+/- 0.5% of GDP) and delayed payments by SOEs to their suppliers which represents a significant
indirect subsidy (+/- 0.6% of GDP) when taking into account the interest payable if the total outstanding
amount had to be borrowed.
153
SOEs here abuse their market power to effectively create free loans. The
WTOTrade Policy Review on China also assesses the level of direct financial support for SOEs. In 2016, around
3,000 SOEs listed in the Shanghai and Shenzhen stock exchanges received government support, totalling
RMB 123.215 billion, an increase from RMB 89,421 billion in 2014.
154
Example: China’s shipbuilding sector
A recent study on the shipbuilding sector showcases the impact of China’s subsidies on domestic and global
markets.
155
The study estimates that the amount of government support to Chinese domestic shipbuilding
companies between 2006 and 2013 equates to RMB 550 billion/USD 90 billion, with the lion’s share going
to entry subsidies, followed by production subsidies and investment subsidies. According to the study, this
has boosted China’s domestic investment and entry by 270% and 200% respectively, and increased its global
market share by 40%, creating sizeable distortions.
It is, however, important to note that not all direct subsidies are made out to SOEs: listed private-sector firms
received about a third of total direct subsidies in 2018.
147
Although export credits are not subsidies, the way in
which China uses them has the impact of a subsidy, since it allows China to provide loans to foreign buyers of
Chinese goods in order to create markets. According to US Export-Import Bank data, China has the world’s
largest export credit system, and it provides more funding to support its exports each year than the three next
countries in the list combined.
156
153
Gavekal Dragonomics,
“The Size of State Subsidies”,
2019.
154
World Trade Organisation,
“Trade
Policy Review: China”,
2018, p. 89. Companies that received financial support are mainly from the chemical, automobile, excavation and steel industries.
155
Vox CEPR,
“Industrial
Policy: Lessons from China”,
2019.
156
Gavekal Dragonomics,
“The Size of State Subsidies”,
2019.
157
US Export-Import Bank,
“Reports on Global Export Credit Competition”,
2018
and
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0109.png
100
200
300
400
500
30
50
10
20
40
0
0
Source: US Export-Import Bank, 2019
Source: US Export-Import Bank, 2019
Medium and long-term export credit volumes
In USD billions
Short-term export credit volumes
In USD billions
107
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
China
India
Italy
South Korea
Germany
France
Finland
Belgium
The Netherlands
United Kingdom
Japan
Sweden
Canada
Denmark
Brazil
Spain
South Africa
Switzerland
Russia
412.8
SINOSURE
(China)
114.6
481.4
KSURE
(South Korea)
49.08
121.9
NEXI
(Japan)
49.84
43.96 43.64
EDC
(Canada)
39.8
ECGC
(India)
11.39
15.43
10.96 11.06
2.81 2.39
0.61 1.05
30.9
EXIAR
(Russia)
EULER HERMES
(Germany)
US EXIM
(United States)
Norway
Israel
Austria
Hungary
Turkey
United States
Australia
Mexico
2018
Other OECD
2017
SACE
(Italy)
0.16 0.05
UKEF
(United Kingdom)
2017
0.01
0
0
0
ABGF
(Brazil)
BPIFRANCE
(France)
2018
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0110.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
108
The consequences of China’s direct and indirect subsidies are significant
1.
First and foremost, subsidies divert resources away from other, more productive parts of China’s economy.
China would benefit greatly from eliminating most of its industrial subsidies and indirect subsidies as its
economy would grow more sustainably and robustly.
2.
Second, they create market distortions because they lead to artificially lower prices, create artificial
demand and allow companies to grow beyond what they would be able to under market conditions.
3.
Third, subsidies can also lead to overcapacities and the dumping of products below market prices, which
places enormous downward pressure on affected industries globally.
4.
Fourth, subsidies significantly distort fair competition, because foreign firms which do not receive
subsidies see their profits dwindle and their market shares erode.
Although various forms of state aid have caused market distortions in China, these problems also increasingly
spill over into the global trading system, including the EU. This is due to China’s growing economy as well
as the increasing internationalisation of its companies. Some of the effects include unfair competition for
European companies on third markets from subsidised competitors, dumping of subsidised products on our
internal market, subsidised procurement bids that result in abnormally low tenders, as well as acquisitions of
European companies by subsidised entities. While there is already a broad awareness of these consequences,
the exact scale of these problems is less well known. Further research on the consequences on our internal
market would be useful to evaluate which measures would be most effective to address them.
How to move forward
Tackling the challenges posed by state subsidies on foreign markets such as China is not easy. A lack of
transparency within the Chinese economy means that it is hard to assess whether and to what extent a
company receives subsidies. It is important that the EU and other like-minded partners continue to encourage
China to rein in direct and indirect industrial subsidies for its own benefit and that of its trading partners.
Nevertheless, relying on a single approach is unlikely to produce significant results in the short term. As the
challenges and possible solutions are intertwined, they require a comprehensive approach. Solutions should
be simultaneously pursued with China, at WTO level through trilateral cooperation with the USA and Japan,
and in the EU.
158
An improved process for the notification of subsidies at the WTO would ultimately be an
important stepping stone to creating better rules defining the use of legitimate and illegitimate subsidies in
pursuit of fairer global trade and to reduce market distortions. The EU should work with like-minded partners
to consider adopting more binding requirements on notifications, including penalties for non-compliance and
a strong role of the WTO Secretariat in monitoring and enforcement.
158
See chapter ‘3.1 World Trade Organisation’ for more information.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0111.png
109
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
DEMANDS
72
INTRODUCING NEW RULES AND DISCIPLINES ON SUBSIDIES SHOULD BE A KEY PRIORITY IN
MULTILATERAL EFFORTS ON WTO REFORM.
In this context, the focus should be on updating the
rules on subsidies, improving trade policy monitoring and notification procedures, clarifying the
role of state-owned enterprises, strengthening the role of the WTO Secretariat, and setting up joint
complaints in the WTO dispute settlement system. We support the EU’s proposals to address these
issues by, for example, reversing the burden of proof on notifications.
TRILATERAL COOPERATION BETWEEN THE EU, THE USA AND JAPAN TO DEVELOP RULES AND
DISCIPLINES ON INDUSTRIAL SUBSIDIES SHOULD LIKEWISE CONTINUE IN PARALLEL TO THE
ABOVE.
To move ahead with the agreed objectives of delivering concrete measures, it is essential
that market-distorting practices are addressed. The results from these discussions should be used
to launch plurilateral efforts to negotiate agreements on tackling market distortions and disciplining
subsidies in parallel to multilateral negotiations at the WTO. This could also act as a stepping stone to
a future multilateral agreement.
THE EU SHOULD ENGAGE CHINA BILATERALLY THROUGH THE JOINT EU-CHINA WORKING
GROUP ON WTO REFORM TO STRENGTHEN INTERNATIONAL RULES ON INDUSTRIAL SUBSIDIES.
European business welcomes the fact that both the EU and China have already committed to this work
in the joint statement of the 21
st
EU-China summit in April 2019.
THE EU SHOULD APPLY THE ‘SOE PRINCIPLE’ IN TACKLING SUBSIDIES, AND REVERSE THE
BURDEN OF PROOF FOR FOREIGN STATE-OWNED ENTERPRISES WITHIN ITS INTERNAL
MARKET AND INSTEAD LET THEM PROVE THAT THEY DO NOT RECEIVE SUBSIDIES ON THEIR
HOME MARKET.
159
A lack of transparency in some countries means that EU investigative authorities
face difficulties when trying to find enough evidence to prove that foreign companies have obtained
subsidies in their home market. By placing the burden of proof on foreign SOEs, the assumption is that
they receive subsidies at home unless they can prove otherwise. This measure would overcome issues
of transparency while also being compatible with the WTO’s non-discrimination principle. Since SOEs
tend to receive a very large share of subsidies, this measure would allow the EU to address a very large
part of the subsidy problem without disproportionately affecting all businesses. The non-discrimination
principle also does not prevent the EU from differentiating between itself and foreign firms, since it
already enforces an internal state aid framework. We invite the European Commission to explore and
discuss this proposal in greater detail.
THE EU SHOULD CARRY OUT AND PUBLISH A STUDY ON HOW SUBSIDIES PROVIDED TO CHINESE
COMPANIES IMPACT THE EU INTERNAL MARKET AND EUROPEAN COMPANIES.
This study should
aim at identifying and measuring potential adverse impacts and breaches to EU law and analysing
potential unfair competition.
73
74
75
76
159
See chapter ‘4.1 State-owned enterprises’ for a more detailed explanation of the SOE principle.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0112.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
110
4.3. OVERCAPACITY
China’s industrial policy of state-led economic planning has led to overcapacity in several sectors of the
economy. While subsidies are one of the most important drivers of China’s overcapacity, a range of other
policy instruments also contribute to and exacerbate this problem. Research to date shows that eight
upstream industries in China that are most affected by overcapacity are: steel, electrolytic aluminium,
cement, chemicals, refining, flat glass, shipbuilding, and paper and paper board.
Nevertheless, this does not imply that Chinese overcapacity exists only in upstream sectors or that their
impact is limited to upstream sectors. Shipbuilding is a downstream sector in which Chinese overcapacity
also has a strong impact. The world shipbuilding industry is historically characterised by cyclicality, strong
government intervention (particularly in Asia) and overcapacity.
160
Between 2002-2007 the EU28+Norway
maintained an average level of shipbuilding production (measured in million compensated gross tonnage
(CGT)) of 4.5 million CGT per year, while China averaged 3.8 million CGT per year. During the peak years of
the financial crisis between 2008-2011, shipbuilding production in the EU28+Norway adjusted downward,
whereas Chinese production went up and peaked at over 19 million CGT. Between 2011-Q1 2019, the
production of the EU28+Norway went down to an average of 2.2 million CGT per year whereas China averaged
14 million CGT per year.
161
The overcapacity in the shipbuilding sector has meant that shipyards have had to
accept loss-making orders to fill production facilities, with the resulting losses leading to new government
interventions to save shipyards from bankruptcy and reducing the capital needed to invest in clean and safe
technology. Overcapacity in shipbuilding has also had knock-on effects on the shipping sector, by reducing the
value of existing fleets, and creating incentives to purchase new ships which leads to additional capacity and
lower price levels.
While comparable data is generally hard to find, data between 2008 and 2014 show that in six upstream
sectors for which comparative data were available overcapacity increased substantially, and in some cases
more than doubled. An argument often heard within Chinese circles is that the collapse in international
demand is one of the main reasons why overcapacity grew so much during this period. Nevertheless, both
capacity and production of these materials increased significantly during this period, including those which do
not really lend themselves to be traded internationally due to their low price and high trade costs, like cement.
Although a drop in global demand might have meant that more capacity was not utilised in some sectors, the
figures for the sectors below and their pre-existing overcapacity in 2008 point to domestic drivers as their
main source.
China has acknowledged the problems of overcapacity and initiated plans to tackle it through so-called
supply-side structural reform. This set of policies is meant to reduce distortions in the supply side of the
economy and upgrade the industrial sector. Nevertheless, the results to date have not yet led to a meaningful
reduction in overcapacity.
160
See the subsidies chapter (4.2.) for an example of Chinese government support for the shipbuilding sector. See also OECD,
“Imbalances
in the Shipbuilding Industry and
Assessment of Policy Responses”,
2017; and OECD,
“Workshop
on factors impacting costs and distorting the shipbuilding market”,
2018.
161
SEA Europe based on IHS Fairplay data
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0113.png
111
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
The development of overcapacity in China between 2008-2014: an increase
Overcapacity
Capacity
(in mio. t)
Production
(in mio. t)
Utilisation rate
(in %)
2008 vs. 2014
(2015) Scale of
overcapacity
(in mio. t)
132
327
4.9
9.2
450
850
77
230
76
215
9
21
Steel
Electrolytic
aluminium
Cement
2008
2014
2008
2015
2008
2014
2008
2014
2008
2014
2008
2014
644
1140
18.1
38.1
1870
3100
391
686
650
1046
89
129
512
813
13.2
28.9
1420
2250
314
456
574
831
80
108
80
71
78
76
76
73
80
66
88
79
90
84
Refining
Flat glass
Paper and
paperboard
Source: European Union Chamber of Commerce in China, "Overcapacity in China: an impediment to the Party’s reform agenda", 2014
While China is not the only country in the world with issues of overcapacity, its overcapacity in the steel sector
in 2014, for example, stood at twice the total annual consumption of steel in the EU.
162
So while global initiatives
such as the Global Forum on Steel Excess Capacity is a good platform to tackle this issue in the steel industry,
the systemic drivers of China’s overcapacity as well as new industrial plans such as Made in China 2025 risk
overcapacities being created in other sectors in the future, unless these drivers themselves are addressed.
The box below contains an overview of the most important drivers of overcapacity in addition to subsidies. It
exposes the difference between policy efforts, which on the one hand try to reduce overcapacity, and China’s
industrial policy on the other hand, which leads to overcapacity. A lack of alignment between the central
government and local governments, including the duplication of industrial policies, also contributes to
overcapacity. While the problem of overcapacity is acknowledged by the Chinese government, its policies have
also aimed at keeping input prices low in order to stimulate secondary sectors, particularly heavy industry.
163
Drivers of overcapacity in China
1.
2.
3.
4.
5.
6.
7.
Local protectionism and the fragmentation of industries that is driven by regionalism
Weak enforcement of regulations
Low input prices due to government policies
A fiscal system that encourages local governments to attract excessive investment
Widespread availability of inexpensive technology
Environmental, health and safety (EHS) standards and laws that are not fully implemented
A philosophy of market share vs. profitability
Source: European Union Chamber of Commerce in China, “Overcapacity in China: An Impediment to the Party’s Reform Agenda”, 2016
162
European Steel Association,
“European
Steel in Figures”,
2018.
163
European Commission,
“Working
Document on Significant Distortions in the Economy of the People’s Republic of China for the purposes of trade defence investigations”,
2017,
p. 19.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0114.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
112
The impact of overcapacity on China and the global economy
Overcapacity has a significant impact on China’s economy. Besides the misallocation and waste of resources,
affected industries are beset by a range of issues. Their profitability is severely hampered, meaning that
they are unable to muster the capital required to invest in R&D and pursue innovation. Affected companies
struggle to move up the value chain, and instead further increase their capacity to try and grow their market
share and improve their competitive situation. This vicious circle is a major obstacle to curbing overcapacity.
164
China’s overcapacity also has a strong impact on the global economy, depressing global prices, eroding profits
of European companies and reducing European capacity. This has led to several anti-dumping cases within
the EU as well as repeated calls by affected industries for the EU to take stronger measures to fend off the
effects of overcapacity. The effects and their causal relationship are shown in a simple illustration below.
Impact of overcapacity on global economy
Chinese exports
Chinese
subsidies
Chinese
overcapacity
Global price
Profits of
European
companies
European
capacity
Trade data from China also reflects the exports of Chinese overcapacity. Quarterly data since 2014 show that
China’s net exports in overcapacity sectors have increased substantially by volume since 2012. Although
comparative data on overcapacity is limited and not fully available up to 2019, the three sectors for which
overcapacity and trade data are available show that the build-up in overcapacity correlates with a substantial
growth in exports in steel (241% of 2012 levels by Q1 2016), paper & paperboard (203% of 2012 levels by Q1
2016) and aluminium (160% of 2012 levels by Q1 2016). While steel and paper & paperboard volumes both
peaked in 2016 and decreased since then, aluminium exports have continued to grow. In the first quarter
of 2019 steel exports dropped to 140% of 2012 levels, paper & paperboard dropped to -30% of 2012 levels,
whereas aluminium grew to 221% of 2012 levels.
The growth in net exports of aluminium corresponds to a substantial increase in China’s production of
aluminium, as is shown in the aluminium case study below. Since joining the WTO in 2001, China’s production
in aluminium grew from 13% of global production to 56% – or more than half – of global production in 2018.
When comparing global production with the latest year for which Chinese overcapacity figures are available
(2015), Chinese overcapacity in aluminium in 2015 was as high as 34% of aluminium production by the rest
of the world. While this is only one example for which comparative data are available, it would be generally
useful to know which sectors, upstream or downstream, are currently or likely to be affected similarly in order
to formulate appropriate policy responses.
164
European Union Chamber of Commerce in China,
“Overcapacity
in China: An Impediment to the Party’s Reform Agenda”,
2016.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0115.png
113
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Trade and overcapacity
Change in China’s net exports in overcapacity sectors by volume by four-quarter rolling sum, index value (4Q2012=100)
Aluminium
products
300
250
200
150
100
50
0
-50
-100
1Q2014
2Q2014
3Q2014
4Q2014
1Q2015
2Q2015
3Q2015
4Q2015
1Q2016
2Q2016
3Q2016
4Q2016
1Q2017
2Q2017
3Q2017
4Q2017
1Q2018
2Q2018
3Q2018
4Q2018
1Q2019
Lead-acid
batteries
Steel products
Paper and
paperboard
Fertilisers
Source: Asia Society Policy Institute China Dashboard, 2019
Case study: the aluminium sector
In January 2019, the OECD published a report “Measuring distortions in international markets: the aluminium
value chain”. The study demonstrates that Chinese state support has contributed to the development of
aluminium overcapacity in China. The OECD has established that of the up to USD 70 billion subsidies provided
over 2013-2017 to 17 international companies examined, 85% went to 5 companies – all of them Chinese.
The aluminium value chain can be broadly divided into upstream (up to the primary production, i.e. aluminium
smelting) and downstream (production of semi-fabricated products).
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0116.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
114
An overview of the aluminium value chain
Bauxite mining
Use phase
Alumina production
Recycling
Product
manufacturing
Primary aluminium
production
Semi-fabrication
Source: European Aluminium
In 2000, China stood for 10% of global primary aluminium production. By 2018 this figure rose to 53%. In
parallel, Chinese primary aluminium overcapacity reached 10 million tons in 2017. For comparison, European
Union’s production of primary aluminium stands at 2.2 million tons – nearly 5 times less. Chinese overcapacity
in semi-fabricated products has been multiplied by 4 since 2008.
165
Global production of primary aluminium
(in million tons)
70
60
50
40
30
20
10
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
China (estimated)
Total
2014
2015
2016
2017
Source: International Aluminium Institute, 2019
2018
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0117.png
115
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Aluminium, as oil, is globally priced. The price of aluminium has experienced a decline since 2011. In the
European Union and North America, this price decline corresponded to a fall in the profitability of aluminium
producers and led to aluminium smelter closures. However, despite higher input costs in China, Chinese
aluminium-producing firms appeared not to have been affected and showed solid profit margins. This
suggests the use of state intervention stimulating company profits and leading to capacity growth in China.
It also contributes to the vicious circle of overcapacity further depressing global prices and hurting company
profitability even further. While no figures are readily available in this case study, we can assume that it would
also have consequences on employment in the EU.
Overcapacity makes primary aluminium cheaper domestically in China, thus benefitting development of
Chinese downstream industries that use these products as inputs. Lower production costs for semi-fabricated
products have in turn translated into lower export prices that have made China more competitive in most
segments of the market. This is equally true for exports of products containing aluminium, for example car
wheels, bicycles and shower curtains. Such exports are detrimental to aluminium demand outside China,
further challenging market balances and global prices, as well as manufacturing value chains outside China.
Exports of semi-finished aluminium products out of China continue at record levels
Gross semis exports (kt)
Semis exports (monthly, kmt)
600
Semis exports (net, kt)
Chinese competitive adv. downstream (USD/ton)
Comp. adv. (USD/mt)
700
600
500
400
400
300
300
200
200
100
100
0
jul 07
jul 08
jul 09
jul 10
jul 11
jul 12
jul 13
jul 14
jul 15
jul 16
jul 17
jul 18
jan 07
jan 08
jan 09
jan 10
jan 11
jan 12
jan 13
jan 14
jan 15
jan 16
jan 17
jan 18
jan 19
jul 19
500
0
Source: Norsk Hydro calculations based on Chinese customs and multiple journalistic sources, 2019
165
The Aluminum Association, European Aluminium, Aluminium Association of Canada and Japan Aluminium Association,
“Aluminium
excess capacity: time to act”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0118.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
116
According to the OECD report, the non-market forces that drive overcapacity include a wide range of state
intervention, which might help explain the persistence of overcapacity in the aluminium industry. At a broad
level, this includes all policies that directly or indirectly favour increases in capacity that are not market-
driven, either by encouraging the construction of new smelters or preventing the retirement of older ones:
Financial support provided by SOEs (to SOEs).
The provision of financial support appears to be prevalent
in the Chinese aluminium industry. Subsidies, and subsidised bank loans in particular, prevent the exit of
less productive firms hit by shocks. In the OECD study, Chinese aluminium SOEs have attracted the vast
majority of all financial support provided to sampled companies, although two large private firms also
benefitted from support from state-owned banks. State influence in China is especially evident in the area
of financing, with companies able to borrow from banks and other state-owned financial institutions on
terms that are much more favourable than those available on private markets. State enterprises thus play
a role as both recipients and providers of support in China.
Input subsidies provided by SOEs (to SOEs).
For example, Chinese SOEs provide inputs such as coal,
alumina, or electricity to other companies at below-market prices. However, it is difficult to identify
the specific policies underlying these sorts of practices due to the opaque relationship between the
government and companies in China.
Targeted policies supporting exports of downstream products.
Chinese policies, on the one hand,
discourage exports of primary aluminium while on the other hand, they encourage exports of downstream
products through VAT rebates for exports. This has negative impact throughout the value chain on
importing markets like the EU due to lower demand for locally manufactured products.
How to move forward
Overcapacity, while not a new or uniquely Chinese phenomenon, occurs predominantly in China. China’s
overcapacity is driven by various reasons, and government attempts to curb it have produced limited results.
At the same time, new industrial policies such as Made in China 2025 risk creating overcapacities in additional
sectors, unless the drivers of overcapacity are addressed properly. The impacts are manifold, both on China
and the global economy. The EU, China and other trading partners should therefore work together to do their
utmost to eliminate the drivers of overcapacity.
There are also several barriers to addressing overcapacity that make it harder to move forward and effectively
tackle the issue. These include local subsidies and protectionism, whereby local governments want to attract
investment and grow their GDP. The threat of social unrest also looms large in provinces where industries
mired in overcapacity are a major source of employment. Most importantly, however, the way in which the
government continues to intervene in the economy from multiple angles makes any singular policy effort
difficult and requires a broad effort.
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. It would contribute
to China’s declared objective of transitioning to a more sustainable, market-driven economy as highlighted
in the ‘Decision on Some Major Issues Concerning Comprehensively Deepening the Reform’ in 2013.
166
The
EU and other governments should continue to engage with China in order to help China in eliminating its
overcapacity. The EU should move in parallel, however, to prevent and mitigate the negative consequences on
European business and develop plurilateral efforts to develop rules to restrict government-induced market
distortions.
166
Communist Party of China,
“Decision
of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform”,
2014.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0119.png
117
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
DEMANDS
77
THE EU SHOULD ENGAGE CHINA TO TAKE FURTHER STEPS TO SET AND PUBLISH GOALS TO
REDUCE EXCESS CAPACITY THROUGH LEGAL AND MARKET METHODS AND TO STOP DUMPING
ITS OVERCAPACITY ON FOREIGN MARKETS.
Otherwise there is a risk that this overcapacity knocks
out entire industries in Europe and ultimately leads to trade defence measures and other policies.
While China has undertaken efforts to restructure its overcapacities in steel, the country remains the
largest exporter of those overcapacities in absolute terms.
THE EU SHOULD ALSO CONTINUE ENGAGING IN PLURILATERAL DIALOGUES LIKE THE G20 AND
OECD
GLOBAL FORUM ON STEEL EXCESS CAPACITY.
The G20 is the political forum where outreach
efforts to eliminate overcapacity can best be deployed. It is unfortunate, however, that China withdrew
from the Global Forum on Steel Excess Capacity on 23 October 2019. As a major contributor to steel
overcapacity, China should be encouraged to re-join the forum. The EU should also take a leading role
to ensure that the OECD forum makes concrete progress and adopts binding commitments to remove
market-distorting policies that contribute to excess capacity.
THE EU SHOULD ENGAGE LIKEMINDED PARTNERS IN ORDER TO LAUNCH PLURILATERAL
NEGOTIATIONS ON ELIMINATING GOVERNMENT-INDUCED MARKET DISTORTIONS.
This should
be done in parallel to other bilateral and multilateral efforts to address the issue of overcapacity.
A plurilateral approach of this kind could help bind members to new rules on government-induced
market distortions, something which is lacking in the current WTO framework.
78
79
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0120.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
118
4.4. COMPETITION AND STATE AID
Competition policy
The lack of a level playing field poses a serious challenge for European companies as Chinese companies
do not play under the same rules, leading to unfair competition. As discussed, this does not only negatively
impact European businesses competing in China, but it also affects the level playing field in the EU Single
Market and in third markets. In order for European companies to remain competitive at a global level, the
EU should put On place a smart implementation of EU competition rules to ensure that effective competition
between companies exists that contributes to job creation, growth and investment. It should also address the
global challenges which businesses are facing in order to boost their and the EU’s overall competitiveness.
167
The role of competition policy and merger control
European business supports a strong competition policy. We clearly recognise the fundamental role that
well-functioning competition rules play in the Single Market and in a market-oriented economy, both in terms of
limiting distortions and ensuring efficiency and innovation by protecting consumer choice and allowing competitors to
enter new markets. Furthermore, EU competition policy is one of the few areas where the EU has extra-territorial teeth.
EU merger policy as such does not prevent the creation of large companies but its impact in influencing companies’
strategic decisions should not be underestimated. Even though the vast majority of concentrations subject to EU
merger control are cleared unconditionally (90% of all mergers), various transactions have also been abandoned
and notifications withdrawn, possibly in view of a likely prohibition or significant remedy requirements.
168
In recent debates, the suggestion has been made that relaxing EU merger review conditions is necessary
to allow for greater European market concentrations in the context of increasing global and Chinese
competition. Allowing greater European market concentrations would however not necessarily mean that
European companies would be better able to compete with Chinese giants. After all, Chinese companies – in
particular SOEs – would continue to benefit from state subsidies and many Chinese companies would still be
protected from foreign competition on their domestic market through various market access barriers.
The EU Merger Regulation, relevant notices and guidelines, and the existing body of case law and practice,
give the Commission enough discretion to identify all the competitive constraints that merging firms face
and any changes to the substantive test and other provisions in the Merger Regulation would create new
uncertainties, nullifying some of the well-established case law, and increase existing discretion. This would
be inappropriate in view of the legally sub-optimal procedures under the EU Merger Regulation with limited
external and internal controls. Instead, the Commission should explore how EU competition policy can adapt
to developments on global markets and where necessary change relevant notices and guidelines.
Evolving markets and market definitions
Regarding the definition of markets, overall the Commission defines geographic markets correctly, setting
the right framework to assess competitive constraints from outside the EU. However, the Commission should
identify on the basis of objective and transparent criteria, whether there are situations where it should put
more weight on the global market environment when assessing certain concentrations, while bearing in mind
overall market developments as well as competition within the internal market. For example, in cases where
the merging parties compete outside the EU and where third-country competitors do not (yet) have business
activities or revenues in the EU, enough consideration should be given to the global market environment. By
not properly taking the global market environment and dynamics into account and by focusing too much on
167
For more information, see BusinessEurope,
“Improving
EU Competition and State Aid Policy”,
2019.
168
BusinessEurope,
“Improving
EU Competition and State Aid Policy”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0121.png
119
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
immediate effects in the EU, or on narrow geographical markets, the Commission may put EU companies at
a disadvantage, preventing them from achieving greater scale and technological leadership which enables
them to compete at global level. It should also be explored whether the Commission is sufficiently flexible
when appraising efficiencies from mergers.
Analysing and offsetting competition distortions
In the Commission’s strategic outlook on the EU-China relationship, the Commission announced they should
assess how to fill existing gaps in EU law with regard to the distortive effects of foreign state ownership
and state financing in the internal market. This has become even more relevant in the light of recent
mega-mergers of Chinese SOEs (see chapter ‘4.1 State-owned enterprises’).
It is key that the Commission monitors and analyses the competitive risks from the recent increase in market
concentrations in China and the implications on the competitive landscape, as discussed in the chapter on
SOEs, as well as the impact of any foreign government support that could be granted. The average asset size
of industrial SOEs increased from RMB 923 million in 2008 to around RMB 2,300 million in 2017.
169
The EU
needs a granular effective monitoring system to evaluate the potential competitive risks of increasing market
concentrations and concentrated foreign control of industries.
The Commission should take account of the various forms of public subsidies (e.g. export subsidies, loans,
funding of state-owned companies, etc.) that companies from outside the EU enjoy. These subsidies are
most relevant when assessing both markets’ dimensions (as they may allow companies from outside the
EU to sell globally, while EU companies often cannot, thereby giving the impression of the market being
smaller) and market players’ power on the same markets (as companies benefitting from public subsidies
might consequently have much stronger market power). A bottom-up fact-finding exercise, with the help of
company information, would be key to build a picture of the situation and should be implemented immediately.
State Aid
State subsidies, market protection and unfair trade practices that infringe market-based principles give an
unfair competitive advantage to competing firms. To counter this, the EU needs effective state aid control.
In the EU, we need more coherent application of the rules at national level. At international level, we need
strengthened rules to address market-distorting subsidies, including indirect industrial subsidies in the
form of tax cuts, cross-subsidisation, cheap sovereign loans to state-owned enterprises and/or inflated
procurement prices paid by local public authorities.
EU state aid rules have usually arranged for a level playing field within the EU, without ensuring also a level
playing field for EU companies competing worldwide. The existence of a so-called
“matching clause”
in
some situations (e.g. the Research, Development and Innovation framework) aims at compensating for the
distortive third-country subsidy. However, this clause has never been applied, because there is a lack of data
regarding aid granted by third countries to competitors. This reinforces the need for a fact-finding exercise,
as stressed above. In any event, support received by competitors from non-EU countries should not only be
considered in the context of the level of aid granted to the EU firm (as covered by the matching clause) but
more generally to achieve an accurate assessment of the overall competitive environment.
Work needs to be done to improve the scope and implementation of relevant WTO rules and the Commission
should address this issue in the context of free-trade agreements. The global situation should also be
particularly taken into account in the context of cluster policy, and particularly the fact that other regions of
the world, like the USA, India and China have very supportive cluster policies.
169
Ross Garnaut, Ligang Song and Cai Fang (edd.),
“China’s
40 Years of Reform and Development 1978-2018”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0122.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
120
DEMANDS
80
THE EU MUST ENSURE A SMART IMPLEMENTATION OF EU COMPETITION RULES THAT PROTECTS
CONSUMERS WHILST ENSURING THAT EU COMPANIES CAN ALSO COMPETE AT GLOBAL LEVEL.
At the same time, the EU should ensure that the administrative and procedural framework of EU
competition proceedings is sufficiently speedy, transparent and proportionate.
THE 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. By not properly taking the global market environment and dynamics into
account and by focusing too much on immediate effects in the EU, or on narrow geographical markets,
the Commission may put EU companies at a disadvantage, preventing them from achieving greater
scale and technological leadership which enables them to compete at global level.
IMPROVE MERGER PROCEEDINGS.
Merger control proceedings before the European Commission
take a long time and are disproportionately burdensome. Excessive information and document
consultation must be reduced to a manageable level and the often lengthy pre-notification meetings
should not be the rule. There should be a proper due process and effective checks and balances in the
system. Internal checks should involve a complete and impartial re-examination of both the procedural
and the substantive aspects of a case and access to these bodies should not be limited as this prevents
them from being an effective impartial arbiter throughout the proceedings. Existing checks and
balances should be strengthened and institutionalised. This should not lead to longer procedures.
THE EU MUST FIND SOLUTIONS TO MITIGATE EXTERNAL DISTORTIONS 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. This
assessment should both address disturbances in the the EU Single Market as well as on external
third markets. DG Competition, the European Competition Network (ECN), the Council of the EU’s
‘Working Party on Competition’ and all other relevant actors should actively work together to assess
whether our existing instruments are adequate and effective where actions by third countries are
causing market distortions. There should also be consistency between different EU policies so that
they converge towards common objectives.
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 (in particular SOEs). In such a
case, European competition authorities should diagnose and combat market power. The competition
law instruments should be used to address this new global challenge. To this end, the EU should
monitor and analyse the risks to competition from increasing Chinese market concentrations, also
taking into account that formally independent undertakings may operate in a (state-influenced)
coordinated manner (single economic entity).
81
82
83
84
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0123.png
121
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
85
EU RULES ON HORIZONTAL COOPERATION SHOULD ENCOURAGE COMPANIES TO COLLABORATE
TO CARRY OUT JOINT RESEARCH AND DEVELOPMENT AND TECHNOLOGY DEVELOPMENT,
ACHIEVE OBJECTIVES OF OTHER EU POLICIES, OR MAKE MORE EFFECTIVE BIDS FOR
CONTRACTS.
Especially in the age of Industry 4.0, joint research projects or collaborations through
industry platforms play an important role. Consortia of companies would be eligible for tender,
enabling it to bid for the larger contracts that have become more and more regular. The Commission
should therefore give clear guidance on how companies can enter into such arrangements in order to
compete more effectively without falling foul of competition rules.
THE EU SHOULD STRENGTHEN EU STATE AID RULES TO ADDRESS MARKET-DISTORTING
SUBSIDIES OUTSIDE THE EU:
Work needs to be done to improve the scope and implementation
of relevant WTO rules and the Commission should address this issue in the context of free-trade
agreements. The Commission should continue its active work on making trade agreements with
substantive provisions on state aid, also with a view to enforcing them. These are important steps
towards better subsidies control which takes the global dimension into account.
THE EU MUST ENSURE THAT STATE AID POLICY SUPPORTS INVESTMENT IN LARGE RESEARCH
AN D I N N OVATI O N PROJ E CTS TH AT C ON TR I BU TE TO G ROWT H, J OB S A N D E U G LOB A L
COMPETITIVENESS:
This will allow European companies to effectively compete on the global (digital)
markets. In addition, the promotion of so-called IPCEIs (“Important Projects of Common European
Interest”), joint projects in key technologies such as microelectronics, battery cell production or the
“low-carbon industry” requires a broader approach and faster approval.
86
87
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0124.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
122
05
REINFORCE
THE EU’S OWN
COMPETITIVENESS
With technologies 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 is falling behind in this race. The EU is losing
its relevance on innovation for the benefit of the Chinese
market. The EU’s share of the world gross expenditure on R&D
had decreased from 25.8% in 2000 to 20% in 2018. Over the
same period, China’s share has increased from 5% to 21% .
170
The EU must deepen the Single Market, develop an ambitious
industrial strategy, invest more in R&D and stimulate
digitalisation to maintain a competitive edge.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0125.png
123
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
5.1. A COMPETITIVE SINGLE MARKET
AND AMBITIOUS INDUSTRIAL STRATEGY
A supportive business environment is crucial for providing a basis for the creation and expansion of firms. The
EU only ranks 29
th
on average in terms of the overall ease of doing business (compared to 8
th
for the USA and
46
th
for China).
171
Although the EU still ranks higher than China in terms of the overall ease of doing business,
the EU is steadily losing its competitive position in comparison to other major economies. Completing the
Single Market (in particular its digital aspects), a strong industrial policy and reducing the regulatory and
administrative burdens for business are essential to provide the domestic base from which new companies
can develop economies of scale to compete globally.
The
renaissance
of the Single Market
The EU’s competitiveness in the global economy stems from internal competition and efficiency gains in a
well-functioning, open and harmonised EU Single Market. The free movement of capital, goods, services,
people and data on the Single Market not only enhances the competitiveness of the EU, but also generates
economic leverage, both to the EU as a whole and to its members individually. However, there are numerous
data pointing to lack of integration and the potential still unused (2.28% of EU GDP in services, or 1.8% of EU
GDP with full application of the mutual recognition principle in goods).
172
One issue that showcases the lack of Single Market integration is that European start-ups struggle to scale up
their business operations across the EU. It is highly complicated to expand and grow in the EU as the Single
Market remains scattered in certain areas. In comparison to other major economies such as the USA and
China, the EU performs poorly with regards to high-growth firms that have reached a USD 1 billion market
value within a short time frame from start-up - the so-called ‘unicorns’. The EU has not matched other regions
when it comes to developing such firms, with the number of unicorns founded since 2010 amounting to only
29 in the EU, compared to 139 in the USA and 81 in China. Moreover, the average value of EU unicorn firms is
USD 2.1 billion, only about half that in China (USD 4 billion) and the USA (USD 3.6 billion). This illustrates the
challenges that the EU has with scaling up its enterprises.
Completing the EU Single Market is pivotal, to create economies of scale and to compete successfully with
our main competitors such as China. The EU should therefore put the completion of the Single Market back
on top of the EU agenda.
170
European Commission,
“Science,
Research and Innovation Performance of the EU”,
2018.
171
World Bank,
“Doing
Business 2019: Training for Reform”,
2019.
172
European Parliament,
“Contribution
to Growth: European Digital Single Market”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0126.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
124
Number and average value of unicorns by region
Width shows average valuation of unicorns (in billion USD billion)
140
120
100
80
60
40
20
Number of unicorns
3.6
0
USA
4
China
Average value per unicorn
2.1
EU
2.8
India
Data until November 2018. Source: CB Insights and BusinessEurope, 2018
An ambitious industrial strategy
A more pro-active approach is necessary. This does not mean that Europe should become inward-looking
or become more like China by applying a
dirigiste
industrial policy. Europe must not enter a new era of
interventionism where the state ‘picks the winners’, thereby limiting and hindering other business action and
competition as a whole.
Instead, the EU should concentrate its efforts on improving the framework conditions that incentivise
companies of all sizes to improve their performance, ability to scale, invest and safeguard the EU’s economic
resilience. Furthermore, it needs to foster industrial cross-border cooperation and networks around value
chains that are key to the EU’s industrial competitiveness and strategy autonomy. For instance, the work
around microelectronics, batteries, low-carbon industries, hydrogen or cybersecurity is important to position
the EU in areas of key technologies. This more strategic approach should pave the way for a pooling of public
and private resources, including investment, at the critical phase of moving technologies from labs to first
industrial deployment and commercialisation. This is the moment when public support may be necessary to
fill the financial gap to overcome market failures. In this way, the EU can equip itself to compete successfully
with China and other countries in the context of an increasing competitive global economy.
Reducing regulatory and administrative barriers
Businesses continue to experience regulatory and administrative hurdles when doing business in the EU and
in the EU Member States. Administrative complexity, regulatory heterogeneity and different approaches, for
example, in consumer protection, cause barriers to trade and burdens for European businesses, while reducing
choices for consumers. At the same time, China is rapidly catching up with the EU in terms of fostering a
conducive regulatory business environment, potentially impacting the EU’s long-term competitiveness.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0127.png
125
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
While China’s business environment is strongly confined by barriers such as forced technology transfer and
a distortive state aid system, in some areas it is nowadays easier to do business in China than in the EU. The
ease of starting a new business is one key indicator of the overall ease of doing business in an economy. While
China’s competitive landscape has made rapid advancements in terms of time and costs required to start a
business, the EU can do more for a conducive business environment. In 2019, China ranked 27
th
out of 190
economies in terms of the ease of starting a business, while the EU only ranked 65
th
.
173
The days required to start a business in China have declined from 29.4 days in 2014 to 8.6 days in 2019. In the
EU, the days required to start a business in the EU have only declined from 13.6 days in 2014 to 11.9 days in
2019.
174
China has exceeded the EU with regard to time required to start a business 
Time required to start a business (days)
China
40
EU
30
20
10
0
2013
2014
2015
2016
2017
2018
2019
Source: World Bank, 2019
Within the EU, regulations furthermore differ across national borders. This regulatory heterogeneity
damages the EU’s ability to foster a dynamic business environment which allows companies to benefit from
economies of scale. Revisiting the example of the ease of starting a business, it takes 3.5 days to start a
business in the Netherlands, whereas the same process takes 37 days in Poland.
175
Similarly, the number
of procedures required to legally start and formally operate a business also vary significantly amongst EU
Member States. In Sweden, there are 3 procedures on average to be completed when starting a business,
while that number is three times higher in Germany as there exist 9 procedures on average. When it comes to
actual implementation of EU Single Market rules and administrative practices, it is even more complex.
Meanwhile, China has introduced a single form for entrepreneurs to obtain a business licence, an organisation
code and tax registration. Beijing furthermore streamlined the company registration process and launched
portals for online company registration, simplifying the procedures for starting a business and fostering
a more dynamic business environment.
176
It is essential for European businesses that the EU does not lag
behind in this regard. However, in practice it remains challenging to obtain a business license and requires
companies to engage with multiple government departments through a convoluted process.
173
World Bank,
“Doing
Business 2019: Training for Reform”,
2019.
174
World Bank, “Time
required to start a business”,
2019.
175
World Bank,
“Doing
Business 2019: European Union report”,
2019.
176
World Bank
“Doing
Business 2019: China report”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0128.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
126
The EU must enhance its regulatory environment to maintain regulatory competitiveness. The better
regulation principles should, for example, be applied more consistently to prevent high administrative and
regulatory burdens for companies, in particular SMEs.
DEMANDS
88
DEEPEN THE EU SINGLE MARKET.
This is essential to help provide the domestic base from which
new companies can develop economies of scale and compete globally. This is essential also to further
integrate markets for goods and services, including logistics and network services, and ensure a
barrier-free framework that helps wide-scale roll-out of digital technologies. Consistent policy-
making is necessary so that decisions do not hinder digitalisation and, likewise, choices on digital do
not undermine the Single Market freedoms.
DEVELOP A MORE STRATEGIC EU INDUSTRIAL POLICY.
Business and public authorities will need
to collaborate to support and co-invest more intensively in strategic areas for Europe’s future global
competitiveness and strong autonomy in critical technologies and infrastructure. In that regard, the
work on strategic value chains by the Strategic Forum on Important Projects of Common Europe
Interest (IPCEI) should be further developed, in clear and transparent process. The EU’s industrial
policy should aim 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.
Compared to China and the USA,
the EU is steadily losing ground in terms of regulatory competitiveness. Competitiveness proofing,
including an SME test and full use of the innovation principle, must be an integral part of the ex-ante
impact assessment for all legislative proposals.
EUROPEAN BUSINESS CALLS ON THE EU AND EU MEMBER STATES TO HARMONISE NATIONAL
REGULATIONS AS MUCH AS POSSIBLE, WHILE KEEPING IN MIND THE PROPORTIONALITY AND
NECESSITY PRINCIPLES.
Regulatory asymmetries make it challenging for companies, in particular
start-ups, to develop economies of scale. The EU and the EU Member States must harmonise
regulations as much as possible and based on better regulation principles, or otherwise rely on the
mutual recognition/country of origin application. This should go hand in hand with facilitating business
start-ups and stimulating company expansion.
THE EU SHOULD STRENGTHEN THE IMPLEMENTATION AND ENFORCEMENT OF LEGISLATION
BEHIND OR – IF NECESSARY – AT THE EU BORDER.
EU companies comply with stricter regulations
and standards, while products coming from abroad do not always comply with the same rules.
Improving implementation and enforcement would also advance the level playing field.
89
90
91
92
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0129.png
127
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
5.2. RESEARCH AND INNOVATION
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 is falling behind
in this race. On the other hand, China is becoming a powerhouse in some key areas of research, development
and innovation.
Gross expenditure on R&D within the EU was equivalent to 2.07% of total GDP in 2017. This figure is
disappointing when compared to other countries such as South Korea (4.55%), Japan (3.20%), the USA
(2,79%). In terms of R&D intensity (R&D expenditure as percentage of GDP), China spends 2.13% of its GDP on
research and development, which is relatively equal to the EU’s R&D intensity.
177
China nowadays outspends the EU in terms of expenditure on R&D
Gross domestic expenditure on R&D (GERD), 2006-2017
As percentage of GDP
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Japan
United States
China (except
Hong Kong)
EU28
Source: World Bank, 2019
However, the EU is losing its relevance on innovation for the benefit of the Chinese market. The EU’s share of
the world gross expenditure on R&D had decreased from 25.8% in 2000 to 20% in 2018. Over the same period,
China’s share has increased from 5% to 21%. As of today, the EU accounts for less than one fifth of the world’s
business investment in R&D, whilst China accounts for 24%.
178
177
Eurostat,
“R&D
expenditure in the EU increased slightly to 2,07 of GDP in 2017”,
2019.
178
European Commission,
“Science,
Research and Innovation Performance of the EU”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0130.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
128
World business enterprise expenditure on R&D
4
%
4
%
6
%
5
%
7
%
28
%
19
%
42
%
2000
USA
EU
Developed Asian economies
China
24
%
2015
19
%
25
%
17
%
BRIS
Rest of the world
Developed Asian economies refer to Japan, South Korea, Singapore and Taiwan / BRIS refers to Brazil, Russia, India and South Africa
Source: European Commission, 2018
Raising EU public funds and making EU framework programmes (FPs) for research and innovation more
attractive for European companies, drafting and implementing a ‘fit-for-innovation’ regulatory framework,
developing and attracting skilled people, enhancing collaboration and cooperation with international partners
are essential elements in order for the EU to remain competitive.
More and smarter public funding
One of the main concerns for European business is that the EU might fall behind and that China’s RDI
expenditure will outperform the EU’s expenditure. Therefore, there is an urgent need for the EU to scale up
public spending on RDI to realise the EU objective of allocating 3% of GDP to research and development.
179
The EU should, for example, ambitiously increase the budget of EU framework programmes for research and
innovation. The FPs play a crucial role in leveraging investment, boosting innovation and funding excellent
research. While the FPs only make up for a small proportion of the total public investment in RDI in the EU -
about 10% of public R&D investment,
180
they are decisive for companies’ investment decisions. According to
the European Commission, each euro invested through Horizon Europe, the 9
th
FP, can potentially generate a
return ranging from €10 to €11 over the same period (2021-2027).
In June 2018, the European Commission proposed a total budget allocation of EUR 94 billion to Horizon
Europe. Whilst this budget proposal represents a raise of 29% from Horizon 2020, the European business
community calls for matching the strong policy ambition with an equally ambitious budget, increasing the
financial envelope to at least EUR 120 billion (in constant prices). Anything below is considered neither
sufficient to address the EU’s innovation deficit, nor for competing with other third countries such as
China.
181
Public funding is a vital piece in the RDI puzzle, with evidence that government funding in RDI
crowds in private-sector funding and stimulates total investment on RDI. In this regard, European business
welcomes that European Commission President Ursula von der Leyen called on the European Parliament to
“significantly modernise” the EU budget for RDI in the new Multiannual Financial Framework in order not to
fall behind on our competitors – most notably the USA and China.
182
179
For more detailed policy recommendations, see BusinessEurope,
“BusinessEurope
views on maximising the impact of EU research and innovation programmes”,
2017.
180
European Commission,
“Key
findings from the Horizon 2020 Interim Evaluation”,
2017.
181
For more policy recommendations, see BusinessEurope,
“BusinessEurope
comments on Horizon Europe”,
2018.
182
European Commission,
“Speech
by European Commission President Ursula von der Leyen in the European Parliament plenary on the occasion of the presentation of her College
of Commissioners and their programme”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0131.png
129
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Better stimulate business to perform and fund RDI
The participation of businesses in RDI projects is of pivotal importance for the successful commercialisation
of innovations. However, China is currently outperforming the EU both in terms of business performance
of R&D (which can be funded by the public sector) and business funding of R&D (which can be performed
by non-business entities). In 2017, 66% of all R&D activities within the EU were performed by the business
enterprise sector, equalling a value of 1.36% of GDP. However, business performance was significantly higher
in China (1,65%) and the USA (2.04%) and was even higher in other countries such as South Korea (3.62%) and
Japan (2.53%).
183
The Chinese business sector is not only performing more R&D, but also funding more R&D than European
companies. Although the distinction between the public and the private sector is highly blurred in China,
Eurostat data illustrate that in 2016, 76% of all R&D costs in China were financed by the business sector, while
in the EU only 57% of all R&D expenditure is funded by the business sector.
184
For the EU to remain competitive, it is essential to stimulate business expenditure on RDI and business
funding of RDI as much as possible as business is the main driving force to translate research into innovative
products. The EU should engage the private sector more vigorously to speed up efforts in overcoming the
‘valley of death’ – the gap between the research work and the commercialisation phase.
In doing so, EU programmes should be made attractive to companies. To reach this objective, more emphasis
should be put on the “Global Challenges and European Industrial Competitiveness” pillar and key-enabling
technologies (KETs). These are the essential technology building blocks which underpin Europe’s global
leadership in various industries. In light of their relevance and in response to Made in China 2025, companies
call for more budget and targeted policies for KETs.
Gross domestic expenditure on R&D by performance per sector, 2017
(Percentage relative to GDP)
Business enterprise sector
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
EU28
Source: Eurostat, 2019
Government sector
Higher education sector
Private non-profit sector
China (except Hong Kong)
Japan
United States
183
Eurostat,
“R&D
Expenditure”,
2018.
184
Ibidem.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0132.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
130
Gross domestic expenditure on R&D by source of funds, 2016
(% share of total)
Business enterprise sector
100
90
80
70
60
50
40
30
20
10
0
EU28
China (except Hong Kong)
Japan
United States
Government sector
Other
Source: Eurostat, 2019
“Fit-for-innovation” regulatory framework
Innovation depends on many systemic factors, including the incentives and obstacles set by the existing
regulatory framework.
Regulation is an important aspect of investment and planning for companies, because it guarantees stability
and certainty. For instance, it was a well-designed regulation which pushed Europe to technology and market
leadership in the early years of mobile telephony. However, if Europe wants to be competitive and develop
its ‘third way’ of regulating new technologies, it needs to support an innovative regulatory framework. At
this date, China’s technological and economic footprint grows, and so is its influence in shaping rules and
attracting RDI investment.
In this perspective, the EU is equipped with one of the largest and most advanced regulatory architectures in
the world, with the Single Market being one of the EU’s biggest success stories. At the same time, the diversity
and complexity of this regulatory landscape runs the risk of stifling the ability of companies to innovate in
certain situations, and therefore pushes companies to develop their RDI projects outside of Europe.
To encourage companies to make RDI investment in Europe, the EU should aim at fostering innovation
when drafting and implementing new regulation. From a positive narrative for emerging technologies to
full implementation of the innovation principle, from a closer involvement of industrial stakeholders to the
adoption of innovative regulatory tools (e.g. sandboxes for RDI and innovation deals), EU companies believe
that the EU could do a lot to foster innovation through regulation.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0133.png
131
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Skilled people
European companies have difficulties in finding talented technical staff for RDI. Around 40% of European
employers have difficulties in finding people with the skills they need to grow and innovate, creating substantial
problems for recruiting and consequently major bottlenecks in companies’ capacity to develop new offerings
and businesses.
185
This strongly and adversely impacts Europe’s RDI performance, as companies are more
relaxed to invest outside of Europe, where the best universities and students are.
While the competence for the content of teaching and the organisation of education and training schemes lies
with Member States, the EU business community believes that the EU could support national efforts to propose
academic programmes that are designed to provide the skills required by companies. For instance, the EU
should guide Member States to provide students with a basic understanding of business and digitalisation
courses to be implemented at primary and secondary education level. Industrial PhD programmes should be
strongly promoted, mobility encouraged, and future-proof vocational training supported.
In all these areas, the EU has a great potential to help Member States with joint goals, common tools for
transparency, shared best practices and recognition of skills and qualifications. This would ultimately reduce
the skills gap and bring Europe into a more comfortable position in the ’war for talent’.
Intra-EU collaboration
Over the last years, the conversion of knowledge into innovative products, technologies, applications and
services has become more complicated and has therefore pushed companies to collaborate with other
entities (e.g. universities, research and technology organisations (RTOs), other companies, etc.) when
developing their RDI projects.
The USA and China have long understood the potential of collaboration for RDI deployment, and have
particularly supported knowledge clusters, such as the Silicon Valley and Shenzhen. In its ‘Outline for a
national Medium and Long-term programme for Science and Technology Development’ (2006-2020), China
set out its agenda on RDI, which – among its many objectives – also plans to expand international and regional
science and technology cooperation and exchanges, so as to create an ecosystem able to encourage mass
innovation and entrepreneurship.
Whilst the EU has a few but strong knowledge clusters (e.g. cyber-valley in the German state of Baden-
Württemberg or the Brainport Eindhoven in the Netherlands), the EU community considers the EU should do
more to foster collaboration. The objective should be to speed up efforts to overcome the ‘valley of death’ and
the gap between the demonstration and commercialisation phases.
Horizon Europe’s industrial pillar should for example be strengthened by, amongst others, enhancing
public-private partnerships and joint technology initiatives and simplifying participation procedures to make
European partnerships more attractive for companies. Also, to support industry scale-up and technology
diffusion, a European approach to and shared vision of technology infrastructures is key.
185
European Commission,
“Communication:
A new skills agenda for Europe”,
2016.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0134.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
132
Third-country participation
Europe does not lack ideas. However, European front runners are often bought up by non-EU competitors
– all along with their know-how, copyright and patents. We can explain this phenomenon in two ways: from
an ’internal perspective’, the necessary scale-up funding is missing and the Single Market should be further
deepened. From an ‘external perspective’ targeted foreign industrial strategies and a distorted unlevel
playing field play a role.
186
While European RDI projects and funds are often open to third-country participants, China’s RDI projects
and funds are mostly closed to foreign applicants. China’s National Medium- and Long-Term Programme
for Science and Technology Development (MLP) promotes “indigenous innovation”, benefitting China’s
domestic companies at the expense of foreign businesses. This could present a long-term challenge for
foreign companies in China, whose products within supply chains may be substituted and whose access to the
Chinese market may be challenged. The EU should encourage China to open its research and development
projects equally to domestic and foreign parties to improve reciprocity.
The Horizon Europe programme sets out rules for third-country participation. International collaboration
with countries that have a strong track record on science and innovation, such as China, is key. At the same
time, it is important that partnering countries show similar levels of commitment as the EU to co-funding and
access to funding, as well as to respecting and enforcing intellectual property rights.
More caution is also required regarding open research cooperation and open access to data with respect to
critical industries. While acknowledging the potential benefits of making research data from public-sector
research more widely available, caution is needed to avoid leakage of critical or sensitive research data. Open
access to RDI projects and open access to data should not apply by default. Tailor-made approaches may be
required, in which public and private partners contractually agree on a voluntary and case-by-case basis how
data access should be managed.
DEMANDS
93
SCALE UP R&D BUDGETS AND SUPPORT PRIVATE-SECTOR RDI INVESTMENT IN ORDER TO
REACH THE EU’S 3% TARGET.
To boost RDI, artificial intelligence and digital technologies, as well as
protecting intangible assets, the post-2020 EU budget (MFF) must scale up public spending on RDI.
The EU must ambitiously bolster Horizon Europe, the InvestEU programme and other initiatives that
provide loans and guarantees to public and private RDI investors.
INCREASE THE BUDGET OF HORIZON EUROPE.
The EU’s funding of Horizon Europe should be
increased to at least
EUR 120 billion
(in constant prices). To leverage private investment and to address
the EU’s innovation deficit in the context of the acceleration of the global tech race, 60% of Horizon
Europe’s budget should be allocated to the ’Global Challenges and European Industrial Competitiveness’
pillar. The EU should design a more ambitious programme to reflect that research, development and
innovation are genuine EU priorities. In this context, a particular emphasis on KETs would make Horizon
Europe more attractive to companies.
94
186
European Political Strategy Centre,
“Rethinking
Strategic Autonomy in the Digital Age”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0135.png
133
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
95
CREATE A ‘FIT-FOR-INNOVATION’ REGULATORY ENVIRONMENT TO OVERCOME THE “VALLEY OF
DEATH” BETWEEN RESEARCH AND COMMERCIALISATION.
Regulatory efficiency and an industry-
friendly Horizon Europe will contribute to the potential of commercialising research and innovation.
In the framework of the better regulation agenda, the EU should fully implement the ‘innovation
principle’ across the whole policy cycle. An important step to achieve this would be to make the use of
the ‘innovation tool’ in the impact assessment process for all relevant new EU legislation mandatory,
and at the same time give guidance on the relation between the innovation and the precautionary
principles. Also, the EU should engage more proactively with stakeholders (including through
regulatory sandboxes and innovation deals) to ensure EU legislation fosters innovation. Finally, there
is a need for faster decision-making in order to avoid long legislative processes, e.g. the translation of
documents into multiple languages.
ENSURE THE SKILLS AND JOBS OF THE FUTURE BY INVESTING IN TRAINING AND EDUCATION.
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. The EU should invest in education, including life-long learning and vocational
education and training, to increase the quantity of qualified workers in all relevant areas, particularly
in the fast-moving areas of technical and digital professions.
ENHANCE COLLABORATION BY SUPPORTING EUROPEAN PARTNERSHIPS AND MAKING THEM
MORE ATTRACTIVE FOR COMPANIES.
Because of the rising complexity and interdisciplinary nature
of technologies, companies need to collaborate more. Also, the need to respond to societal challenges
pushes companies to collaborate further and more often with new partners and sectors. While
market forces should be the main drivers of R&D collaboration, the EU should play a role in fostering
collaborative projects. The EU should for example support collaborative efforts by companies, by
allocating the budget to partnerships and collaborative calls according to their technology content,
objectives and expected impact. The business community should be consulted when designing policies
to promote and improve future public-private partnerships.
MAINTAIN OPENNESS AND COOPERATE WITH INTERNATIONAL PARTNERS IN RDI PROGRAMMES
WHILE REQUIRING RECIPROCAL ACCESS TO CHINESE FUNDED RDI PROJECTS AND PROTECTING
SENSITIVE AND CRITICAL RESEARCH DATA.
To achieve the greatest potential societal and economic
benefits, research is an area that needs international cooperation to thrive. An open Horizon Europe,
based on the principle of fair participation meaning fair access, will leverage a wider pool of talent,
expertise, experience and resource to deliver better results. At the same time, the EU should demand
fair access to Chinese R&I projects and more caution is needed to protect sensitive and critical
research data. When European companies face discriminatory restrictions to third-country RDI
markets, the EU should engage this third country to open its RDI market. As a measure of last resort
and with the purpose of encouraging the third country to open its RDI markets, the EU should consider
restricting access to the European RDI market for companies from the restrictive third country.
96
97
98
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0136.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
134
5.3. DIGITAL ECONOMY AND CYBERSECURITY
The EU’s efforts should simultaneously improve the EU’s digital competitiveness and strengthen European
cybersecurity at home, while aiming to address digital protectionism in China.
On enhancing its competitiveness, the EU’s efforts should aim at improving the EU’s ‘digital competitiveness’.
The IMD World Digital Competitiveness Ranking measures the capacity and readiness of 63 economies to
adopt and explore digital technologies as a key driver for economic transformation in business, government
and wider society (100 = the most competitive, 0 = the least competitive). China climbed from the 38
th
position
on the ranking in 2014 to the 22
nd
position in 2019. In its jump, China overtook the EU in terms of digital
competitiveness in 2019 (China scored 84.3 points and the EU scored 82.2 points).
187
The EU must therefore
significantly step up its efforts to remain a leading player in the digital economy.
Regarding digital protectionism, the EU should encourage China to abandon its digital restrictive policies
and practices.
188
China is for example extremely restrictive in the area of digital trade. The Digital Trade
Restrictiveness Index (DTRI) created by the European Centre for International Political Economy (ECIPE)
measures to what extent countries restrict digital trade (0 = open; 1 = closed). This index shows that China is
the most restricted country in digital trade in the world with a score of 0.70. The EU ranks 37
th
with a score of
0.21.
189
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. Governments should oppose digital protectionism, data localisation requirements
and forced source code disclosure in return for market access, as these undermine the digital economy’s
global nature as well as business integration in global value chains. China’s new data protection law should
be carefully assessed to see whether it delivers on these goals. The global dimension of the digital economy
also means that international standards, upholding cybersecurity and fair public procurement rules are ever
more important.
Digital protectionism can be exploited to gain ‘network effects’ and create ‘winner takes all’ models. The
asymmetries in market openness that accompany digital protectionism therefore create several risks and
problems for European business. China has several policies in place to exploit these asymmetries.
190
Digital
protectionism is one of the biggest economic and political challenges for European companies, as China
intends to develop policies to open new growth markets amid a continuing economic slowdown and to achieve
global leadership and self-reliance in the digital economy. At the same time, the EU should address the
cyber-related risks and abuses companies experience as a result of government-sponsored cyberattacks.
The EU can only succeed in a digital world economy if it combines pro-competitive policies with tools that
contribute to a global level playing field, address unfair behaviour, and tools that ensure cybersecurity.
187
Own calculations based on IMD World Competitiveness Canter,
“IMD
World Digital Competitiveness Ranking”,
2019.
188
See chapter ‘3.2 Trade’ under sub-heading ‘digital trade’ for more information.
189
European Centre for International Political Economy (ECIPE),
“Digital
Trade Restrictiveness Index”,
2018.
190
Mercator Institute for China Studies,
“China’s
Digital Rise: Challenges for Europe”,
2019, p. 44.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0137.png
135
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
China is the most restricted country in digital trade
Digital Trade Restrictiveness Index (1 = completely closed, 0 = completely open)
0.8
0.6
0.4
Global average
0.2
0
Mexico
India
South Africa
Canada
Russia
Japan
Brazil
China
USA
EU
Source: European Centre for International Political Economy, 2017
Within Europe
The right mix of enhancing our digital economy and deterring unwanted behaviour relies on a mix of
pro-competitive policies and steps to address our vulnerabilities.
Unlocking the EU’s digital competitiveness
Europe needs a true digital transformation to increase its global competitiveness and deliver growth and
jobs. If successful, Europe could see a gross added value worth EUR 1.25 trillion between 2015 and 2025 in
manufacturing alone. To the contrary, if we fail to turn the digital transformation to our advantage, the potential
losses can be up to EUR 600 billion by 2025 – the equivalent of losing over 10% of the EU industrial base.
191
To achieve real ‘digital competitiveness’, the EU needs to enable businesses to reach their potential in the
digital era, allowing innovation opportunities and providing legal predictability. The EU should invest in key
enabling technologies such as artificial intelligence (AI), robotics, quantum computing, semiconductors,
microelectronics and others. The EU also needs to invest in the digital skills of the workforce, as well as to
foster trust through cybersecurity measures and knowledge through research, development and testing.
Modern and efficient infrastructure is the starting point of a digitised economy, and a coordinated EU-wide
cybersecure deployment of 5G and ultra-fast broadband networks are vital for this. And as the digital economy
is increasingly borderless, the EU needs to provide leadership in shaping the global rules-based system that
supports business integration through global value chains.
192
5G is the catalyst of the next phase of this ongoing digital revolution. It will connect billions of machines and
enable new technologies, such as: automation, robots, block chain, sensors, Internet of Things (IoT), AI, smart
cities, future mobility, industry 4.0, financial services, content services, public services, eHealth. Moreover,
5G will result in more rapid innovations in nanotechnologies/advanced materials and micro-electronics.
5G will also have a major impact on cybersecurity. BusinessEurope welcomes the European Commission
191
Compared to the 2015 baseline scenario in Roland Berger,
“The
Digital Transformation of Industry”,
2015.
192
See BusinessEurope,
“Our
Digital Ambition: priorities for 2019-2024”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0138.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
136
recommendation on the cybersecurity of 5G networks and believes there are a number of actions that the
EU and Member States can take to facilitate the roll-out of 5G while taking adequate measures to prevent
harmful forces from undermining these opportunities or damaging trust.
193
Artificial intelligence is another collection of technologies that offers tremendous potential for business
transformation while helping us answer many of societal challenges. AI technologies are forecast to add
up to USD 15 trillion to the global economy by 2030. It could support industry 4.0 and build on strengthening
our world-class manufacturing sector through improving supply chain communication, harnessing data
and cutting waste to answer developing consumer and business needs. It can support smarter cities
through more efficient water supply, waste collection, lighting and indoor heating systems. AI has the ability
fight resource inefficiency faster through streamlining energy infrastructure and maintenance of supply.
Healthcare is already being improved through AI to assist diagnosis and treatment of our ageing population
taking strains off our health systems. The EU could for example invest in the healthcare infrastructure and in
AI in the life science sector. China is increasingly becoming more competitive in this area as it is for example
strongly incentivising digitisation and the development of AI solutions for its ageing population through the
Chinese New Generation Artificial Intelligence Development Plan. The European business community has
many recommendations that will enable the EU to take advantage of the opportunities provided by AI.
194
Without the correct legal framework, the full potential of AI and the societal goals which it could deliver, will
not be achieved. This represents a global competitive challenge. As other regions such as China race forward
with a large market and relatively relaxed conditions within which to experiment, their technological leaps
could be greater and faster as a result. Europe faces a choice, get the balance between open innovation and
societal protection correct, or accept and welcome a future where it will be commonplace for a great number
of sectors to buy superior AI solutions from third countries to achieve their ambitions.
Cybersecurity
Improving our cybersecurity is also an important part in achieving the EU’s digital transformation and
fostering trust in our digital economy. At present, European businesses are increasingly falling victim to
large-scale cyber-attacks stemming from non-EU countries aimed at misappropriating sensitive business
information such as trade secrets and intellectual property. As a result, individual companies suffer
irrecuperable damage.
Without effective legal means to mitigate cyber-related risks, the EU industry as a whole will see its
competitiveness impaired and incentives to engage in innovation undermined. Damages resulting from
cyber-enabled theft have been estimated at 0.41% of EU GDP, or EUR 55 billion.
195
Cyber-enabled theft is
a global problem, and could affect our economic growth well into the future. Many EU Member States are
grappling with the fast-paced increase in cyber threats, interconnectedness and lack of a European response.
Available evidence shows that China is among the major culprits in cyberespionage and that companies are
frequently targeted. Known state-sponsored attacks target businesses almost as frequently as government
institutions.
196
The EU lags behind in taking measures to detect and address industrial espionage and is behind
other developed economies when it comes to protecting its IT environments. Alarm bells are sounding across
the European business community as the risks are set to increase exponentially over time with the increased
connectivity in IoT devices and greater reliance on digitisation of business processes. Indeed, developments
in cloud computing could mean that an entire connected business, including equipment settings, operational
schedules and production details, can be copied and pasted, stolen and handed over to a competitor within a
few years.
197
193
See BusinessEurope,
“Cybersecurity
of the 5G Ecosystem”,
2019.
194
See BusinessEurope,
“Artificial
Intelligence Recommendations”,
2019.
195
Center for Strategic and International Studies,
“Net
Losses: Estimating the Global Cost of Cybercrime”,
2014. The cost figure covers the year of the study, and could differ
for other years.
196
Mercator Institute for China Studies,
“China’s
Digital Rise: Challenges for Europe”,
2019, p. 40.
197
European Centre for International Political Economy,
“Stealing
Thunder”,
2018, p. 7.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0139.png
137
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Member States and the EU are considering their relationship with and strategy on China in the digital domain
as tensions have recently reached a boiling point. The EU recently passed its Cybersecurity Act and created the
European Union Agency for Cybersecurity (ENISA) which are key to face digital threats. However, they do not
address cyber-attacks sponsored by third states targeting technologies, trade secrets and other confidential
industrial information. The Cybersecurity Act will nevertheless lead to cybersecurity schemes that define
minimum cybersecurity requisites. Once these schemes have been developed, companies in Europe will be
able to declare the conformity of their products and services with these schemes in order to demonstrate
vis-à-vis potential buyers that these products and services fulfil certain cyber-security measures. Additional
measures are necessary, however, to deter cyberespionage from Chinese entities. Likewise, high-level
political declarations between states can be toothless initiatives: only three years after the ‘Obama-Xi Cyber
agreement’ for example, Apple/Amazon chips were hacked to spy on the US government.
198
Most hacks occur through critical infrastructure such as broadband networks. According to MERICS, “the
lack of nationwide standards for IoT devices, cheap and low-quality products from China pose a security
risk to Europe, as has been shown in the past. The spread of unsecured Chinese devices is thought to have
contributed to a massive increase in Distributed Denial-of-Service (DDoS) attacks in Europe.”
199
The EU is
now moving towards fully rolling out 5G and Member States are already contemplating how to do this safely.
BusinessEurope welcomes the EU’s proposal to agree on a coordinated approach regarding the security of 5G
networks.
200
So far, however, no decision has been fully taken as how to fend off Chinese interference. Some
Member States are more concerned with public security while others are wary of Chinese retaliation. The
long-term damages from Chinese actions in this area are slowly being understood however, and companies
are pushing governments more than ever before to find a solution. Even though risks of Chinese interference
exist, Europe should continue to uphold its values and principles. This includes that the admission or
exclusion of a company from our digital infrastructure must be based on transparent justifiable criteria (e.g.
a combination of technical, economic, political and judicial considerations). In particular, the same (very high)
security criteria must apply to all companies – regardless of their geographical origin.
The right mix of enhancing our digital economy and deterring unwanted behaviour relies on a mix of
pro-competitive policies and steps to address our weaknesses. While the right mix of security measures
such as security by design in the Cloud, IoT and 5G architecture, IoT certification and strong encryption are
good examples of how cyber-resilience could be strengthened, these are very expensive solutions and will
never be fully effective without an accompanying strategy to deter hostile actors. In other words, in the cyber-
world defence is much harder than offence. Effective and pre-emptive policy responses should therefore be
considered that prevent cyber-issues from emerging.
Within China
China’s objectives and policy measures
China is pursuing a comprehensive digital strategy in order to unlock key drivers of economic growth. While in
theory this could create business opportunities for domestic and foreign enterprises alike and hence, for both
the Chinese and European economies, the objectives and policy measures adopted in support of China’s digital
strategy present enormous challenges for European business in their current form.
First, the Communist Party’s dual objective of increasing control over all aspects of society and the economy
means that digital policies are designed with this objective in mind.
201
This leads to an increasingly sophisticated
and tailored approach of government interference into independent management and investment decisions. The
quest for control also seriously undermines the protection of intellectual property, as China’s Cybersecurity Law
requires that companies hand over source codes and algorithms and forces them to store data within China, and
proactively requires them to justify reasons for transferring data overseas.
202
198
Bloomberg,
“The
Big Hack: How China Used a Tiny Chip to Infiltrate U.S. Companies”,
2018.
199
Mercator Institute for China Studies,
“China’s
Digital Rise: Challenges for Europe”,
2019, p. 39.
200
See BusinessEurope,
“Cybersecurity
of the 5G Ecosystem”,
2019.
201
The Independent,
“China
national congress: Xi Jinping signals spread of state control over all aspects of people’s lives”,
2017.
202
This is a barrier for investment into China for many multinational companies, particularly for those sectors with technical and international supply chains for which it is
essential that companies can easily and efficiently share data.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0140.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
138
Second, China’s pursuit of self-reliance and autonomy results in several discriminatory policies. A key
objective includes industrial and economic upgrading, a relatively benign goal if it was pursued transparently
and under fair conditions in which foreign businesses could participate as equal stakeholders. However,
core elements of the Made in China 2025 strategy and the Digital Silk Road strategy outline “indigenous
innovation” criteria aimed at excluding foreign companies from supply chains while simultaneously pursuing
ambitious semi-official global market share targets of up to 70% in some sectors. This approach undermines
fair competition and creates a zero-sum dynamic which leads to protectionist outcomes. A case in point is that
China ranks first on the Digital Trade Restrictiveness Index.
203
Besides undermining a level playing field within
China, the global market share targets also raise concerns about fair competition on third markets and on the
European market.
Third, China’s ambitious economic targets paired with the discriminatory policies outlined above lead to a
number of problematic outcomes for European business. On the one hand, China employs a host of support
measures for domestic companies, using government support, regulations and financing to ensure it achieves
its digital strategy. This may include privileged access to procurement markets, exemption from or delayed
implementation of regulations, preferred access to capital markets, bank loans, or investment from state-
backed venture capital funds.
204
On the other hand, foreign businesses experience the flipside of the coin by
being blocked from China’s digital infrastructure, being prevented from accessing China’s generous digital
support programmes, facing discriminatory procurement practices, while experiencing forced technology
transfers, data localisation requirements and theft of intellectual property.
China’s Cybersecurity Law
China’s Cybersecurity Law came into effect on 1 June 2017. This is complemented by the Guidelines of the
Cyberspace Administration of China (CAC) which deals specifically with cross-border data flows as well as
several further acts of primary law, such as the Cryptography Law, and secondary legislation such as the
Provisions for Cybersecurity Vulnerabilities Management. All these are wide in scope and require companies to
adapt constantly to new legislative requirements. The scope of China’s cybersecurity legislation is far-reaching.
It entails targeting Internet security, protection of public and private information, cryptography, safeguarding
digital sovereignty, smart home security and response reporting. It applies domestically but also on foreign
markets. While many parts are similar to the EU directive on the security of Network Information Systems
(NIS) and the General Data Protection Regulation (GDPR) in terms of incident reporting and consent to process
data, certification procedures mean foreign companies have to disclose trade secrets for certain higher tiered
equipment. The levels of tiering are still unknown and yet to be fully implemented. There is a concern that local
companies will be treated with more lenient rules than foreign ones. This would be unfair compared to the EU’s
GDPR or Cybersecurity Act. Data localisation rules also oblige companies to prove that data being transferred
abroad are necessary and that they perform security assessments prior to the transferral of any data, which
further restricts the free flow of data.
205
This also restricts the possibility to fully harness the potential of new
technologies, such as machine learning, for which huge quantities of data are essential to provide for precise
predictions (e.g. predictive maintenance).
China’s Cybersecurity Law places onerous restrictions on commercial encryption products that could adversely
impact billions of euros in cross-border trade. Provisions in the new Cybersecurity Law and related measures
that include broad data residency requirements and restrictions of cross-border data flows, trade-inhibiting
security reviews and requirements for ICT products and services, forced transfer of technology, and broad
requirements for data sharing and technical assistance raise serious concerns for companies with global
operations. These measures will add costly burdens, restrict competition and may decrease product safety.
They also underscore the asymmetry between the access that Chinese companies enjoy on other markets and
the access foreign companies have in China. For example, Chinese companies are generally able to fully own
203
See chapter ‘3.2 Trade’ under sub-heading ‘digital trade’ for more information.
204
Mercator Institute for China Studies,
“China’s
Digital Rise: Challenges for Europe”,
2019, p. 16.
205
Ibidem,
pp. 23-24.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0141.png
139
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
and control data centres and cloud-related services in Europe with no foreign equity restrictions or technology
transfer requirements, and they can do so under their brand name and without any need to obtain a license. By
contrast, such access is impossible for foreign cloud companies operating in China.
All countries have legitimate concerns about privacy and national security, but China is the principal country
addressing these concerns by often requiring foreign companies to transfer their technology and to surrender
their brand and operating control in order to do business. Requirements that are claimed by Chinese authorities
to be neutral and non-discriminatory are instead having the effect of excluding foreign competitors who cannot
meet them because of technology transfer, encryption and other requirements.
DEMANDS
Enhancing our digital competitiveness:
99
ENHANCE AND INVEST IN THE EU’S 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 size of the domestic market is a decisive factor for the international competitiveness
of digital business models. In this regard, the EU should invest in key enabling technologies such as
artificial intelligence, robotics, quantum computing, and others.
INCREASED INVESTMENT IN DIGITAL INFRASTRUCTURE.
High-performance networks are key
to the success of digitisation. Member States must also take a concerted approach to the security of
5G networks and their roll-out. They should encourage telecommunications providers to assess the
strategic nature and cybersecurity of the equipment they use in 5G roll-out particularly for the most
sensitive communications networks, namely defence ministries and secure networks for government
communications.
206
This would require horizontal requirements for the suppliers of network equipment
to ensure security along the value chain.
100
Enhancing our cybersecurity:
101
PURSUE A EUROPEAN APPROACH TO EUROPEAN CYBERSECURITY SCHEMES.
Rather than taking
uncoordinated steps to be the first-in-class, EU Member States should coordinate their efforts to
ensure that products and services on the European single market are cyber-resilient. To this end, a
speedy and industry-driven development of cybersecurity schemes under the EU Cybersecurity Act
is needed to develop standards against which the cybersecurity level of products and services can
be declared. Priority should be given to developing an EU cybersecurity scheme on 5G infrastructure
components.
THE EU SHOULD ALSO PROMOTE AND PROTECT ITS CYBER DEFENCE INDUSTRY IN ORDER TO
SAFEGUARD OUR INNOVATION FROM CYBERATTACKS AND CYBERESPIONAGE.
Public and private
investments are needed to stimulate European cyber-defence businesses and start-ups. This is
increasingly needed as the risk of state and non-state cyber-attacks and cyberespionage is growing.
102
206
A one-sided focus on 5G risks being too narrow in scope. As more or less all traffic is offloaded to the fixed network, it is of equal importance that the backbone networks,
consisting of optical fiber, are safe and secured. In particular, nodes must be protected and deployed in a way that enables robust communications. This is not the case
today, leaving important parts of the network open for intrusion.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0142.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
140
103
USE OUR STRENGTHS IN DIGITISATION.
The EU needs to become better at exploiting specific
strengths, such as the strong demand for security and data protection. This can be achieved in part
by upholding secure supply chains for core digital technologies and devising bottom-up strategically
effective and autonomous digital policies to support them.
207
Cybersecurity and a high level of data
protection must be turned into a competitive advantage in global competition.
IDENTIFY WHAT LEGAL OPTIONS EXIST TO ENHANCE THE PROTECTION OF THE EU AGAINST
FOREIGN CYBER-THREATS.
To develop our capacities to deter and prevent state-funded cyber-
espionage, the European Commission should launch a study to determine what legal options exist to
deter states engaged in supporting, enabling, tolerating or neglecting the prevention of cyberattacks or
cyber-intrusions and to hold them accountable when attacks or intrusions occur. The new EU sanctions
regime to counter cyberattacks is a good step.
DEVELOP A DIPLOMATIC TOOLBOX TO DETER INSTANCES OF CYBERESPIONAGE:
As a pro-active
response to the export of China’s strategic industrial policy, European policy-makers should review
their own European and Member State level powers to deter actors from carrying out cyberespi-
onage. The European Commission could then coordinate possible actions and when they can legally
be used and in what way. Going forward the Commission could coordinate Europe’s response. This
would ensure Europe has a full face answer to cyberattacks across the region in order to deter this
wide-scale and growing issue.
THE EU SHOULD SPEAK UP MORE FREQUENTLY IN A COORDINATED MANNER THROUGH PUBLIC
STATEMENTS AND FOLLOW-UP ACTIONS
to indicate that it will regard state-sponsored cyberattacks
against EU companies as anti-competitive trade measures and therefore take measures when
justified. Such signalling might discourage state-sponsored attacks targeting EU firms. Alternative
non-legislative measures such as diplomatic action or economic retaliation could be considered to
apply pressure on non-cooperative states.
THE EU SHOULD SEEK INTERNATIONAL SUPPORT IN TACKLING CYBERSECURITY ISSUES AND
ENGAGE THROUGH INFORMATION-SHARING PLATFORMS FOR LIKE-MINDED PARTNERS THAT
TRACK CYBERATTACKS
and pool resources to better adapt to developing trends and threats.
104
105
106
107
207
Digital transformation needs to be addressed properly. Europe needs incentives for a large-scale migration to more secure standards. A low-hanging fruit is enabling
of the latest Internet protocol called IPv6. Europe is falling short in terms of IPv6 users. Despite the fact that IPv6 include IPSec, which provides confidentiality, authen-
tication and data integrity, telecom operators in Europe are lagging behind in adopting IPv6, leaving their customers to less secure solutions and less interoperability.
Furthermore, it hampers the uptake of IoT. The public sector could lead the way by enabling IPv6 in all public services.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0143.png
141
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Addressing digital protectionism:
108
CHINA’S ICT MEASURES SHOULD BE NARROWLY DEFINED, REFLECT INTERNATIONAL NORMS,
BE NON-DISCRIMINATORY AND CONSISTENT WITH WTO AGREEMENTS TO WHICH CHINA IS A
PARTY.
They should not unnecessarily impose nationality-based conditions or restrictions on the
purchase, sale or use of ICT products and services by commercial enterprises.
THE EU SHOULD ENCOURAGE CHINA TO COMMIT TO INTERNATIONAL STANDARDS IN THE
DIGITAL ECONOMY.
This would also benefit Chinese companies seeking to access global markets.
At the same time, foreign companies must be able to participate equally and reciprocally in
standardisation work in China in the same way as Chinese companies can engage in standard setting in
the EU (CEN/CEELEC, ETSI or at national level).
THE EU SHOULD SET UP A FORMAL MECHANISM TO ADDRESS CYBERSECURITY-RELATED
ASPECTS WITH CHINA
in order to address our concerns. One of the objectives should be to press
China to address commercial espionage outside and within its borders.
109
110
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0144.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
142
06
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’s 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.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0145.png
143
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
6.1. EU CONNECTIVITY STRATEGY
Connectivity networks and business competitiveness are closely linked. Fostering European connectivity
and improving the connectivity between the EU and the rest of the world are of essential importance. A
well-functioning EU-wide transport infrastructure network is important to connect European regions and
for the proper functioning of the EU internal market. Improving intra-European transport and infrastructure
networks contributes to the competitiveness of the EU. Ambitiously improving the connectivity between the
EU and Asia should be a key priority of the European connectivity strategy. Connecting transport, digital,
energy, and human networks will facilitate bilateral trade by for example cutting transportation costs. This
will benefit businesses and consumers in both the EU and China.
The EU-Asia Connectivity Strategy and the EU-China Connectivity Platform
On 19 September 2018 the European Commission and the High Representative of the Union for Foreign Affairs
and Security Policy adopted the joint communication ‘Connecting Europe and Asia – Building blocks for an
EU strategy’.
208
This connectivity strategy promotes Europe’s engagement with its Asian partners through a
sustainable, comprehensive and rules-based approach to connectivity, exploiting the existing and planned EU
networks. The strategy aims to decrease the investment gap in connectivity by engaging private investors,
national and international institutions and multilateral development banks.
European business welcomes the joint statement of the 21
st
EU-China summit in April 2019 as it included
promising elements for forging synergies between the EU Strategy on Connecting Europe and Asia and the EU
Trans-European Network for Transport (TEN-T) on the one hand, and China’s Belt and Road Initiative on the
other hand. These synergies will further be discussed in the EU-China Connectivity Platform. European business
calls on the EU and China to consider such synergies in close dialogue with business and other stakeholders.
Larger investments in connectivity within the EU
EU connectivity starts at home. Even today, passenger transportation between two European capitals can
be extremely difficult due to the poor availability of quality infrastructure. China is able to offer projects
under non-market conditions to meet the infrastructure needs of the most Eastern and Southern European
countries.
209
Unless the EU mitigates the impact of China’s government-induced distortions within the Single
Market and enables sustainable alternatives, Member States might be incentivised to work with Chinese
companies for infrastructure projects under unfair conditions. Consequently, this could lead to an erosion of
confidence and hinder the call for ‘speaking with one voice’. The EU should also cooperate closely with key
partners in the region such as Turkey, the Balkans and the Eastern Partnership to improve the connectivity
with and within the EU’s neighbouring regions, ultimately stimulating the growth of trade and investment.
Currently, there is an investment deficit with regard to connectivity investments within the EU. This threatens
the EU’s competitiveness vis-à-vis China and other competitors. The completion of the TEN-T core network will
require approximately EUR 750 billion until 2030.
210
Italy for example – as a major exporter and a Mediterranean
hub – needs to speed up shipments and to reduce an infrastructural gap at a cost level estimated of around EUR
70 billion per year (roughly 4% of GDP).
211
The completion of TEN-T should therefore remain a key priority.
European businesses support the European Commission’s proposal to renew the Connecting Europe Facility
(CEF II) beyond 2020 under the new Multiannual Financial Framework. While CEF II by itself is not the only
solution to Europe’s transport investment challenge, its renewal marks an important step towards reaching
our future infrastructure needs. European business is however concerned that the budget dedicated to
transport infrastructure has been reduced by 8% compared to the current CEF programme in terms of real
208
European Commission,
“Connecting
Europe and Asia: Building blocks for an EU strategy”,
2018.
209
See chapter ‘1.3 China Inc.’ for an overview of the types of distortions that affect these projects.
210
European Commission,
“Delivering
TEN-T”,
2017.
211
Confindustria,
“Italy,
Europe and China: Recommendations for a new cooperation strategy”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0146.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
144
value (i.e. adjusted to inflation).
212
As transport is one of the main enablers of economic growth and prosperity,
the EU should abstain from reducing the CEF II budget. In fact, the budget should rather be increased.
EU-wide multimodal transport infrastructure is needed for the EU’s overall competitiveness and proper
functioning of the internal market.
The EU should also bolster other funds that contribute to TEN-T and European connectivity in general.
These include amongst others the InvestEU fund, the European Fund for Strategic Investment (EFSI) and the
European Structural and Investment Funds (ESIFs). For the EU to remain competitive globally, it is essential
that the EU budget for these connectivity funds is increased ambitiously under the new MFF.
Larger investments in connectivity outside the EU
The Asia Development Bank has estimated that Asian economies need EUR 1.3 trillion a year worth of
infrastructure investment until 2030 to maintain Asia’s growth momentum and address the climate change
challenge. This illustrates the enormous potential that European companies have on the Asian market.
However, in comparison to China, the EU lags behind in funding the high infrastructural investment needs
on Asian markets. The EU should make more funds available to support the connectivity strategy, leveraging
private and commercial funds and investments.
The EU Strategy on Connecting Europe and Asia needs to be adequately funded. The EU’s connectivity
strategy – targeting not only Asia but the entire world – is funded by the EU external action budget. This
budget has been increased to EUR 123 billion for the period 2021-2027, including an investment framework
that amounts to up to EUR 60 billion. To put this into perspective, the total EU external action budget of EUR
123 billion roughly equals the amount that one individual Chinese bank, the China Development Bank, has
already invested in loans to the Belt and Road Initiative.
213
There is a strong need to increase the EU budget
for connectivity, while avoiding that this leads to massive public debts such as in China.
Besides the external action budget, the EU has several other financial means to finance its connectivity
strategy. These include the Investment Facility for Central Asia, the Asian Investment Facility and the
European Fund for Sustainable Development (EFSD). The EU should make more use of innovative, smart
and multi-dimensional funding mechanisms and ‘blending’ to support its connectivity strategy. A successful
funding strategy would leverage private investment in connectivity projects.
Promoting the EU connectivity strategy
Only increasing the connectivity budget will however not necessarily lead to more successful connectivity
projects in third countries. It is also essential that the EU promotes its connectivity strategy. This could partly
be achieved through better branding. By bringing the EU initiatives together under a single, simple brand
such as, for example, the
‘Marco Polo Strategy’,
the EU could better promote its Connectivity Strategy. It is
essential that the Connectivity Strategy is not only promoted by the European institutions in Brussels, but also
by Member States and Member State representations in third countries. A more holistic approach is needed
in this regard. The EU Connectivity Forum in 2019 was a good step in the right direction, but more needs to
be done.
The EU is already one of the world’s greatest donors and financial contributors to local development. The
EU must ensure that funding and investment that fall under the scope of the EU Connectivity Strategy
are adequately branded as such and are well communicated to EU Member States and companies. This
is often not the case. According to the Bertelsmann Stiftung, Western countries outspend China in terms
of FDI and official development assistance (ODA) flows in most countries in the ‘Belt and Road region’.
212
BusinessEurope,
“Transport
infrastructure: The Connecting Europe Facility and the Trans-European Transport Network”,
2018.
213
European Institute for Asian Studies,
“Note
of Comment on “Connecting Europe and Asia”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0147.png
145
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
China only significantly outspends the West in Kazakhstan, Pakistan and Laos. At the same time, Western
countries significantly outspend China in Afghanistan, Armenia, Azerbaijan, India, Morocco and Nigeria.
214
The perception, however, is vastly different. Therefore, the EU should communicate more clearly that it is a
massive investor in third countries.
Comparison between Chinese and Western official financial flows to various countries
Kazakhstan
Uzbekistan
Belarus
Moldova
Serbia
Albania
Morocco
Egypt
Pakistan
India
Sri Lanka
Nigeria
Kenya
Tanzania
Myanmar
Lao People’s
Democratic
Republic
Vietnam
Indonesia
Azerbaijan
Armenia
Turkmenistan
Afghanistan
Kyrgyzstan
Tajikistan
Bhutan
Significantly more Chinese funds
More Chinese funds
Approximately equal
More Western funds
Significantly more Western funds
Source: Bertelsmann Stiftung, 2019
214
Bertelsmann Stiftung,
“Was
der Westen entlang Chinas neuer Seidenstrasse Investiert”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0148.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
146
The financial contributions, however, are not branded using terminology that speaks to the imagination and is
linked to a wider strategic narrative that covers EU values and interests. As a result, the EU struggles to bring
attention to its instruments and companies are not always aware of existing opportunities.
It is essential that the strategy and approach to connectivity are well understood by partners in the region.
A soft launch of the connectivity strategy and public diplomacy outreach with partners including Japan,
Indonesia and other South and Southeast Asian countries would contribute to building bases for partnership.
For example, the EU and India both focus on rules and normative aspects of connectivity, which is a good
starting point for future cooperation. And Japan with its two continents, two oceans approach, is a major actor
on connectivity in Asia and an important potential partner for the EU.
Promoting high standards
As transport networks and business competitiveness are closely linked, European business encourages this
cooperation, whilst emphasising that any form of cooperation should abide by the principles of market rules,
transparency, open procurement, a level playing field, fair competition and high standards. Businesses view
the joint statement of the 21
st
EU-China summit as reflecting the EU’s values and international values. The
real challenge lies in implementing these values and principles. Moreover, European businesses do not yet
see the promises that China made at the 21
st
EU-China summit and at the 2019 Belt and Road Forum reflected
in current Belt and Road projects. The EU should therefore continue to urge China to implement the principles
of market rules, transparency, sustainability, open procurement, a level playing field, fair competition and
high standards in their Belt and Road projects.
Prevent possible transport bottlenecks and constraints resulting from the BRI
Lastly, the EU should prepare European transport corridors to facilitate the potential increase of traffic
generated by China’s economic growth and the Belt and Road Initiative. A study prepared by the European
Parliament Directorate-General for Internal Policies for the TRAN Committee in 2018 assessed the
opportunities and challenges for EU transport arising from the BRI.
215
European businesses support the
recommendation from the study that “the TEN-T Corridor Studies [of the European Commission] should be
reviewed periodically to take account of developments in the BRI and other relevant third-country initiatives”.
Additionally, to foster synergies with the BRI, the EU should use the EU-China Connectivity Platform to initiate
EU-China joint studies to determine priority corridors analogous to those prepared for TEN-T. In this regard,
the ‘Joint Study on Sustainable Railway-based Comprehensive Transport Corridors between Europe and
China’ is a positive development.
Engaging the private sector
The effectiveness of the EU connectivity strategy would benefit from structural input from the private sector
and other stakeholders. Therefore, the European External Action Service (EEAS) should consider establishing
a
Business Advisory Council
that will allow key stakeholders to discuss the implementation of the strategy
and contribute to the strategy. Public-private partnerships should play an increasingly important role as they
can enable a faster and more flexible delivery of transport projects. EU companies should also receive more
information from the EEAS on how to benefit from EU funds related to the Connectivity Strategy.
215
European Parliament,
“The
new Silk Route – opportunities and challenges for EU transport”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0149.png
147
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
DEMANDS
111
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. Inside the EU, these funds include amongst others
CEF II, the InvestEU fund and the European Fund for Strategic Investments (EFSI). Funding instruments
that cover connectivity projects outside the EU and that should be bolstered include amongst others
the Investment Facility for Central Asia and the Asian Investment Facility.
THE EU SHOULD BETTER DEMONSTRATE AND COMMUNICATE ITS EXISTING FINANCIAL
CONTRIBUTIONS AND INVESTMENTS AND REBRAND THE CONNECTIVITY STRATEGY WITH A
MORE ATTRACTIVE NAME SUCH AS THE ‘MARCO POLO STRATEGY’.
The EU is already one of the
world’s greatest donors and financial contributors to local development but struggles to bring this to
the attention of the public as the strategy suffers from a lack of effective branding and promotion. By
bringing the EU initiatives together under a single, simple brand such as the ‘Marco Polo Strategy’, the
EU could better achieve the aims of its Connectivity Strategy and make companies aware of the existing
opportunities.
PROMOTE THE EU CONNECTIVITY STRATEGY IN THIRD COUNTRIES.
The EU will have to make sure
that its strategy and approach to connectivity are well understood by partners in different regions. A
soft launch of the connectivity strategy and public diplomacy outreach in partners including Japan,
India and Southeast Asian countries will contribute to build bases for partnership.
THE EU SHOULD ONLY ALLOW FOREIGN COMPANIES TO EU-FUNDED CONNECTIVITY TENDERS
WHEN EUROPEAN COMPANIES HAVE EQUAL ACCESS TO FOREIGN-FUNDED CONNECTIVITY
TENDERS.
This means that 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
foreign-funded infrastructure projects such as the BRI. The EU should ensure that such a measure
would be legally feasible and that it would also have the objective to maintain the openness of
connectivity projects as much as possible. Moreover, the EU should advocate for ambitious market
access improvements in the exchanges and activities of the EU-China Connectivity Platform.
FOCUS ON IMPLEMENTATION AND FLEXIBILITY.
Businesses regard the EU-Asia Connectivity
Strategy as comprehensive and a good reflection of the EU’s values. The real challenge lies in
implementation, particularly the funding of connectivity initiatives. The EU will have to make sure
that different actors including Member States, financing institutions and the private sector are also
integrated under this umbrella. The EU should continue to make more use of innovative, intelligent
funding mechanisms and blending to leverage private investment.
TRANS-EUROPEAN (AND NATIONAL) INFRASTRUCTURE MUST BE SIGNIFICANTLY IMPROVED
AND EXPANDED TO REMAIN COMPETITIVE.
EU connectivity starts at home. Remaining regulatory,
administrative and technical barriers within the EU need to be removed to ensure necessary access
to infrastructure facilities, inter-connections, inter-operability and to create an investment-conducive
regulatory and financial framework.
112
113
114
115
116
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0150.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
148
117
THE EU SHOULD ADDRESS THE BELT AND ROAD INITIATIVE 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 TEN-T corridor
studies should be reviewed periodically to take account of developments in the BRI and other relevant
third-country initiatives in order to prevent the emergence of bottlenecks and constraints resulting
from the potential increase of traffic generated by the BRI. More generally, TEN-T policy should
become more outward-focused to take explicit account of such initiatives.
INTENSIFY CONSULTATION AND DIALOGUE WITH BUSINESS AND OTHER STAKEHOLDERS
THROUGH THE CREATION OF A BUSINESS ADVISORY COUNCIL.
The connectivity strategy is a
good first step. However, the EU should extend its outreach to businesses and other stakeholders,
particularly in the field of confidence building for small companies in relation to the available
opportunities and to make sure the EU’s connectivity approach is well understood. The EEAS should
for example create a structural stakeholder platform that is easily an openly accessible to discuss the
implementation of the strategy, to receive valuable input from business, and to share knowledge to
increase the effectiveness.
IN ORDER FOR DIFFERENT EUROPEAN ACTORS TO HAVE A MORE COHERENT FOREIGN ECONOMIC
DIPLOMACY, 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.
Trade
promotion activities are largely a national competence, and it would be useful if the EU and Member
States shared their intelligence on connectivity with each other.
118
119
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0151.png
149
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
6.2. THE BELT AND ROAD INITIATIVE
The Belt and Road Initiative (BRI) was launched by President Xi Jinping at the start of his tenure in 2013. The
initiative has become China’s most important foreign policy strategy through which it aims to connect the
Eurasian continent from China to Europe. During the past three years, BRI projects have focused primarily
on land and maritime infrastructure investment, construction, railways and roads, automobile, real estate,
e-commerce, and electricity networks.
The strategy underlines China’s push to take a larger role in global affairs through the creation of a China-
centred hub and spokes trading network. The plan’s long-term geopolitical objective is to make the Eurasian
continent under Chinese leadership an economic and trading area that rivals the transatlantic one. At present
China holds just over USD 3 trillion in foreign exchange reserves, has a growing but slowing economy coupled
with overinvestment during the global financial crisis, which produced growing levels of overcapacity in a
number of industrial sectors. Consequently, China wants to expand its outbound investment, open up foreign
markets for its companies, export its overcapacity abroad and foster political influence.
Estimations of the size of Chinese investment flows for the BRI vary according to different sources. MOFCOM
states that the average investments in the BRI add up to about USD 15 billion annually.
216
MERICS estimates
that China has in total invested more than USD 70 billion into BRI-related infrastructure projects between
2013 and 2018.
217
Chinese financial institutions also claim to fund the programme by attributing all their
investments in BRI-related sectors – ranging from ports and dams to LNG carriers – to be contributing to the
initiative. The China Development Bank (CDB) for example stated to have provided over USD 190 billion for
BRI projects since 2013. While China has demonstrated its willingness to lend substantial amounts of capital,
China is beginning to realise that the funding requirements of the BRI will exceed its capacity to finance it.
Therefore, Beijing is now trying to mobilise multilateral development banks and raise private-sector funding
to make up for the funding shortfall.
Opportunities for European business
The volume of funds committed to date present a clear opportunity for business. According to the Asian
Development Bank, there continues to exist an annual infrastructure investment gap of USD 459 billion in
Asia.
218
The BRI contributes to meeting Asia’s large infrastructure investment needs, and while Chinese
companies are competitive in the construction and transport sector, European companies are well positioned
and globally recognised for their quality and expertise. European companies, including SMEs, are world
leaders in developing environmentally friendly, resource-efficient and sustainable products and building
materials.
Besides the construction and transport sectors, infrastructure development opens up a number of opportunities
for European logistics providers who transport goods. As rail transport is faster than maritime cargo and
cheaper than air cargo, logistics providers estimate that rail transport will grow from 5% to 10% of all transport
between Europe and Asia during the next few years, complementing existing links. A number of service sectors
also see opportunities in the BRI, including banking, consulting, insurance, digital and legal services. There are
also other sectors, including the chemical industry, which supply raw materials that end up in trains, cars and
other building materials. Europe is competitive in these areas and several European companies supply both
European and Chinese companies and stand to benefit no matter who implements the BRI.
216
The Diplomat,
“China’s
Belt and Road: A Reality Check”,
2019.
217
Mercator Institute for China Studies,
“Mapping
the Belt and Road Initiative: this is where we stand”,
2018.
218
This is because Asia’s developing countries spend only about USD 881 billion a year on infrastructure, well below an estimated need of USD 1.34 trillion per year from
2016 until 2030. See Asian Development Bank,
“Closing
the Financing Gap in Asian Infrastructure”,
2018.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0152.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
150
Barriers for European business
These opportunities have by and large not been realised to date for a number of reasons. The Chinese
government clearly sets the strategy and focus of the initiative and employs a deals-based model as opposed
to a rules-based model to implement BRI projects. Instead of using transparent public tenders and allowing
fair competition for projects, China provides non-competitive funding, which falls foul of OECD guidelines,
brings together consortia of subsidised Chinese state-owned enterprises, and uses various means of
economic diplomacy to convince foreign governments to take on BRI projects.
A 2018 survey amongst European businesses active in China demonstrated that 45% of the businesses
do not see any opportunities in participating in the BRI. The survey furthermore demonstrated that many
European companies are excluded from participating in the BRI because of preferential treatment of Chinese
contractors, insufficient information available regarding potential projects and a lack of transparency in
public procurement and tendering.
219
Out of all contractors participating in Chinese-funded BRI projects, 89% are Chinese companies, 7.6% are
local companies (companies headquartered in the same country as where the project was taking place),
and 3.4% percent are foreign companies (non-Chinese companies from a country other than the one where
the project was taking place). In comparison, out of the contractors participating in projects funded by the
multilateral development banks, 29% are Chinese, 40.8% are local, and 30.2% are foreign. Moreover, less than
1% of projects have so far been financed by multilateral development banks.
220
As long as the CDB and China
Eximbank finance projects are tied to Chinese content requirements, it will not be possible for European
companies to participate on an equal footing.
An example of China’s deals-based approach to connectivity
China’s deal-based approach can be illustrated by a rail project in Malaysia that was executed in the context of
the BRI. China convinced the Malaysian government to resume a Chinese rail project in Malaysia by reducing
the costs of the project from USD 20 billion to only USD 10.7 billion after the project was suspended over
political concerns regarding the high price and excessive debt Malaysia would be settled with.
221
This example
not only illustrates the high costs of projects that China is willing to pay to increase its influence abroad, it
also raises questions of whether BRI projects are solely based on commercial prices. After all, a sudden price
reduction of 50% seems commercially impossible. This example furthermore demonstrates that it is highly
challenging for European companies to outbid Chinese SOEs in a public tender.
Another important issue for European companies is the lack of information and transparency surrounding
the BRI. There is no official portal or database of BRI projects (in English), and European companies have
largely been unable to find information on how to get involved unless they have been approached directly by
a Chinese consortium.
219
European Union Chamber of Commerce in China,
“Business Confidence Survey”,
2018.
220
Centre for Strategic and International Studies,
“China’s
Belt and Road Initiative: Five Years Later”,
2018.
221
New York Times,
“China
Yields on Malaysia Rail Project as Global Infrastructure Program is Re-Examined”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0153.png
151
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
China’s rhetoric of a more open, clean and green BRI now needs concrete action
China has embarked on an active promotion campaign in the hope that more countries and stakeholders
will support the flagship initiative. China hosted dozens of world leaders during the Second Belt and Road
Forum (BRF) in Beijing in April 2019. At the forum, Xi Jinping promised that the BRI will be open, green and
clean. A joint statement released after a meeting of the participating government leaders emphasised the
need for high-quality projects, encouraged multilateral cooperation mechanisms under BRI and called for
the participation of developed countries. The EU abstained from participating as a bloc, although several EU
Member States sent representatives to the BRF.
European business calls on China to translate the rhetoric about an open, clean and green BRI into concrete
action, to provide more information to foreign stakeholders, to increase transparency and to involve European
business at an earlier stage of BRI project development. Moreover, BRI tendering processes must be made
fully transparent and open to foreign contractors and should also respect high-level technical standards.
How to move forward
European business encourages Europe to engage China and the BRI on a European level. Unfortunately,
European responses to the BRI have only partially been harmonised. On the one hand, the EU has developed a
common position, officially welcoming the BRI with a number of caveats.
222
The EU recognises that when done
in the right way, and carefully evaluated, more investment in cross-border infrastructure links would unleash
growth potential with broad-based benefits. But the EU stresses that to make the BRI an open initiative and to
link it with the EU, it should adhere to market rules as well as EU and international norms and standards. The
EU also calls for an open and inclusive approach, non-discriminatory procurement, and more transparency.
Multilateral frameworks like the Asia-Europe Meeting (ASEM) and the Asian Infrastructure Investment Bank
(AIIB) could be used to realise this. The EU has also emphasised economic, fiscal, climate and environmental
sustainability as key criteria to bear in mind when assessing the vitality of infrastructure projects. European
business encourages the EU to continue these united efforts and voice European concerns in a coordinated
fashion.
On the other hand, the EU has also been divided as several EU Member States have endorsed the project.
Twelve EU Member States and five Western Balkan states joined the BRI under the ‘17+1’ cooperation format.
However, Chinese investments in Central and Eastern EU Member States have remained low. In 2018, only 2
% of all Chinese FDI into the EU were invested in Eastern European Member States.
223
The 17+1 format and the fact that several other EU Member States, such as Italy, Portugal and Luxembourg,
have participated in the BRI illustrates the EU’s internal divisions regarding the BRI and the EU’s
uncoordinated approach towards China more generally. The lack of an orchestrated approach towards the BRI
has subsequently allowed China to take advantage of divisions within the EU. For instance, growing Chinese
influence has led to internal division in the EU on important foreign policy decisions concerning China.
Some EU Member States that received sizeable Chinese FDIs, watered down or vetoed European positions
on contentious Chinese actions with regards to human rights or the South China Sea. The EU will remain
vulnerable to Beijing taking advantage of internal divergences as long as a coordinated European approach is
missing.
222
European External Action Service,
“Belt
and Road Forum: EU Common Messages”,
2017.
223
In this statistic, Eastern EU Member States include Austrian, Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia. Please consult Rhodium Group and
Mercator Institute for China Studies,
“Chinese
FDI in Europe”,
2019.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0154.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
152
DEMANDS
120
EUROPE SHOULD ENGAGE CHINA AT THE EUROPEAN LEVEL AND SPEAK WITH ‘ONE VOICE’.
The
EU Member States should speak with ‘one voice’. Member States should call on China to increase
reciprocity, especially in the infrastructure sector, improve transparency, prioritise high labour and
environmental standards and ensure debt sustainability. Europe should be united on this issue and
develop a ‘coordinated approach’ in order to exert a maximum level of influence.
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 procurement. Surrendering these principles in favour of a deals-based approach
advanced by China could undermine the EU’s interest. Tenders have to respect the principles of the
rule of law and transparency and abide by international technical, environmental and social standards.
As long as CDB/Exim finance projects are tied to Chinese content requirements, it will not be possible
for European companies to participate.
CHINA SHOULD CONSISTENTLY BE URGED TO APPLY INTERNATIONAL STANDARDS IN RELATION
TO THE BRI.
The BRI can help to ensure that – in areas such as financial services, the environment
and public procurement – long established standards are used, which will decrease technical barriers
to trade, facilitate trade flows and allow for a greater variety of organisations to become involved in
the BRI. In cases where international standards have not been developed, the European Commission
should work urgently with Europe’s leading companies to help set new standards and embed them at
the international level.
COMPANIES NEED TO BE INVOLVED AT AN EARLIER STAGE OF BRI PROJECT DEVELOPMENT.
Companies need to do their due diligence, assess whether projects make commercial sense, whether
they should co-finance projects, and share their insights and expertise. This is difficult when they are
involved when the project has already been set. Foreign companies also need the same access to state
funds that Chinese companies have to conduct feasibility studies and to ensure that there is sufficient
funding behind a project so that they can actually be paid for providing their services.
121
122
123
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0155.png
153
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
6.3. COMPETITION ON THIRD MARKETS
Background
Emerging in 1999, the ‘Going Global’ strategy sought to bid farewell to the Mao-era mindset of self-reliance,
urging Chinese firms to take advantage of booming world trade to invest in global markets. The first years
of ‘Going Global’ coincided with China’s 2001 admission to the WTO. From the outset, the ‘Going Global’
strategy was about nurturing Chinese “dragon heads” (national champions) to become globally competitive
multinational firms. The vast expansion of Chinese state-owned companies on third markets in the last
decade was facilitated by a sophisticated state-coordinated subsidy programme in combination with exclusive
targeted political support by the Chinese government and the Chinese policy banks, especially China
Eximbank.
All companies, whether they are from the United States, Europe or elsewhere, compete internationally within
the multilateral governance frameworks established through the WTO, OECD, and others. The ability to
compete furthermore relies on notions of free markets.
China’s selective multilateralism, however, frequently distorts fair competition and the level playing field
for European companies. China’s growing international activity and the reaffirmed commitment to its state-
driven economy means that market distortions have increasingly spilled over onto third markets and policy
domains that go beyond trade and investment, a challenge for which remedies do not yet fully exist.
State-backed companies compete on world markets with privately run companies
As Chinese companies set up subsidiaries abroad, participate in procurement bids and infrastructure
projects, and acquire foreign firms, the power of state-backing on China’s home market is increasingly felt to
the detriment of privately run companies.
China’s state-coordinated engagement on third markets is most obvious in headline-grabbing infrastructure
deals in developing countries, and in particular in Africa. China has recognised the opportunities in Africa and
is showing great interest in African markets. Chinese companies act with high speed and risk appetite – also
because of government support. China is now the largest investor in many African countries. To compete,
the EU should support European companies by facilitating risk reduction, financing and support European
private-sector projects in Africa on the basis of market principles.
China has a clear focus on exporting African resources. A large part of Chinese investment in Africa goes into
transport, energy and raw materials. The Chinese investment in transport and energy is often used to extract
and export raw materials. The Chinese commodity deals with third-country governments are often tied to
other projects, i.e. infrastructure (Angola Model) – which are mostly executed by Chinese companies.
The Chinese government directly or indirectly intervenes in every step of the model (see figure ‘Chinese
state coordination of infrastructure delivery in Africa’). Chinese ministries negotiate package deals with
governments and oversee approving project investment. Partner governments conclude the financing
contracts of government-to-government (‘G2G’) package deals with China Eximbank, while construction and/
or extraction contracts and licenses are for example negotiated with China’s state-owned enterprises (SOEs)
under the supervision of the respective Chinese ministries. After signing, China Eximbank disburses loans
directly to the SOEs, which in turn revert their profits to the bank, allowing for future direct contracting.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0156.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
154
The model of a
G2G contract
regularly includes tax, tariff and visa exemption, reducing the costs of imported
labour, equipment and material. The
financing agreement
sets the rules of procurement to ensure execution
by Chinese companies via direct contracting and enables a fast mobilisation of funding. The
construction
contract
allows companies to implement their own standards and rules thus reducing compliance costs,
while the
Barter Deal
grants preferential licensing, resource discounts and tax exemptions.
Furthermore, there is a risk of excessive public debt in developing countries as a result of some large Chinese
loans that go beyond the debt-carrying capabilities of some developing countries. In turn, excessive debt will
lead to negative effects such as unfavourable macroeconomic conditions and the excessive dependence on a
single investor.
Chinese state coordination of infrastructure delivery in Africa
State-owned profits
Loan approval
Loan disbursement
PRC Ministries
(Foreign Affairs,
Commerce)
Exim Bank
State-Owned
Contractor
State-owned
extraction company
G2G contract
Construction
contract
Financing
contract
African government
Barter Deal
Source: EIC, 2019
Deviation from multilateral financing practices
China’s selective approach to multilateralism means that Beijing is sometimes reluctant to adhere to the
multilateral financial architecture, as displayed in the illustration ‘seven pillars of the multilateral official
finance system’. The global framework includes: detailed regulations for development finance, official export
credits, financial and technical assistance for countries in debt distress and debt rescheduling for developing
countries to major creditor countries on a multilateral basis rooted in the Paris Club.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0157.png
155
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
Seven pillars of the multilateral official finance system
Multilateral
official finance system
International
Monetary
Fund (IMF)
(1945)
Multilateral
development
banks
(e.g. IBRD
in 1944,
followed by
many others)
Bilateral
development
banks
(e.g. KfW
in 1944,
followed by
many others)
OECD DAC
(1960)
&
ODA Aid
Agencies
Paris Club
(1956)
OECD Export
Credit Group
(1963)
&
OECD
Arrangement
Members
(1978)
WTO
(1995)
successor
of GATT
(1948)
Source: Mudde, 2018
China continues to ignore the multilateral consensus on export and development finance and, unlike OECD
countries, does not yet make a clear distinction between official development aid and officially supported
export credits. China’s financial loans are highly non-transparent and they do not adhere to the rules of the
OECD Development Assistance Committee (DAC) and the OECD export credit reporting system. Its practices
include amongst others:
Minimum risk or market-based premiums
for officially supported export credits adopted by the OECD to
comply with WTO regulations
do not apply
to China. China can easily undercut pricing from OECD export
credit agencies (ECAs) and create competitive advantages for Chinese (construction) companies. China’s
Sinosure is for example highly opaque about its pricing.
Minimum interest rates
for officially supported export credits do not apply to Chinese official finance.
Neither do relevant OECD minimum interest rates to safeguard the WTO obligation – so-called commercial
interest reference rates (CIRRs).
Terms and conditions
of export credits regarding the repayment profile, maximum credit periods,
maximum grace periods, maximum support for local costs and minimum down payments (15%)
do not
apply
to China.
China is not a member of the OECD DAC.
Therefore, China’s development loans risk lacking transparency
and may not be in line with ODA standards and practices on concessionality. China would have to use
substantially higher subsidy funds to meet international aid requirements.
224
Standards is one of the ways through which the level playing field is distorted
Besides direct state support, there are also other issues that further erode the level playing field. China’s
approach to standard setting is one important factor.
225
China actively participates in the development of
international standards to facilitate access to foreign markets. Domestically, however, China often uses
national standards with diverging national content from international standards or adds additional national
224
Ibidem.
225
See chapter ‘3.7 Standardisation’ for more information.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0158.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
156
requirements to the international standard. China also often imposes its national standards unilaterally in
third countries through initiatives such as the Belt and Road Initiative, but increasingly also in the area of 5G
(‘Digital Silk Road’). Consequently, the application of Chinese standards instead of international standards
does not only create problems and trade barriers for foreign companies active on China’s domestic market,
but also on third markets.
Consequences of unfair competition
There are several drivers that have facilitated essential competitive advantages for Chinese companies
outside the international lending framework apart from export subsidies. As a result, these companies
may offer services at dumped prices. Factors in favour of this practice are amongst others low wages, lax
regulations and preferential treatment. The Chinese price for export services is linked to protectionist
measures for the domestic Chinese market (Chinese exporting companies are often exempted from VAT). This
has helped Chinese companies to create monopolies on foreign markets. Over the past ten years for example,
Chinese contractors have tripled their international market share from 7% to 21%.
226
In 2018, McKinsey stated in a report that Chinese companies expand their activities outside their value
chains once they have established market presence. This means for instance that construction companies
become active in ICT, manufacturing companies participate in the farming industry and mining companies
are advancing in the energy sector. These companies serve as market entry facilitator, diplomatic leverage
and as resource supplier for domestic production. According to McKinsey, Chinese companies generate a
profit margin of more than 20%. Profit margins of this size are highly unusual, especially on international and
national construction markets.
227
For European international contractors the above-mentioned alleged profit margins represent a serious
obstacle in the realisation of infrastructure projects financed by multilateral or bilateral development banks
where Chinese bidders often undercut their international rivals by 20% or more. Borrowers of European
development financial institutions (DFIs) and multilateral development banks (MDBs) often choose Chinese
contractors based on the lowest price. The fact that bid prices offered by Chinese contractors usually lie below
the direct costs indicates that high profits generated via projects under tied Chinese financing agreements
are “re-invested” to distort competition in international open tenders. As a consequence, Chinese contractors
have gained ground in international open competitive tenders while being cross-financed through subsidies,
supported by high returns on G2G contracts and exempted from taxes and tariffs. In this context, there have
been reports of bidding practices that undermine conventional bidding standards: several Chinese companies
participate in the bidding procedure with differently priced bids. After the closest bid has won, the winning
company contracts its Chinese competitors for the execution of project works. This type of behaviour leads to
a heavy distortion of competition and to project cost explosion via price undercutting.
228
The main consequence of China’s approach to internationalisation as described above is that they lead to
unfair competition between private companies and Chinese state-backed companies, or SOEs. It tilts the
level playing field in such a way that the global market share of European firms is lower than it would be in
the absence of such practices. Significantly for certain sectors, China’s approach to industrial subsidies also
generates enormous overcapacities that depress global prices in these sectors, which puts great pressure
on companies in those sectors to remain profitable.
229
China’s Belt and Road Initiative is to a large degree a
culmination of the various issues highlighted above, and requires an adequate response by European policy-
makers in order not to shut out European companies out of important global markets. The EU Connectivity
Strategy is an important step in this regard.
230
226
Engineering News-Record,
“Top
250 International Contractors Statistics”,
2019.
227
McKinsey & Company,
“Dance
of the lions and dragons: How are Africa and China are engaging, and how will the partnership evolve?”,
2017.
228
The Rhodium Group,
‘Leveraging the Chinese State Against Foreign Firms: Rail and Beyond’,
2019.
229
See chapter ‘4.2 Subsidies’ and ‘4.3 Overcapacity’ for more information.
230
See chapter ‘6.1 EU connectivity’ and ‘6.2 the Belt and Road Initiative’ for more information.
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0159.png
157
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
While European companies welcome international competition, domestic economic support, mercantilist
policies, flouting of OECD guidelines and state-led contract negotiations all contribute to tilt the international
playing field. To restore a level playing field, China should therefore rein in (discriminatory) industrial
subsidies, further open up its home market, adhere to OECD guidelines on financing, and let Chinese
companies compete for contracts on their own merits.
DEMANDS
124
THE EU SHOULD WORK TOGETHER WITH PARTNERS TO AIM TO INTEGRATE CHINA FULLY WITHIN
THE EXISTING MULTILATERAL FRAMEWORKS.
The EU and EU Member States should call upon China
to implement and adhere to multilateral arrangements such as those under the OECD, the Paris Club
and WTO agreements such as the GPA that would restore the level playing field in the area of standards,
official financing, procurement and investment. The EU should work with China and other OECD
members to fully implement the existing global standards for export and project financing and develop
future standards in line with the OECD consensus.
THE EU AND EU MEMBER STATES SHOULD CALL UPON CHINA TO IMPLEMENT AND ADHERE TO:
125.1
All decisions, recommendations and guidelines of the
OECD Development Assistance
Committee (DAC).
Chinese development loans do not meet the minimum concessionality levels
that the OECD-DAC applies to tied aid – 50% for least developing countries (LDCs) and 35% for
other countries –, meaning that China would have to use substantially higher subsidy amounts
to meet international aid requirements.
125.2
All obligations determined by the
OECD Arrangement on Officially Supported Export Credits.
China is the global leading provider of export credits, supporting Chinese exporters with
generous financing terms that are not available to European exporters and to other OECD
countries that are bound to strict OECD rules on export financing. The terms and conditions of
their export credits are opaque, and China should commit to transparency on the terms they
offer their exporters. China should particularly implement and adhere to the work being done in
the international working group on export credits.
126
WHEN THIRD COUNTRIES DO NOT FOLLOW OECD FINANCING RULES AND PRACTICES, TO THE
EXTENT LEGALLY POSSIBLE, THE EU AND EU MEMBER STATES SHOULD DECLARE COMPANIES
FROM THAT SPECIFIC COUNTRY INELIGIBLE FOR PARTICIPATION IN INFRASTRUCTURE TENDERS
FINANCED FROM EU OFFICIAL DEVELOPMENT ASSISTANCE (ODA).
The EU institutions and Member
States should only untie European ODA to other OECD and non-OECD countries on a reciprocal basis.
Reciprocity should be fully transparent and verifiable, and it must be ascertained that untied aid is not
de facto
tied. Along the lines of the European Investment Bank Transport Lending Policy Point 96 and
97,
231
the EU should also consider withdrawing the credit lines or co-funding grants benefitting third
countries engaging in unfair trade practices.
125
231
European Investment Bank,
“Transport
Lending Policy”,
2011, whose article 97 mentions that the EIB “will check (…) for the existence of any outstanding issues concerning
(i) Intellectual Property Rights, (ii) potential breaches of trade agreements and, (iii) as far as possible, the risk of distortions caused by anti-competitive practices
(including, inter alia, state aid, direct subsidisation, injurious or below-cost pricing …) in the producer country or in the shipyard concerned. The Bank will not finance
shipping projects where such satisfaction cannot reasonably be obtained.”
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0160.png
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
158
127
AS THE WORLD’S LARGEST DONOR, THE EU AND ITS MEMBER STATES SHOULD REBALANCE
THE SECTORAL OFFICIAL DEVELOPMENT ASSISTANCE (ODA) PORTFOLIO AND PUT A STRONGER
EMPHASIS ON THE INFRASTRUCTURE SECTOR, AND ESPECIALLY ON TRANSPORT AND WATER.
OECD statistics for the year 2018 show that these two crucial infrastructure sectors account for only
around 10% of the European ODA to Africa. Comparable figures for Japan, China and South Korea lie at
almost 50%. The EU needs to take measures to make European development assistance more visible
to stakeholders and citizens in recipient countries. Lastly, the EU must invest in the technology needs
of developing countries (for example 5G) and invest in private sector development.
THE EU SHOULD PROVIDE ADDITIONAL FLEXIBLE GUARANTEES FOR EUROPEAN COMPANIES
UNDER THE NEW EXTERNAL INVESTMENT PLAN IN THE NEXT MULTIANNUAL FINANCIAL
FRAMEWORK.
European companies lead in providing sustainable long-term solutions but on many
third-country markets they face increasing pressure from state-owned companies from emerging
actors, with whom they cannot compete on a price basis. The creation of more flexible instruments
to support the ability of EU companies to compete in third countries, especially vis-à-vis Chinese
enterprises, is essential.
THERE IS AN URGENT NEED FOR THE EUROPEAN UNION TO PERFORM ON PAR WITH ASIAN
OR US DEVELOPMENT FINANCIAL INSTITUTIONS (DFIS), EXIM BANKS AND POLICY BANKS,
AID AGENCIES, ETC. IN TERMS OF BOTH VOLUME AND MANAGEMENT CAPACIT Y FOR
INFRASTRUCTURE FINANCE ON THIRD MARKETS – IN PARTICULAR IN AFRICA.
A more streamlined
and versatile financing institution on EU level, capable of combining European development and export
finance and thus of matching the performance of Asian and US institutions, could work alongside
European DFIs and Export Credit Agencies and aggregate existing financial capacity and technical
expertise. It is of utmost importance that the European Union is committed to a fundamental reform
of the OECD consensus on export credit to create a level playing field but also to make the consensus
more attractive for non-OECD countries to join the arrangement.
EU DELEGATIONS ACROSS THE WORLD NEED TO PLAY AN INCREASED ROLE IN CONDUCTING
EFFECTIVE ECONOMIC DIPLOMACY.
This includes communicating and promoting European
strategies, funds, and mutual education on third-country needs and what could be offered by EU
policies and European companies to satisfy them.
128
129
130
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0161.png
159
THE EU AND CHINA: ADDRESSING THE SYSTEMIC CHALLENGE
EUU, Alm.del - 2019-20 - Bilag 452: Materiale fra dialogmøde med Dansk Industri 10/3-20
2161611_0162.png
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.
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Republic
Denmark
Denmark
Estonia
Finland
France
Germany
Germany
Greece
Hungary
Iceland
Iceland
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Montenegro
Norway
Poland
Portugal
Rep. of San Marino
Romania
Serbia
Slovak Republic
Slovenia
Spain
Sweden
Switzerland
Switzerland
The Netherlands
Turkey
Turkey
United Kingdom
Avenue de Cortenbergh 168
B - 1000 Brussels, Belgium
Tel: +32(0)22376511 / Fax: +32(0)22311445
E-mail: [email protected]
WWW.BUSINESSEUROPE.EU
EU Transparency Register 3978240953-79