Some observations on China-EU economic and trade relations

This article is based on Prof. Xiankun Lu’s speech on 4 September at the Bruegel Annual Meeting 2024. Given the time constraint, Prof. Lu’s speech did not cover all of the content below.

Some observations on China-EU economic and trade relations

1. In recent years, there has been a lot of discussions, with divergent views, on the direction of China’s trade policy.

Positive aspects include: a consistently strong commitment to continue to promote reform and opening-up; trade still a key driver of its economic growth; increased efforts to open up its market, both goods and services, with an applied tariff of 7.5 per cent on goods (below the bound level of 10 per cent), and two new documents just last week to further open up its services (Opinions on Improving the Market Access System, and Opinions of the General Office of the State Council on Promoting the High-Quality Development of Trade in Services through High-Level Opening Up); multilaterally China also gradually demonstrating more flexibility by opting-out Special and Differential Treatment (S&D), and is playing an active role in plurilateral negotiations.

However, also some aspects that are seen as less positive, including: more state domination and government intervention; more “coercive” or “retaliatory” trade measures as diplomatic tools; albeit an expressed willingness to negotiate “spillovers” effects of its economic system, unclear how this will be handled; and security considerations gradually influencing its economic and trade policy, etc.

These two aspects are not static, instead are constantly adjusting and evolving. For example, China has recently put forward a series of policies on equal treatment of foreign and private enterprises, and has introduced in June this year the Regulations on the Review of Fair Competition, considered by many to be an attempt to put under control the “visible hand” of government intervention.

For China’s trading partners such as the EU, the key question is how to “engage” China to ensure that it will continue its reform and opening-up, including how to negotiate the “deeply-rooted” issues that relate to the topic of our discussion today. From a Chinese cultural perspective, such bilateral “engagement” requires a positive framework because a negative one is often counterproductive.

In terms of bilateral economic and trade relations, my personal feeling that the current state of China-EU economic and trade relations is not providing such a positive framework. In the past 30 years that I have been working on China-EU economic and trade relations since 1993, the current relations are probably in its worst situation.

When I returned to Beijing from Brussels in 2000 after finishing my first diplomatic post, I participated in the drafting of the White Paper on China-EU Economic and Trade Relations. I remember that the main point of view at that time was that China-EU relations were less politicized than those with the other major trading partners, and there was an appeal to upgrade China-EU economic and trade relations in Chinese diplomacy to be on par with China-US economic and trade relations. There were indeed some complaints by European diplomats that EU-China trade relations in China’s diplomacy were always “secondary”.

After that, in 2001 China and the EU established the “Comprehensive Partnership”, and in 2003 the “Comprehensive Strategic Partnership”, and since then, economic and trade relations have been on the rise. However, in recent years, China-EU economic and trade relations have taken a sharp turn for the worse. Just a few days ago a Chinese media interviewed me, with the first question “Are China and Europe heading for a trade war?”. This is a reflection that currently Chinese public opinion on bilateral relationship is rather negative. This situation requires serious reflection by both sides.

Personally, I think the main problem lies in the misalignment of perceptions between the two sides and the serious damage to mutual trust, under which the discussion of economic and trade issues, be it on industrial subsidies, or on restrictions on export of critical materials, may not be fruitful. In the eyes of Chinese experts, in recent years the EU has adjusted its relations with China, from a “comprehensive strategic partnership” to a “three-point approach”, i.e., “a cooperation partner, an economic competitor and a systemic rival”, which, again in their eyes, fails to reflect the “strategic autonomy” that the EU has always emphasized. From China’s cultural point of view, such a “three-facet approach” simply can not be implemented, because for bilateral engagement, you cannot do “duet singing with your mouth, wrestling with your arms, while stumbling each other with your feet” at the same time.

China-EU economic and trade cooperation is so closely-woven that bilateral trade volume reaches 1.5 million dollars per minute, hence any alienation would be too big a cost to bear by either side. China and the EU must take a long-term view, rethinking the overall perception of bilateral relations, and rebuilding mutual trust through dialogue. If under a positive framework, many of the issues discussed today can find solutions. For example, on the issue of labor protection, we have had some provisions in the China-EU Comprehensive Investment Agreement (CAI). Of course, that Agreement has been put in refrigerator for political reasons, which has not only wasted the progress in labor and other issues, but has also brought the regulatory framework of China-EU economic relations back to the outdated 1985 Agreement on China-EU Economic and Trade Cooperation (CETC). It calls for the two sides to explore how to formulate a new framework agreement for bilateral economic and trade cooperation in light of the new era and the need for its long-term and stable development in the future.

From a multilateral perspective, the WTO and its mechanisms have always been a positive framework, as it is rule-based and multilaterally-processed. Bilateral differences between China and the EU can be resolved through the WTO reform discussion. In 2021, Chinese President Xi Jinping said in his speech at the Shanghai Expo that China will participate, with a positive and open attitude in the negotiations on issues such as e-commerce, trade and the environment, industrial subsidies, and state-owned enterprises, to help maintain the dominant role of the WTO in international rule-making.

In addition, both China and the EU attach great importance to safeguarding the multilateral trading system, and have achieved good cooperation within the WTO, e.g. for the establishment of the Multi-party Interim Appellate Arrangement (MPIA), and some plurilateral initiatives such as on investment and environment.

With the deterioration of geopolitics, the risk of fragmentation of global trade cooperation will cause enormous damage, with the WTO predicting a sharp drop in global GDP of 5% and the IMF predicting a 7%. In addition, the WTO reform is struggling to make progress. It is hard to say that the future is positive. In this case, the leadership of the EU is indispensable. But to play it well, the premise is to actively cooperate with other members, especially mediating with other major players to promote cooperation instead of division.