China and the EU: Free Trade Agreement in sight?

China had already announced interest in a similar agreement with the EU in the spring of this year. Shortly thereafter, EU diplomats who considered an EU-China Free Trade Agreement as more and more likely have been quoted in the media. This is surprising, considering that China had managed it into the European headlines with its imports of cheaper photovoltaic systems to the single European market in the summer, which caused quite some turmoil.

China approaches free trade with the EU country by country for some time now. The goal: to leave the European Union no choice but to accept the Free Trade Agreement.

Clever China

The plan seems to work: at the meeting of the Foreign Affairs Council in Luxembourg, EU-trade ministers issued a mandate to start negotiations on a bilateral investment agreement with the country. At the 16th EU-China summit on the 21st of November in Beijing the central theme of the negotiations is this first independent agreement. Afterwards a two-year negotiation period is expected to eventually pave the way for a free trade agreement.

The planned investment agreement shall bring together 26 existing bilateral agreements between individual EU member states and China to form a single one and create more legal certainty. That way the investment protection for both sides is supposed to be ensured. The package negotiated by the Commission can only enter into force as soon as the European Parliament agrees.

China’s interest in the agreement lies in the fact that the EU is its largest trading partner. Since 2003 the Sino-European trade has doubled to €435 billion per year. Furthermore, the investment of the People’s Republic in the US decreased due to the financial crisis or the U.S. Shutdown. But certainly also the EU is not averse to concluding a free trade agreement with China: The country is the second largest market for European goods.

In comparison, the investment of EU countries in the People’s Republic is - with only two percent - vanishingly small. The reasons for this are the many political and bureaucratic barriers, such as the obligation to co-operation with local firms or transfer of knowledge. Certainly also the poor standards of human rights - at least at the political level – are playing a role. According to the Organisation for Economic Cooperation and Development (OECD), China has the greatest barriers for foreign investors from all 20 leading industrialized and emerging countries. At the same time the country would benefit from the investments more than the EU.

China - savior of Europe

What are the advantages for the EU under this agreement? Without import tariffs and with simplification of importing goods, it would be easier for European companies to enter the Chinese market in the future. By reducing the number of different arrangements it would be easier for Chinese investors to make direct investments in Europe. Thus new jobs would be created and new markets could be opened up. Still, some countries are convinced that China can save Europe. Over the past few years, Chinese companies have invested heavily in Europe’s industries. Early in the year rumors occurred, that the Chinese shipping company Cosco could become the majority owner of the biggest Greek port of Piraeus soon. In the summer, European car companies were able to save themselves from bankruptcy due to investments from the Far East.

But the terms China and transfer of knowledge also create fears of European companies to be flooded by Chinese dumping products - as has happened with photovoltaic systems.

Probably not without reason, because China is not acting out of pure charity. Local investors hope especially for synergies by applying the technological know-how of European companies on their other products. In addition, the acquisitions increase the sales of own goods in Europe.

China - the flagging savior of Europe

Nevertheless, it also looks less bright lately referring to China’s economy. Exports declined in September for the first time since a long period. According to analysts, this is a sign that the global economy remains weak and thus the high dependence of China on the world market will be disclosed.

In Switzerland one prides oneself in the meantime, to stay ahead of the European neighbors. The country has already concluded a free trade agreement with China, and thus strengthened the competitiveness by its own account.