Building a Common Future: EU-China Economic Relations to 2025

Written by | Monday, October 30th, 2017

Today is a key moment for the European Union and China to consider how to deepen their relations and especially the full range of bilateral economic relationship by boosting trade and investment, promoting cooperation on the environment, energy and global governance, and by collaborating in technology, innovation, science and infrastructure. While the mutual ties between both sides are already very well developed, this is not yet visible in other areas. Beyond trade in goods, many of the economic relations remain underdeveloped including trade in service, foreign direct investment and cooperation in technological innovation and financial integration.

Current stocks of cumulative direct investments between the EU and China are lower than those between the EU and the US. In 2015, the amount of EU foreign direct investment (FDI) in mainland China (excluding Hong Kong) amounted to €168 billion, while the investment stock from mainland China in the bloc was only €35 billion (€115 billion including Hong Kong). This contrasts with the stock of EU FDI in the US of €2.6 trillion and the US FDI stock in the EU of €2.4 trillion. These low EU-China FDI flows demonstrate that there is untapped potential in investment in both directions.

However, European and Chinese economic realities are not likely to converge in the foreseeable future. There are still major differences in the political system, which limit the potential of the bilateral relations. It is incumbent upon governments and firms on both sides to find ways to overcome these obstacles and come up with more pragmatic ways to build on their existing relations. Both sides should also build on the existing EU-China 2020 Strategic Agenda for Cooperation, reaffirming their common interest in the new international reality, recognizing their own differences, and prioritizing where progress is achievable and which areas are currently underdeveloped.

In order to do so, a bilateral investment agreement should be finalized as soon as possible. Ongoing EU-China talks for an investment deal could be used as a forum to address differences and facilitate investment. An EU–China investment deal has the potential to initiate a new round of economic reform, including in the state-owned enterprises, and market liberalization in China. Moreover, Brussels should open talks on establishing an EU-China free trade agreement but these can only be started when the investment package is finalized.

Brussels and Beijing can also work together to boost mechanisms of good global governance and thus contribute to the multilateral trade system. Since they are not direct competitors in security area, they can also buttress the stability of the multilateral global order by channeling support through existing institutions such as WTO and the G20. Importantly, China-EU relations should not disadvantage the US given their combined importance in the global economy. Moreover, the benefits of a closer EU–China relationship are likely to be boosted if the EU and the UK are able to agree on a sensible Brexit deal that will ensure a continued close economic relationship between them.

 ‘EU–China Economic Relations to 2025: Building a Common Future’ – Analysis by a Team of Authors – Chatham House / The Royal Institute of International Affairs.

(The Analysis can be downloaded here)

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