The China-EU Relationship: Trade but Verify

Written by | Friday, November 23rd, 2018

The EU (and the US) have been extremely naïve in the way they have developed their trade relationship with China. As long as the Chinese Communist Party (CCP) has such an extensive control over the institutions of the state and the levers of the economy, there is little likelihood Western hope of a liberal open market China will be realised any time soon. Furthermore, the CCP injects such dysfunctionalities into the Chinese economy and state system that China threatens both its own economic well being and security and that of the EU and US as well.


This does not mean that the EU and the US should not trade with China. Rather, it means that the West has to take measures to protect itself from the damage that China can inflict on it. To that end, the EU needs to trade, but recognise who we are really dealing with, protect our interests and channel their trading operations in a direction which encourages commercial but not politically driven trade.


In 2001, China, supported by the United States and the European Union, joined the World Trade Organisation (WTO). What both the US and the EU hoped was that China would become the third pillar of an open modern international trade system. This was part of a greater Western hope that China was moving in the direction of adopting a liberal, rules based system of governance, which would ultimately lead to some form of democratic system.


Back in 2001, this did not seem a wildly unrealistic proposition. China had liberalised its markets, downsized its state-owned enterprise system and permitted wave after wave of foreign investment to enter the country. Economically, this appeared to be the basis of a win-win deal: China would obtain substantial economic growth and become a partner in the open trading system, and the US and the EU would obtain access to the fast-developing Chinese market.


Two decades later, those hopes have been dashed. Almost as soon as China had joined the WTO, it began closing its markets to foreign capital; it then imposed more and more restrictions on foreign firms trading into China and firms establishing themselves locally unless they were willing to surrender knowhow and intellectual property. At the same time, China enthusiastically made the most of trade access provided to it by WTO accession, as the economy boomed via exports.


The key moment of change, however, was the 2008 financial crisis. It saw China then abandon most of the remaining economically liberal trajectory that had been in place prior to 2001. In the face of collapsing demand from the West for its products, the CCP went back to the tried and trusted method of using the party-state controlled banks (which is almost all of them) to fund expansion of the state owned enterprises (SOEs) and state construction projects. The net effect of this programme was to ensure current economic growth, while undermining the prospects of developing a high value added, consumer-oriented decentralised economy in the future.


The EU does need to develop an effective response to threats posed by Chinese trade and investment policies. The aim should never be to prohibit trade with China but to encourage legitimate commercial trade with no ties to the CCP party-state, which could undermine our security. More broadly, much more pressure needs to be brought on China on the issue of reciprocity. It is unacceptable and unsustainable for a major trading partner to ride on the market access granted by the WTO for a decade and a half, while simultaneously progressively closing its own markets to EU and US business. The overall objective of EU trade policy with China should be to encourage trade, but verify, so that the terms of trade do not undermine either our economic or actual security.


‚The China-EU Relationship: Trade but Verify‘ – Analysis by Alan Riley – Barcelona Centre for International Affairs / CIDOB.

(The Working Paper can be downloaded here)

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