EU-China News Brief - 21 January 2020
In todays news we cover:
What does US-China Phase One Trade Deal Mean for Europe?
EU, US, and Japan Jointly Propose New Anti-subsidies Measures
New Book by College of Europe on EU-China-US Triangle
Former EU Diplomat Suspected of Spying for China
Prague’s Divorce with Beijing
Can European Companies Win Belt and Road Projects?
China’s State Capitalism and the Quest for Level Playing Field - a Report by Business Europe
What does US-China Phase One Trade Deal Mean for Europe?
On January 15th China and US signed the widely discussed phase one trade deal. It may be more of a ceasefire rather than a deal as such, but the agreement took the headlines around the world.
Under the conditions of the phase one deal Beijing committed to increase (in comparison to 2017 levels) the purchase of US goods and services by $200 billion (32 billion in agricultural goods) over the course of the next two years (32 billions are supposed to be purchased in agricultural goods). It is important to point out that China pledged to purchase those goods on “market conditions”. In exchange the US committed to cut by half the 15% tariffs on $120 billion of Chinese goods with other tariffs remaining in place. China has not committed to cancellation of any of the tariffs it has imposed.
So the terms of the deal seem to point at a political motivation of President Donald Trump, who might have been looking for a success story ahead of the upcoming elections. In such a case the ceasefire may last until the elections. As stated by EU’s Commissioner for trade Phil Hogan, who was in Washington between 14-16th of January “let’s look at the detail of what that deal has actually achieved, we still have 20 per cent tariffs on both sides. This is not going to be good for competitiveness or jobs, which is a desired objective of President Trump. In the short term, it might work between now and November.”
And that is not a good news for the EU. The pressure imposed on Beijing by the trade war with the US has just been limited. And it is that pressure that last year helped the EU officials to get China to accept EU’s tougher language in the buildup to and during the 2019 EU-China Summit.
According to reports from that time, the EU was even ready to refuse to sign a joint statement following the summit, should China not agree to greater commitments on economy, trade and human rights.
Given the decreased American pressure, China has more breathing space in its discussions with the EU on domestic subsidies and structural economic changes.
But will the deal directly impact European businesses?
In a news briefing issued after the signing of phase one trade deal, the European Ambassador to China, Nicholas Chapuis said that on January 16th he received assurances from Chinese authorities that the deal would “in no way” affect European businesses.
But the deal may also impact EU’s position in its negotiations of the bilateral investment treaty with China.
As stated by He Zhigao, researcher at Chinese Academy of Social Sciences, China’s leading think tank: “Certainly, a China-US trade truce can weaken the EU's bargaining power amid the China-EU BIT talks, which could be a legitimate concern for the bloc with its high dependence on trade and investment.”
Well, the BIT has been negotiated since 2013 and chances are that also the 2020 deadline may prove challenging to meet.
EU, US, and Japan Propose New Anti-subsidies Measures Amid Commissioner Hogan’s Visit to the US
The signing of the phase one trade deal came amid a US visit of EU’s trade commissioner Phil Hogan, who was in Washington between 14-16th of January.
During his visit Commissioner Hogan tried to secure a trade reset with the American administration, which imposed tariffs on civil aircrafts, agrifood and other European exports worth $7.5 billion and threatened to take further steps as a response to France’s digital services tax and European support for Airbus. Thanks to Hogan’s visit and discussions between Trump and Macron, further escalation is now suspended until the end of the year as digital services tax will be discussed on OECD level.
But what is even more important for EU-China relations is that during Hogan’s visit, following two years of talks, the EU, US and Japan jointly proposed new measures to limit industrial subsidies for WTO members and to address the issue of forced technology transfers. Both matters are closely linked to the economic discussions between EU and China and we will touch upon them again in this news briefing.
The proposal lists four new types of “unconditionally prohibited subsidies”. As described by Euractive, these are: “unlimited guarantees; subsidies to an insolvent or ailing enterprise in the absence of a credible restructuring plan; subsidies to enterprises unable to get long-term financing or investment from independent commercial sources in sectors or industries with overcapacity; and certain direct forgiveness of debt.”. These would be added to the list of currently prohibited subsidies together with a clause putting the burden of proof on the subsidising country.
Such measures are seen as targeted at China - a WTO member and an economy in which state-owned enterprises play an important role and state takes an active role in the domestic economy.
While only a proposal, the joint announcement by the EU, US and Japan supports EU’s position in its discussions with China on industrial subsidies and transfer of technology to which both parties committed in the EU-China joint declaration from April 2019. But well, let’s see how the WTO crisis unfolds as well...
New Book by College of Europe on EU-China-US Triangle
In relation to the previous two news bites, I would like to draw your attention to a new book released last week by the College of Europe - “The Evolving Relationship between China, the EU and the USA. A New Global Order?”. The book was edited by Prof. Jing MEN, Prof. Simon SCHUNZ and Dr. Duncan FREEMAN.
It is a timely publication, which - according to its description - discusses the relative power of the three actors and compares their beliefs and interests on foreign and security policy; economics and trade; as well as climate change and energy. As a study of both the bilateral relations between the three actors and their trilateral interactions, it can make a valuable read.
I haven’t put my hands on it yet to comment more, but I definitely look forward to doing that. Check the links in the transcript of this episode on our website to get to know more.
Former EU Diplomat Suspected of Spying for China
Three German nationals - two lobbyists and a former EU diplomat - are under investigation for alleged spying for China. According to “Der Spiegel”, two suspects allegedly shared private commercial information with the Chinese Ministry for State Security and the third expressed his will to do so. In the course of investigation, their homes and offices in Brussels, Berlin and southern Germany were raided by the police.
As reported by the EUobserver, the EU diplomat in question is Gerhard Sabathil, a former EU ambassador, who served as an EU diplomat in South Korea, Germany, Iceland, and Norway before being recalled from South Korea over losing security clearance in 2016. In 2017 he started to work for Eutop, a Brussels based lobbying company.
It is important to point out that moving to a lobbying company upon finishing work at EU institutions is a common practice for senior EU officials - it is referred to as a “revolving doors” phenomenon. If you are interested in this topic, you can visit website of Corporate Europe Observatory and look through their “RevolvingDoorWatch” database.
Back to the news - this case highlights a bigger problem.
German News agency Die Welt claims to have seen an EU foreign service note that estimates that 250 Chinese and 200 Russian spies operate in Belgium.
At the same time the EU does not have an operational counterintelligence. As established by Politico through discussion with an EEAS spokesperson: “EU institutions rely on national authorities to provide security clearances for their diplomatic staff.” And they are not obliged to explain their decisions to the EU.
Not having an EU counterintelligence also means that counterintelligence in Brussels is a responsibility of Belgian intelligence services. EUObserver reports that these services have only around 30 counter-intelligence officers investigating those Chinese and Russian spies - bear in mind, estimated at 450 strong.
Regardless of this specific story or the allegations towards these specific three individuals, the EU counter-intelligence capabilities really need to be significantly improved. And hopefully this case will be a Sputnik moment.
Prague’s Divorce with Beijing
A row between Prague and Beijing, which started last October escalated last week over sister-city partnerships, so agreements that formalize special trade, cultural or educational exchanges between cities.
To quickly recap, Prague was a sister-city with Beijing, Shanghai, and Guangzhou. But as the city’s mayor Zdeněk Hřib began to question the merit of having “One China policy” clause included in the partner-cities agreement, Beijing quickly retaliated by cancelling joint projects and ultimately cancelling the partnership in October 2019.
It is important to point out that the “One China Policy” clause is part of almost any political agreement signed by the People’s Republic of China at any level - from EU level, through member states level, all the way to the level of local governments. It is viewed by Beijing as a proof of respecting PRC’s territorial integrity and is aimed at deligitimising support for independence movements in Taiwan or Tibet.
In a new development on this issue, last Monday Prague government signed a partnership agreement with Taipei. This resulted in Shanghai cancelling its city partnership with the Czech capital. Shanghai Municipal Foreign Affairs Office stated: “We urge the administration of Prague to realize its mistakes as soon as possible, remove the negative impact through concrete actions, and adhere to the One China principle.”
But it appears that the reasons behind Prague’s changing stance towards Beijing go beyond activity of mayor Hřib. There are also economic reasons behind this decision. Investments in the city and the country that Czechs discussed with Mainland Chinese have simply not materialised. And as stated by Jiri Pospisil, a Czech member of the European Parliament "Taiwan is a several times larger investor in the Czech Republic than the People's Republic of China, and on top of that it also respects the principles of freedom and democracy."
Let’s take a look at these investment expectations in a wider context, which can tell us about PRC’s activity in Central and Eastern Europe. Last week we talked about the 17+1 framework and its upgraded summit scheduled for April in Beijing. In case you haven’t listened to our previous news brief, the summit will be led by President Xi Jinping himself prompting the countries of the format to send their heads of state.
On Czech side that would be President Miloš Zeman, who has been in office since 2013 and has been one of the most committed proponents of engagement with the PRC. Just to give you a few examples of that:
In 2015 Zeman was the only Western leader to join the Beijing parade commemorating 70th anniversary of the end of World War II celebrated in China as a Victory in Anti-Japanese War; It is also in that year that Zeman appointed Ye Jianming (叶简明), chairman of CEFC as own honorary advisor on economic cooperation with China.
In 2016 during visit of President Xi Jinping to Czech Republic, Zeman participated in signing of 30 agreements that were to bring $4 billion of investments to Czechia. At that time Zeman said that he hoped his country would be “an unsinkable aircraft carrier” for Chinese investment in Europe
In 2018, when Zeman’s advisor Ye Jianming suddenly disappeared amid corruption scandal involving his company CEFC, the Czech president tried to minimise the fallout
In 2019 Zeman met with Huawei founder Ren Zhengfei to voice his support for the company and invite Huawei to participate in rollout of Czech 5G, which stood in contrast to Czech Prime Minister Andrej Babiš, who has been actively critical towards the company.
To put it simply - you really can’t question Zeman’s commitment to building a close relation with Beijing.
And it is this very same President Zeman, who stated last week that he will not attend the 17+1 summit in Beijing, because - as he reportedly stated in an interview streamed online - “I don’t think the Chinese side has fulfilled what it promised,”. Instead, Zeman will send the Deputy Prime Minister Jan Hamacek, which was “adequate to the level of cooperation” according to the President.
And such a disillusionment is not an isolated case. In an interview with South China Morning Post Rudolf Fürst, Head of the Centre for EU-Asia relations at the Institute of International Relations Prague said that most of the EU states participating in 17+1 format are now “perceiving the Chinese investment promises as merely virtual” and that “The 2012 new wave of China’s honeymoon is over.”
Let’s put numbers on it.
Do you remember the McKinsey and Rhodium Group FDI report from last week’s news brief? According to their data, Chinese FDI to the 12 EU countries in the 17+1 framework between 2010 and 2019 sums up to $8.43 billion (with more than half of this sum being formed by FDI in Greece, Hungary, Romania. In comparison over this time period China invested $13.9 billion in Finland, $11.42 billion in Netherlands, $8.57 billion in Sweden.
So in the second decade of 2000s China invested more in Sweden alone than in the 12 EU countries of the 17+1 format combined.
There are of course multiple reasons for such differences in amount of investments from the Chinese side, but whatever the reason the Czech case of disillusionment is not uncommon.
I think that the overall issue was neatly summed up by Richard Turcsanyi the Deputy Director of the Institute of Asian Studies in Bratislava, who said: “I see the current sharp downturn of Czech-China relations being related to very high and unrealistic expectations which existed perhaps on both sides, driven to a large extent by the ignorance of each other.” Great sum up, in my view.
One final announcement in relation to this news bite - the Prague case is a very interesting example of paradiplomacy, so a way in which local level governments participate or impact the national level diplomacy. And so it happens that a very interesting event on this topic will take place in Brussels next week. Polish Institute of International Affairs will present its report “The Subnational Dimension of EU-China Relations”: How Does EU-China Paradiplomacy Work?” at Press Club Brussels Europe on 29th of January. I read the report and I highly recommend giving it a look. You can find the links to the report and the event announcement in the transcript of this episode on the website.
Can European Companies Win Belt and Road Projects?
We stay on the topic of reports. On January 16th the European Union Chamber of Commerce in China released a report ‘The Road Less Travelled’, which is focused on involvement of European companies in the Belt and Road initiative. The report is based on a survey study that included 132 companies of various size - all members of the European Chamber.
The report notes that the participating companies have seen improvements in the feasibility, sustainability and quality of BRI-related projects, but significant problems remain in regards to openness and transparency in promoting and awarding Belt and Road projects.
Among surveyed companies only 20 have bid for BRI projects and among them only 2 got to know about the project through publicly available data - others were brought in through business or governmental connections. More than half of the companies participating in bidding process listed insufficient availability of information available as the top challenge and close to 40 percent said that they struggled with “non-transparent public procurement systems”.
What is more, according to European companies it is simply hard to compete for BRI projects with Chinese companies, whose offer is characterised by ‘vertical integration’. This means that through their connections can “provide everything from project management, financing, materials and construction services, all the way to post-completion services”. Consequently, few European companies manage to acquire BRI contracts. Those that succeed often work in quality and safety services or provide critical technology and know-how in areas of shipping and logistics in which Chinese companies still struggle. The hardest sector for European companies seems to be ICT.
The report calls on the EU to pay special attention not only to China’s activity on EU’s common market, but also to the openness of competition in third country markets.
In the first context the report suggested applying international procurement instrument (IPI), which “in essence it would compel Chinese firms accessing the EU market to operate under the same restrictions that European companies face in China with the intention of incentivising positive reciprocity”.
In regards to competition at third country markets the report criticised a limited progress on EU’s Connectivity Strategy saying that the EU needs to develop a viable alternative to the BRI. “If the EU fails to play an active and competitive role, there is a real danger that it could eventually become little more than a peripheral market tacked on to the end of Eurasia.”
Another interesting finding is that it is increasingly the Chinese enterprises themselves that try to identify BRI projects. This allows them to get various preferential treatments from accelerated approval procedures or access to funding.
In relation to that, the report describes that the European companies can therefore leverage the BRI label to their advantage in seeking Chinese partners. I was happy to see this point, as it strongly resonates with a seminar and publication “How to leverage the Belt and Road Strategies of Your Chinese Partners”, which I prepared for the EU SME Center in Beijing and the Benelux Chamber of Commerce in China back in 2018.
You can find the links to the European Chamber report and my short publication on the related topic in the transcript of this episode. I also include a link to a podcast interview, which I recorded a year ago with Bruno Lhopiteau - a highly successful managing director of Siveco, China’s biggest maintenance consultancy. In the interview we discussed his experience of working on BRI projects. I really recommend this interview as an additional context for this report as it comes from a European entrepreneur directly works with Chinese SOEs on BRI projects.
China’s State Capitalism and the Quest for Level Playing Field - a Report by Business Europe
And yet another report and once again a meaningful one. Also on 16th of January Business Europe, a Brussels-based lobby group representing European enterprises issued a report “The EU and China - Addressing the systemic challenge”.
The report revolves around “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”. According to Business Europe, China is on a trajectory 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”.
The report focused on interests of European businesses and defined the key objectives for the EU as “1 Secure a level playing field between China and the EU 2 Mitigate the impact of China’s government-induced market distortions 3 Reinforce the EU’s own competitiveness 4 Ensure fair competition and cooperation on third markets”
We will return to this topic in the next news briefing and cover Business Europe’s recommendations then.
However, if you just can’t wait to know more, visit our website and check the transcript of this episode to get a link to the full report.