EU-China News Brief - 28 January 2020
In today’s news we cover:
Coronavirus Strikes Amid Chinese New Year
EU and China complete another round of BIT negotiations
Can an alliance including EU and China save WTO?
Trump Targets Europe at Davos Forum
Merkel and Macron call Xi Jinping
EU’s Huawei toolbox about to go public
What do members states plan to do in the Face of US-China Rivalry?
Coronavirus Strikes Amid Chinese New Year
What happened - The virus was initially identified in Wuhan, the capital of Hubei province, and has been spreading rapidly reaching major Mainland cities such as Beijing and Shanghai. According to the newest data from today, around 4600 cases were confirmed in China and 50 outside of Mainland China. We’re talking about Hong Kong, Macao, Taiwan, Thailand, United States, Canada, Australia, Japan, South Korea, Vietnam, Singapore, Malaysia and Nepal as well as France and Germany. 106 people passed away due to the infection and over 70 were confirmed as cured. The death rate is now between 2 and 3 percent, but it may rise. Particularly vulnerable are older people with immunity system compromised by chronic diseases - among them the death toll is at around 5 times higher than among young people. Overall, the virus seems as of now less deadly than SARS - the previous virus to put China on such a high alert - which havocked China in 2003 with a death toll of 10%.
But a big challenge in stopping the outbreak is that the symptoms can show up even two weeks after getting infected by the coronavirus. Also - unlike SARS already during the incubation period the virus can be transmitted to other people. That makes an effective control extremely hard. The situation has been even more challenging given the time of the outbreak, which coincided with the Chinese New Year celebrations - a period which features the largest recurring human migration in the world as tens of millions of Chinese return to family homes for celebrations. Chinese authorities imposed a travel ban covering 16 cities affecting over 50 million people and citizens of Hubei province face additional restrictions when travelling.
The virus has reached Europe. Last Friday French authorities confirmed that three people infected with the virus were identified in Paris and Bordeaux. Also on Tuesday a new case was confirmed in Bavaria, Germany. According to WHO, the outbreak of the virus doesn’t constitute Public Health Emergency of International Concern, which means that WHO doesn’t consider it a grave international threat. During his meeting with Chinese officials in Beijing WHO director general expressed his confidence in China’s ability to contain the situation and said that evacuation of foreign citizens from China is not necessary. The WHO continues to monitor the situation and may change this status.
Some observations - So it’s hard to give a straight comment on this situation. On one hand back in 2003 during SARS outbreak it took Chinese authorities months to admit the situation and to begin to cooperate with the WHO. This time it took them less than a month and the WHO director has voiced his approval for China’s prevention measures. That’s clear improvement.
On top of that on January 26th Chinese authorities prohibited wild animal trade in the country. In my view, this is a very meaningful move, because consumption of wild animals, which still occurs in some places in China for example at exotic food markets, can lead to creation of new viruses. This decision by the authorities, if implemented properly, can significantly decrease the chances of a next similar outbreak. That’s all positive.
Having talked about the positives, let’s take a look at the other side of the coin. Reports emerged that Chinese authorities - initially on a local level - tried to downplay the situation in a period before the 20th of January, which is when an announcement by Central government mobilised the country. It appears that whistleblowers active before that date were being detained and the local authorities did not take proper action to prevent spread of the virus despite already knowing that it can be transmitted - for example by allowing large celebrations to proceed in Wuhan on the 18th of January.
One final comment, which is an interesting in regards to political dynamics is the fact that although it is President Xi Jinping himself, who raised a call to action on January 20th, he appointed Premier Li Keqiang to head to Wuhan and to be the face of government efforts to combat the virus. So the coronavirus case may yet have an important impact on the top levels of Chinese politics. If things go South Premier Li will be the one to take the blame, if situation gets under control, this will be branded as success of the Central government, so primarily Xi Jinping who called for action. And Premier Li - although uninfluential in the face of Xi’s personality cult - is still a voice generally supporting liberal market reforms put in nominally number 2 position in China. If he gets fully sidelined it may further undermine the cause of China’s market reforms.
In the transcript you can find links to sites monitoring the progress of the virus. Naturally we wish everyone to stay safe and hope that the situation will get resolved quickly.
EU and China complete another round of BIT negotiations
What happened - The EU and China completed the 26th round of negotiations on Comprehensive Agreement on Investment also known as EU-China Bilateral Investment treaty or EU-China BIT in short. This round took place in Brussels in two sessions - one between 16th-17th and another between 20th-21st January 2020.
The two sides worked through the newest offers made in December 2019 and discussed such issues as ensuring a level playing field for EU-China cooperation and the position of SOEs within this context. According to the announcement by the European Commission, “Further work was done on sustainable development, notably on climate, and discussions continued on labour related provisions and mechanism to resolve differences in this area”. The next round is set to take place between 4th and 6th of March in Beijing.
What is it about - The BIT agreement between the EU and China is set to replace the individual bilateral investment promotion and protection agreements, which China has with individual member states. Currently that would be 26 BITs, as Belgium and Luxembourg have a joint agreement and Ireland doesn’t have a BIT with China. Such national BITs cover issues related to investment protection and dispute settlement - so to put simply are aimed at providing a framework for a smoother exchange of mutual investments.
The BIT negotiations between the EU and China have been going on since 2013 and are a truly complex process. The EU-China BIT has to unite the interests of all EU members, who will have their national BITs replaced and on top of that it is wider in scope, because aside from the usual content it will deal with a very big issue - market access.
And that is a very problematic point as China pursues selective investment policies, which come in a form of negative lists or requirements put on foreign companies to enter into joint ventures with Chinese partners - all part of China’s Foreign Investment Law.
This is naturally hard to accept for the EU, whereas China regards it as a legitimate attempt to protect its economy as - according to China - a developing country.
Agreeing on the scope of the EU-China BIT took almost three years and in mid-2018 the Chinese side put forward its proposal. But according to the EU Commission China’s proposal only reiterated the country’s commitments derived from its other obligations - for example those of a WTO member - and it didn’t include additional commitments.
Tough negotiations followed and progress has been slow. In December 2019 EU’s Director General for trade Sabine Weyand even called the BIT negotiations as moving at “snail's pace”. These comments were criticised by Beijing’s evoy to the EU Mr. Zhang Ming, who further called for “meeting each other halfway.” But on January 20th Commissioner Hogan seems to have alluded to that statement saying that “meeting halfway will not work for the EU” given that the EU and China have unequally open markets and that this asymmetry poses the challenge.
The process of making the BIT happen has not been easy and it remains to be seen whether the two sides can sign the agreement by the end of 2020 as they declared.
My take - In my view, the problematic progress on EU-China BIT negotiations clearly shows the underlying problem - difference coming from EU’s commitment to market economy and China’s to state capitalism or party capitalism.
To meet the demands put forward by the European Union, China would have to adjust the way it governs its economy. And it is hard to be optimistic about the EU’s success in this regard given the trajectory of changes in China.
Under President Xi Jinping China has been undergoing centralisation, growing direct and indirect involvement of the Party in the economy and increasing support for state owned enterprises. And those trends are partially related to China’s economic slowdown, which made Beijing pursue a more hands on approach in the economy through such programs as Made in China 2025 or the 双创 so innovation focused campaigns. Also the Belt and Road Initiative helps the Chinese government to coordinate its economic actors from central level.
Of course, it is important to point out the positive changes that were accomplished in recent years such as increasing the number of sectors in which foreign investments are allowed through so-called negative lists. We have also seen China made an incredible jump of 47 positions in World Bank’s Ease of Doing Business Index between 2018 and 2020 moving from 78th position to 31st.
But let's say that overall in the BIT negotiations on market access and level playing field, the EU is facing a partner that has a different system and the two systems are currently diverging, not converging.
At the same time it is clear that a high-pressure approach, which is what President Donald Trump is trying to apply, has so far had limited results. The Phase One has not brought meaningful benefits for the US in the larger scheme of things, but has limited pressure put on China.
In my view, of course the EU should continue to encourage China to pursue market reforms (ideally without using a patronising tone) and it should consider tougher stance on reciprocity for example through mirroring some of the restrictions that the EU companies face in China.
But it is important to be clear about what is the end goal for creating an even playing field in the EU-China economic cooperation - is it about China changing its regulations in general or is it about China changing its practices towards European companies? Is it about values and models we believe in or is it about pragmatism and business we want to make.
But back to the BIT 2020 - what signals should we keep an eye on?
I think that there are a couple of things to look out for.
The first one is Huawei, the decision of EU member states on whether or not to ban the Chinese tech giant from rollout of European 5G will definitely have a major impact on BIT negotiations this year as China clearly indicates that market access for its tech companies is a key point for BIT in Beijings view.
Second, more obvious one will be the discussions during the EU-China summit by the end of March in Beijing and the EU27 + China Summit in Leipzig later in the year. Particularly this second event may play an interesting role in my view. Of course, we are yet to see the agenda for that event. It will take place during German Presidency and is promoted by Chancellor Merkel, who clearly wants to engage China, as we will discuss again later today.
Finally, the third element is the United States and its President. For one, if the EU does become the next target for Donald Trump, which he suggested in Davos, the European block will be put at disadvantage in BIT negotiations. So Transatlantic deal that we will discuss today will also be a factor. But the outcome of the US elections will also play a role here. Re-elected Trump may return to pressuring China (albeit poses risk for increasing tensions with the EU) and democratic President is more likely to cooperate with the EU.
Whether 2020 deadline for BIT can be met remains to be seen.
Can an alliance including EU and China save WTO?
What is it about - the WTO dispute settlement mechanism has been paralyzed since December 2019, due to the United States blocking of all nominees to the seven-member appellate body panel. Since December 11th the body only has one active member and three is the lowest number required for the body to sign off rulings. It is the highest level of appeal in the WTO dispute settlement mechanism.
Without it the whole dispute settlement mechanism becomes unoperational, because any trade dispute can end up in a limbo with no institution to take the final appeal. Many have dramatically called it “the death of WTO”.
What happened - On January 24th in Davos Commissioner Hogan announced that the European Union and 16 countries including China are devising a temporary solution to the WTO crisis. The solution is based on WTO’s Article 25 of the Dispute Settlement Understanding, which allows the countries to apply voluntary arbitration in dispute settlement.
Under such an approach, the aforementioned countries can simply voluntarily agree that disputes between them - at least until further notice - will be run by the appellate body as if the crisis didn’t occur.
The agreeing parties are the EU, Australia, Brazil, Canada, China, Chile, Colombia, Costa Rica, Guatemala, South Korea, Mexico, New Zealand, Norway, Panama, Singapore, Switzerland and Uruguay. It is important that China is on board, as it is involved in a large portion of trade disputes. Details are still being negotiated and the solution is clearly branded as temporary.
Naturally, the US is not planning to participate in this mechanism meaning that any trade disputes that President Trump may choose to pursue still cannot be resolved through WTO mechanisms.
At the same time President Trump is planning to move swiftly with proposals of reforming the WTO. He recently announced that within the next two weeks Director-General of the WTO Roberto Azevedo will travel to Washington to discuss the potential changes to WTO.
Trump Targets Europe at Davos Forum
What happened - On January 22nd at the Davos World Economic Forum President Donald Trump targeted Europe despite previous signs of de-escalation, which we covered in the last week’s news brief. The tensions are related to the EU’s support for Airbus, trade barriers and plans to impose taxes on digital services, which would primarily affect American tech giants. Recent France’s plans to impose 3% digital tax were met with American threats to subject $2.4 billion of French imports to 100% tariffs. The two sides both agreed to suspend the plans.
But in Davos President Trump went into offensive threatening imposing up to 25% of tariffs on imports of vehicles from the EU, despite the fact that tariffs in this case would have to be announced by last November according to American regulations. All in order to put pressure on the EU in the context of a new transatlantic deal. As President Trump clearly stated “ultimately, it will be very easy because if we can’t make a deal, we’ll have to put 25 percent tariffs on their cars”.
But the things may not escalate to this extent, as the President von der Leyen said at Davos forum that she shared a good conversation with President Trump and stated “We are expecting in a few weeks to have an agreement that we can sign together”. The agreement which is to focus on trade, technology, and energy is to be reached this spring with a goal of signing a full trade agreement by November. This is all relevant in the context of EU-China-US triangle, but let's return to this in the next news bite.
Merkel and Macron call Xi Jinping
What happened - Last Wednesday Chancellor Angela Merkel and President Emmanuel Macron had each exchanged phone calls with President Xi Jinping. Over those two calls Xi Jinping signalled his hopes that 2020 will be a year of new developments in Europe-China relations. According to reporting by Stuart Lau, Xi mentioned climate change, WTO reform and global economic governance as the key common ground issues.
Both German and French leaders made comments that suggest that they will not advocate for a ban on Huawei in their respective countries. President Macron stated “I wish to reiterate that, on the question of 5G, France will not impose any discriminatory policies against any specific country or company”. He also stated his interest in organising another visit to China.
In her Davos speech Chancellor Merkel said: "We Europeans must be wisely reflecting how we can deal in this digital age with Chinese products and offerings, and weigh very carefully whether we wish to decouple ourselves from the Chinese value chain". In Davos Merkel also expressed her hopes to formalise regular EU-China conversations, which she hopes to start with Leipzig Summit.
Observations - Naturally all the previous three news bites are intertwined. The triangle of EU-China-US relations is being redefined in one of its most profound aspects - trade. But the impact of this will be broader - strategic, if you will.Merkel and Macron are not the EU, but equally obviously those two European leaders do politics not only on a national, but also european scale. And the phrase that in my view represents well what they are both doing vis-a-vis China is to “increase European strategic independence” or strategic autonomy. Finding the European position that will be distinct from that of US and China and not going into full alignment with either.
At the end of this show I will bring up a report that discusses wider positions of different EU member states on this issue.
EU’s Huawei toolbox about to go public
What happened - The European Commission is set to publish the toolbox for mitigating the risks associated with rollout of 5G technology on January 29th. According to information available, the toolbox will not contain decisive measures which would push the Member States to allow Huawei to participate in the 5G rollout or to ban its equipment. But the toolbox will provide Member States with a framework to exclude Huawei should they choose to do so on the basis of their own risk assessments.
We covered the wider picture of the 5G issue in the news brief from January 13th and we will surely return to the topic in the next news brief to analyse the toolbox. The United Kingdom is also set to make a decision on Huawei today, but it will take place after the recording of this episode. We will be sure to cover it together with the EU toolbox next week.
My take - My opinion remains the same as last year, the EU-level discussion on 5G is going to be aimed at providing the Member States with a standard-based narrative. that potential Huawei exclusion or inclusion is a result of a standard-based approach rather than a political one. This could be leveraged in managing the impact of the decision on tensions with the US or China that can arise from either of the decisions. I think we may see exclusion of Huawei from core networks, but at large the company will be free to operate at European markets. Of course none of the EU member states has such a telecommunication cybersecurity facilities as the UK, lut let’s wait with any further comments till next week with wider comments.
What do members states plan to do in the Face of US-China Rivalry?
To wrap up this episode, I want to bring to your attention a recent report released by the European Think-tank Network on China, which connects national EU think tanks working on China. The report is called “Europe in the Face of US-China Rivalry” and contains insights from 18 member states and also recommendations for EU-level perspective.
According to overall findings, all the analysed countries are trying to balance their relationships with the US and China attaching high value to military protection from the former and economic cooperation with the latter. Given the tensions between the two finding this balance is hard to achieve - as shown for example by Huawei debate. And it appears that in this context a concept of strategic autonomy is gaining traction.
You can find a link to the report in the transcript of this episode.