China and Europe : Trading for the Future

The European Union is China’s largest trading partner, and despite growing protectionism on the mainland, optimism among EU businesses in China remains high, but for how long ? While gains by some marquee European companies have strengthened ties between the EU and China, falling exports and rising barriers are causing problems.

Protectionism on the rise

The European Union recently filed a World Trade Organization complaint against China on the grounds that Beijing was unfairly helping domestic makers of steel, aluminum and chemicals by effectively blocking overseas exports of the raw ingredients needed for steel aluminum and chemical products. The complaint alleges that Chinese steel, aluminum and chemical companies are getting first rights on raw materials from domestic producers at super low prices. This is allowing them to compete unfairly against overseas companies who have to buy their raw materials on the open market, which are now arguably at higher prices because the lack of Chinese output is limiting availability of supplies.

The United States filed a similar complaint, saying that there appeared to be a "conscious policy to create unfair preferences for Chinese industries by making raw materials cheaper for China’s companies to get, and goods more economical for them to produce."

In response, China’s Ministry of Commerce said in a statement : "The main objective of China’s relevant export policies is to protect the environment and natural resources. China believes the policies in question are in keeping with WTO rules."

Beijing is not expected to change its policy anytime soon as infrastructure projects launched as a result of China’s huge stimulus package ramp up and begin to require the steel and aluminum products that are benefitting from the alleged unfair trade practices.

The recent WTO filing is not the first time the EU has had issue with China’s protectionist policies. In its 2008/2009 white paper, the European Union Chamber Commerce in China (EUCCC) stated that despite improvements in some sectors, European companies are still not granted fair and equal market access to China.

In June, Beijing introduced a new "Buy Chinese" policy that could agitate foreign trade relations and encourage protectionism. The new policy outlines that only Chinese products and services may be used for government procurement except when certain products or services are not available within the country or could not be bought on reasonable commercial or legal terms.

The move was a response to reports from local industry associations complaining that local governments discriminate in favor of foreign suppliers for projects related to China’s RMB4 trillion stimulus package. Since China’s exports and foreign direct investment have been depressed in recent months, the economy has been coping largely because of the deployment of the massive stimulus package which has increased subsidies, lending by state-owned banks and infrastructure spending.

Green technology and innovation breeds optimism

Despite Beijing’s recent protectionist moves, EU companies remain mostly positive on their investments in China. According to the EUCCC, Beijing’s "affirmation of the importance of innovation, openness and competition," and China’s efforts to ensure "sustainable balanced growth" have been encouraging.

The EU is China’s top tech supplier and European companies are keenly interested in China’s burgeoning "green tech" sector. At the Second EU-China High-level Economic and Trade Dialogue held in May, Ambassador Serge Abou, head of a delegation for the European Commission to China, said European companies expect to increase participation in clean, new and renewable energy in China.

China contributes 57 percent of the world’s certified emission reduction (CER) produced with more than 500 U.N.-registered Clean Development Mechanism (CDM) projects - the Kyoto Protocol, developed countries can reduce their emission by providing fund or technologies in projects under DM in developing countries. European companies are major buyers of China-made CER.

In June, The European Commission announced that it would provide financing of up to US$70 million to help China build a coal-fired power plant with designed with high-tech equipment that would give it near-zero emissions.

The so-called clean coal technology is very attractive to China, where coal-fired power plants supply the bulk of the country’s energy, and have helped to make the country the biggest emitter of carbon dioxide in the world.

Europe sees carbon capture and storage, a technology that is still in its infancy, as a key to fighting climate change. The European financing is only a fraction of the estimated final cost of the project - US$400-700 million. The cash will come from a US$85 million fund earmarked for clean coal technologies in developing countries.

High profile joint ventures between European companies and China are also gaining momentum. European aviation giant Airbus delivered its first jet built outside of Europe in June. Built at its factory in Tianjin, the A320 was delivered to Dragon Aviation Leasing and will be used by the regional Chinese carrier Sichuan Airlines.

Airbus’ Tianjin plant builds narrow-bodied A320s to cater to China’s growing airline domestic market. Airbus is expected to deliver 70 A320s to China in 2009, with 10 coming from the Tianjin plant. Capacity at the Tianjin plant will increase to four per month by 2011. Airbus China’s president, Laurence Barron, believes that the target capacity of 48 planes a year will be insufficient to meet demand in the China market.

"Whether China’s growth proceeds like a surging wave or a revolving propeller," Sichuan Air’s president Lan Xinguo told Bloomberg, "the trend is positive and increasing."

Bilateral growth

The airline industry is not the only sector that is seeing positive growth in the China market. The EU, already China’s biggest trading partner, has seen exports to China increase at an annual rate of over 20 percent in the last five years. In 2008, bilateral trade amounted to US$425.6 billion.

At the beginning of 2009, Chinese Premier Wen Jiabao went on a "confidence trip" to Europe to bolster relations and ease European concerns over’s China’s trade policies during the global crisis. The trip resulted in the signing of a series of economic and technological cooperation deals with Germany, Belgium, Spain and United Kingdom which was followed by a Chinese trade promotion mission.

China has planned a second EU buying mission for later in the year. "China is ready to work with the EU to further promote mutual investments, enhance cooperation in small- and medium-sized enterprises, trade facilitation, science and technology, transportation and post, in an attempt to fight all forms of trade and investment protectionism," Mr. Wen said.

Immune to some of the fallout from the global financial crisis, Asia is beginning to recover but efforts to reinvigorate the economy are now, according to Beijing, at a critical stage.

"China’s economic performance has started to show positive changes, favorable factors are increasing, and the overall situation has stabilized and is moving in a good direction," Chinese state media reported Mr. Wen as saying. "Our economy is at a critical moment as it steadily moves in an upward direction…the foundation for economic recovery is not stable and many uncertainties remain."

By Andy Scott, China Briefing