1. EU-China’s Trade-FDI-Hi-tech policy conundrum
Jacques Pelkmans
CEPS & College of Europe
CEPS Event on Cybersecurity, Digital and Tech Leadership
14 May 2019
Thinking ahead for Europe • Centre for European Policy Studies (CEPS) •

2. Structure A dizzyingly complex policy conundrum
Critical policy questions for the EU
What can EU trade policy do?
What can be done about FDI?
What about EU industrial policy?
What can China do before 2025?
1/27/2020
Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium

3. Complex policy conundrum
Even when ignoring the US/China trade war
And its possible fall-out for the EU, ….also
ignoring Chinese foreign and defence moves,
Policy conundrum is still extremely complicated
China exploits its [self-defined] “socialist market economy with Chinese characteristics”, with layers of control
Using a myriad of policy tools, SOEs at home and abroad, regulation, border restrictions, funding, and above all the power over its huge domestic market
1/27/2020
Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium

4. Complex policy conundrum (2)
Nothing is what it seems in China
Average tariffs are now low, but with more than digits peaks in clothing, it is not adjusting swiftly
For EU comparative advantage goods [cars, various machinery], 339 peaks throttle EU exports, often above 20 %
A lot of discussion on Chinese standards, but… China does not have ‘standardisation bodies’ [Annex TBT Agr.]
‘Enterprise standards’ (a business secret, at times) had to be reported (!) until the 2017 new law
FDI laws still distinguish ‘foreign’ and Chinese firms; pushing for ‘national treatment’ disrupts the system
1/27/2020
Centre for European Policy Studies (CEPS) •

5. Complex policy conundrum (3)
Although China is now roughly economic size of US,
EU FDI stock in US is over 13 X EU FDI in China, due to restrictiveness….and a ban on profit repatriation
Chinese market economy more than private firms with CCP boardmember, with clear instructions
Possibly, CAI [BIT] with China might be accomplished in 2020, but there will be no easy legal recourse, so?
On (large) subsidies, notifications, SOEs and public procurement, China’s WTO membership is a failure
All of this w’out talking about ‘forced tech transfer’
+ ‘fog’ over 100s of ‘investment funds’, state in many ways
1/27/2020
Centre for European Policy Studies (CEPS) •

6. Critical policy questions for the EU
Is the hi-tech industrial policy in China (since 2003) unique in GATT/WTO ?
What of its features are objectionable?
How can they best be addressed by EU alone or with others?
What can China do, in cooperation with the EU and/or in other international cooperation?
1/27/2020
Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium

7. Tentative answers first
China’s hi-tech strategy is not entirely unique
But its wide scope [10 sectors !], tight control and aggressive employment of resources probably is
US military-industrial complex was once an example
So was the GSM strategy in Europe (since 1982)
GSM strategy took ten years and was run by SOEs: the MS telecoms companies and their laboratories
Total investment huge: equal to putting a man on the moon
Hand-in-glove with EU +MS, frequencies, tests, etc.
Nobody even thought of going to the GATT, but….
in patent pool, exclusion if not ‘invested’ [Japan, Korea]
1/27/2020
Centre for European Policy Studies (CEPS) •

8. Tentative answers first (2)
Chinese approach is holistic, almost anything goes
in the framework of ‘Chinese characteristics’
Single Chinese market protected carefully, esp. b/c that eventually provides critical scale benefits
Massive funding on an impressive scale, but exactly how impressive nobody knows [poor or no reporting ]
In 2015 another 300 (!!) ‘investment funds’ added
Often prohibited foreign FDI or restricted (JVs)
Chinese enterprise networks/mergers SOEs [AML ignored ]
Selective ‘forced tech transfer’, spying & acquisitions in RoW for tech-transfer to Chinese domestic market
1/27/2020
Centre for European Policy Studies (CEPS) •

9. What can EU trade policy do ?
Multilateral: attach consequences to non-notification ; rule out the most trade-distorting subsidies ; play out the submitted cases (e.g. tech transfer); strict adherence to 2001 Protocol, with consequences ; but also engage with China ( acclaimed ‘leadership’) in WTO reform such as App. Body, Spec & Diff Treatment (graduation), and new plurilaterals in e-commerce, as well as suspended TiSA, and at long last, the GPA
Bilateral: both a constructive approach via Dialogues (EU/China has nearly 60, all relevant subjects are in), greater participation in R & D, no exclusion in standard-setting, opening up services in earnest, finishing the CAI within one year ; and a conditional approach on digital/data (with consequences), tougher on lack-of-LPF in the BRI
Unilateral: trade-defence instruments, esp. CVD on subsidies ; proper but firm application of FDI screening
1/27/2020
Centre for European Policy Studies (CEPS) •

10. What can be done about FDI ?
Half-yearly bilateral meetings on application of China’s new FDI law [ best with trading partners ]
Regular bilaterals on EU screening of FDI
Reporting on ‘investment funds’ with various SOE/ state/provincial/city governments’ involvement
And of course the CAI itself
1/27/2020
Centre for European Policy Studies (CEPS) •

11. What about EU Industrial Policy?
Strategic choices [EPSC] about support for broad technologies or industries in EU; EU to do more !
More and targeted funding in pre-commercial stages
Tight links with single market/EU regulation and global-oriented standardisation; EU to be much better in exploiting the single-market-basis
Benefit from the Unitary Patent, keep its quality high
Dialogues and possibly cooperation in ten sectors of China 2025, insisting on transparency to begin with
1/27/2020
Centre for European Policy Studies (CEPS) •

12. What can China do before 2025?
Given EU’s cooperative and constructive approach
Visibly reward it in non-trivial ways, reach out
Transparency in subsidies and China 2025, yearly
Conclude the CAI – fully accept ‘national treatment’
Work more on standards with EU, is truly globally oriented
Consider opening up (tariff peaks, services) without a threat-or-tit-for-tat-approach
With SOEs crucial for China’s strategy, more Dialogue
Joint EU-China leadership in WTO: make it credible
1/27/2020
Centre for European Policy Studies (CEPS) •

13. THANK YOU
1/27/20201/27/2020
Centre for European Policy Studies (CEPS) • Place du Congrès 1, 1000 Brussels, Belgium