Economic and Trade Cooperation between China and Europe:Achievements, Challenges and Opportunities

Liu Shuguang

Professor， School of International Economics， China Foreign Affairs University

Both China and the European Union are important poles on the world economic stage and in international pattern. The total population of the two sides accounts for about a quarter of the world total， the total economic volume accounts for nearly 40%， and the bilateral trade volume accounts for about one third of the total international trade. Strengthening cooperation between China and the EU will not only help to give full play to their respective comparative advantages， achieve mutual benefit and win-win results， and enhance the well-being of both peoples， but also add impetus to world economic growth. China and the EU should seize the opportunity to strengthen policy coordination and economic and trade cooperation so as to ease the downward pressure on the economy.

China-EU Economic and Trade

Cooperation Enjoys a Good

Momentum of Development

As important trade partners to each other， China and the EU enjoy stable growth rate of bilateral trade in goods and rapid development in service trade. Both sides have made great progress in investment and financial cooperation， and have benefited a lot in scientific， technological and logistics cooperation.

I. Steadily Developed Trade Relationship

China and the EU are important trade partner to each other. The EU has remained Chinas largest trade partner for 16 consecutive years. Chinas trade with the EU accounted for 14.8% of Chinas total foreign trade in 2018. China is the second largest trade partner of the EU， and the EUs trade volume with China accounted for 15.4% of its total foreign trade in 2018. The total trade volume between China and the EU in 2019 reached US$705.1 billion， registering a record high. Among that， Chinas exports and imports to the EU were US$428.5 billion and US$276.6 billion respectively （see Table 1）.

China and the EU maintain a stable growth in their goods trade. In the past decade， under the EUs unfavorable situation of sluggish economy and stagnant demand， China-EU trade has still maintained a rapid growth rate. The years 2017 and 2018 have both witness double-digit growth rate of China-EU trade， which were 12.7% and 10.6% respectively. In 2019， the trade volume between China and the EU increased by 3.4% while that between China and the US dropped by 10.7%.

China and the EU maintain a rapid development in their service trade. From 2011-2017， the EUs service trade export to China has grown by 14.5% annually in average， twice that of the EUs service trade exports of the same period. The EUs service trade with China has remained a surplus， reaching 21.2 billion euro in 2018. In 2017， the EUs export of computer services to China was 5.1 times of that of import. The export of intellectual property costs was 14.48 times of that of import. The EU also maintained a high surplus in tourism and education services.

II. Gradually Enhanced Investment Cooperation

The EUs investment in China has maintained a stable development trend for a long time. The growth of the EUs direct investment in China during 2009 and 2017 has been increasing （as shown in Table 1）. In the whole year of 2018， the EUs direct investment in China reached US $10.42 billion， an increase of 103% over that of 2009， and its proportion in foreign investment increased from 5.5% to 7.5%. By the end of 2018， there were over 47，200 EU investment projects in China， and more than 16，000 enterprises in China， with an accumulated investment amount of over 130 billion US dollars. The vast majority of EU enterprises have good business performance in China and have a bright future. According to a report of the European Union Chamber of Commerce in China， 77% and 75% of the EU enterprises in China made profits in China in 2018 and 2019 respectively， which represented the top and the second highest value in the past decade. In 2018， 66% of the EU enterprises achieved positive income growth， while 39% achieved a higher profit margin in their operation in China compared with their global average.

Chinas investment in Europe has shifted from rapid growth to stabilization. Since the financial crisis in 2008， Chinas investment in Europe has maintained a rapid growth rate， and the investment industries and fields have been continuously expanding， which has promoted the in-depth cooperation between China and the EU in the fields of industrial manufacturing， infrastructure， commercial logistics， etc. From 2008 to 2011， Chinas investment in Europe grew at an explosive speed， increasing by 15 times in three years， and breaking through the US$10 billion in 2017 （see Figure 1）. As of 2018， Chinas total investment in the EU has reached US$90.74 billion， accounting for 37.3% of its total investment in developed countries.

III. Innovation in Financial Cooperation

There are various ways of financial cooperation between China and the EU. At the corporate level， China and the EU have established a number of financial institutions. By the end of 2018， 18 European banks have set up 23 branches in China; a number of European insurance companies have set up 19 insurance companies and 4 reinsurance companies in China; a total of 99 European financial institutions have been entitled the Qualified Foreign Institutional Investors （QFII） and RMB Qualified Foreign Institutional Investors （RQFII）.

In terms of official currency swap arrangements and RMB clearing arrangements， the Central Bank of China renewed the local currency swap agreements with the central banks of the EU， the UK and Hungary in 2018 and 2019， the agreed amount with the latter two doubled. This will play a positive role in expanding the use of local currency between China and the EU， stabilizing financial markets， and promoting trade and investment facilitation. Chinas central bank has also signed memoranda of cooperation on RMB clearing arrangements with the central banks of Germany， the UK， France and Luxembourg， and set up an RMB clearing center to promote cross-border transactions between enterprises and financial institutions in China and those in the host countries with RMB as a means of transaction， and further promote the bilateral trade， investment liberalization and facilitation. Moreover， Chinas central bank has issued RMB central bank notes in London to accelerate the development of RMB offshore market. The EU member states have actively engaged with the Asian Infrastructure Investment Bank initiated by China， while China has joined the European Investment Fund and the European bank for Reconstruction and Development.

IV. Fruitful Cooperation in Other Fields

In the field of science and technology， China and the EU have maintained steady cooperation of mutual benefit， and the EU has always been Chinas largest supplier of technology and equipment. By the end of 2018， the EU has exported more than 56，000 technologies to China， with a total contract value of more than US$215 billion. The EU enterprises have actively participated in the construction of Daya Bay nuclear power station， Shanghai maglev train and other major projects. The EU has achieved high returns through technology exports.

China Railway Express provides a new transport channel for China-EU trade and helps to expand China-EU trade and marine-land combined transport business. From 2011 to 2019， China Railway Express have run 21，225 times， connecting more than 60 cities in China and more than 50 cities in 15 European countries. After the outbreak of COVID-19， new functions and missions of transporting medical protective devices and equipment to the EU member states have been added.

In short， the economic and trade cooperation between China and the EU has exerted positive impact on both sides in many aspects and has achieved mutual benefit and win-win results in a real sense. The EUs main benefits from China include： increased output and employment from more exports to China， improved peoples well-being from large quantities of imported Chinese high-quality and low-cost products， strong support for the development of the EU tourism， hotel and catering and luxury sectors provided by big service trade surplus， huge profits to the EU multinational corporates brought about by investment in and technology export to China， reduced bankruptcy and unemployment as a result of allowing Chinese enterprises to merge with the EU ones， and enhanced international status of the Euro as a result of China being encouraged to increase its holdings of Euro reserves.

China has also benefited from its economic and trade cooperation with the EU， mainly including goods trade surplus with the EU， investment and technology introduced from a large number of well-known enterprises and invisible champion enterprises， which has improved Chinas production capacity and export competitiveness， increased employment， improved industrial supply chain， talents training， and promoting of industrial upgrading and economic growth.

China-EU Economic and Trade

Cooperation Still

Faces Multiple Challenges

Although China-EU economic and trade cooperation has made great progress， it still faces multiple challenges， mainly in the following aspects.

Firstly， there is insufficient trade growth momentum. From 2010 to 2019， the average annual growth rate of China-EU trade is 7.4%， 14 percentage points lower than that of the 10 years before the financial crisis in 2008. There are three main reasons for the declining growth rate. First， as results of the lasting impact of the EU debt crisis， the economy of many countries has been in continuous depression， and the unemployment rate remains high， which has hindered the development of trade with China. Second， Chinas export of labor-intensive products is challenged by Southeast Asian countries as a result of the year-by-year rising of its labor costs. Third， there are frequent trade frictions. The EUs trade barriers against China are gradually increasing with more intensive protective measures， more and more serious sanctions and expanding scope.

Secondly， the EU has indefinitely postponed the recognition of Chinas market economy status. On the ground of “market distortion”， the European Commission holds that China is still a non-market economy and does not change the practice of surrogate countries in anti-dumping investigations， which violates the provisions of the WTO protocol that China should obtain market economy status on December 11， 2016. In 2017， the EU even proposed to change its anti-dumping law， that is， in the future， it will no longer distinguish between market economy and non-market economy countries， and will instead determine the punitive tariff rate according to the degree of market distortion， thus gaining more operation space in trade protection measures.

Thirdly， the proportion of China-EU two-way investment stock is low， and the EU protectionism restrains investment development. By the end of 2017， the EUs direct investment in China accounted for only 4.4% of the EUs foreign investment stock， while the investment made by the Chinese mainland in the EU accounted for only 0.95% of the foreign investment in the EU. The research of the Mercator Institute for China Studies （Merics） shows that the investment of the Chinese enterprises in the EU fell by 40% year on year in 2018. After 2017， the European side has tightened its scrutiny of foreign investment. Taking Germany as an example， the 9th amendment to the German Foreign Economic Regulations was passed in July 2017， adding a new “cross-industry review”. In December 2018， the 12th amendment to the German Foreign Economic Regulations was passed， which changed the investment types of “special industry review” and “key infrastructure review” from “25% or more control right” of German enterprises directly or indirectly to “10% or more control right”， and the broadcasting media industry was added to the “key infrastructure review”.

Fourthly， the EU follows the US containment policy towards China and restricts China-EU technical cooperation. As an ally of the US， the EU has not lifted the arms sales ban and has been restricting high-tech exports to China. The EU has linked the technology trade with human rights issues， Tibet-related issues and Taiwan issues， politicizing economic issues， harming the strategic partnership between China and the EU as well as the interests of traditional arms exporting countries such as the UK， France and Italy， and the trade deficit has been expanding. In 2000， the European Union adopted Decree No. 1334， which extended the mechanism of The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies to the field of high-tech exports， and formulated a list of control over exports of dual-use technologies and military supplies， with a view to controlling trade in conventional weapons and high-tech between China and Europe.

Fifthly， the anti-globalization wave in Europe is surging， and populism spoils the atmosphere of China-EU cooperation. In recent years， European nationalism and populism have risen again， and the influence of right-wing forces is increasing. Some member states ignore the benefits brought about by economic cooperation and deliberately emphasize the negative impact of globalization on their own countries. Some EU member states tend to be exclusive of foreign countries. Some politicians hold a negative attitude towards Chinas development and China-EU economic and trade cooperation. They exaggerate the impact of the EU trade deficit to China and the impact of Chinas investment on the EU security， and hinder China-EU economic and trade cooperation. With the global outbreak of COVID-19 in 2020， some people in the EU advocate that foreign investment should return to the EU and rebuild a complete internal industrial chain and supply chain. The response and attitude of some countries to Chinas prevention and control of COVID-19 also show that a considerable amount of the EU people do not trust China， which will， to a certain extent， affect the civil will and official decision-making of the EU cooperation with China.

China-EU economic and trade cooperation has a Great Potential

Although the economic and trade cooperation between China and the EU has been sluggish due to multiple factors， there is an enormous potential in bilateral cooperation.

Firstly， China and the EU still have a high economic complementarity. According to the calculation result of the Revealed Comparative Advantage Index （RCA） of China-EU trade made by Standard International Trade Calculation （SITC）， China and the EU have different revealed comparative advantages， so there is a high complementarity in bilateral goods trade; the two sides have huge growth potential in the field of service trade; and the proportion of mutual investment between China and the EU is still very low， and many investment fields have not yet been effectively developed. The global economy has entered the recession period caused by COVID-19. The European market demand is shrinking， and enterprises are in difficulty. Some European enterprises may have need for equity contraction， liquidation and enterprise sale. The wave of enterprise merger or acquisition may reappear. All those provide new opportunities for Chinese enterprises to increase their equity investment in Europe. The developed financial market， numerous financial institutions and strong financing capacity of the EU are all conducive to new progress in financial cooperation between both sides.

Secondly， the strategic docking between China and the EU has been constantly improved. The Belt and Road initiative has provided a good platform for China-EU economic and trade cooperation. The European side responded positively to the Belt and Road initiative right after it was proposed by China. There are a large number of infrastructure projects and investment opportunities along the Belt and Road， some of which are right in the EU member states and are already cooperation projects between China and the EU. For example， China Ocean Shipping Group （COSCO） has actively participated in the privatization process of Greece， and has made Piraeus Port one of the worlds fastest growing container ports. Connecting Europe and Asia-A Vision of the EU Strategy puts forward a systematic and comprehensive policy proposal on Asia-Europe interconnection， lists China as the primary bilateral cooperation partner， and emphasizes strengthening the cooperation between the EU and AIIB and the cooperation between China and the EU on building an interconnection platform. “InvestEU” is a plan to promote public and private investment within the framework of the EUs next cross annual （2021-2027） fiscal budget， which creates new opportunities for China-EU cooperation. China and the EU should make good use of the existed achievements of strategic docking and jointly promote cooperation of mutual benefit.

Thirdly， China-EU cooperation on the third-party market is still getting momentum. By the end of 2019， China has reached a consensus with 14 EU member states on third-party market cooperation， and has carried out institutional cooperation in infrastructure， energy， environmental protection， finance and other complementary fields. The third party market cooperation is conducive to the effective docking of Chinas advantageous production capacity and EUs advanced technology and overseas economic and management experience with the development needs of developing countries. It is a new field of China-EU economic and trade cooperation. The Chinese Government vigorously advocates the cooperation and provides corresponding policy support.

Fourthly， China-EU economic and trade cooperation witnesses increasingly widening areas. In the field of sustainable development， China and the EU share common ideas and pursuits. There are a lot of cooperation opportunities in renewable energy investment and R&D， low-carbon eco-city construction， new countryside building， and green financial development and so on so forth. There is a huge room for China-EU cooperation in the field of medical and health care. The EU has a leading position in the development of medical equipment， precision instruments and new drugs， while China has outstanding advantages in the production of general medical equipment， medical protection products and research， development and production of traditional Chinese medicine. In addition， the development of 5G technology also requires that both sides strengthen cooperation on mobile communication technology and speed up the building of relevant industrial chain. China and the EU should focus on long-term interests and not be bound by mercantilism and nationalism.

Fifthly， China-EU economic and trade relations are increasingly institutionalized. That will provide stronger institutional guarantee for cooperation. In terms of investment， the negotiation on the Bilateral Investment Agreement （BIT） between China and the EU is coming to success， which will provide a stable guarantee for mutual investment between China and the EU enterprises in the future. In terms of cooperation dialogue mechanisms， the China-EU summit， 17+1 summit and cooperation dialogue mechanisms at all levels are conducive to close cooperation between China and the EU to jointly establish new rules and solve new problems. China and the EU should give full play to the leading role of the China-EU High-level Economic and Trade Dialogue in deepening the dialogues on macro-economic policies and economic and trade policies， handling differences and frictions in constructive ways， so as to promote the long-term， stable， mutually beneficial and win-win development of China-EU economic and trade relations.