Tomorrow’s Silk Road: Assessing an EU-China free frade agreement

The idea of an EU-China free trade agreement (FTA) had never been studied in any detail until President Xi Jinping suggested a joint exploration of this possibility during a visit to Europe in March 2014. The suggestion was taken seriously by the EU in 2016 when Commissioner Cecilia Malmström affirmed that the Commission expects a successful conclusion of the current negotiations on a bilateral investment agreement with China and would like to see significant progress in the country’s domestic reform process before starting any talks on an FTA. In this framework, CEPS and World Trade Institute (WTI) in Bern have attempted to sketch the architecture of a possible FTA between the two trade giants, outlining its rationale and design and anticipating the economic impact at the sectoral and member state level.

EU-China economic relations are dominated today by discussions on whether China will be granted market economy status (MES) in anti-dumping (and anti-subsidy) procedures. The controversy arises from the ambiguity of Art. 15 of the WTO accession protocol for China, agreed 15 years ago and due to expire at the end of this year. Although granting China market economy status would be confined to anti-dumping procedures and would only specify how the EU can set anti-dumping and countervailing duties in the event that the country is found to have engaged in dumping, the debate has been broadened to include a general assessment of whether or not China qualifies as a market economy.

Whatever institutional decision is taken on this this question, there is no doubt that China is ignoring the main concern behind the debate, namely its huge overcapacity in some sectors (e.g. steel and ceramics), which could ultimately jeopardise trade relations with its partners. A serious reform process aiming at drastically reducing such overcapacity is first of all good for China and essential to shift EU-China trade relations to a higher level. There is no doubt that the best design of a potential FTA would follow the current EU approach of the ‘new generation’ of trade agreements, i.e. a ‘deep and comprehensive’ FTA, not purely based on the removal of tariffs but on  a reduction of regulatory divergences in many areas. This implies a lot of homework, especially for China. Aside from significant technical barriers to trade (TBTs) and problems in food, animal feed and animal products, the cross-border provision of services and foreign direct investment represent crucial chapters since those segments are now severely restricted to foreign investors in China. Negotiations in public procurement would also be ambitious by eventually delivering something closer to a Government Procurement Agreement (GPA)–plus, which would be negotiated in the framework of the WTO. Perhaps the most difficult chapter concerns state-owned enterprises (SOEs). Moreover, intellectual property rights and geographical indications (GIs), although fairly advanced in the legislative framework, appear too weak when it comes to enforcement. Economic modelling, although with some limitations, foresees a mutual benefit for the economies as a whole, but a few sectors are inevitably identified that could suffer from labour displacement. The effects of labour displacement across skill levels could be compensated for by domestic policies needed for the economy to re direct its workforce to the most productive sectors.

Pursuing a free trade agreement with China could be a logical continuation of the EU’s trade policy strategy. The study shows that the economic potential in bilateral trade could be significant and has probably been underestimated due to the lack of investment effects in the model. Constructive trade talks can only start, however, after China makes significant progress in the implementation of its reforms, not least by committing to reform SOEs and opening up public procurement.

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