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China - EU trade - background note

12 June 2007
by eub2 -- last modified 13 June 2007

EU Trade Commissioner Peter Mandelson met Chinese Commerce Minister Bo Xilai in Brussels on 12 June 2007 for the annual EU-China Joint Trade Ministerial Meeting. China and the EU have one of the fastest growing trading relationships in the global economy: Europe is now China's largest trading partner, and China Europe's largest source of manufactured imports. The Minister and the Commissioner reviewed bilateral trade relations. Commissioner Mandelson urged his Chinese counterpart to continue to address barriers to EU exporters and investors in the Chinese market and to protect EU businesses in China from intellectual property theft. Although China has now been in the WTO for six years, EU exporters and investors continue to face persistent problems entering and operating in the Chinese market.


The issues:

  • Trade flows: EU exports to China are growing strongly – 21 per cent in 2006 – but the EU still exports less to China than it does to Switzerland. The EU bilateral trade deficit with China follows the same trend as the US deficit: over the single day of the Joint Ministerial Trade Committee Meeting, the EU-China Trade deficit will widen by about EUR 350 million. A part of this is accounted for by a shift in production from other markets in Asia to China, but it nevertheless points to an increasingly unbalanced trading relationship in which the EU export potential to China is hampered by barriers to trade. A study published by the Commission in 2006 (see below) reported that about EUR 20billion in trade opportunities are lost every year to EU businesses because of market access barriers in China. The EU continues to pressure China to address these problems. In January, talks started on a new Partnership and Cooperation Agreement framework. Part of this process is an upgrade of the 1985 EU-China Trade and Economic Cooperation agreement which the European Commission hopes will set out wide new terms for facilitating trade and investment.
  • Intellectual Property Rights: Effective protection and enforcement of intellectual property rights in China is a key issue for Europe and European businesses. China was the source of 80 per cent of counterfeit goods intercepted at EU borders in 2006. Some European manufacturers estimated in February 2007 that Intellectual property rights infringements in China cost EU manufacturers operating there 20 per cent of their revenue. Efforts have been made by China to improve intellectual property protection and enforcement but progress is slow.
  • Services: Services trade is an important economic export for the EU and an area of persistent problems in China. China has made several significant steps in opening its services markets but the barriers to EU exporters and investors remain formidable. In areas like telecoms, construction, insurance and financial services, EU companies are still blocked by discriminatory licensing systems, caps on inward investment and local ownership, enforced joint partnerships and discriminatory regulation – often in direct contravention of undertakings made when China joined the WTO. China has granted more than 20,000 value-added telecoms licenses since 2001: 6 have gone to foreign companies. China still retains ownership caps of between 20-25 per cent on foreign investment in the Chinese banking sector. Both of these are breaches of WTO undertakings.
  • Steel: In 2006 the EU and China established the EU-China Steel Working Group to take a long-term strategic approach to the steel sector. Chinese steel production and export to the EU is growing fast as China channels investment into the sector. There is a risk of overproduction, and subsequent dumping of steel on global markets. The EU-China steel group is intended to help recognise and address problems before they become prominent.
  • Textiles: The EU and China agreed on a Memorandum of Understanding in 2005 for trade in the Textiles and Clothing sector. Both sides are now working together alongside industry to ensure a smooth transition when this agreement expires in 2008.
  • Market Economy Status: In June 2007 the EU presented China with an updated assessment of China's progress towards Market Economy Status. This assessment is a technical exercise within a limited context: MES is only relevant for some practical aspects of anti-dumping investigations. No judgement is passed on China's economy as such. The European Commission noted and welcomed Chinese efforts to meet MES criteria, concluded that China has met one of the five technical criteria for MES, and proposed steps to China that will help make progress on the remaining four criteria.

Background on EU-China trade relationship

  • In October 2006, as part of the Global Europe trade policy; the European Commission set out a wide-ranging new policy for building the European Union's trade and investment relationship with China. This strategy review argued that both China and Europe have benefited from China's economic rise, despite the competitive pressure it has exerted in the global economy. It argues that China's growing trade muscle brings with it new responsibilities to fulfil its WTO obligations, open it markets and trade fairly. The review set out a range of strategies for improving the conditions on which EU companies trade in and with China: including better market access, tougher action to improve enforcement of intellectual property and providing new resources for business on the ground in China. Read 'Competition and Partnership'
  • In February 2007 the European Commission released the findings of a new study that assesses market opportunities for EU companies in China in key sectors. The study identifies major opportunities for EU exporters in green goods, business services and high-value products. However the study also concluded that market access for EU imports to China is still seriously restricted by barriers to the Chinese market and poor protection of intellectual property rights. Read the study

China in international trade

China has become one of the big players of international trade as the world's 3rd exporter and EU's first supplier. However, China is still largely a workshop economy: a relatively small fraction of the total value added of exported products is generated in China. Chinese imports and exports grow in parallel and China is now the 4th largest importer globally.

China became the 4th economic power in 2006, the 3rd exporter globally and the first supplier of the EU. China now accounts for 5% of world trade. By 2030 it is expected to rise to 15%. By the end of the decade China will be the world's biggest exporter.

Most of the products exported from China are assembled from parts made somewhere else; in Asia, Europe or the US, with only a small fraction of the total value added generated in China. Countries like Japan, Taiwan, Korea and other Asian countries which have invested the most massively in China, are those which enjoy trade surplus with China thanks to their exports of parts and components.

China is replacing other Asian suppliers of developed countries. This is the result of Japanese companies and others moving the most labour intensive part of their production to mainland China. As a consequence, Asia's share of total EU imports increased only very moderately by 10% over the last decade.

EU-China trade

China is Europe's biggest source of merchandise imports (EUR 191 billion in 2006). Twenty years ago Europe imported almost nothing from China: in 2006 the EU's trading relationship with China was worth more than EUR 255 billion. The EU bilateral trade deficit with China follows the same trend as the US deficit, with a time difference of 2 years. In 2006 it was EUR 128 billion (Source: Eurostat). The deficit could reach EUR 170 billion this year at current trends.

Europe is China's biggest trading partner and its fastest growing source of imports. EU exports to China doubled between 2002 and 2006 (EUR 63 billion in 2006).

China's exports to the EU are growing at between 15 -20 per cent every year. China is Europe's fastest growing trade partner.

Source: European Commission

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