It is now a critical moment for the EU and China to consider how to deepen their bilateral economic relationship. A new report from leading European and Chinese policy institutes sets out the opportunities — and challenges — facing the EU and China up to 2025. Here are five key points you need to know.

1. While EU-China trade relations are well developed, this is not yet reflected in other areas of economic activity.

This includes trade in services, levels of foreign investment, cooperation on industrial and technological innovation, and financial market integration. New breakthroughs in innovation also offer scope for closer cooperation as what European and Chinese companies build and design together becomes as important as what they sell to each other. Facilitating people-to-people exchanges will also strengthen relations at a number of levels, and would benefit greatly from targeted, reciprocal, multi-year and multiple-entry visas. There is also particular potential — and need — to do more together on climate change.

Workers in a shoe factory in China

Workers in a shoe factory in China
Workers in China labouring in a leather shoes plant that exports to the EU. In 2006, the EU opened a review to decide if they will extend its anti-dumping duties on leather shoes from China. Image: China Photos/Getty Images.

Section 2

2. Current stocks of cumulative direct investments between the EU and China remain much lower than between the EU and US.

There is therefore scope for an enormous increase in investment in both directions. In 2015, the stock of EU foreign direct investment (FDI) in mainland China (not including Hong Kong) amounted to €168 billion, while the investment stock from mainland China in the EU was only €35 billion (€115 billion including Hong Kong). This contrasts with the stock of EU FDI in the US of €2.6 trillion and the US FDI stock in the EU of €2.4 trillion. Developing connectivity — for example through China’s Belt and Road Initiative (BRI) — can further expand bilateral trade and economic cooperation. The EU has the potential to become the western ‘anchor’ of the BRI.
 

Euro and yuan notes

Euro and yuan notes
The euro and the yuan. Image: studioEAST via Getty Images.

Section 3

3. Getting trade and investment agreements right will sustain relations.

Ongoing EU–China negotiations for an investment agreement — which should be concluded as soon as possible — can be used as a platform for addressing differences and facilitating further investment, focused on opening up each other’s service sector. An EU–China investment agreement has the potential to spur further economic reform, including in the state-owned enterprises, and market liberalization in China. Subsequently the two sides should open negotiations on establishing an EU–China free trade agreement (FTA).

Commuters in Hong Kong

Commuters on a tram in Hong Kong
Chinese commuters look out from a tram as they pass HSBC headquarters in Hong Kong on 3 August 2016. Image: Getty.

Section 4

4. The EU and China should work together to strengthen mechanisms of good global governance.

Both benefit from the multilateral trade system, and they are not direct competitors on security issues. With their combined economic weight they can do much to buttress the stability of the multilateral global order. To achieve this, the EU and China should agree approaches bilaterally, as well as work through existing institutions such as the WTO and the G20. However, EU–China cooperation should not disadvantage the US, given its paramount importance to both the EU and China as well as to the global economy. Moreover, the benefits of a closer EU–China relationship are likely to be enhanced if the EU27 and the UK are able to agree a sensible Brexit that ensures a continued close economic relationship between them.

Chinese Prime Minister Li Keqiang with European Council President Donald Tusk

Chinese Prime Minister Li Keqiang speaks with European Council President Donald Tusk
Chinese Prime Minister Li Keqiang speaks with European Council President Donald Tusk at an EU-China Summit in Brussels on 2 June 2017. EU and Chinese leaders are continuing their commitment to fighting climate change following Trump’s Paris agreement pullout. Image: Virginia Mayo/AFP/Getty Images.

Section 5

5. But strengthening relations will not be easy.

There are significant differences between the political and economic systems of the EU and China, and European and Chinese economic models are unlikely to converge in the foreseeable future. It is incumbent upon governments and businesses on both sides to find ways to overcome current obstacles and to design realistic and pragmatic ways to build on their existing relations. EU and Chinese leaders should build on the existing EU–China 2020 Strategic Agenda for Cooperation, re-stating their common interests in the new global context, while also recognising more candidly their differences, and prioritising progress where it is achievable and where relations are currently under-developed.

EU-China Summit in Beijing in July 2016

EU-China Summit in Beijing in July 2016
European Council President Donald Tusk, European Commission President Jean-Claude Juncker and Chinese Premier Li Keqiang attend the EU-China Summit plenary session in Beijing on 12 July 2016. Image: How Hwee Young/AFP/Getty Images.

Link to report

This article was written by Gitika Bhardwaj and Dr Tim Summers and is based on the findings of a new report ‘EU–China Economic Relations to 2025: Building a Common Future’ by Dr Tim Summers, Alicia García-Herrero, K. C. Kwok, Liu Xiangdong and Zhang Yansheng.