Project: Asia Programme, EU-China 2025

Senior Consulting Fellow, Asia Programme (based in Hong Kong)
Alicia García-HerreroSenior Fellow, Bruegel; Non-Resident Research Fellow, Real Instituto El Cano
K. C. KwokHonorary Senior Research Fellow, School of Economics and Finance, University of Hong Kong
Liu XiangdongSenior Fellow, China Center for International Economic Exchanges (CCIEE)
Zhang YanshengFellow, Academic Committee of the National Development and Reform Commission (NDRC); Chief Researcher, China Center for International Economic Exchanges (CCIEE)

EU–China cooperation should not be seen as an end in itself, but as a stepping stone to wider global governance cooperation and reform.

The European Union (EU)–China Summit plenary session at the Great Hall of the People in Beijing on 12 July 2016. Photo: HOW HWEE YOUNG/AFP/Getty Images.The European Union (EU)–China Summit plenary session at the Great Hall of the People in Beijing on 12 July 2016. Photo: Getty Images.

This report is the culmination of an 18-month study by Bruegel, Chatham House, the China Center for International Economic Exchanges and the Institute of Global Economics and Finance at The Chinese University of Hong Kong. The project was supported by a senior advisory group, with input from former ministers on both the European and Chinese sides.

The report identifies key trends and areas of potential economic collaboration in the coming decade. It cites the ‘significant opportunities’ and benefits for the two global powers to deepen their economic ties, with scope for an ‘enormous increase’ in investment in both directions. The study, however, also documents the obstacles - including significant differences between political and economic systems - which could frustrate increased collaboration, and argues that building a genuine strategic partnership will require greater effort from both EU and Chinese leaders.

This is a critically important moment for the EU and China to consider how to deepen the full range of their bilateral economic relationship by increasing trade and investment, promoting cooperation in the areas of climate change, energy and the environment, and global governance, collaborating in science, technology and innovation, infrastructure, and financial services, and engaging in people-to-people exchanges.

While EU-China trade relations are well developed, this is not yet reflected in other areas of economic activity. Beyond trade in goods, many areas of EU-China economic interaction remain under-developed, including trade in services, levels of foreign investment, cooperation on industrial and technological innovation, and financial market integration.

Current stocks of cumulative direct investments between the EU and China remain much lower than between the EU and US. 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. These low EU-China FDI stocks show that there is scope for an enormous increase in investment in both directions.

European and Chinese economic models are unlikely to converge in the foreseeable future. Significant differences between the political and economic systems of the EU and China add to the challenges of deepening their bilateral economic ties. Despite challenges, the EU and Chinese economies will remain inextricably linked. 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.

Conclude a bilateral investment agreement as soon as feasible. Ongoing EU–China negotiations for an investment agreement 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 a new round of economic reform, including in the state-owned enterprises, and market liberalization in China.

Open negotiations on establishing an EU–China free trade agreement (FTA). Such negotiations can be initiated upon the successful conclusion of the investment agreement between the EU and China. Trade in services should be actively promoted in both directions. Healthcare products and services is a good example of an area that can benefit both sides. Driven by the changing demographics of China’s aging population and the capacity gap in healthcare provision between the EU and China, it could become a major area for market opening.

Contribute to strengthening mechanisms of good global governance. The EU and China 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, but channel this support through existing institutions such as the WTO and the G20. However, this 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. All three economies have a mutual self-interest in seeing a constructive outcome from the Brexit negotiations between the EU27 and the UK.

Facilitate people-to-people exchanges. All areas of deeper cooperation – from trade and investment to science and technology – would benefit greatly from targeted, reciprocal, multi-year and multiple-entry visas.

Use China’s Belt and Road Initiative (BRI) as a platform for further expanding bilateral trade and economic cooperation. New BRI-related investment, trade and industrial cooperation can help invigorate growth in the EU and its neighbourhood. The EU has the potential to become the western ‘anchor’ of the BRI, and its global trade could benefit substantially from the initiative, principally due to a reduction in transport costs. EU financial institutions can bring expertise in the long-term financial management of complex infrastructural investment projects, while European investment could help ensure BRI projects meet the necessary global environmental and sustainability standards.

Deepen EU–China cooperation on energy security and climate change. In order to help sustain domestic and international progress towards the Paris goals, the EU and China could take a number of steps together, in accordance with the principle of common but differentiated responsibilities and capabilities. These include pursuing their Intended Nationally Determined Contributions, securing financing for programmes in the least developed countries, and deepening their cooperation on data sharing and transparency in multilateral forums. Climate finance, including green development finance, should be another key area for deeper cooperation.

Focus on the opportunities offered by new breakthroughs in science, technology and innovation. The EU is a research giant facing an 'innovation emergency', while China is a rapidly rising science, technology and innovation powerhouse. The scope for cooperation is great. Both the EU and China will need to promote specific opportunities for technical cooperation wherever possible. Ultimately, what European and Chinese companies build and design together will be as important as what they sell to each other.

Support further EU–China cooperation in the financial sector. The massive demand for infrastructure financing in Asia and under the BRI will offer new opportunities for financial cooperation, especially if the two sides work together to use these opportunities to champion green financing mechanisms and products. Liberalizing the entry requirements for EU financial institutions into the Chinese market would enable them to support China’s reform and development of its financial services industry. Similarly, more Chinese financial institutions should be encouraged to operate in the EU. 
 

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Further reading
 

Discover the 5 things you need to know about the EU-China economic relationship