China has a long list of demands for Europe
by Francesco Guarascio
Desperate for foreign financial help, the European Union is trying to convince the Chinese to increase their investment in the old continent by offering speedier recognition of the People's Republic of China as a functioning market economy. Giving China the status of a "market economy" is considered a vital pre-condition to negotiations starting on possible free trade agreements. In fact, if the state influences the economy above certain levels, it results in competitive distortions of the market - which impact both local companies and any foreign business, with countries linked by free trade deals. No free trade deal is, therefore, feasible with countries that cannot claim true market economy status.
Moreover, being recognized as a functioning market economy helps ease possible anti-dumping measures adopted by commercial partners. This has long been a thorn in the side of China's powerful export machine. We know that China joined the World Trade Organisation in 2001, but never received the precious recognition it so desired. Nevertheless, despite its questionable progress towards liberalization - an unwritten agreement says that Beijing will automatically be granted the coveted status by 2016.
"The public debate has focused for so long on such a deadline that putting it into question would represent a heavy blow to the Chinese," remarked Lord Leon Brittan, vice chairman of the Swiss investment bank UBS and former European Commissioner for Trade and Competition. And yet, the 2016 deadline seems more of a political commitment rather than a legal obligation based on international agreements. "There is nothing in the WTO rules, or elsewhere, to provide that China automatically gets market economy status in 2016," argued Bernard O'Connor, a lawyer specialising in European affairs. "The idea that there is a deadline is an urban myth that seems to have gone global. It has gone viral even in a world where the underlying agreements are freely available to all on the internet," he says, adding that "this misunderstanding is shared by many in China, the European Union and the United States".
The European Commissioner in charge of competition Joaquin Almunia seems to be among those who believe in this "urban myth", since he provided further assurances during a high-level EU-China conference held in Brussels yesterday. He went even further by offering to grant China the coveted status before the foreseen deadline. "China will be given market economy status in 2016 according to WTO rules," said Almunia. "We are looking forward to doing it before, overcoming the existing obstacles without being forced to wait for this deadline." Almunia's sop to China comes as Europe struggles to restore confidence in its markets. It badly needs foreign investment in its securities and economy. Indeed, China's purchase of sovereign bonds of distressed eurozone countries has long been seen as something that is on the cards, but it has not materialized as yet. European missions to China to convince Beijing to buy the bonds issued by the European Financial Stability Facility rescue fund have also brought little tangible results so far.
China has also showed reticence in investing in European companies. In 2010, less than €1bn was channeled towards European investment, representing a tiny portion of Chinese operations around the world. Europe's activities in China were also confined to less than €5bn, last year. This trickle of financial exchanges is explained by barriers raised by both blocs – due to a fear of foreign acquisitions of their best businesses. Europe also regularly complains about China's lack of transparency in public procurement. This is something that precludes European groups from competing for public projects in China. If China were to become more open and transparent, Europe would too, with a reciprocal advantage - goes the often-heard argument in Brussels. But who should start to open up first remains an unresolved matter. In this moment of weakness, Europe is likely to make new concessions. The question is - will they be enough?
The list of Chinese requests is, in fact, long. "A lot of Chinese military people think that the EU arms embargo is not a military sanction, but mostly a political one; we hope a new breakthrough will be made," said Meng Xiangqing, of China's National Defence University, speaking at the same conference as Almunia. The embargo was imposed after the massacre in Tiananmen Square, in 1989, and since then the value of it has been questioned many times within the EU. China considers it "a legacy of the Cold War", but insists that lifting the block will not cause a significant increase in weapon imports from Europe. Beijing actually boasts of having already set up its defensive system exclusively with national technology. Will the sovereign debt crisis also impact on such a strategic security issue? For now, nobody is quite sure.