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Article by H.E. Ambassador Wu Hailong of the People's Republic of China to the EU


A Comprehensive Approach: China-EU Economic and Trade Cooperation


Thanks to the joint efforts of China and the EU, we have in recent years enjoyed smooth growth in our comprehensive strategic partnership with closer high-level exchanges, deeper strategic trust, more extensive mutually beneficial cooperation, and fruitful results in economic and trade cooperation. According to the Chinese statistics, two-way trade between China and Europe registered 567.2 billion US dollars. EU is ranked as China's largest trading partner and export market. Despite the crisis, most of the European companies have kept decent profits in China with 70-80% of companies reporting large growth margins of revenue. At the same time, Chinese companies have also stepped up in making investment in Europe. In 2011, Chinese direct investment to the EU increased by 109.4%.

While business cooperation between China and Europe has indeed brought real benefits to our two peoples, it has also presented us with some problems. And the purpose of this article is to explain some of these issues so that our readers will develop a more comprehensive understanding about the China-EU economic and trade cooperation.

1. Trade Balance

China does not intentionally seek trade surplus against Europe but rather pursues relative balance in development. An overview of the past China-EU trade would show that in the last four decades, Europe had trade surplus against China in the first two decades, and the situation reversed in the second half of the period. The past experience suggests that one country cannot stand on the side of surplus for good. The ups and downs in trade are not a result of policy intervention, but rather a reflection of market demand. The so-called trade imbalance between China and Europe is in fact only part of the story of the global distribution of labor and resources. The reasons are three-fold.

First, the manufacturing business has produced major influence on trade imbalance. Manufacturing business accounts for 40% of China's total foreign trade. Many products labeled "Made in China" are in fact collectively made by a number of different countries across the world. Director General Lamy of the WTO once mentioned that an iPad exported from China generates five times of profits for the US companies that it does for the Chinese manufacturers. On average, Chinese companies

only receive 6.5 dollars of profits per set of iPhone shipped abroad. The majority of the profit goes to the importing countries and multinational corporations.

Second, EU investment in China bears carrying effect on the trade balance between China and Europe. The EU has long been recognized as an important source of foreign investment in China. Many European companies produce and sell their products in China, to the effect to exporting products from Europe to the Chinese market, yet this part of trade was not duly reflected in foreign trade statistics. In 2010, the sales revenue of European companies increased by 27.3% to 466.8 billion dollars, equivalent to 1.4 fold of the Chinese export to Europe and 3 times of the European export to China. If we combine the revenue of European companies in China and Chinese import from Europe and compare the sum with the Chinese export to Europe, we would find that Europe is the one that benefits more from our economic and trade

cooperation. However, such a fact did not hold back China's determination to grow two-way trade with Europe. China remains among the fastest growing export market to Europe. From 2008 to 2011, European export to China grew at an average of 18.3%, far exceeding its overall export growth rate. Only within two years since 2009, China has surpassed Russia and Switzerland to become Europe's second largest export market.

Third, traditional method of statistics has more than fairly increased trade imbalance. EU Trade Commissioner De Gucht once admitted that the existing practice of trade statistics is mainly reliant on the total price of the goods to evaluate trade balance, which could not authentically reflect the benefits of trade due to the recalculation of intermediary products involved in trade. In this respect, the World Input and Output Database (WIOD) produces a more accurate picture of how much each country benefits from international trade. According to the WIOD statistics, the EU trade deficit against China will be cut by 36%.

2. China's Open Market

It has already become a proven practice that only by opening up its economy could a country achieve development and prosperity against the backdrop of economic globalization. China identifies with this principle in the running of its economy. In fact, the three plus decades of reform and opening up is the best testimony to our understanding of the importance of an open economy. When China joined the WTO, we have promised to open 104 service sectors among 160 plus ones listed by the WTO. We have also promised to allow 54 sectors to be run by full foreign investment. Since China's accession into the WTO, the Chinese government has deepened market access reform concerning a number of sectors. For instance, we have already allowed foreign businesses to run compulsory traffic accident insurance. We have allowed foreign investors to hold up to 49% of shares in joint investment securities companies and allowed individual foreign investors to hold up to 49% of shares in joint investment futures commission merchant. We are also considering allowing foreign institutions to carry out prepaid card service in China.

Having mentioned these developments, I do wish to stress that the efforts to liberalize investment must be consistent with the goal of individual countries to realize sustainable economic development. When liberalizing investment, we must take into full account the interest of both the investors and the recipient. Therefore, we believe that investor countries and recipient countries should follow the principle of mutual facilitation and common progress on the matter of investment liberalization, rather than to make our cooperation benefit only one party and compromise the other.

3. China's Investment Environment

The Chinese government is committed to providing foreign businesses with a fair, just and transparent investment environment. We recognize all companies that are registered in China subject to Chinese laws as domestic companies. Therefore, foreign invested companies in China enjoy the same national treatment as do the native companies. All of them, including European businesses in China, are treated as equals without any discrimination.

On one front, the Chinese government continues to draw experiences from abroad to improve the legal regime on foreign investment. The central government has run a check on 2300 pieces of legal documents concerning foreign investment and trade. More than 840 pieces of legal document have been abolished and 336 revised. On the provincial level, government offices have acted to check up or revise over 190,000 pieces of laws and regulations. These efforts have allowed us to meet the WTO standards in terms of the legal regime governing foreign investment. All laws and regulations on foreign investment have been made available to the public through Internet, greatly increasing the transparency of the system and providing foreign investors a predictable and stable legal environment.

On another front, serious efforts have been made to strengthen the protection of the intellectual property rights. The Chinese government has established under the State Council a National Working Group on IPR Protection to facilitate progress in relevant field. Efforts have also been made to tighten law enforcement. It is worth mentioning that China and the EU have always kept practical and efficient exchanges and smooth cooperation on IPR protection. There are many more things that China and Europe could do together on IPR protection if we allow ourselves less finger pointing. In fact, the projects we have done together have already become an example of what developed countries and developing countries could together achieve. It is possible that our cooperation on IPR protection could be upgraded to phase three.

4. The Prospect of China-EU Business Cooperation

I strongly believe that the cooperative spirit remains at the core of our business relations, and I have full confidence in the prospect of economic cooperation and trade. China cannot grow without Europe. Europe also needs China to achieve further development. China is always committed to opening up strategy of mutual benefit and win-win progress. We stand to share development opportunities with our trading partners and do not seek to establish ourselves as the sole winner of globalization. During the 12th Five-Year period, China will implement a more active opening up strategy. We will constantly explore new areas to open up and try to expand and deepen shared interests with our partners.

It is estimated that in the next five years, China will import more than 8 trillion dollars of goods. The energy conservation and emission cut market in Chinese harbors a potential market size of over 471.9 billion dollars. By 2015, the total retail volume of consumer goods is expected to reach 4.9 trillion. All these figures foretell the massive potential of business cooperation between China and Europe. However, potential does not get translated into real results on its own. It requires the joint input from both sides. In my view, there are certain principles that we need to follow.

First, we must build more strategic trust and accommodate each other's concerns. In this globalised world, national interests are tightly bond together. As our shared interest continues to grow, it is all the more important that we should bear in mind the larger picture of our cooperation. We need to work for more mutual trust, and explore ways to tap the potential, deepen cooperation, and grow our trade from strength to strength. When it comes to disputes and problems, we need to take into full account of the interest and perspectives of the other party. We should use dialogue and consultation to find mutually beneficial and win-win solutions. The last thing we should do is to criticize each other or introduce frictions.

Second, we must strengthen policy coordination to create a favorable environment. In the next five to ten years, both China and Europe will experience some major adjustment in macro-policy -from crisis response to growth promotion. To avoid policy crash on business cooperation, we must make good use of existing mechanisms between us to strengthen policy coordination. We should also continue to talk to each other in the G20, WTO and other multilateral settings to uphold a stable and open global business environment.

Third, we must keep open market and oppose protectionism. A couple of years ago, when the world was under the worst hit of the financial crisis, China and Europe have stood firm together to keep an open market. Our cooperation has earned us an upward trade and investment volume, setting for the rest of the world a great example of cooperation in the time of difficulty. Today, we should further intensify exchanges and cooperation, commit ourselves to open markets, and continue to oppose all kinds of protectionism. We need to persuade and encourage our businesses to resolve their disputes through dialogue and exercise caution in introducing safeguarding measures.

Due to the negative influence of the European debt crisis, China-EU trade has shown some worrisome downward developments since the beginning of this year. According to the Chinese statistics, in the first five months of this year, the growth rate of our two-way trade has dropped from 22.9% of the same period of last year to 1.3%. Chinese export to Europe has even experienced a negative 0.8% growth rate. In the face of such a grave challenge, it is high time that China and Europe maintained dialogue and intensified cooperation. Absolutely should we not willfully criticize, still less to retaliate, each other. As wisely put by President Van Rompuy of the European

Council, the key word for China-EU relations is not rivalry but cooperation.

We firmly believe that as our business ties mature over time, and our cooperation will become more resilient and reliable in managing difficult situations and in delivering win-win results.

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