EU-China economic relations: interactions and barriers

This article will look first into the economic figures of trade and investment between the EU and China, before analysing the state of play of the on-going negotiations of a bilateral investment agreement between the two parties.


This article will look first into the economic figures of trade and investment between the EU and China, before analysing the state of play of the on-going negotiations of a bilateral investment agreement between the two parties.

Trade and investment between the EU and China has increased dramatically in recent years. China has become the EU’s biggest source of imports and has become the EU’s fastest growing export market.

Trade in goods largely dominate the trade relationship between the EU and China. Only 18% of all EU exports to China in 2015 were from trade in services, which is significantly lower that the EU average with the world, where 26.9% of EU trade comes from services. China’s exports in services to the EU were only 7%, which is very low, and shows that the bulk of the exports to the EU are goods. Indeed, it exported 350.4 billion euros to the EU in 2015, with a huge net surplus of

  • billion euros. Trade in services is therefore an area that China should seriously improve on. 50.2% of China’s GDP is made up of services. The country is steadily moving from manufacturing to a more service-orientated economy, but this is not yet transcribed into its exports to the EU. Services make up 74% of EU GDP and provides 60% of employment in the EU. EU trade in services balance with China in 2015 produced a surplus of 10.3 billion euro. This was due to a surge in exports. Indeed, exports reached 36 billion euro while imports were 25.7 billion euro. 1

The EU is by far the world’s biggest exporter of trade in services. According to the WTO Trade Statistical Review 2016, if intra and extra EU trade are combined, the EU is responsible for 42% of global export in services, thus making it by far the biggest exporter of services. If we take only Extra EU exports, the EU is still by far the biggest global exporter of services, with 915 billion euros in 2015, representing 24.9% of world export. China is however a very important player also  in trade in services, with total exports of 285 billion euros in 2015, ranking third after the US (690 billion euros).

It is important to understand the role of trade in services in the world trade and in the EU- China relationship. The figures provided by the traditional method of the balance of payment  inform us of the very large predominance of trade in goods. This is in total disconnect with the fact that the majority of the production (GDP) in the two economies are dominated by services. It is interesting to ask ourselves why is that. A possible answer to that question has been found by looking for another way to calculate international trade. There is indeed a completely different perspective if we use the traditional way of counting the volume of transactions at the border or if we use the new way, the Trade in Value-Added indicators (TIVA) which is a database compiled by the OECD and the WTO. It is primarily viewed to outline trade flows taking place within Global Value Chains (GVC’s). The TIVA database provides statistics on the value of trade by source of destination, analysing the supply of goods and services in the Global Value Chains, rather than counting trade in terms of volumes at the borders (Balance of Payments). It should be noted that the TIVA database only shows stats up to 2011 (the latest figures available so far with this new method).2

When we compare the Balance of Payments indicator and TIVA we see a stark difference in the data. EU exports in BOP in 2014 shows that 73.1% in goods and 26.9% in services. The TIVA indicator shows a different story. The 2011 statistics show that 58.4% of the value of total exports are coming from services (including services around the exports of goods), and 39.9% from goods. Although, the TIVA statistics only go up to 2011, it is still a more accurate portrayal of the results, and it provides a better understanding of the value of services in international trade. It is now providing a picture that is more conform to the fact that services contribute to 70% of the national GDPs, but also to 60% of external trade.

When it comes to China, the BOP statistics show that China’s trade is heavily influenced by goods (91.2%). This is true, but if you look at the TIVA database for China in 2011 it shows that 41.9% of the value of all exports of China is coming from services. This again is a stark difference form the BOP stats which only shows 8.8% in services. There is a difference of 33.1% which is very significant.

The TIVA database is crucial for the service sector and gives a more accurate portrayal of the statistics. For China, it shows that a large part of their economy is already orientated in services.

To properly grasp the importance of services in international trade relationship, one must also apprehend the importance of foreign direct investment for services providers who want to reach consumers in other than their home market. An international trade and/or investment agreement are a tool to open and secure the market to services suppliers in foreign markets. Services commitments in Trade agreements are directly linked to investment and must be seen as FDI commitments. Indeed, a large part of Market Access commitments for the services providers in trade agreements are about mode 3 (commercial presence abroad) commitments.

Hence, this explain why a large part of the FDI figures are from services sectors. In 2014, 58.6% of total EU Outward Foreign Direct Investment (FDI) stocks are invested in Services. And, 87.3% of EU Inward FDI stocks are invested into services. Which means that the vast majority of FDI coming to the EU are invested in services sectors. But China still invests heavily in manufacturing. An agreement on Trade and Investment with the European Union should create the conditions for China to increase investment in services. And pushing this logic, one can estimate that the EU companies would invest much more into services activities abroad, should the markets be open. But that is often not the case, and this is particularly true in China as we will see it later in this article.

The EU is by very far the biggest investor and recipient of FDI in the world: in 2015, the EU FDI inward stock was 7.72 trillion $US, while the EU FDI outward stock was 9.34 trillion $US 3. China is also a major investor (1.22 $US trillion inward stock) and recipient of FDI (1.01 $US trillion outward stock in 2015). But unfortunately, it doesn’t seem that much of these FDI are between EU and China. As of 2015, China only received 2.4% of EU FDI. ( 2. Source WTO Trade Statistics review 2016 – figures from 2015; 3 UNCTAD, World Investment Report 2016 – Annex Table 2, p 200)

And more importantly,only 0.6% of Inward FDI in the EU was coming from China4. This is another clear indication that a trade and investment agreement between the EU and China could greatly benefit the two parties.

It is worthwhile analysing the mood in the bilateral investment relationship between EU and China and try to identify what are the recent trend, although it is always difficult and risky to take any conclusion from the short-term trend to the long term.

It is true that in the recent years, China investment to the EU has increased, growing from 18.5 billion euros in 2011 to 34.9 billion euros in 2015 (+88%), but itis true also that the EU investment to China has significantly increased in the same period, growing from 103 billion euros to 168.4 billion euros (+64%).

So why do we seem to have much information about a decrease of EU investment in China? There are a lot of experts talking about the decrease of the Chinese economy. It is said that this decrease is becoming the “new normal”. It is true that the Chinese economy showed a growth in 2014 of 7.5% and in 2016 it dropped to 6.7%. Whilst this reduction of 0.8%. is a significant reduction, the growth rate of 6.7% is still very impressive. It is only second to India which had a growth of 7.5% in 2016. It would be misleading to say that the Chinese economy’ attractiveness is decreasing. It is merely slightly slowing down and concentrating on more domestic policies like environmental issues, housing, and its ageing population. 5

It is true however that China has made unconvincing new government measures with regard to eliminating some of its trade and investment restrictions, and investors are looking carefully at the forthcoming reforms. The announcement of the setting up of Free Trade Zones, with the first pilot project in Shanghai, let foreign direct investors believe that China would finally although only gradually open up its market to investors. But, unfortunately, there were no real new openings and a lack of persuasion of efficiency of new Free Trade Zone (FTZ). Despite the positive statements about china opening up its markets, little actual progress has been made. China has effectively introduced a negative list approach, and re-grouped existing restrictions, but the restrictions list is still very broad. There is a clear lack of coordination between the various levels of central, regional and local authorities, which is creating confusion and hence lack of clarity and certainty, which are the two main elements that investors are looking for.

Furthermore, China is introducing worrying new localisation requirements under the umbrella of “cyber security”. This includes insurance, banking and IT sectors. The internet censorship measures are directly hurting the daily activities of foreign companies trying to do and expand business in China, in particular for the Research and Development centres, that paradoxically China is calling for more investment. These measures are becoming more and more incompatible with the modern digital economy. Depriving investors of the control of their digital strategy and of their data is perceived as a major impediment to foreign companies. Localisation restrictions can play a negative role in growth, preventing investors to take maximum optimisation of the digital strategy. E-commerce is a major contributor to job growth and these restrictions can inhibit that.

If we look at the other way around, i.e. the trend of FDI coming from China to the EU, it seems that many report that Chinese Foreign Direct Investment (FDI) into the EU in increasing significantly in the recent years. It is true that China has invested in some flag ship manufacturing operations which attracted much media attention. It has notably invested in German robotics, in semi-conductors in Sweden, in Greek harbours and in various other projects. However, despite these high-profile projects, investment by China in the EU remains overall very low as we show the figure here above. Many questioned whether these projects and others from Chinese investors were led by politics and not really by business wisdom or profit driven, but there is no clear evidence of that. (4, See Eurostat Foreign direct investment statistics 2017 – Top 10 countries as extra EU-28 partners for FDI stocks, EU- 28, end 2012–2015 (billion EUR)  5 see <>, national bureau of statistics of China)


Let’s now look at whether an agreement between the authorities between these two economic giants could improve the investment environment.

Let’s first have a brief overview of the timeline of the negations: The Council of the EU trade ministers authorised the European Commission to initiate negotiations for a comprehensive EU- China investment agreement on 18 October 2013. Negotiations of a comprehensive EU-China investment agreement were formally launched at the EU-China Summit of 21 November 2013 in Beijing. The aim of this agreement is to remove market access barriers to investment and provide a high level of protection to investors and investments in EU and China markets. There have now been 13 rounds of negotiations between the EU and China, with the last round having taken place on the week of 15th of May 2017.The 14th round of negotiations took place in Brussels the week of 11 July 2017, but it is not clear whether progress were achieved and so far no date is set for the next round.

It is worth to underline that, should the negotiations succeed, the new agreement would replace the 26 existing Bilateral Investment Treaties (BITs) between 27 individual EU Member States and China with one single comprehensive investment Agreement. So far, only Ireland does not have a BIT with China (and with any other countries in the world).

In early 2016, the EU and China negotiators reached clear conclusions on an ambitious and comprehensive scope for the EU-China investment agreement and established a joint negotiating text.

So, what could be the content of the EU – China Bilateral Investment Agreement? Ideally, the business community would welcome that the negotiators would aim at a “deep and comprehensive Investment Agreement”, which would encompass everything but trade in goods related issues. Before going any further it should be explained here that China has in many occasions asked the European Union to open full-fledged trade and investment negotiations covering all issues in trade agreements, but the EU has repeatedly replied that, in the current sensitive trade environment in Europe vis-à-vis China (anti-dumping measures, steel overcapacity, market economic status and the on-going discussion in WTO, etc.), it was not politically possible to enter in tariffs reduction discussion with China.

The negotiations will therefore cover all issues that are linked to investment activities. In regards to services, this would cover market access issues which are linked to investment, i.e. not only the commercial presence abroad (mode 3 of the GATS), but also the movement of people linked to the investments, i.e. intra-corporate transferees (ICT) who will come and work in the subsidiaries and joint-ventures. There are still questions whether copyrights, patents, and data flows, etc. which are linked to the investment will be covered by the agreement. It would seem logical to cover the intellectual property that is linked to the FDI. Similarly, the flows of data from headquarters and other subsidiaries to the Chinese subsidiaries are in today’s digital economy an integral part of an activity of that entity, and without that access, the investors might decide not to invest, or not in the same way. Although the business community would argue in favour of it, Government procurement is not part of the EU-China negotiations on a future comprehensive investment agreement. The parties also excluded from the scope of the talks regulatory disciplines and cooperation.

On the other hand, the negotiators agreed that the agreement will include a “Sustainable Development Chapter”, which is an EU jargon to indicate that it will includes rules on labour and rules on environment. It is not clear however at this stage whether it will include any sanctions, and whether these rules will apply also to the numerous “state-owned companies”.

In addition of the negotiations of pre-establishment market access, the agreement will then of course adopt rules and disciplines on post establishment protection. This section will include the traditional rules on fair and equitable treatment, etc. As for the investor to state dispute settlement (ISDS), it is not clear at this stage what it will be. Due to major public attention driven by strong opposition of civil society organisations against “private” arbitration system, the European Union developed a new Investment Court System (ICS) which significantly differ from the traditional arbitration system invented by the European countries themselves in the end of the fifties and put into place through the ICSID (International Centre for Settlement of Investment Disputes). The ICSID is an international arbitration institution established in 1965 for legal dispute resolution and conciliation between international investors. The ICSID is part of and funded by the World Bank Group, headquartered in Washington, D.C., in the United States. This article will however not expand in the content of this chapter.

We will then focus on the Market Access part of the investment agreement, which is a key pillar in the ongoing negotiations. The current legally bidding level for China is its Schedule of Commitments that it undertook upon its WTO accession in 2001 under the GATS framework. So far, it therefore covers only the services sectors. It does not cover the primary sectors (agriculture, aquaculture and fisheries, mining & quarrying, other raw material and commodities) and the secondary sectors (all the manufacturing sectors). Opening investment opportunities in these two areas will then be discussed for the first time between the two parties.

The parties have decided that for the scheduling of market access and national treatment commitments, they will be using a negative list approach. This means that instead of listing positively the sectors and subsectors which will be open for investment – and consequently all sectors which will not be listed remain closed, or at least uncommitted in the agreement -, the two parties will use a system where by default all sectors are open, except those which are listed as restricted, and then the restrictions are precisely described. This is the EU’s industry preferred choice. The negative list approach is preferred so as to ensure a good readability and comparability of the various parties’ commitments. Such a method obliges the negotiators to review together all service sectors and produce greater liberalisation results and greater clarity, since it is much easier for businesses to assess whether their sector is covered or not and what the limitations are. But of course, everything will depend on the content of the list.

China has started to use this system of negative list some years ago, in the 12th Five Years Plan for “Utilization of Overseas Capital and Investment Abroad” initiated by the China National Development and Reform Commission (NDRC) in 2012. It was also mentioned in the  Third Plenum of the 18th Party Congress in November 2013. These crucial Policy documents have mentioned very promising steps for reforms and opening up markets, and expectations by potential foreign investors in China were high. But long-awaited promises have not been fulfilled thus far.

In 2015, a revised Catalogue has lifted restrictions on FDI in several areas, including in the manufacturing sector, but has made limited progress in services, agriculture and infrastructure, which are sectors where European investors are eager to get access. According to the NDRC, the catalogue reduces the number of restricted industries from 79 to 38, with direct sales and insurance brokerage companies among the beneficiaries. It limits the number of sectors for which Chinese- controlled joint ventures were required from 44 to 35. It also reduces the number of industries requiring joint ventures with Chinese partners, but allowing foreign control, from 43 to 15, including in real-estate developments. All of these announcements are more than welcomed, and it is hoped that these promises will effectively implemented on the ground and that they will be transcribed into the bilateral investment agreement.

If we focus on the services sectors in particular, one can see that the 12th FYP for “Utilization of Overseas Capital and Investment Abroad”, issued by NDRC in 2012 encourages foreign investment in production services such as modern logistics, software development, engineering design, vocational skill training, information consulting, technology, and intellectual property services.  It is also argued that it “steadily open up” banking, securities, insurance, telecom, fuel  and logistics industries, guides foreign capital to enter healthcare, culture, tourism, home services and it also encourages foreign capital to enter creative design. In practice however, the Chinese government largely failed to fully deliver this programme. The 13th FYP is expected in the fall of 2017, and foreign investors will carefully monitor the intentions of the government in the sectors listed above.

Indeed, market access barriers remain important in China in most of these listed sectors. And  it has not been really possible to test the real political willingness of China to open further through bilateral or plurilateral trade and investment negotiations: China had expressed an interest in entering into negotiations in the Trade in Services Agreement (TISA). The TISA negotiations started in 2013, but are currently stalled due to the uncertainty created by the election of Donald Trump as President of the United States. China was also entering into the final phase of the negotiations of a bilateral investment agreement with the US, but they also have been stalled and it is not clear whether the new US administration will be willing to resume them both.

So the negotiations of the EU-China Comprehensive Investment Agreement are the real test  for the Chinese authorities. The business community would aim at the removal of all equity caps, with negotiated exceptions. Business will also look at getting more commitments in professional services, which include lawyers, auditors and accountant, architects and engineers, etc., in telecommunication services, in postal & express services, and in the various financial services sectors (banking, asset managements, insurance). For instance, it is expected that the negotiators will try to remove or reduce these following existing equity caps and joint venture requirements: So far, foreign stakes are limited to 50% in value-added telecom services (excepting e-commerce); 49% in basic telecom enterprises; 50% in life insurance firms and 49% in security investment fund management companies.

Another example of obstacle to do business for foreign investors are the existing Citizenship Requirements, where for instance in the accounting and auditing sectors, the Chief Partner of a firm must be a Chinese national. There are many other examples of this nature.

The bilateral investment agreement will be an opportunity to negotiate the removal of concrete market access barriers. Furthermore, these negotiations are also seen by foreign investors as a unique occasion to improve the business environment in China. Companies often cite a long list of significant challenges to establishing and operating businesses in China. These challenges include:

  • Rising costs, difficulty in finding qualified human resources
  • Unclear and inconsistent enforcement of laws and regulations,
  • Corruption at various level of the authorisation and licensing procedures,
  • Opaque and selectively enforced investment approval procedures,
  • Licensing barriers that favour domestic
  • Unreliable legal system, lacking of effective administrative and legal resources. Forced transfer of technology and new barriers on cross border data flows. There is a draft counter terrorism law, which imposes onerous requirements on foreign technology firms. There is an intrusive national security mechanism and this could be used to hinder or block

More than half of the U.S and EU companies – surveyed by the American Chamber of Commerce known as AmCham and by the EU China Chamber of Commerce (EUCCC), expressed the view that foreign businesses are less welcome in China than before. This survey was conducted in 2014.

It is hoped that the negotiations of the EU-China Comprehensive Investment Agreement will reached an ambitious and balanced conclusion that will contribute to restore a positive business environment and trust in both parties, to allow trade and investment to strive.

Kerneis Pascal (2018), Part I-4 “EU-China economic relations: interactions and barriers”, Book “China- European Union Investment Relationships – Towards a new leadership in Global Investment Governance?”, Edited by Julien Chaisse – Edward Elgar Publishing, 287 pages – ISBN 978-1-78897-189-8