“This Agreement Was Born Out of a Common Interest”

Public Events

China’s importance for the global economy has been growing for years. And it will continue to grow. Since 2020, the country has been a member of the Comprehensive Economic Partnership (RCEP) in the Asia-Pacific region, the largest free trade zone in the world. Due to its great economic weight, the Chinese economy is now not only an important partner for the European Union, but also a competitor. After several years of negotiations, the EU and China have just reached an agreement on investment. ZEW President Professor Achim Wambach and Dr. Philipp Steinberg, head of economic policy at the German Federal Ministry for Economic Affairs and Energy (BMWi), discussed the agreement and fair competitive conditions for European companies at a #ZEWlive event on Wednesday, 13 January 2021. The event was moderated by Jessica Sturmberg.

“For years, imports and exports between the EU and China have been growing steadily. China has become an important trading partner for Europe. The German economy has benefited greatly from Chinese growth,” ZEW President Achim Wambach opened his keynote speech at the beginning of the event. Through its industrial strategies, the People’s Republic has also become a competitor. With the ‘Made in China 2025’ strategy, for example, China is pursuing the goal of increasing domestic value creation in ten key industries and making the country fit to compete for global technology leadership through targeted investments abroad.

Adjusting EU instruments to China’s economic system

The Chinese economic model differs from the European Single Market. “China has a hybrid economic model: it has both state and market economy elements, but primarily relies on central economic planning, which also includes industrial policy,” said Achim Wambach. In pursuing its goals, the Chinese state also intervenes in the economy, for example through subsidies and state-owned enterprises. “These companies do not operate purely according to business rules, but base their entrepreneurial actions on the state’s industrial policy goals. If one looks at the misallocations resulting from this, it is questionable whether this system is superior to our social market economy,” the ZEW president explained. According to Achim Wambach, China’s preferential treatment of Chinese companies that are active on the European market can lead to distortions of competition. In order to prevent disadvantages for European companies resulting from the investment agreement, the EU Commission is putting anti-subsidy and anti-dumping instruments in place. “The European Single Market is based on the premise that companies compete fairly with each other, and that no state should interfere in this competition. In order to guarantee this, the EU Member States have strictly defined the conditions under which state aid to companies is permissible and when it is not,” the economist emphasised. The EU must ensure that these rules are also observed by Chinese companies that are active in Europe.

Philipp Steinberg agreed on that. The head of the economic policy department at the BMWi pointed out that a change in awareness has taken place in the relationship with China. While in the past changes were expected to result from trade, it has become clear that, if necessary, China has to be dealt with more harshly. The changed view is reflected, for example, in the EU Commission’s White Paper, which includes the goal of protecting European companies from being taken over by state-subsidised corporations from abroad. “The agreement aims to create a level playing field for EU investors by setting clear rules regarding state-owned Chinese companies, transparency of subsidies and other competition-distorting practices,” Philipp Steinberg told the audience of around 270 people who followed the event via a live stream.

Drafting of the agreement is still in progress

According to the EU, the wording of the investment agreement will be worked out in greater detail in the coming months. The text will then have to undergo legal review before being submitted to the Council of the EU and the European Parliament for adoption. “How will Europe benefit from this agreement?,” moderator Jessica Sturmberg asked the discussants. “With the agreement, both parties are entering into an investment relationship based on sustainable development principles. For example, in the areas of labour rights and the environment, China commits not to lower protection standards in order to attract investment, to comply with its international obligations and to promote responsible corporate behaviour by its companies. These are good foundations,” said Philipp Steinberg.

For Achim Wambach, this agreement came at the right time. “At the end of the German EU Council Presidency, the change in the US Presidency provided a window of opportunity. The EU has used this to bring a seven-year marathon of negotiations to a successful conclusion. This agreement was born out of a common interest and we must now move forward on that basis, piece by piece,” said Achim Wambach. This agreement is very important for further cooperation with China, because concerns such as a global climate policy can only be successfully tackled together with China. As a next step, the EU should develop a common position with the US, said the ZEW president, looking ahead. Steinberg was also in favour of multilateral agreements. Especially in view of the current challenges facing the EU, such as the coronavirus pandemic, joint cooperation is important.