Blog: Increased trade EU and China comes at a price

Tuesday, China agreed on Google's 12.5 billion dollar acquisition of the US company Motorola. This permission was needed because both companies are doing business in China. From now on, Google will be capable of producing mobile phones and tablets by themselves. But there's a catch: Android, Google's mobile operating system, should be available in China at no cost for the next five years. This conditionality is a typical example of Chinese government's tactics to control access to its market and foreign investment. Additionally European companies are only allowed to settle in China via joint ventures, they are not allowed to become majority shareholders. Strategic technology transfer, such as the Android case, has become a standard demand to foreign business. It is one of the main issues in a report on the trade relations between the EU and China that was adopted by the European Parliament yesterday. Besides having the benefit of substantial government aid, Chinese companies can also increase their competitive advantage vis-à-vis their European counterparts using the technologies strategically acquired through deals that grant them market access in the first place. No licensing fees are paid, nor are profits shared. A lack of intellectual property rights protection is increasingly discouraging the EU from tapping into the full potential of this export huge market. While we have the iPhone 4s, the Chinese consumer can already buy a copied and improved version. After becoming a member of the World Trade Organization (WTO) in 2001, China has grown to be the world's biggest exporter of goods (10.36% in 2010). The lion's share goes to the EU (39.5%), while China is currently the EU's second biggest trade partner. The EU accounts for 20% of foreign investment in China, while the other way around China accounts for just 1.7%. The European trade deficit with China has increased from €49 billion to €168.8 billion between 2000 and 2010, indicating that trade relations between China and the EU are increasingly out of balance. At the very least, this should tell us something about the access of European companies to the Chinese market. However, as a WTO member, China is required to liberalize its trade and to open its market. Recently, the US, Japan and the EU filed a complaint with the WTO for the first time, in response to export restrictions on rare earths, of which China controls 97% of global production. These rare earths are essential for advanced technologies and products: sectors in which the US, Japan and the EU still have the advantage and invest heavily in R&D. It is a prime example of Chinese trade politics. It also shows how a multi-polar world is manifesting itself in international trade: The number of (trade) dispute settlements in multilateral (trade) organization is bound to grow. That is why the European Parliament wants the European Commission - which conducts the common commercial trade policy on behalf of the Member States - to fully commit to WTO dispute settlement mechanisms and comprehensive use of trade defense instruments. The EU cannot lose the competitive advantage of its knowledge-based economy. That is why, together with the US, we should put pressure on China to come to reasonable agreements at forums like the WTO or the World Intellectual Property Organization (WIPO). The potential of European export to China is simply too big to ignore, we should get as much out of it as we can. In the coming years, China will also continue to focus on increasing domestic consumption and growth by development of its services sector, car industry and its construction and energy sectors. These are the same goals as those put forward in the 2020 strategy of the European Commission, which is aimed at making Europe's economy stronger and more competitive. This is where the opportunities and challenges lie for European business. However, it remains to be seen whether the EU will be able to fix the balance of trade between China and the EU in this time of need. Enormous Chinese state investments in the Euro zone have weakened the EU's bargaining position. Still, the EU has some opportunities left. In 2016, it will have to join in deciding on whether China will get the coveted 'market economy status' in the WTO. With this status, the EU and the US will no longer be allowed to use trade defense against China, like anti-dumping measures against goods that are offered below market price using Chinese governmental support. But before that day comes, China will have to further liberalize its market, reduce state influence and aim for sustainable economic growth while respecting the environment and human rights. This also shows the importance of dialogue in international trade, as it can address a broader range of concerns and have benefits for multiple stakeholders. Moreover, currently our combined economic strength is the only convincing fist the EU can make internationally. The report can be found here.