Future Opportunities and Challenges in EU-China Trade and ...

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Philip Bartley
Project Coordinator
Team Leader, EU-China Trade Project

Why is this study important?
Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Increasing Opportunities…
…but also an increased challenge from
emerging Chinese competitors
only one approach acceptable to EU and China
WIN-WIN

I. STUDY OVERVIEW
Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010

Stakeholder Participation
Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
25 Senior Industry, Trade, Legal and other Experts
More than 200 industry-specific questionnaires
received…
…including almost 100 face-face interviews in
Beijing, Shanghai and in Europe
Conference in Brussels (07.07.2006) close to
400 participants

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Sectors Studied
MANUFACTURING
• Machinery
• Chemicals
• Automotive
• Pharmaceuticals
• ICT equipment
• Agriculture
SERVICES
• Financial services
• Distribution/ Retail
• Construction
• Telecommunication Services
An Emerging Sector
• Environmentally Sustainable Technologies and Services
A Horizontal Study
• Exploring China’s IP Environment

II. OPPORTUNITIES
Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Where do Opportunities Exist for EU
Companies?
MANUFACTURING
Commoditised
Higher-End Market
Markets Segments :
• 12% p.a. avg growth
Specialised High
• €1,000 billion by 2010
Value-Added Markets
SERVICES
Open Services Markets (excl. Banking) :
• 14% p.a. avg growth
Closed • €500 billion Markets by 2010
Environmentally Sustainable Technologies and Services:
A new cross-cutting opportunity for EU business
11 th Five Year Programme:
• €98 billion by 2010.

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
European Business on Opportunities…
“Increased synergies between
EU and emerging Chinese firms
can lead to a strong relationship
and increasing European and
Chinese impact on the world
economy.”
-Automotive Sector
“Producers have so far
focused on coastal areas they
are now definitely looking at
more rural areas to expand.”
- Pharmaceutical Sector
“We see tremendous opportunities,
in particular improvements in
healthcare, energy saving and
lifestyle perspectives.”
-Distribution Sector
“Environmental sustainability
and energy efficiency is
something we could become
market leaders in – globally as
well as in China.”
-Construction Sector
“We are going to open a new office in China in order to catch the
opportunity of low cost labour and to increase opportunities of business.”
-Sustainable Tech & Services Sector

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
III. THE CHINA CHALLENGE

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
China’s Ascent Epitomises the Challenge
of Globalisation for EU Business
• Comparative advantage in cheap labour ensures
global dominance in price sensitive commodities
• Export driven strategies, supported by state
also impinging on international markets
•Chinese companies are rapidly moving up the
value chain in sectors such as:
Automotives
Electric &
Industrial Machinery
Some
Chemicals
ICT Equipment

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
In responding, EU Business Can Draw on
Key Competitive Strengths
Design
Innovation
and R&D
However, Market Marketing Access
Obstacles Prevent
and Branding
European
Companies from Competing on a
Level Playing Field and Taking
Advantage of their Competitive
Strengths
Servicing (after-sales,
customised solutions)
Management
Operating
Systems
Superior Quality of
Goods and Services
Financial strength
(mainly multinationals)

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
European Business on Market Access Obstacles…
“It appears that the trade
barriers are getting more
subtle/refined.”
- Chemicals Sector
“The continued policy of
building national
champions worries us.”
- Machinery Sector
“We can only do what the
government allows us to do, and
given the current restrictive policy
environment our margin of
freedom is virtually nil.”
- Telecom Sector
“Our Chinese competitors
dont stick to the rules [in
labour & environmental
regulations]. This means we
can never offer the same low
costs as our competitors.”
“The biggest obstacle to our
further expansion is the
foreign ownership ceiling of
Chinese banks. If this ceiling
was lifted we would like to
own a controlling stake.”
- Financial Sector
“More non-tariff barriers and policies to
favour local manufacturers will emerge.
The EU-China trade dialogue has to
deepen and the EU must become tougher”

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
European Companies Face Substantial
Market Access Barriers Including:
• Lax enforcement of Intellectual Property Rights
• Subsidies
• Lack of transparency and unfair treatment
• Lack of uniformity of regulations
• Government procurement practices
• Equity restrictions on foreign investment
• Standards and compliance regime (TBTs)
• Environmental and labour standards not applied
Costs of Non–Tariff Barriers to European Operators:
Over € 21.4 billion.

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Quantification of Market Access Obstacles
Statistical Data, Sector Findings, Survey
Partial Equilibrium Model
Outputs
Figure 1: Simplified Overview of Partial Equilibrium Model
Step 1: Model Inputs
1. Qualitative Information
Sector Studies
2. Trade Data
3. Tariff & NTB Data
4. China Production
Output Data
Step 2: PE Model
Step 3: Scenario Outputs
Composition of the Model
Costs of Non-Tariff Barriers 1. Changes in Market Access
(Tariffs, ntbs, investment)
Model Calibration
2. Impact on Consumption,
Domestic, Output and Imports
3. Impact on Trade Creation and
€8.9 Billion Model Testingin services and Diversion is Established
€12.4 Billion in traded goods
Total: € 21.4 billion
Assembly
Model

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Quantification of Market Access Obstacles
Statistical Data, Sector Findings, Survey
Partial Equilibrium Model
Outputs
Figure 1: Simplified Overview of Partial Equilibrium Model
Step 1: Model Inputs
Step 2: PE Model
Step 3: Scenario Outputs
1. Qualitative Information
Composition of the Model
1. Changes in Market Access
Sector Studies KEY FINDING: MARKET (Tariffs, ntbs, investment)
2. Trade Data
Model Calibration
2. Impact on Consumption,
3. Tariff & NTB Data ACCESS OBSTACLES ALSO
Domestic, Output and Imports
4. China Production
3. Impact on Trade Creation and
Output Data HURT Model Testing CHINA and Diversion is Established
Assembly
Model

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Market Access Obstacles Hurt China by:
This will reduce China’s chances of fostering
globally competitive companies in higher value
added industries
• Causing Imbalances in the Economy (e.g.
distortion of pricing; irrational competition;
overproduction; etc.)
•Domestic consumption depressed by lack of
availability reasonably priced high quality
foreign goods and services
• Lax IPR regime reduces incentives for local as
well as foreign companies to conduct R&D in
China

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Moving Towards a WIN-WIN Approach
• Chinese economy needs sustainable growth
-Value added manufacturing
-Services
-SMEs/ Private sector
-Stronger regional growth
-Restructuring Financial sector
-Higher consumer spending
• Europe can be a strong facilitator
-Currently EU Exports more to Switzerland
than to China (86bn v 63bn in 2005)
• The opportunities for long-term, reciprocal
and mutually beneficial trade benefits are
massive

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Positive scenarios: Fair trade conditions
ICT: Focus on innovation and design. Applications
across other sectors e.g.. Chemicals, auto, agric.
Market of US$130 billion by 2010
Machinery: high value, precision, sustainable.
10% Sales growth till 2010
Chemicals: Financial strength, Specialty chemicals,
R&D, customer relationships.10.2% Sales growth
till 2010
Automotive: Production will be double domestic
demand 16 million vehicles by 2011.New designs
and auto parts. Emission reductions.
Pharmaceuticals: Preventative medicines. Deeper
penetration in regional markets. Reduction in
generics …..TCMs in home markets

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Positive scenarios: Fair trade conditions
Agriculture: Requires continued market opening.
Move towards high quality/ value-added. Services
investments; irrigation, supply chains, rural economy
Financial Services:
2010 Non life/ Life (0.4% to 5% and 0.8% to 8%)
20% annual growth in consumer loans
50% annual growth in credit card business
15% annual growth in business transactions Banks
0.5% to 3.5% by 2010
Construction: Worlds largest construction market
2010; Quality and Sustainability within considerations.
Telecoms: Market all but closed

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
IV. RECOMMENDATIONS

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Policy Recommendations
Press China to fully implement the spirit
of its WTO commitments and support
further liberalisation of its economy
• Establishing a comprehensive EU-China
dialogue on strategic economic issues at
senior government level:
• Expanding the Commission’s local
presence across China:
• Enhancing awareness of risks associated
with investing in China:
• Stepping up efforts to meet the goals of the
Lisbon agenda

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Sector Recommendations: Highlights
• Machinery: Public procurement and elimination of
subsidies
• Chemicals: Adoption of intermediate notification
requirements
• Automotive: Compulsory Certification System duplicates
international certification practices. Reduce capital
finance requirements
• Pharmaceuticals: Pricing policies requires clarification.
Also improved IP Protection.
• ICT: Indigenous standards v international standards
• Agriculture: Significant improvement of SPS controls
and transparency

Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010
Sector Recommendations: Highlights
• Financial Services:
Banking: restructure capital requirements
Insurance: Provincial barriers reduced. Licences given.
• Distribution and retail: Non-discriminatory agreement
on the establishment of new outlets.
• Construction: Negotiate permission for ‘registered
foreign contractors’ (Decree 32 prior to WTO)
• Telecommunications and Value-added services:
Clarification of the upcoming Telecommunications Law
and reduction of regulatory risk

THANK YOU
Future Opportunities and Challenges in
EU-China Trade and Investment Relations
2006-2010