Friday

21st Sep 2018

Analysis

Beyond US dispute, EU still aiming at China

EU trade commissioner Cecilia Malmstroem sprung a surprise last Friday (1 June), when she not only took the US but also China to the World Trade Organisation (WTO) in what stops just short of an all-out global trade war.

In addition to the expected response to US tariffs on EU steel and aluminium imposed from that day, Malmstroem announced that the EU was challenging Chinese legislation which, she said, "undermines intellectual property rights of EU companies."

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  • Trade commissioner Malmstrom: "We cannot let any country force our companies to surrender this hard-earned knowledge at its border" (Photo: European Commission)

"If players in the world do not stick to the rulebook, the system might collapse," she said, linking the two issues.

Challenging both Washington and Beijing "demonstrates we are not choosing any sides," she said, suggesting that the reply to US tariffs should not be considered as the main issue.

"Despite everything that is going on with [US president Donald] Trump, it is in no way the scale of the trade issue the EU has with China," noted Hosuk Lee-Makiyama, from the European Centre for International Political Economy (ECIPE).

According to the European Commission, the EU and China trade "on average over €1 billion a day", amid EU calls for more "reciprocity" on access to markets and stepped-up EU measures against Chinese dumping and strategic investments.

In fact, by opening a procedure on property rights against China, the EU followed the US, which launched its own, slightly different, case in March and presented to the WTO just days before Malmstroem's announcement.

Investment talks

The US argued in Geneva, where the WTO is based, that what it called "forced technology transfer" was a "systematic, state-directed, and non-market pursuit of other [WTO] members' cutting-edge technology in service of China's industrial policy," according to notes published by Reuters.

The issue was also discussed last Thursday (31 June) in Paris between Malmstroem, US trade representative Robert Lighthizer, and Japan's minister of economy and trade Hiroshige Seko, as part of trilateral talks over global trade issues, including steel overcapacity.


In a statement, they said that "no country should require or pressure technology transfer from foreign companies to domestic companies."

Sources said that while opening an EU case against China was not a US demand as part of a larger bargain in their trade dispute, both sides had discussed a common approach and had been exchanging information on Chinese practices.

EU-US talks were also continuing in Brussels this week to coordinate further action.

Ahead of a China-EU summit in Beijing next month, the EU is looking for more cooperation with China on security, especially the survival of the Iran nuclear deal, climate change, and illegal migration, while trying to move forward on a long-term Comprehensive Agreement on Investment.

Member states are expected to soon start talks on an EU screening mechanism for foreign investment that is mainly targeted at China. The WTO case on property rights is another means to force China to rebalance investments relations.

'We have to react'

For years, EU companies that wanted to enter China have been required to grant ownership or usage rights of their technology to domestic Chinese entities, and have had to accept joint-ventures with Chinese companies.

"It's more and more difficult for EU companies to do business in China," MEP Franck Proust told EUobserver, noting that many faced the same pattern.

"You lure them with the size of the market, you attract investors which you oblige to get into joint venture and allow transfer of technology, and four or five years later you become a player yourself," he said.

The French centre-right MEP, who is a member of the European Parliament's international trade committee and the house's point man on the screening of foreign investment, warned that it would be "terrible" for the EU to have only a short-term vision.

"When I see some laboratories, some companies, opening research centres in China … Allow me to have doubts on the long term viability of this kind of strategy," he said.

"We have to react," he said.

"Technological innovation and know-how is the bedrock of our knowledge-based economy," Malmstroem argued last week. "We cannot let any country force our companies to surrender this hard-earned knowledge at its border," she said.

Acting alongside the US and Japan is a means for the EU to have more leverage on Beijing.

Looking at the weakest link

"What we have learned over the years is that China knows how to deal with lawlessness," said Lee-Makiyama.

"It can deal with a G0, a G1 or even a G2," he said, referring to a world order where there would be no dominant power, or just the US, or the US and China. "But it won't deal with a G3 or a G4 [with the EU and Japan]. Once they get cornered that have no choice than to reform," he said.

However, the trade expert warned, "China is looking at the weakest link, and it thinks it's the EU."

He pointed out that China had "better compliance with WTO rules" than many other members of the organisation and that it has always implemented WTO rulings.

"As they have no bilateral trade deals, they are bound to follow rules. It's the minimum standard," he noted.

China has rejected both the US and the EU's accusations on property rights.

It said it has "always attached great importance to the protection of intellectual property rights and adopted strong measures to protect the legitimate rights and interests of domestic and foreign intellectual property rights holders."

According to WTO rules, the EU will have to prove that beyond situations faced by EU companies, there is a deliberate policy by Chinese authorities, which violates the organisation's rules.

"There must be some kind of policies to challenge. It's not easy to do," Lee-Makiyama noted. "China never writes anything down. How can you prove things?", he said.

'Not shooting from the hip'

The EU is arguing that Chinese legislation is discriminatory to foreign holders of intellectual property right and restricts their ability to protect their rights.

The EU and China have 60 days to discuss the dispute. If no "satisfactory solution" is found, the WTO will be asked to set up a panel to rule on the outcome.

While bilateral talks, held at the WTO in Geneva, will be mostly technical, political discussions, especially at the summit in Beijing, are likely to influence the outcome of the consultations phase.

Just before Malmstroem launched the case on Friday, Chinese foreign minister Wang Yi was in the office of her boss Jean-Claude Juncker.

According to a commission source, the two men only "briefly discussed trade issues of common interest."

Asked by EUobserver about the meeting, Juncker's spokesman summarised the EU mood by saying the showdown is about to begin.

"We're not shooting from the hip. We prefer a rule-based international trade system," he said.

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