EU-Chinese trade relations under pressure?

The need for even closer co-operation between Europe and China is paramount.

In the context of a struggling economy, Europe and China are closely tied together. The groundwork for increased European-Chinese exchanges has been set up in areas such as trade and economic co-operation, investment and clean technologies. However, hurdles remain and the need to create even closer co-operation is paramount.

China’s new leaders will face tremendous transformational tasks. While their economic focus will be on maintaining a stable growth, they face other challenges, such as attracting foreign investment, and ensuring technological development alongside promoting local know-how. In this context, practices such as local governments bailing out companies in financial trouble or banks failing to honour the letters of guarantee issued to European companies will need to be further scrutinised. China is the EU’s second largest trading partner, but 2012 particularly was dominated by friction over trade.

Over the past few years, an alarmingly large number of European companies involved in the photovoltaic (PV) industry have been forced to reorient their business, have sold up or simply gone bankrupt. This sector is fighting hard to hang on to its 13% domestic market share, while at the same time China continues to subsidise its export-driven industry, which accounts for 80% of the EU solar energy market.

As recently as July, one of the world’s largest producers of filters that convert sunlight to power saw its debts partially absorbed by its host city: the repayment of the company’s loans to an investment group had been included in the city’s annual fiscal budget. EU companies, meanwhile, must comply with state aid regulations against distortion of competition. Unfair government-orchestrated practices put at risk any technological or intellectual advantages European companies may have.

But while this particular Chinese company enjoyed the backing of a bank, it simultaneously refused to respect the trade agreements – backed up by a letter of guarantee from one of China’s largest commercial banks – it had with a European manufacturer.

Similar cases, involving corporations active in various industries, whereby European companies were forced to file a suit against their Chinese business partners in order to get paid, have occurred over the past few years. This kind of practice, when the contractual payment of a bank guarantee needs to be challenged before a court, seems to have become common practice in China, and could seriously damage EU-China trade relations.

The final judgment on a similar case, currently being heard before the Chinese Supreme Court, will be a good indicator of how European companies can expect future trade relations to evolve; the level of trust in Chinese letters of guarantee will also certainly come into question. The very principle of the bank guarantee – the unconditional payment of financial warranties as part of a legally-binding contract – should not be questioned, as many more businesses in similar situations could face difficult times.

It is thus abundantly clear that urgent action is required to stop these and other practices harming EU-China trade relations.

Already, the European Commission has started an investigation into the matters of dumping and subsidising of the Chinese photovoltaic industry; investigations which have to be concluded by June and August 2013 respectively.

Chinese companies are coming to Europe in ever-increasing numbers, and investments averaged €1 billion yearly between 2003 and 2008. In 2011 alone, the total investment topped €7 billion. Nonetheless, China’s investments account for only 3.5% of the total direct investment made in the EU – but this percentage keeps growing steadily. However, these Chinese imports have helped European companies to reduce production costs and, as a direct consequence, have allowed the EU’s exports to become more competitive. To allow the EU-China trade relations to prosper further, it is of the utmost importance that practices such as those now prevalent in the PV industry are dealt with swiftly and decisively.

Christofer Fjellner MEP is a member of the Group of the European People’s Party (Christian Democrats) and a member of the committee on International Trade.

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