Communication from the Commission - Building a comprehensive partnership with China
Date: 1998-03-25
Institutions: European Commission
Subjects: China, EU policy, EU relations, cooperation policy, international trade

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 25.03.1998 
COM(1998) 181 final 

COMMUNICATION FROM THE COMMISSION 

Building a Comprehensive Partnership with  China 

Table of contents 

Summary 

A. Engaging China  further  in the international  community 

A.l  Upgrading the EU-China political dialogue 
A.2  Building  upon the ASEMprocess 
A.3  Addressing global issues 
A,4  Fostering dialogue on Asian  regional issues 
A. 5  Underpinning  autonomy  in Hong Kong and Macau 

B. Supporting  China's transition  to an open society 
based  on the rule of law and the respect for  human  rights 

B.1  Promoting human  rights through  open debate... 
8.2  ... and through  cooperation 

C. Integrating China  further  in the world  economy 

C. 1  Bringing  China into the world trading system 
1.  Supporting China's accession to the WTO 
2.  Strengthening the bilateral trade agenda 
3.  Promoting investment 
4.  Developing bilateral agreements 
5.  Making financial  liberalisation  and regulation go hand in hand 
6.  Promoting the euro 

C.2  Supporting  economic and social reform 
1.  Side-effects  of company restructuring 
2.  Financial reform 
3.  Industrial cooperation 
4.  Business dialogue 
5.  Legal and administrative  reform 
6.  Training 
7.  Science and technology 
8.  Environment 
9.  Energy 
10.  Regional disparities, poverty alleviation and social cohesion 

D. Making Europe's funding  go further 

E. Raising the profile  of the EU in China 

Conclusion 

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Summary 

China's development  since embracing economic reform  under Deng Xiaoping  twenty 
years  ago  has  been  remarkable.  The  country  is  undergoing  a  dramatic  internal 
transformation  from  a  centrally-planned  economy,  largely  closed  off  to  the  world, 
towards  an  increasingly  market-driven  one  engaged  in  global  commerce.  This  has 
been  accompanied by a significant  evolution  in China's civil  society,  even if the  full 
respect for universal standards in the field of human rights remains incomplete. 

In  1995,  the  European  Union  responded  to  the  economic  and  political  challenges 
posed  by the changes  in China by drawing  up a comprehensive  policy  for  the  future 
development  of  the  EU's  relations  with  China.  It  adopted,  in  the  spirit  of  the  "new 
Asia strategy" endorsed  by the Essen European Council, a Communication on a long-
term policy for  China-Europe  relations1  that  has  served  the  EU  well,  providing  a 
useful  roadmap for the future. 

Most  of  the  initiatives  within  the  1995  strategic  document  are  already  underway, 
the  1995 
while  others  have  yet  to  mature.  The  analytical  foundations  of 
Communication  still  hold  true,  and  it  therefore  remains  the  platform  on  which  the 
EU's  policy  towards  China  is  built.  However,  several  developments  of  such 
significance  have occurred  since  1995 that  the EU should  respond  by upgrading  and 
intensifying  that policy  further. 

Firstly,  the  Chinese  Government  recently  gave  its  strongest  endorsement  of  market 
reform  and global  integration  since reform  was launched  in  1978. The XVth  Chinese 
Communist  Party  Congress  in  1997  ushered  in  the  post-Deng  era  by  endorsing  an 
ambitious economic and social reform  agenda for the next five years. This can be seen 
as  a  clear  signal  of  China's  intention  to  consolidate,  accelerate  and  complete  the 
transition already underway. 

Secondly,  China  has  become  at  once  more  assertive  and  more  responsible  in  its 
foreign  policy, both regionally and globally. China's role in promoting peace in Korea 
and  Cambodia  reflects  its  renewed  commitment  to  the  development  of  Asia  as  a 
whole. An unprecedented series of summits between China and some of its key world 
partners  over  the  last  year  have  demonstrated  China's  wish  to  be  recognised  as  a 
world  power  while  reflecting  a  common  perception  among  these  partners  that 
constructive engagement with China should become a key policy priority. The smooth 
and  successful  handover  of  Hong  Kong  to  Chinese  sovereignty  in  July  1997  was  a 
particularly clear expression of China's increasingly mature and responsible  approach 
to its changing role in the region and on the world stage. 

Thirdly,  the  financial  crisis  that  began  to  spread  across  Asia  in  1997  has  exposed 
serious  structural  weaknesses  in  the  economies  of  some  of  China's  neighbours  and 
will inevitably have some impact on China itself. It could be seen as an early warning 
for  China  since  it  highlighted  the  risks  associated  with  certain  aspects  of  the 

COM (95) 279 du 5.07.95. 

dcvdoment  paths  followed  by  other  Asian  countries.  The  crisis  underlines  the  need 
for  further  reform  and  liberalisation  within  China  to  guard  against  similar  problems 
arising in its own economy. 

Finally,  the  EU  itself  is  changing  in  ways  that  will  lead  China  to  adjust  its  own 
strategic vision of the European continent. The EU stands on the threshold  of a single 
currency and enlargement eastwards, and with the Treaty of Amsterdam has equipped 
itself with new means to assert itself on the world stage. 

Such  developments  call  both  for  long-term  vision  and  for  active  engagement. 
Engaging  China's  emerging  economic  and  political  power,  as  well  as  integrating 
China into the international  community, may prove one of the most important external 
policy challenges  facing  Europe and other partners in the 21st century. 

This  Communication  seeks  to  meet  that  challenge  by  building  upon  the  analysis  of 
China's political  and economic development  set out  in the  1995 document  in order to 
set the priorities  for a new, comprehensive  EU-China partnership. 

The new EU-China partnership will aim at: 

•  engaging  China  further,  through  an  upgraded  political  dialogue,  in  the 

international  community 

•  Supporting  China's  transition  to an open  society  based  upon  the  rule  of law 

and the respect for human rights 

•  Integrating China further  in the world economy by bringing it more fully  into 
the  world  trading  system  and  by  supporting  the  process  of  economic  and 
social reform underway in the country 

•  Making Europe's funding go further 

•  Raising the EU's profile in China. 

* ** 

A. Engaging China further in the international community  | 

China's  emergence  as an  increasingly  confident  world  power  is of  immense  historic 
significance, both to Europe and to the international community as a whole. China has 
become  a  major  partner  in  a  world  increasingly  bound  together  by  the  forces  of 
globalisation.  The EU's prime objectives must be to see China integrated rapidly and 
fully  into  the  international  community,  both  politically  and  economically,  and  to 
support  its  transition  towards  an  open  society  based  upon  the  rule  of  law:  this  will 
facilitate both development  in China and greater global stability. 

The  EU  is  committed  to  a strategy  of  comprehensive  engagement  with  China.  This 
should  be  achieved  through  a  renewed  and  upgraded  EU-China  bilateral  political 
dialogue,  as  well  as  through  the  greater  involvement  of  China  in  both  regional  and 
multilateral  initiatives of global  interest. 

A.  1  Upgrading the EU-China political dialogue 

China's willingness to play  a greater role on the world  stage has been  demonstrated 
recently  by  an unprecedented  series of bilateral  summits  with  Japan,  Russia  and  the 
US,  giving  each  of  these  key  partners  the  chance  to  display  publicly  their  shared 
commitment to China. 

Up  until  1994,  the  EU's  political  dialogue  with  China  was  limited  to  short  annual 
meetings  in  the  margins  of  the  United  Nations  General  Assembly.  The  EU  has 
steadily  intensified  this  political  dialogue,  following  an  exchange  of  letters  in  1994. 
The time has now come  for the EU and China to raise the status of their  relationship 
by  holding  annual  summits  at  Head  of  State  and  Government  level,  encouraging 
contacts at ministerial level, and by holding meetings between Political Directors  in a 
similar vein to contacts with other key partners. Annual EU-China Summits would put 
the  EU-China  relationship  on  a  commensurate  footing  with  the  EU's  approach 
towards other major  international partners such as the US, Japan and Russia, raise the 
profile  of the EU in China and vice versa, as well as injecting  added momentum  into 
the negotiation and resolution of key issues in the EU-China relationship. 

A,  2  Building upon the ASEMprocess 

The  Asia-Europe  Meetings  (ASEM)  process,  launched  in  Bangkok  in  1996,  has 
developed  into a broad  forum  for in-depth consultations between  European  and Asian 
partners  at political  and  expert  level, and  has stimulated  a wide series of  cooperation 
initiatives.  By virtue  of  its  informal  nature  and  the variety  of  issues  addressed  in  its 
framework,  ASEM  has added  a new dimension  to the  EU-China  relationship.  China 

has taken  a constructive approach  in the process and has been particularly active in all 
AS EM economic cooperation  initiatives. 

Dialogue  with  China  should  be upgraded  in the context  of the  EU's broader  regional 
strategy  towards  Asia  as  embodied  in  ASEM.  The  EU  should  aim  to  encourage 
China's  continued  commitment  to  taking  an  active  part  in  ASEM  and  the  ASEM 
follow-up  process. Promoting dialogue with China on sustainable development  in the 
Asia region, addressing the issue of maritime  security  in the Asia region,  combatting 
illegal  drugs  trafficking,  coping  with  the  effects  of  the  Asian  financial  crisis  and 
addressing  the issue of arms control  and non-proliferation  are prime examples  where 
the EU should seek China's active involvement in ASEM. 

A.  3  Addressing global issues 

Over  recent  years  China  has  been  forging  a  more  coherent  and  outward-looking 
foreign  policy to match its growing economic weight. The EU should build on this by 
encouraging China to play a proactive and responsible role in global issues. 

The  EU  should  engage  China,  a permanent  member  of  the  United  Nations  Security 
Council, in dialogue on major UN developments, in particular UN reform. 

The EU should endeavour to raise issues related to China more regularly during G7/8 
meetings.  It  should  also  work  to  intensify  the  increasingly  substantial  dialogue  with 
China launched by the OECD in 1995. 

China's  status as a nuclear  power gives particular  importance  to its disarmament  and 
non-proliferation  policy. In recent years, China has taken the welcome steps of joining 
the  Nuclear  Non-Proliferation  Treaty,  the  Chemical  Weapons  Convention,  the 
Biological  Weapons Convention and the Zangger Committee (a nuclear export control 
regime),  as  well  as  respecting  key  provisions  of  the  Missile  Technology  Control 
Regime.  It  also  signed  the  Comprehensive  Nuclear  Test  Ban  Treaty.  Continued 
support  and  encouragement  should  be  given  to  Beijing's  greater  involvement  in 
multilateral  negotiations  on  such  issues.  Europe  should  also  establish  dialogue  with 
China  on  the  anti-personnel  landmines  issue,  urging  it  to  adopt  a  permanent  export 
ban and to engage positively  in the international process to eliminate these weapons. 

Illegal  immigration  and international  crime are issues of grave concern both to China 
and the EU. The EU should promote a substantial dialogue and encourage cooperation 
with China on combatting illegal drug trafficking,  money-laundering, organised crime 
and  illegal  immigration.  Previous  EU  experience  in  other  third  countries  on  such 
issues  could  constitute  a  useful  platform  on  which  to  consider  launching  specific 
cooperation initiatives in China. 

The EU will continue to take every opportunity, within the political dialogue, to raise 
human  rights  issues  in  addition  to  the  specific  bilateral  dialogue  on  human  rights 
detailed in section B of this communication. 

The  way  China's  economy  develops,  its  energy  demand  increases,  and  the  pace  of 
rapid  industrialisation  continues,  is  having  a  profound  environmental  impact  at  the 
national,  regional, and  global  level. The  EU should  aim  to ensure China's  continued 
commitment  to  addressing  world  environmental  challenges  such  as  global  warming 
and  greenhouse  gas  emissions,  not  least  through  EU  funded  cooperation  projects 
mentioned  in  section  C2.  In  particular,  the  EU  should  encourage  China's  further 
involvement  in  the  pursuit  of  global  environmental  objectives  in  the  context  of  the 
1992 Rio Earth Summit and its follow up, notably in the area of climate change. 

A,  4  Fostering dialogue on Asian regional issues 

The EU has a role to play in maintaining stability in the Asian region through the non 
violent  resolution  of  conflicts  there,  notably  as  a  participant  in  ASEAN-sponsored 
regional  fora.  China  shares  its  frontiers  with  fourteen  countries  and  has  unresolved 
border  disputes  with  some  of  them.  The  growing  demand  for  a  multilateral  security 
dialogue  in  East  Asia  provides  opportunities  for  Europe  to  increase  its  overall 
influence  in the region. As the ASEAN  Regional  Forum (ARF)1 develops  further,  and 
as  China  shows  willingness  to  engage  further  in  confidence-building  measures  in 
Asia, the EU should use this forum more systematically to discuss security issues with 
China. 

Europe,  a  key  contributor 
to  the  Korean  Peninsula  Economic  Development 
Organisation  (KEDO)  and  a major  provider  of  food  aid  to  North  Korea,  has  a clear 
interest in the peaceful  resolution of the Korean question, as does China. The Korean 
peninsula  should be among key issues that  feature  in the EU's regular  dialogue with 
China. 

Likewise, the EU and China could consider launching a dialogue on other countries in 
the region, such as Cambodia, Vietnam and Burma, where China has strong  influence. 

China's  increasing  reliance on energy  imports  from  Central  Asia  is bound  to  make it 
perceive  stability  in  the  region  as  a  strategic  priority.  Given  the  EU's  own  strategic 
interest  in  Central  Asia  and  privileged  relationship  with  Russia,  developments  in 
Central Asia should be addressed at the appropriate time and in the appropriate  forum. 

Recent  indications  of  an improvement  in relations  across the  Taiwan  Straits  and  the 
prospect  of  a  more  open  and  direct  dialogue  between  Beijing  and  Taipei  are 
encouraging.  As  before,  the  EU  should  welcome  any  steps  which  can  be  taken  to 
further the process of peaceful  reconciliation. 

The ASEAN Regional  Forum  (ARF) was established  in  1994 as a forum  bringing 
together  intra and extra regional powers to examine  issues of  security  in the Asia-
Pacific  region  with  a  view  to  maintain  peace  and  stability.  It  comprises  the  nine 
ASEAN member States, the ten ASEAN dialogue partners (Australia, Canada, China, 
South  Korea,  United  States,  India,  Japan,  New  Zealand,  Russia  and  the  European 
Union) and the two ASEAN observers (Cambodia and Papua New Guinea). 

A. 5  Underpinning autonomy in Hong Kong and Macau 

Strong  economic  links  and  historical  ties  with  Hong  Kong  and  Macau  make  it 
inevitable that Europe will continue to take an active interest  in the two territories, not 
least  in view of the hitter's handover in  1999. In the spirit of ils  1997 Communication 
entitled  "The  European  Union  and Hong Kong:  Beyond 1997"",  the EU should seek 
to  underpin  further  the  autonomous  responsibilities  of  the  Hong  Kong  Special 
Administrative  Region,  following  the  smooth  handover  in  July  1997  and  the 
successful  management  of  the  post-handover  period  so  far.  The  Commission  will 
publish  an  annual  report  on  EU-Hong  Kong relations.  It will  also  aim to ensure that 
the  EC-Macau  Trade  and  Cooperation  Agreement  remains  fully  implemented  after 
Macau's  handover  to  support  Macau's  autonomous  responsibilities.  Hong  Kong and 
Macau  have important  roles to play as gateways to other regions of China, and the EU 
should develop bilateral cooperation initiatives with both territories. 

The  EU  considers  the  continued  expression  of  differing  opinions  through  the  media 
and  other channels  in Hong  Kong to be  a healthy  sign  of political  maturity.  The EU 
will  continue to watch the electoral  process  in Hong Kong closely, placing  particular 
emphasis  on  the  EU's  support  for  the eventual  development  of  universal  suffrage  in 
the SAR. 

Proposed initiatives: 

Propose  annual  EU-China  Summits  and  other  top-level  meetings  as  well  as 
EU-China  Political Directors' meetings 
Enhance still further China's involvement in ASEM 
Cooperate on the future of the UN 
Raise  awareness  of  China-related  issues  within  G7,  and  encourage  further 
dialogue between China and OECD 
Propose  dialogue  on  non-proliferation  and  cooperate  on  reinforcing  related 
export controls 
Urge  Chfna  to integrate  fully  into the global  arms  control  process, notably  to 
introduce a permanent ban on the export of anti-personnel landmines 
Cooperate  on  combatting  drug  trafficking,  money-laundering,  crime  and 
illegal  immigration 
Raise the issue of human rights within the political dialogue 
Develop dialogue on environment and sustainable  development 
Discuss Asian regional security with China 
Develop  dialogue  with  China  on  Korean  peninsula,  Central  and  South-East 
Asia 
Work to underpin autonomy of Hong Kong 
Ensure  a  smooth  transfer  of  sovereignty  in  Macau  in  1999  and  develop 
cooperation with Macau 

COM (97) 171 final, 23.04.1997. 

B. Supporting China's transition to an open society 
based on the rule of law and the respect for human rights 

China  is  still  far  from  meeting  internationally  accepted  standards  on  human  rights. 
Serious  shortcomings  in China's  human  rights record  remain,  including  in such  areas 
as  the  suppression  of  freedoms  among  certain  ethnic  minorities  and  political 
dissidents,  use  of  enforced  prison  labour,  a  still  under-developed  system  of  rule  of 
law, and the extensive use of the death penalty. These remain matters of grave concern 
to the EU, its Institutions and public opinion at large. 

Nonetheless, the situation of human rights in China has improved over the last twenty 
years.  Economic  reform  has  introduced  greater  freedom  of  choice  in  education, 
employment, housing, travel  and other areas of social  activity. China has passed  new 
civil  and  criminal  laws  to  protect  citizens'  rights  and  has  signed  several  key 
instruments bringing the country closer to international  norms. It has also taken  steps 
to  develop  the  electoral  process  at  local  level,  allowing  villagers  to  designate  their 
local authorities. 

A commitment  to universally  recognised  human rights and fundamental  freedoms  lies 
at  the  heart  of  the  EU's  policy  worldwide.  Full  respect  for  these  principles  is 
inextricably  linked to economic development  and prosperity, as well as the  long-term 
social and political stability of any country. 

The  challenge  for  China  now  is  to  sustain  economic  growth  and  preserve  social 
stability while creating an open society based on the rule of law. If Europe wishes to 
have a role in this process, it should continue to use all available channels to promote 
the cause of human rights  in China in an active, sustained  and constructive  way. The 
resumption  of the EU-China human  rights dialogue without  any pre-conditions  gives 
the  EU a real  opportunity  to pursue  intense discussions  which, coupled  with  specific 
cooperation  projects, remains at present the most appropriate means of contributing to 
human  rights in China. 

B. 1  Promoting human rights through open debate... 

The EU believes in the merits of dialogue, in all appropriate fora, over  confrontation. 
The  EU  and  China  should  therefore  tackle  their  differences  in  a  frank,  open  and 
respectful  manner. 

An EU-China specific dialogue on human rights was launched in 1995 and interrupted 
in  the  Spring  of  1996.  Since  its resumption  in November  1997, China  has  shown  a 
new-found  willingness  to  engage  in  a  serious  and  results-oriented  dialogue.  All 
subjects  of  concern,  even  the  most  sensitive  ones,  have  been  addressed  during  the 
discussions and the prospect of continued, regular dialogue has now been  established. 
Furthermore,  this  dialogue  has  enabled  the  EU  to  obtain  China's  agreement  in 
principle  on  a  cooperation  programme  designed  to  strengthen  the  rule  of  law  and 

promote  civil,  political,  economic  and  social  rights.  Since  the  dialogue  resumed, 
China has given a series of encouraging signals, including its decision  to sign the UN 
Covenant  on  Economic,  Social  and  Cultural  Rights.  China  has  also  given  an 
underlaking  lo examine the I IN Covenant on Civil  and  Political  Rights with a view to 
signing  it,  and  has  increased  dialogue  with  the  UN  authorities  in  the field of  human 
rights. 

The EU will continue to urge China to sign and  ratify  the UN Covenant  on Civil and 
Political  Rights, to ratify  the UN Covenant  on  Economic,  Social  and  Cultural  Rights 
and to fully  implement both covenants. Furthermore, the EU will encourage enhanced 
cooperation with specialised  UN bodies and raise all issues of concern, including the 
plight of certain Chinese citizens. 

As it attaches great  importance to the respect  for  the cultural,  linguistic  and  religious 
identity  of  ethnic  minorities,  the  EU  will  continue  to  raise  issues  relating  to  these 
matters in Tibet within the bilateral dialogue on human rights. 

Finally,  the  Commission  will  continue  to  press,  within  the  International  Labour 
Organisation,  for  the  ratification  by  all  members,  including  China,  of  the  ILO 
conventions  on core  labour standards,  including  those on  freedom  of association,  the 
right  to  collective  bargaining,  the  prohibition  of  forced  labour,  of  exploitative  child 
labour and  anti-discrimination. 

B. 2 

...and through cooperation 

The  resumption  of  the  EU-China  dialogue  on  human  rights  has  placed  renewed 
emphasis on the constructive resolution of differences.  This gives the European Union 
a chance to put  its good  intentions  into practice  and  deliver  tangible  assistance. Two 
major priorities should be pursued: 

•  Promoting  the  rule  of  law.  The  EU  should  help  China's  efforts  to  develop  a 
society  based  on  the  rule  of  law.  Developing  a  sound  and  transparent  legal 
framework,  both  in  the  civil  and  criminal  sphere,  providing  rights  to  Chinese 
citizens - including the right to a fair trial - making them aware of those rights, and 
training lawyers and judges, would help achieve this goal as a first step. The EU is 
currently  devising  an ambitious programme  of legal  and judicial  cooperation  with 
these  objectives  in  mind  which  will  be  discussed  with  Chinese  authorities  and 
ready for implementation by Autumn  1998. 

•  Strengthening  civil  society.  The  EU  should  aim  to  strengthen  those  practices 
which  make  up  the  fabric  of  a  strong  civil  society.  It  should  promote  civil  and 
political rights through initiatives such as the support for a training centre in China 
for officials  engaged  in the implementation  of the village governance law. It could 
also allow  for assistance to the most vulnerable groups in society, including  ethnic 
minorities, women - as a follow  up to the Beijing  1995 conference on Women - and 
children.  Initiatives  aimed  at  promoting  consumers'  rights  and  at  supporting 
consumers'  organisations  could  also  be  a way  of  strengthening  civil  society.  The 

role  of  Non-Governmental  Organisations  in  implementing  projects  aimed  at 
strengthening civil society should be fully  exploited. 

Proposed initiatives: 

Urge  China  to  sign,  ratify  and  fully  implement  UN  Covenants  on  human 
rights and ILO conventions on core labour standards 
Reinforce bilateral human rights dialogue with China 
Back up dialogue with concrete cooperation  programmes 
Promote rule of law 
Strengthen civil society 

C. Integrating China further in the world economy 

The scale and speed of China's economic growth are making it one of Europe's  major 
economic partners. China's trade with the world  has almost doubled  in value over the 
last five years, and it now runs a massive trade surplus both with Europe and with the 
United  States. It has become the second  largest  recipient  of foreign  direct  investment 
in the world  after  the United  States, and the tenth  largest trading nation. It is  forecast 
by the World Bank to become one of the top three traders in the world by 2020. 

China's  unprecedented  economic  development  has  required  a  delicate  balance 
between  rapid  economic growth,  far-reaching  reforms  and the need  to preserve  social 
cohesion.  This  process  has  potential  repercussions  both  for  China  and  for  the  world 
economy, and  it is in  Europe's  overwhelming  interest  that  this  transition  be  nurtured 
right through to its fruition,  making China a strong, stable and open partner. 

It is the  EU's  view that the objective  of assisting China to become a global  economic 
player  fully  integrated  in the world  economy  and  able to comply  with  common  rules 
should  be  achieved  through  a  combination  of  trade  discussions  and  targeted 
cooperation  initiatives.  This  strategic  approach  should  seek  to  accelerate  and 
consolidate  China's  integration  into  the  world  trading  system  while  supporting  the 
reforms that are so vital for China to thrive within that system. 

C.l  Bringing China into the world trading system 

EU-China  trade  has  increased  more  than  twenty-fold  since  the  beginning  of  the 
reforms,  making  China  the  EU's  third  extra-European  trading  partner  and  creating 
vast  potential  for  European  trade  and  investment  there.  The  EU's  trade  deficit  with 
China reached  20 billion  ECU in  1997, reflecting  China's  growing export  capacity  as 
well as the obstructive effect  of market barriers in China itself. The EU should use all 
available  channels,  notably  China's  WTO  accession  process  and  the  EU's  bilateral 

11 

trade negotiations, to iron out such barriers and  help create an open Chinese economy 
that benefits  European and global interests alike. Improving the climate  for  European 
investment in China should also be one of the EU's top objectives. 

1.1. 

Supporting China's accession to the WTO 

The EU remains one of the keenest advocates of China's early accession to the WTO. 
It  will  provide  an  important  boost  for  China's  economic  reform  and  will  signal 
strenghtened  international  confidence  in  the  reform  process.  It  will  also  cement 
China's  place  in  the  global  economy  and  provide  traders  and  investors  with  greater 
certainty  when  doing  business  in  China.  Furthermore,  striking  the  right  terms  of 
accession  for  China  will  be  a  determining  factor  in  the  pace  and  scope  of  further 
multilateral  trade Rounds. 

Financial  turbulence  in  Asia  has  triggered  a  crisis  of  confidence  in  several  Asian 
economics  which  could  have  spillover  effects  in  China.  Against  this  background, 
China  has  a prime  interest  in  demonstrating  its  continued  commitment  to  the  WTO 
accession  process  as  a  means  of  sustaining  outside  confidence  in  the  fundamental 
health and dynamism of the economy. Closing markets or delaying reforms  would be 
a misguided and counterproductive response to financial market instability. 

China has made significant  progress in recent  years to  liberalise  its trade regime and 
open  its  economy  to  the  world.  Whether  on  tariff  cuts,  currency  reform  or  the 
development  of  the  legal  system,  the  pace  of  change  has  been  remarkable,  and 
together, the EU and China are progressing towards a trade relationship which should 
culminate in China's membership of the WTO. However, for this goal to be achieved, 
sustained  efforts  still  need  to  be  made  by  China  to  respect  the  following 
commitments: 

•  Meet key WTO principles such as: 

transparency, including prompt publication of all relevant laws and 

regulations, clear licensing criteria and better identification  of the authorities 
responsible for granting licences. 

national treatment, notably by offering  the same operational conditions to 

foreign companies as to domestic ones. 

non-discrimination  against EU companies vis-à-vis those of other trading 

partners. 

•  Offer  real  market  access  for  industrial  and  agricultural  goods  by  cutting  tariffs 
significantly  -  including  the  removal  of tariff  "peaks" (duties  of  15% and  higher) 
and  adherence  to  the  Information  Technology  Agreement  -  and  by  removing  all 
quotas,  unjustified  technical  barriers  to  trade  and  other  non-tariff  measures.  This 
should be achieved as a follow-up to the conceptual breakthrough  negotiated by the 
European  Commission  with  China  in  October  1997,  in  which  a  series  of  precise 
principles were agreed which provide clear parameters in which the negotiations on 
China's detailed tariff commitments are being pursued. 

12 

Rapidly  remove  the  current  monopolies  on  foreign  trade  so  that  all  Chinese  or 
foreign  nationals in China can engage in import and export. 

• 

Provide  substantial  opening  of  China's  services  market  in  distribution,  télécoms, 
financial  services,  professional  services,  tourism,  travel  and  medical  services. 
China  is  today  moving  into  a  new  phase  of  economic  development  in  which 
services will  be the engine of  future  growth.  Foreign  companies would  bring  vast 
assets to China  in terms  of jobs,  technology,  on-the-job  training  and  management 
skills. 

Open the financial sector (banking,  securities  and insurance)  in a more  systematic 
and  comprehensive,  if  gradual,  manner.  This  would  boost  China's  long-term 
growth  and  outside  confidence  in  the  economy,  and  can  be  pursued  without 
prompting  uncontrollable  capita! movements  and  excessive  volatility.  It  is also  in 
China's  interest  to  set  up  a  proper  regulatory  framework  and  independent 
supervisory authority. 

Improve the conditions  for  foreign  companies  establishing  in China. This  includes 
removing  all  restrictions  on  the  legal  form  of  establishment  (whether  as  a joint 
venture or a wholly-owned  company), lifting  geographic  restrictions  and  those on 
the scope of permitted  activity, and removing pre-establishment conditions.  It also 
includes the removal of export performance  requirements and export subsidies. 

Eliminate WTO-incompatible measures designed to promote priority industries. 

• 

Rapid  implementation  of  the  WTO  TRIPS  Agreement  and  full  enforcement  and 
protection of intellectual property rights. 

®  Establish a transparent, open and competitive procurement  regime. A key  objective 
in this regard  would  be to secure China's  membership  of the  WTO Agreement  on 
Government  Procurement  as  part  of  the  WTO  accession  package.  China  has  the 
largest procurement  market  in the world  and  failure  to obtain  access to that  market 
would significantly  reduce the overall value of the market access package. 

•  Join the WTO-related Civil Aircraft  Code. 

The  EU's  approach  during  the  accession  negotiations  should  continue  to  be 
characterised by the following  features: 

Firstly,  the  EU  must  negotiate  resolutely  to  secure  firm  and  viable  market  opening 
commitments commensurate with China's stage of development, potential and size, in 
order to make China's accession a lasting success. 

Secondly, the EU has developed the concept that part of the final package may require 
the use of clearly defined  transition periods for  sectors where China needs to phase in 
its  WTO  obligations  beyond  the  date  of  accession  while  adjusting  its  laws  and 

13 

practices.  This  approach  has  been  put  forward  by  the  EU  to  respect  China's  own 
policy of implementing reforms  gradually. 

Thirdly, the  EU should  encourage China  to anticipate accession  by setting as an early 
foreign 
priority  the  amendment  of  domestic  laws  and  regulations  that  affect 
investment, the aim being to make its investment regime less restrictive, more  unified 
and its evolution more predictable. 

Finally,  the  EU  should  be  on  hand  to  assist  China  as  it  makes  the  necessary 
adjustments,  whether  through  cooperation  or  by  offering  practical  assistance  during 
the  negotiations  themselves.  The  EU  is  already  drawing  up  a  series  of  cooperation 
programmes  designed  to  support  China's  reforms  during  and  beyond  the  accession 
process, especially  while  it  is adapting  to  WTO disciplines  during  transition  periods. 
This  initiative will  include programmes  to  raise awareness of WTO principles  - such 
as on  intellectual  property,  public  procurement,  norms  and  standards,  and  customs  -
among  Chinese  officials  at all  levels of government  and business  executives,  as well 
as aligning China's  legislative  and regulatory  framework  with WTO rules. WTO will 
also  be  a  central  theme  in  a  broader  training  programme  for  the  Chinese 
administration.  Furthermore,  the  EU  will  develop  a  specific  post-accession  dialogue 
with  China  to  ensure  the  implementation  of  its  WTO  commitments  both  during  the 
phasing-in period and beyond. 

The  EU  is  ready  to  conclude  the  negotiations  as  soon  as  China  shows  it  can  offer 
genuine  market  opening,  if  necessary  phased  in  gradually  according  to  an  agreed 
timetable,  and  ensure  that  the  country  becomes  an  open,  proactive  and  forward-
looking WTO member ready to participate in further  liberalisation. Above all, China's 
WTO accession  should  not be seen as a new constraint  imposed  by the outside world 
on  China,  but  rather  as  a  supportive  process  which  will  strengthen  its  own  internal 
reform  programme. 

1.2. 

Strengthening the bilateral trade agenda 

The EU has a long history of trade relations with China, as embodied within the  1985 
EC-China  Trade  and  Cooperation  Agreement1  and  the  EC-China  Joint  Committee 
meetings. Bilateral trade discussions should be pursued alongside the WTO process as 
an  effective  means  of  exchanging  information  and  resolving  bilateral  issues.  They 
provide  a  useful  forum  for  ensuring  strict  adherence  to  the  principle  of  non 
discrimination, for example in fields such as maritime transport and financial  services. 
Issues  pursued  within  this  bilateral  dialogue  should  dovetail  with  the  EU's  Market 
Access  Strategy,  launched  in  1996 to  target  the  removal  of  obstacles  to  EU  exports 
and  investments  worldwide.  In  parallel,  the  EU  should  use  this  bilateral  channel  to 
gain  information  concerning  the  implementation  of  China's  WTO commitments  and 
to ensure that these commitments are given concrete  effect. 

OJECL 250/1, 19.09.1985. 

14 

China  is,  by  far,  the  main  beneficiary  of  the  EU's  Generalised  Scheme  of  tariff 
Preferences  (GSP), with  more  than  30% of  the  value  of  all  beneficiaries'  imports  in 
1997. However, the implementation  of the scheme's graduation mechanism  (in which 
GSP  advantages  for  certain  sectors  are withdrawn  due to  the high  level  of  industrial 
development  in  those  sectors)  will  necessarily  reduce  the  advantages  previously 
enjoyed  by China. Nevertheless, the new  GSP special  incentive  arrangements  (social 
and  environmental  clauses)1, will  allow  beneficiary  countries  to  obtain  an  additional 
preferential  margin,  provided  they  meet  international  standards  of  labour  rights 
(International  Labour Organisation  standards  on child  labour,  freedom  of  association 
and  rights  of  bargaining)  and  environmental  protection  (International  Timber 
Organisation  standards on sustainable management of tropical  forests).  In the event of 
applications  from  China,  the  Commission  will  examine  carefully  if  China  meets  the 
requested standards. 

The  European  Commission  has  proposed  amendments  to  the  EC  anti-dumping 
legislation  vis-à-vis  China  that  take  account  of  the  market  reforms  underway  in  the 
country.  The  proposal2  includes  the  removal  of  the  label  "non-market  economy" 
which applies to China under the current legislation, by instituting a new case-by-case 
approach  in anti-dumping  proceedings  whereby  Chinese  exporters, who are  found  to 
operate  within  clearly  defined  market  economy  conditions,  will  be  granted  market 
economy  treatment.  This means that  the domestic  prices  and costs of  such  exporters 
will be used to establish normal value rather than information  from  a market  analogue 
third country. 

The proposal also introduces a more systematic approach to the granting of individual 
treatment  and  calculation  of  comparative  advantage.  The  proposal  will  reflect  the 
specific  behaviour  and  operating  conditions  of  individual  firms,  whilst  at  the  same 
time acting as an incentive for further  reforms  among Chinese companies. As such, it 
will interact positively with the ongoing WTO accession negotiations. 

The EU has confirmed  to China that it is ready to phase out its quantitative restrictions 
on  Chinese  products  as  rapidly  as China  is able to  remove  its own.  The  removal  of 
both  sets  of  quantitative  restrictions  should  be  pursued  as  part  of  an  overall  market 
opening strategy and in the context of the WTO accession negotiations. 

The  Commission  and  Member  States  need  to  be  fully  updated  at  all  stages  on 
commercial  legislation  and  administrative  practice  governing  trade  in  goods  and 
services  in  China.  A  strengthening  of  coordination  and  the  regular  exchange  of 
detailed  information  between  the  Member  States'  Embassies  and  the  Commission's 
Delegation  in  Beijing  would  make  for  a  more  efficient  and  focused  bilateral  trade 
dialogue. 

COM (97) 534 final, 29.10.1997. 
SEC (97) 2290. 

15 

1.3 

Promoting  investment 

The  development  of  Foreign  Direct  Investment  (FDI)  has  been  a  key  element  of 
China's  economic  growth  since  it  engaged  in  reforms  in  1978.  For  several  years, 
China has been the largest recipient of FDI among developing countries, and has now 
become  the  second  largest  recipient  of  FDI,  after  the  United  States.  Investments 
originating  in  the  Asia-Pacific  region,  notably  from  Hong  Kong  and  Taiwan, 
dominate  FDI  in  China,  thus  highlighting  the  regional  dimension  of  China's 
integration  into  the  world  economy.  The  Asian  financial  crisis,  which  will  reduce 
incoming  FDI  in  China,  makes  it  all  the  more  important  for  China  to  further  attract 
investment from  its other partners, especially Europe and the United States. 

The EU should aim at improving the investment environment  for  European  companies 
in  China.  The  construction  of  a  sound  and  transparent  regulatory  framework  for 
investment  and  a better  enforcement  of  Chinese  regulations  on  intellectual  property 
rights are prime examples to achieve this objective. 

those 

strategy, 

industrial 

focusing  primarily  on 

The  EU  trade  policy  must  be  backed  up  by  a  comprehensive  strategy  to  promote 
investment,  as  well  as  business  and  industrial  cooperation  with  China,  so  as  to 
strengthen  the European presence  in the Chinese market. The EU should  launch  such 
a 
such  as 
telecommunications,  energy,  environmental  technology  and  services,  transport  and 
financial  services  - where Europe has a clear competitive  advantage  (see also section 
C.2). The  EU  should  strengthen  the EU's  export  and  investment  promotion  facilities 
for  China,  in  particular  the  European  Community  Investment  Partners  (ECIP) 
programme, which aims at supporting the creation of joint-ventures between  European 
and  Chinese  companies  in  China,  and  the  Asia-Invest  programme,  which  aims  at 
helping  European  small  and  medium-sized  enterprises  identify  potential  partners  in 
China.  The  EU  should  continue  to  devote  particular  attention  to  small  and  medium-
sized enterprises  in its business and investment promotion strategy in China. 

sectors 

- 

1.4 

Developing bilateral  agreements 

The EU-China trade dialogue could be further  strengthened  through the conclusion of 
specific bilateral agreements in areas of particular interest, such as: 

•  Maritime  transport.  A  sectoral  agreement  on  maritime  transport,  for  which  the 
Commission has a negotiating mandate, should  aim to strengthen cooperation with 
China and improve market access conditions  for  European operators in China. The 
EU intends to base this agreement on the principles of freedom  to provide maritime 
services, free access to cargo activities and unrestricted  access to ancillary services. 
The agreement  may provide  for the establishment  of a Working  Party which  could 
report  to  the  Joint  Committee  set  up  under  the  EC-China  Trade  and  Economic 
Cooperation Agreement. 

•  Air  transport.  The conclusion  of a Memorandum  of Understanding  between  the 
Commission,  China  and  the  European  Association  of  Aeronautical  Industry  on 

16 

Industrial  Cooperation  in  the  Aeronautical  Sector  could  be  a  starting  point  for 
cooperation  in  the  field  of  air  safety,  environment  and  infrastructure.  This 
cooperation  should  be  accompanied  by  the  commencement  of  a  dialogue  in 
aviation matters. 

Nuclear  trade  and  safety.  The  Commission  should  study  the  merits  of 
negotiating  a bilateral  agreement  with  China  in  areas related  to  nuclear  trade  and 
nuclear  safety  in the  framework  of the Euratom  Treaty.  China's policy  on  nuclear 
non-proliferation  is  a  key  issue  that  should  be  taken  into  account  in  such  an 
analysis. 

• 

Customs.  The  Commission  has  been  authorised  to  negotiate  an  agreement  on 
customs cooperation  and mutual administrative assistance. This will  serve the dual 
purpose  of  facilitating  trade  between  the  EU  and  China  on  the  one  hand,  and 
creating a framework  through which to fight customs-related  fraud  on the other. 

Science and technology.  A specific  EU-China science and technology  agreement 
should be concluded  in order to enhance and expand  cooperation  in fields such as 
energy,  environment,  life  sciences,  material  sciences,  transport,  telematics, 
information  and  communication  technologies.  It  will  strengthen  the  presence  of 
European economic operators in China. 

1.5  Making financial liberalisation and regulation go hand in hand 

The  creation  of  a  sound  financial  environment  is  vital  to  sustain  the  confidence  of 
investors  and  traders  in  China.  The financial crisis  that  has  struck  some  of  China's 
neighbours  in  1997  can  be  seen  as  an  early  warning  signal  from  which  China  can 
learn.  It throws  into  sharp  relief the need  for  China  to build  a solid,  transparent  and 
open  financial  and  banking  system,  and  to  make  bank  lending  market-driven  and 
commercially viable in order to avoid exposure to weaknesses similar to those of other 
Asian economies in  future. 

Together  with  the  reform  of  its  State-owned  enterprises,  China  has  embarked  on  an 
ambitious  reform  of  its  financial  system.  This  includes  the  creation  of  a  sound 
regulatory  framework  for  financial  activities. The EU fully  supports this and  is ready 
to offer  China, through  cooperation  projects,  its own expertise  in financial  regulation 
and prudential  supervision. This should  also be pursued  through  any initiative  which 
could be taken within ASEM. 

At  the  same  time,  the  EU  should  seek  to  persuade  China  that  liberalisation  of  its 
financial  services  markets  -  notably  market  access  for  foreign  financial  service 
providers  in banking,  insurance  and  securities  - would  strengthen  the wider  banking 
reforms.  It would increase liquidity, prompt  a more viable and effective  allocation  of 
credit  within  the economy,  raise standards  and  increase  available  expertise,  boosting 
jobs  and  growth  in  the  process.  An  early  commitment  to  include  financial  services 
within  China's  WTO  offer  would  increase  investor  confidence  at  a  time  when  it  is 
severely  lacking  in  some  of  China's  neighbours.  This  would  not  entail  any  sudden 

17 

exposure to market risk, as the EU has not suggested that China should introduce  full 
freedom  of capital movement in the near  future. 

1.6 

Promoting the euro 

The advent of Economic and Monetary Union makes it important for the EU to inform 
China of the major  changes EMU will bring to its economic ties with Europe, as well 
as to the  international  monetary  system  itself. In parallel  with  its commitment  to the 
construction  of  a  sound  and  open  financial  and  banking  system  in  China,  the  EU 
should  establish  a regular  EU-China macro-economic  dialogue. This dialogue  should 
aim,  inter  alia,  at  informing  China  -  which  already  has  the  world's  second  largest 
foreign  currency reserves - about  EMU and  about the potential  of the euro as a stable 
reserve currency. 

Within  the  information  actions  on  the  euro  aimed  at  third  countries  which  the 
European Commission will develop, special attention should be given to China. 

Proposed initiatives: 

Give  continued  impetus  to  WTO  accession  negotiations  until  a  viable 
accession package is achieved 
Allow  China  to benefit  from  transition  periods  while certain  sectors  adapt to 
WTO obligations 
Offer  China  cooperation  projects  to  help  its  economy  adapt  to  WTO 
obligations 
Re-activate  bilateral  trade talks to exchange  information  and  resolve  issues of 
mutual concern 
Use  bilateral  trade  talks  to  cement  commitments  made  in  the  WTO  process 
and improve synergy of these talks with the EU's market access strategy 
Adopt  the  Commission's  proposed  new  anti-dumping  regulation  towards 
China and Russia 
Pursue  gradual  and  reciprocal  removal  of  EU  and  Chinese  quantitative 
restrictions 
Develop a comprehensive EU investment promotion strategy and business and 
industrial cooperation in China 
Develop bilateral agreements in specific  sectors 
Urge  China  to liberalise  financial  services  in  step with  reform  of  its  financial 
system and provide relevant EU expertise 
Inform China about the importance of the Euro as a stable reserve currency 

18 

C.2.  Supporting economic and social reform 

China's  reforms  are  radically  changing  the  economic  and  social  landscape  of  the 
country.  The  pace  of  reform  is  impressive,  but  the  process  remains  fragile  and 
incomplete. The challenge  for  China is to pursue its economic transition whilst  at the 
same  time  integrating  the  concept  of  sustainability  into  economic  growth  and 
guarding  itself  against  social  instability.  The  EU  should  therefore  not  just  seek  to 
negotiate the removal of trade and investment obstacles, but also help China build  the 
institutions,  policies,  human  resources,  management  techniques  and  other  flanking 
instruments that constitute the fabric of a modern, outward-looking economy. 

The resources  available  for this process will  always be small  in comparison  with  the 
needs. If the EU is to maximise the impact of these resources, cooperation needs to be 
concentrated on a small number of key objectives. 

The  five  traditional  pillars  of  EU-China  cooperation  set  out 
in  the  1995 
Communication  - human  resources  development,  administrative  and  social  reforms, 
business  and  industrial  cooperation,  environmental  cooperation,  rural  and  urban 
poverty alleviation  - have stood the test of time through the successful  implementation 
of  a  range  of  projects,  and  the  principles  behind  the  1995  long-term  strategy  will 
continue to underpin  the EU's approach  to its cooperation  programme. This approach 
was  further  developed  in  the  EC-China  Memorandum  of  Understanding  on  the 
programming  of  EC-China  cooperation  projects  signed  in  Beijing  in  October  1997 
between the Commission  and the Chinese Authorities. 

Given  the pace of change  in China, it is important  to  further  update the objectives  of 
the  EU-China  cooperation  programme  in  keeping  with  the  reforms  taking  place  in 
China.  The  following  specific  priorities  -  to  which  must  be  added  WTO-related 
cooperation projects (section C.l.l) and human rights cooperation projects (section B) 
- should be highlighted: 

1.  Side-effects  of company  restructuring.  China is restructuring many of the State-
Owned Enterprises (SOEs) which still form the core of its industry. This process of 
unprecedented  scale  and  complexity  could  have  major  social  and  political  side-
effects.  The  EU  should  not  try  to  address  all  aspects  of  a  reform  process  of  this 
magnitude, but  rather  focus  on  limited  priorities,  in close  coordination  with  other 
donors,  notably  the  World  Bank.  From  its  experience  with  restructuring  and 
privatisation,  both within  the EU and  in Central  and Eastern  Europe  and the New 
Indépendant  States,  the  EU  would  be  well  placed  to  offer  its  expertise  as  China 
introduces  new  models  of  ownership,  corporate  governance,  accounting  and 
management. The EU could  also help China address welfare  reform,  which  is one 
major  fall-out  of  SOE  restructuring  since  the  Chinese  welfare  system  in  urban 
centres is largely taken care of by SOEs themselves. In keeping with China's desire 
to minimise the  social  side-effects  of economic reform,  and in order  to  contribute 
to urban poverty alleviation, the EU could help China in its search for new models 
of  welfare,  including  medical  care,  social  security,  unemployment  insurance  and 
pensions. 

19 

transparent  and  market-driven  banking  system 

2.  Financial  reform.  China  has  wisely  embarked  on  the  reform  of  its  financial 
system,  whose  fate  is  closely  linked  to  that  of  the  debt-ridden  state-owned 
enterprises.  A  sound, 
is 
indispensable  for  the  creation  of  a  sustainable  economy.  The  EU  -  in  close 
cooperation  with  both  international  and  Member  States'  financial  institutions 
responsible  for financial supervision  and prudential  standards  - should  help  China 
to develop the kind of rules, supervisory mechanisms and prudential  standards that 
will  enable it to guard  against  structural  weaknesses  exposed  elsewhere during the 
Asian  financial  crisis. 

3.  Industrial  cooperation.  Sectoral  cooperation  schemes  focusing  on  those  sectors 
where  EU  industry  has clear competitive  and  technological  advantages  and  China 
has  specific  needs  should  be  developed  as  a  way  of  tackling  issues  such  as 
regulation,  the  definition  of  common  norms  and  standards,  the  development  of 
mutually  recognised  certification  procedures, the integration  of cleaner  production 
training.  Administrations, 
processes,  as  well  as  industrial  and  commercial 
regulatory  bodies,  and  industries  from  both  sides  should  be  involved  in  this 
exercise.  Small  and  medium-sized  enterprises  should  be  encouraged  to participate 
include 
in 
telecommunications, information  technologies and aeronautics. 

this  process.  Priorities 

forthcoming 

initiatives 

could 

for 

4.  Business  dialogue.  The  EU  should  support  a  greater  involvement  of  European 
business  and  industry  in  China.  A  business  dialogue  should  bring  together  EU 
executives  and  Chinese  businessmen  and  policy-makers  in  order  to  increase 
awareness  of  China's  transition  process  and  provide  expertise  on  market  reform. 
The results of this dialogue should  also be used to identify  further  priorities  for EU 
trade policy and cooperation initiatives. 

5.  Legal  and  administrative  reform.  The  EU  should  back  up  its  bilateral  and 
multilateral  trade  negotiations  with  concrete  assistance  to  China  in reforming  and 
modernizing  the  overall  legal  and  administrative  framework  of  its  economy. 
Definition  and  enforcement  of  legislation  -  for  example  in  intellectual  property, 
company  law  and public  procurement  - as well  as administrative  organisation  and 
management  should  be among the specific  targets. The  EU's  continued  support  to 
the  construction  of  a  sound  and  competitive  procurement  regime  would,  in 
particular,  increase  industrial  competitiveness  and  help  China  establish  a  modern 
and efficient  public sector. 

6.  Training.  Cooperation should help China strengthen its own training capacities by 
proposing  modern  professional  training  standards  and  practices.  This  should 
address  the  needs  of  both  administration  and  industry.  Vocational  training 
programmes  for  industry  would  both  help  up-grade  the  quality  of  manpower  in 
China  and  promote  European  management  practices,  technical  know-how  and 
standards, thus  facilitating  European  investment.  Likewise,  training  initiatives  for 
public  servants would  help them  face  the  challenges  of  a market-driven  economy 
open to the world. 

20 

7.  Science  and technology.  Scientific  and technological  cooperation  should  be used 
more  actively  as  a  means  to  strengthen  European  companies'  position  on  the 
Chinese  market  as  well  as  supporting  China's  own  economic  development.  It 
should  focus  on  agriculture, 
technologies, 
biotechnology,  material  sciences,  transport,  energy,  the  environment  and  natural 
resources.  A  specific  EC-China  Science  and  Technology  Agreement  should  be 
negotiated  rapidly  (see Section CI.4),  and a web of partnerships  should be created 
to  allow  the  exchange  of  young  scientists,  managers  and  engineers  in  selected 
economic sectors. 

information  and  communication 

8.  Environment.  China has become increasingly  aware of the environmental  cost of 
its  former  industrial  model, and of  its impact on the global  environment.  It is now 
seeking  to  reconcile  rapid  growth  with  sustainable  production  and  consumption 
patterns.  The  EU  should,  along  the  lines  set  out  in  the  Communication  on  a 
Europe-Asia  Cooperation  Strategy  in  the  Field  of  Environment I  develop 
cooperation  projects  focusing  on  clean  production  methods,  waste  minimisation, 
environmental  standards and training, and environmental  management capacities as 
well  as  appropriate  technology  transfer.  The  EU  should  in  particular  help  China 
integrate  environmental  priorities  -  such  as  the  prevention  of  industrial  pollution 
and greenhouse gas emissions, and the conservation of biological diversity -  further 
into national  economic  policy-making  processes and  into development  schemes  at 
regional and local levels. Where desirable, and in line with the Chinese objective of 
reducing  poverty,  environmental  conservation  and  poverty  alleviation  projects 
should be integrated together. 

9.  Energy.  Europe should offer  its environmental  and energy know-how to China to 
help it develop efficient  and clean industries  and also to establish a presence  in its 
potentially  lucrative  market  for  green  technology,  along  the  lines  set  out  in  the 
Commission's  Communication  on  a  Europe-Asia  Cooperation  Strategy  for 
Energy?  Promoting  energy  efficiency,  as  well  as  developing  clean  coal 
technologies  and  alternative  energy  resources,  notably  natural  gas,  should  be  top 
priorities.  The  EU  should  seek  to  develop  synergies  with  international  financing 
institutions (IFIs) on these issues. 

10.Regional  disparities,  poverty  alleviation  and  social  cohesion.  Despite  a 
significant  rise  in  living  standards,  China  is  still  a developing  country.  Rural  and 
urban poverty  are rife, China's vast floating  population presents a serious threat to 
social  stability  and lasting  economic prosperity,  and disparities between  advanced 
coastal regions and less developed inner provinces have become a key concern  for 
both Chinese local and central authorities. The EU should help China accelerate the 
spread  of prosperity  across  the  country  and  improve regional  and  social  cohesion 
through,  inter  alia, projects  aimed  at developing  all  communication  links  between 
coastal  and  less  developed  inland  regions.  This  could  in  particular  increase  the 
attractiveness of inner regions for both Chinese and foreign  investment. 

COM (97) 490 final, 13.10.1997 
COM (97) 308 final, 18.07.1996 

21 

Proposed initiatives: 

•  Provide  expertise  to  reduce  side-effects  of  company  restructuring,  notably 

welfare  reform 

•  Provide expertise for financial  sector reform 
•  Strengthen industrial and business cooperation 
•  Cooperate on legal and administrative  framework 
•  Develop human  resources cooperation  with  focus on professional  training and 

exchange schemes 

•  Expand scientific and technological  cooperation 
•  Promote  sustainable  development  and  help  China  integrate  environmental 

policy concerns 

•  Foster transfer of know-how and technology  in energy sector 
•  Develop  cooperation  to  reduce  regional  disparities,  alleviate  poverty  and 

improve social cohesion 

D. Making Europe's funding go further 

A  comprehensive  policy  for  relations  with  China  needs  to  be  backed  up  with  the 
appropriate  financial  means to implement  it. The  EU's budgetary  resources  for  China 
have  more  than  tripled  as  a  direct  result  of  the  policy  launched  in  1995,  rising  to 
around  70  million  ECU  per  year  up  to  1999,  from  an  annual  average  of  20  million 
ECU  over  the  1991-1994  period.  This  has  enabled  the  EU  to  demonstrate  its 
commitment  to cooperation  with  China by pushing  forward  with  the vast  majority  of 
new  ideas  proposed.  As such,  the current  envelope  appears  sufficient  at  this  stage to 
finance both  the  shorter  and  longer-term  initiatives  outlined  in  this  Communication, 
so long as the budget is maintained for the 2000 to 2006 period. 

Nevertheless,  the  EU  should  consider  all  possible  avenues  for  improving  the 
efficiency  of its activities. 

One key message of this Communication  is that  EU-funded  cooperation  programmes 
need to be even more closely  linked with the EU's broader  China policies. From  the 
human rights dialogue  through  the WTO accession  negotiations  to questions  relating 
to China's  economic  development,  the  EU should  seize the chance  to  underscore  its 
policies with concrete assistance projects where at all possible. The EU is emerging as 
one of the most  important grant donors  in China, and every effort  should  be deployed 
to maximise  this advantage. Giving projects  direct  relevance  to key  policy  objectives 
is one of the best  ways of  improving  their efficiency.  It  is a simple  exercise  in  value 
for  money  which  could  be  achieved  without  increasing  the  overall  budget  allocated 
for China. 

22 

Like other international  donors, the EU is continually  looking for ways to improve the 
delivery  of  projects.  So  far,  it  has  tended  to  concentrate  on  relatively  high-budget 
programmes  spread  over  several  years.  This  maximises  the  impact  of  a  cooperation 
budget which will  remain small in relation to the needs of a country the size of China. 
Nevertheless, there are five important refinements  that should be introduced: 

Firstly,  the  EU  faces  an  ever-increasing  demand  for  supporting  small  but  highly 
visible  projects.  Some  of  these  initiatives  -  such  as  making  European  expertise 
available  rapidly  for  the  development  of  new  legislation,  professional  training, 
networking  with  EU  counterparts,  organisation  of  seminars,  and  the  production  of 
information  and  communication  material  etc  -  have  a  potential  impact  going  way 
beyond  the  small  budget  involved.  The  European  Union  should  develop  a  facility 
whereby a selection of the very best of these smaller projects  could be funded  directly 
and rapidly from the Commission's Delegation in Beijing. 

Secondly,  synergy  between  the  EU  and  Member  States'  cooperation  programmes  is 
still  underdeveloped.  Mechanisms  for  improving  coordination,  complementarity  and 
possible joint projects should urgently be considered. 

Thirdly,  in view of the  limits  imposed  by a relatively  modest  cooperation  budget,  the 
Commission  has been exploring ways of collaborating  more closely with  international 
financing institutions.  New  opportunities  have opened  up  for  using  EU  grant-funded 
projects  to  prepare  the way  for  larger  funding  from  organisations  such  as  the  World 
Bank.  In addition,  the  EU should  envisage  funding  European  experts  in  some  of  the 
Bank's  policy  related  discussions  with  the  Chinese  government.  This  benefits  all 
partners  concerned  and  is  particularly  well  suited  to  sectors  like  welfare  reform, 
energy and the environment. 

Fourthly, the European Investment Bank (EIB), which has a mandate  for  intervention 
in Asia  up to the year 2000, has currently  a modest  degree of involvement  in  China. 
Up to  now,  it has  launched  one project  - in the field of  energy  - with  a budget  of  50 
Mccus.  It appears,  however,  that  there  is room  to  improve  the  EIB's  involvement  in 
China  within  the existing  mandate. This  is even  more  important  in the context  of the 
World  Bank's 
through 
concessional financing and  to abolish  all  concessional  financing  from  1999 onwards. 
The  issue of the size  and  allocation  of the  EIB's financial envelope  in  Asia  after  the 
expiry of its present mandate remains open. 

its  development  assistance 

to  scale  down 

intention 

its  implementing  capacity,  the  Commission 

In  order  to  ease  the  EIB's  entry  into  China,  make  its  lending  more  competitive  and 
strengthen 
to  consider 
apportioning  part  of  its  cooperation  budget  to  the  EIB  in  order  to  fund  feasibility 
studies and pre-investment  analysis which would prepare the ground for EIB loans  for 
projects  of  common  interest  implemented  by  institutional  borrowers  in  China.  An 
improved  intervention  of  the  EIB  in  China  would  increase  the  visibility  of  its 
cooperation work in China and raise the profile  of its relations with the country  more 
generally. 

is  ready 

23 

Fifthly,  it is essential  to continue close dialogue  with  the Chinese  authorities  in order 
to  ensure  that  project  development  responds  to  shared  objectives.  This  dialogue 
should  encompass  all  phases of  the  project  cycle,  with  particular  attention  put  to the 
programming  phase,  as  illustrated  hy  the  Memorandum  of  Understanding  on 
programming  of  1998  and  1999  cooperation  signed  in  October  1997  between  the 
Commission  and the Chinese Authorities. 

As  a  result  of  this  dialogue,  an  early  discussion  and  exchange  of  information  with 
Member  States  on  the  basis  of  multiannual  programming  would  also  contribute  to 
increased  synergies  with  Member  States programmes. The same applies  for  the  EIB, 
World Bank and other donors. 

Proposed initiatives: 

Facilitate rapid funding of small, short-term projects out of Beijing 
Increase  synergy  between  EU's  China  policy  objectives  and  cooperation 
programmes 
Improve synergy with EU member states 
Investigate  different  means  and  approaches  for  collaboration  with  World 
Bank and other lenders 
Cooperate with I.IB to expand  EIB activities in China within existing mandate 
Strengthen  regular  dialogue  with  China  on  programming  and  project  cycle, 
and ensure early information  of Member States and IFIs 

E. Raising the profile of the European Union 

The  reemergence  of  China  is  having  a  profound  effect  on  public  opinion.  Few 
businesses, institutions or individual people outside China are not aware in some way 
of  its  rapidly  growing  profile  on  the  world  stage.  For  some  it  is  perceived  as  an 
inexhaustible  source  of  opportunities,  others  are  more  cautious  in  their  assessment; 
most  see  it  as  a broadly  positive  development  that  requires  a carefully  balanced  but 
decisive  response  from  their  public  authorities,  including  the  European  Union.  For 
such a response to be effective,  it must be visible, not just in Europe, but in China and 
the world at large. Greater visibility will give the EU added weight in its dealings with 
China. 

Close coordination  within  the  EU itself will  be needed  if the  EU is to raise its  profile 
in China succssfully.  Annual  summits and other high-level meetings with the Chinese 
leadership, of the kind recommended  in section A.l  of this Communication, would go 
some  way  to  improving  visibility,  and  should  be  given  adequate  exposure  to  the 
media. 

The EU should  also upgrade its information  policy towards China substantially.  As a 
first step  it  should  draw  up  its first-ever information  strategy  devoted  solely  to EU 
relations  with  China.  The  strategy  should  identify  key  target  audiences  within 
business,  government,  academia,  NGOs,  the  media  and  other  groups  in  order  to 
diffuse  information  about the relationship. Such audiences should, where possible, be 

24 

sought  in China  as well  as  in  Europe.  A new  information  strategy  could  include  the 
following actions, among others: 

Proposed initiatives: 

1 
Set up a Commission Press and Information  Service (SPI) in Beijing, to add to 
those already existing in Washington and Tokyo 
Expand  the  number  of  Chinese  visitors  travelling  to  Europe  i.e.  through  the 
EU Visitors' Programme 
Increase  the  intensity  of  cultural  exchange  through  schools,  universities  and 
other educational  establishments 
Organise cultural  initiatives such as exhibitions and explore means  to develop 
future cooperation  in the cultural  field 
Increase the presence of the EU at conferences  devoted  to Chinese  affairs  and 
organise seminars and conferences on the subject of EU-China  relations 
Expand  cooperation  with  existing  EU  Studies  Centres  in  Chinese  universities 
and with the Chinese Society for EU Studies 

Conclusion 

China's  growing political  and  economic  self-confidence  should  serve  as an  incentive 
for  the  EU to engage the country  more  fully.  Its growing  strength  has been  matched, 
by and large, by a growing sense of responsibility. China's  increasing assertiveness on 
the  world  stage  therefore  deserves  a  positive  response  from  Europe.  It  also  requires 
vision.  This  Communication  seeks  to  set  out  that  vision  by  laying  the  ground  for  a 
comprehensive partnership based on a set of specific, action-oriented  initiatives. 

The  focal  point of that  vision  must be to ensure the successful  and  lasting  integration 
of China  as an  equal  partner  in the world  economy.  This  should  be  coupled  with  an 
active commitment  to creating  a strong  and  open  civil  society  based  on  fundamental 
freedoms  and  human  rights,  in  step  with  China's  move  towards  a  market  economy. 
China's  WTO  accession  process,  as  well  as  the  EU's  bilateral  trade  agenda  with 
China,  remain  key  instruments,  together  with  Europe's  elaborate  cooperation 
programme  with  China,  to  bring  this  to  fruition.  At  the  same  time,  the  EU  must  be 
ready  at  short  notice  to  adapt  its policy  to  any  unforeseen  changes  prompted  by  the 
speed and scope of China's transition. 

Europe and China both  stand on the threshold  of critical  change. This should  give the 
former  the  added  incentive  to craft  its own  genuinely  European  strategy  towards  the 
latter. 

The Council  is invited  to endorse the  initiatives  laid  out  in this Communication,  and 
to  invite  the  Commission,  the  European  Parliament,  Member  States,  business  and 
other  actors to cooperate  in pursuing  the  approach  outlined.  The  Commission  stands 
ready to move forward with the initiatives outlined in the months ahead. 

25 

The  Commission  will  regularly  report  to  the  Council  and  the  European  Parliament 
this 
in 
about 
Communication.  A yearly report will be produced  to this end. 

the  progress  made 

implementation  of 

the  proposals  of 

the 

26 

ISSN 0254-1475 

COM(98)  181  final 

DOCUMENTS 

EN 

11  02  10 

Catalogue number  :  CB-CO-98-212-EN-C 

ISBN 92-78-32897-9 

Office  for Official  Publications  of the European  Communities 

L-2985  Luxembourg