Commission working document accompanying COM(2006) 631 final: Closer Partners, Growing Responsibilities A policy paper on EU-China trade and investment: Competition and Partnership {COM(2006) 631 final}
Date: 2006-10-24
Institutions: European Commission
Subjects: EU relations, competition, cooperation policy, economic relations, investment, trade relations

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 24.10.2006 
COM(2006) 632 final 

COMMISSION WORKING DOCUMENT 

Accompanying COM(2006) 631 final: Closer Partners, Growing Responsibilities 
A policy paper on EU-China trade and investment: 

Competition and Partnership 

{COM(2006) 631 final} 

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TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

China's economic revival........................................................................................... 4 

The EU-China trade and economic relationship..................................................... 5 

The benefits of openness.............................................................................................. 5 

The impact of competition ........................................................................................... 7 

Obstacles to market access........................................................................................... 8 

Conditions of competition............................................................................................ 9 

The EU's response and priorities for action .......................................................... 11 

Insisting on openness ................................................................................................. 11 

Levelling the playing field ......................................................................................... 11 

Supporting European companies................................................................................ 12 

Defending the EU's interests: dialogue first............................................................... 13 

Building a stronger global relationship ...................................................................... 14 

Conclusion............................................................................................................................... 15 

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Competition and Partnership  
A policy for EU-China trade and investment 

Executive summary 

China  is  the  single  most  important  challenge  for  EU  trade  policy.  EU-China  trade  has 
increased  dramatically  in  the  past  few  years,  doubling  between  2000  and  2005.  Europe  is 
China's largest export market; China is Europe's largest source of imports. This trade policy 
paper addresses the economic and competitive challenges that flow from this change and the 
responses the EU should adopt in the area of trade  and investment. It is part of  the  broader 
partnership with China and the approach set out by the Commission in its Communication on 
relations with China: "Closer Partners, Growing Responsibilities". 

The EU's open market has been a large contributor to China’s export-led growth. The EU has 
also benefited from the growth of the Chinese market: EU exports to China have more than 
doubled  in  the  past  five  years.  Competitively  priced  Chinese  products  have  helped  keep 
inflation  and  interest  rates  in  Europe  lower.  European  companies  have  gained  from  their 
investments in China. But competition from China has raised serious challenges for Europe in 
some important manufacturing sectors. 

If we strike the right balance, there is ample scope for a continued mutually beneficial trade 
partnership  between  Europe  and  China.  Political  leaders  on  both  sides  should  continue  to 
argue for open economic engagement. Europe should continue to offer open and fair access to 
China's exports and to adjust to the competitive challenge, while pursuing policies to support 
those bearing the burden of economic adjustment at home. China itself should reciprocate by 
strengthening its commitment to economic openness and market reform. It should strengthen 
legal protection for foreign companies and the enforcement of this protection and reject anti-
competitive trading practices and policies. 

In  pursuing  this  relationship  the  European  Commission  will  strongly  defend  openness  in 
European  trade  with  China.  But  it  will  also  seek  to  ensure  that  China  meets  its  WTO 
obligations  and  continues  to  liberalise  access  to  its  goods,  services,  investment  and  public 
procurement  markets.  It  will  seek  the  end  of  forced  technology  transfers  for  European 
investors and imposed export requirements. The EU will seek tougher protection of the legal 
rights of EU companies, especially in the area of intellectual property and urge China to end 
the unfair subsidisation or protection of strategic industries. It will seek to ensure that these 
issues  are  taken  forward  within  the  overall  process  of  dialogue  and  co-operation  between 
Europe  and  China  and  are  clearly  and  comprehensively  covered  in  the  new  Partnership  and 
Cooperation  Agreement  including  the  updating  of  the  1985  Trade  and  Co-operation 
Agreement.  To  assist  European  businesses  in  China,  the  Commission  will  oversee  the 
establishment  of  new  commercial  resources  in  China  and  Europe  to  support  European 
business and promote language learning. 

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1. 

CHINA'S ECONOMIC REVIVAL  

China's 
economic 
return 

Two hundred years ago, China was the largest economy in the world. But, 
by  1978,  its  share  of  global  GDP  had  fallen  to  0.5%.  Since  then,  China's 
policy of reform and economic openness has unlocked unprecedented levels 
of  growth  and  development.  Reforms  increased  the  role  of  the  private 
sector,  channelled  high  levels  of  savings  into  investment,  increased  the 
level  of  education,  favoured  a  move  away  from  agriculture 
into 
manufacturing  and  unlocked  the  potential  of  China's  large  pool  of  700 
million  workers.  Since  1980  China  has  enjoyed  annual  average  growth  of 
9%  and  has  seen  its  share  of  world  GDP  expand  tenfold  to  reach  5%  of 
global GDP.  

The benefits 
of growth 

China’s  growth  has  resulted  in  the  steepest  recorded  drop  in  poverty  in 
world  history.  Per  capita  income  has  doubled;  doubled  and  then  doubled 
again reaching a fifth of current EU level in purchasing power parity. China 
reduced  by  170  million  the  number  of  people  living  on  a  dollar  per  day 
between 1990 and 2000. At the same time, a large middle class with rising 
purchasing power has emerged.  

A new trading 
power 

A major 
recipient of 
foreign 
investment 

The progressive integration of China into the international trading system - 
spurred by its membership of the WTO in 2001 - has provided China with 
secure, open and predictable export markets. China has become the world’s 
third largest exporter. Its total external trade is now more than three times 
the  combined  trade  of  India  and  Brazil.  Exports  represent  more  than  one 
third of China’s economy. However, the majority of China’s exports focus 
on processed goods with limited added value. 

China  is  one  of  the  world’s  largest  recipients  of  foreign  direct  investment 
(FDI)  and  operates  incentives  for  foreign  investment.  In  2005,  foreign 
invested companies accounted for more than half of total Chinese exports.  

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A stable, 
growing 
China is in 
Europe’s 
interest 

Europe  has  a  critical  interest  in  China’s  transition  to  a  stable,  prosperous 
and  open  economy.  It  recognises  that  the  openness  of  the  EU  market  to 
Chinese  exports  will  be  a  key  factor  in  China’s  further  development.  But 
Europe  also  stands  to  benefit  from  China’s  growing  market  for  advanced 
technology,  high-value  goods  and  complex  services.  European  consumers 
will continue to benefit from competitively priced imports from China. The 
macro-economic  benefits  of  China's  export  strength  for  European 
competitiveness  and  growth  are  significant.  These  gains  outweigh  the 
losses suffered in particular areas. 

The 
challenges of 
sustainable 
growth 

The  only  sustainable  approach  for  Europe  is  to  welcome  China's  growth 
and  seek  to  benefit  from  it  through  open  trade.  To  build  and  maintain 
political support in Europe for this policy and the adjustment it requires, the 
benefits of openness and change must be fully realised. This means China 
must  show  that  it  is  committed  to  embracing  globalisation  as  a  two  way 
street.  China  should  use  its  growing  influence  to  champion  open  markets 
and fair competition.  

Moreover, despite its economic success, China faces serious challenges. Its 
competitiveness as an exporter cannot hide the structural problems it faces. 
Rapid  growth  has  been  accompanied  by  environmental  costs,  social 
inequalities  and  human  health  challenges.  For  growth  to  continue,  China 
will need to maintain the momentum of domestic reform and rebalance its 
pattern  of  growth  away  from  the  export  sector  and  towards  domestic 
demand.  China  should  continue  its  efforts  to  develop  a  more  sustainable 
approach  to  the  exploitation  of  natural  resources.  In  these  areas  Europe 
should offer recognition of the challenges and support for reform in China 
to  balance  legitimate  demands  on  China's  behaviour  towards  its  trading 
partners and the international system. 

2. 

THE EU-CHINA TRADE AND ECONOMIC RELATIONSHIP 

2.1. 

The benefits of openness 

Mutual benefits   China's  integration  into  the  global  trading  and  investment  system  has  been 
beneficial for both Europe and for China. The EU represents more than 19% 
of  China’s  external  trade.  European  companies  trading  in  China  have 
brought  capital  goods,  knowledge  and  technology  that  have  helped  China 
develop  its  productive  capacity.  Reciprocally,  trade  with  China  helps  to 
promote  growth  and  jobs  in  Europe through increasing  exports,  continuing 
specialisation  in  high-value  products  and  services  and  strengthening  the 
global competitiveness of EU companies.  

EU exports  EU exports to China increased by more than 100% between 2000 and 2005, 
much  faster  than  its  exports  in  the  rest  of  the  world.  In  the  services  sector 
EU  exports  to  China  expanded  six  fold  in  the  period  1994-2004,  based 
particularly  on  its  strengths  in  the  financial,  construction,  distribution  and 
educational services sectors.  

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EU investments 
in China 

Investments  in  China  have  allowed  EU  firms  to  remain  competitive  by 
gaining access to lower-cost inputs. A significant part of the value added of 
products "made in China" accrues to European companies. It has also helped 
European  business  maintain  jobs  and  viable  economic  activities  in  the  EU 
such  as  research,  design,  marketing,  global  management  and  complex 
manufacturing. Some investments  in  China have allowed EU firms to gain 
market share in the China market and supported our exports.  

Chinese 
investments in 
Europe 

China’s direct investment abroad remains modest but is increasing rapidly. 
Total  Chinese  foreign  investment  in  2004  was  €3  billion  with  a  strong 
emphasis  on  securing  access  to  natural  resources.  Europe  only  receives  a 
fraction  (2%)  of  this.  However,  as  this  investment  increases  with  Chinese 
commercial  expansion  beyond  its  domestic  market,  European  companies 
will  benefit  from  selling  their  experience  and  knowledge  in  distribution, 
sales and logistics networks.  

The price effect  Competitively priced imports from China have resulted in lower input prices 
for  EU  businesses  and  lower  prices  for  manufactured  products  in  Europe 
which  have  generally  translated  into  lower  prices  for  consumers.  The  total 
effect on inflation was estimated by the OECD to be -0.2% for the euro zone 
for  the  period  2001-2005.  This  in  turn  has  helped  keep  low  global  interest 
rates. Savings generated as a result of cheaper goods and inputs have been 
invested in other parts of the European economy. 

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BOX 1: Opportunities for EU businesses to compete in China 

•  The evolution of EU-China trade reflects the evolution in overall EU trade with emerging 
economies. While the latter, and China in particular, are making significant gains in some 
segments of high technology products (such as laptop computers, mobile phones and DVD 
players), the EU is strengthening its specialisation in high-quality products in preference 
to low- and middle-quality goods.  

•  Commission  studies  indicate  that  the  expansion  of  the  Chinese  market  will  continue  to 
bring  important  benefits  to  EU  operators.  Although  Chinese  companies  will  become 
competitive  in  more  market  segments  (for  example  in  basic  chemicals  or  some  types  of 
vehicles),  other  segments  will  expand  rapidly  (for  example,  specialty  chemicals,  demand 
for capital-intensive car components) offering new opportunities to EU operators.  

•  The EU is particularly strong in exports of machinery and vehicles which account for two 
thirds  of  all  EU's  goods  exports  and  one  third  of  all  Chinese  imports  of  machinery.  EU 
exports to China of chemicals have doubled in the last five years, making China the EU's 
second export market. The EU market share in China in 2005 was 16% - similar to that in 
Japan  and  ASEAN  countries  but  lower  than  its  market  share  in  the  USA  (20%),  India 
(21%) or in Brazil (31%). There is potential to increase EU market share in line with EU 
performance  in  other  markets.  As  China  develops,  its  demand  for  high-end  branded 
European consumer products will increase. 

•  In order to succeed, EU operators will need to develop a more thorough knowledge of the 
Chinese market and play on their comparative advantage. Europe’s chief assets in its trade 
relationship with China are innovation, specialisation, quality, related services and brand 
identity. High unit labour costs are not necessarily an impediment to export success: the 
strongest performing European exporters to China have some of the highest labour costs 
in Europe.  

2.2. 

The impact of competition 

Adjustment in 
Europe 

Competitively priced imports from China have added to the pressure on the 
European  economy  to  adjust  to  new  sources  of  global  competition,  in 
particular  in  traditional  low  value-added  manufacturing.  Chinese  products 
compete with EU products not just at home but in emerging markets in Asia, 
Africa  and  Latin  America.  This  competition  is  an  inevitable  and  important 
spur  to  European  competitiveness.  In  particular,  Europe  needs  to  develop 
and consolidate areas of comparative advantage in high value and high-tech 
design and production, foster innovation and help workers adjust and retrain. 
This  makes  it  all  the  more  urgent  to  make  further  progress  on  the  Lisbon 
reform  agenda  and  to  pursue  the  right  competitiveness  and  adjustment 
policies at home.  

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Delocalisation  Delocalisation  to  China  has  had  a  negative  impact  on  certain  sectors  and 
regions.  This  remains,  however,  a  limited  phenomenon.  Current  EU 
investment  in  China  represents  a  fraction  of  total  EU  foreign  investments 
(only  1%  of  total  EU  outflows,  excluding  indirect  investment).  The  total 
stock of EU direct investments in China represents 5.5% of overall foreign 
investment in China. 

The 
technological 
challenge 

China’s research efforts are developing rapidly and China  has the potential 
to move up the value chain into traditional areas of EU expertise. However, 
China has yet to develop a coherent policy on innovation, and is hampered in 
its efforts by its inadequate protection of intellectual property. While China 
has become the world’s first exporter of information technology products, a 
large  proportion  of these exports come  from  foreign  companies  established 
in  China  that  import  research-intensive,  high  value-added  components. 
Europe cannot, however, afford to be complacent.  

The trade 
deficit  

Europe runs a steep trade deficit with China: in 2005, Chinese exports to the 
EU reached €158 billion and EU exports to China €52 billion, resulting in a 
trade  deficit  of  €106  billion.  However,  approaching  the  EU-China  trade 
deficit  in  isolation  is  misleading.  Asia's  share  of  EU  imports  has  remained 
relatively stable at 20-25% over the last decade. The trade deficit with China 
hides  to  some  extent  the  fact  that  its  exports  have  partly  replaced  exports 
from other Asian countries. 

  While  the  Chinese  competitive  challenge  needs  to  be  put  clearly  in 
perspective,  it  is  unquestionably  real  and  has  important  consequences  for 
companies  and  individual  workers  in  Europe.  This  is  why  securing 
reciprocal free and fair market in access in China is crucial. Here, a range of 
obstacles  to  market  access  and  skewed  conditions  of  competition  need 
urgent attention.  

2.3. 

Obstacles to market access 

  While  Chinese  tariffs  have  gone  down  significantly  as  a  result  of  China's 
WTO  accession,  EU  exports  still  face  a  number  of  tariff  and  non-tariff 
barriers  to  trade  and  restrictions  on  investment  in  manufacturing  and  in 
services.  There  is  a  growing  perception  that  incomplete  implementation  of 
WTO  obligations  and  barriers  to  market  access  are  preventing  a  genuinely 
reciprocal trading relationship between Europe and China.  

Tariffs   In the course of WTO accession China’s tariffs were reduced to an average 
of  8.8%  for  non-agricultural  products.  However,  China  has  maintained  a 
number of tariff peaks in some industries of particular importance for the EU 
such  as  textiles  and  clothing,  leather  and  fur,  footwear,  ceramics,  steel  and 
vehicles. 

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Non-tariff 
barriers  

European  exporters  and  investors  are  facing  an  increasing  number  of 
unjustifiable non-tariff barriers in the form of product certification, labelling 
standards, import approval requirements and customs clearance delays. The 
application  of  laws  is  often  not  uniform  and  regional  variations  in  customs 
procedures  have  a  negative  impact  on  trade.  Unreasonable  sanitary  and 
health  requirements  can  create  barriers  that  hamper  exports  to  China,  in 
particular  for  agricultural  products.  Chinese  national  standards  often  differ 
significantly  from  international  standards.  This  results  in  high  compliance 
costs and extended delays for business which impact on their ability to sell 
on  the  China  market,  affecting  in  particular  EU  small  and  medium-sized 
enterprises.  

Government 
procurement  

China  committed  itself  to  opening  its  procurement  market  and  acceding  to 
the  multilateral  Government  Procurement  Agreement  as  soon  as  possible 
after its accession to the WTO. China has now committed to start accession 
negotiations in 2008. However, many procurement markets remain closed to 
European businesses. In some sectors, technology transfers have been made 
a condition for foreign companies to participate in international bids. 

New policies 
discriminating 
foreign 
operators  

Investment 
restrictions  

In  key  sectors  such  as  automobiles,  steel,  semiconductors  or  shipbuilding, 
new  policies  are  emerging  which  appear  to  be  based  on  a  ‘China  first 
approach’  contrary  to  the  non-discriminatory  principles  of  the  WTO.  In  a 
number  of  industries  China  has  been  imposing  local  content  requirements, 
either  through  direct  legislation  or  investment  authorisation,  limiting  EU 
exports  and  unfairly  aiding  local  industry.  There  is  a  growing  risk  that 
competition policy will be used against foreign operators and that the lack of 
independence  or  transparency  of  many  regulators  results  in  decisions 
favouring Chinese operators. 

In  the  manufacturing  and  services  sectors  European  investors  are  still 
prevented from setting up wholly owned foreign enterprises and are required 
to  establish  joint  ventures  with  Chinese  partners.  In  the  telecoms  and 
financial services sector, EU firms have been unable to expand significantly 
because  of  high  capital  requirements  and  complex  approval  procedures.  In 
the  manufacturing  sector,  China  continues 
investment 
restrictions  on  some  key  industries  for  Europe  such  as  automobiles, 
petrochemicals or steel.  

to  maintain 

2.4. 

Conditions of competition  

  EU  companies  often  find  themselves  competing  on  unfair  terms  in  China. 
The  absence  of  conditions  of  fair  market  competition  and  inadequate  legal 
protection  pose  serious  problems.  China’s  policies  on  the  environment, 
social standards, currency valuation and natural resources can distort trade. 

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Intellectual 
property and 
legal rights, 
forced 
technology 
transfers.  

The  adequate  protection  of  intellectual  property  rights  such  as  patents, 
copyrights and trademarks is central to the exercise of Europe’s comparative 
advantage  in  innovation,  design  and  high-value  production.  Insufficient 
protection  of  intellectual  property  represents  a  pressing  challenge  for  EU 
businesses  in  China.  China  is  by  far  the  largest  source  of  counterfeit  and 
pirated products seized at the EU’s borders. While China has made welcome 
progress in setting up an intellectual property regime, loopholes remain and 
effective  implementation  and  enforcement  of  laws  remains  uneven  or 
lacking.  EU  companies  also  face  an  opaque  and  burdensome  legal  and 
judicial  system  that  offers  insufficient  guarantees  of  legal  protection  of  the 
rights of EU companies.  

Subsidies   China has channelled significant subsidies to favoured national industries, in 
particular  companies  destined  to  become  national  or  regional  champions. 
These  companies  have  also  benefited  from  preferential  policies  such  as 
privileged  access  to  the  banking  sector.  In  some  cases,  such  as  the 
automotive  and  steel  sectors,  whole  sectors  benefit  from  an  integrated 
industrial policy intended to support domestic production and boost exports. 
China  has  also  developed  a  taxation  system  granting  tax  preferences 
contingent on the use of local content or export performance.  

Flexible 
Exchange Rate 

China’s exports to the EU have also benefited from the currency alignment 
of  the  Chinese  renminbi  to  the  dollar,  which  has  given  them  an  important 
competitive advantage. China is now moving towards increased flexibility in 
its currency regime, which should help shift the balance to higher levels of 
domestic consumption.  

Excessive 
saving 
depresses 
demand for 
imports 

Demand  for  EU  products  in  China  is  also  suppressed  by  low  domestic 
demand resulting from high savings as a result of limited public provision of 
health  and  social  security  services.  Enterprises'  savings  are  also  very  large 
and account for about half of China's savings. This both suppresses domestic 
demand,  including  for  EU  goods  and  services  and  ensures  that  the  bulk  of 
domestic production is exported.  

Environment, 
social and 
safety 
conditions 

China’s  regulatory  regime  for  the  protection  of  the  environment  remains 
incomplete and implementation on the ground inadequate or discriminatory 
in favour of local producers. This is contributing to the rapid deterioration of 
China's environment. China has also maintained restrictions on investment or 
imports of certain environmentally friendly products and services. China has 
yet  to  ratify,  transpose  and  implement  into  domestic  legislation  four  of  the 
eight  core  ILO  conventions  relating  to  freedom  of  association,  collective 
bargaining  and  forced  labour  and  other  important  conventions  on  labour 
inspection,  health  and  safety  at  work  and  social  protection.  Chinese 
companies  also  often  fail  to  meet  reasonable  safety  standards  for  their 
products; half of the alerts in Europe for dangerous non-food products are for 
products manufactured in China. The lower environmental, social and safety 
standards applied in China confer a competitive advantage to production in 
China.  

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Distorting the 
market for 
global trade in 
natural 
resources 

China's race for natural resources abroad has become a major phenomenon. 
China  is  now  the  second  biggest  fuel  importer  globally:  this  is  a  clear 
indication  that  global  competition  for  resources  is  set  to  increase.  China's 
export  performance  also  relies  on  imports  of  resources  from  many 
developing countries. In some cases, China is subsidising the import of raw 
materials  conferring  advantages  to  its  industry.  At  the  same  time,  China 
limits  exports  of  certain  domestically  abundant  natural  resources  such  as 
coal, coke, rare earth, hides and silk, which can distort availability and price 
of raw materials in world markets.  

3. 

THE EU'S RESPONSE AND PRIORITIES FOR ACTION 

3.1. 

Insisting on openness 

  Europe should pursue a fair and robust trade policy on China. It should insist 
that  openness  benefits  both  Europe  and  China,  and  that  an  economically 
strong China is in Europe’s interests. It cannot call for openness from China 
from behind walls of its own.  

Enforcing 
China’s WTO 
obligations  

to 

the  WTO  Government  Procurement  Agreement 

The  EU  continues  to  monitor  closely  China's  implementation  of  its  WTO 
accession  obligations.  Substantial  work  remains  to  be  done  by  China.  This 
will  remain  a  central  priority  for  the  EU  in  the  years  to  come.  The  non-
accession 
leaves 
important Chinese markets closed and China should honour its commitment 
to open accession negotiations in 2008 and to work to bring these to a rapid 
conclusion. In 2007, the Commission will undertake a comprehensive review 
of  market  openness  in  China  and  China’s  implementation  of  its  WTO 
commitments.  It  will  strengthen  its  links  with  EU  business  to  help  identify 
key areas of concern.  

Liberalising 
beyond WTO 
obligations  

The EU will continue to urge China to move beyond its WTO commitments 
in improving market access for EU companies. The EU market is one of the 
most open markets in the world and will continue to pursue further opening 
of the Chinese market to create reciprocal opportunities for EU and Chinese 
operators. The EU will work with Chinese authorities at all levels to achieve 
this goal. In 2007 the EU will also reshape its overall market access strategy. 
It  will  increase  cooperation  with  Member  States  to  improve  EU  exports  to 
China. 

3.2. 

Levelling the playing field 

  The EU will continue to press China to improve its record in protecting the 
rights  of  EU  companies  through  a  transparent  legal  and  judicial  system 
where the regulators are fully independent.  

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Combating 
forced 
technology 
transfers, 
piracy and 
counterfeiting  

Subsidies, 
banking 
reform and 
trade 
restrictions on 
raw materials 
and energy 
goods 

Following a global enforcement survey this year, China is now the EU's first 
priority  for  intellectual  property  enforcement  worldwide.  China  should 
implement its WTO commitments both in law and on the ground and impose 
effective  deterrents  against  counterfeiting  and  piracy.  The  EU  will  create  a 
set of concrete benchmarks against which to measure China's progress. The 
EU will work with China on the creation of a special risk assessment system 
for  customs  controls  to  fight  counterfeiting  more  effectively  and  set  up 
contacts between EU and Chinese ports and airports. The EU will address as 
a  priority  requirements  for  technology  transfer  that  are  not  based  on 
voluntary business decisions and the  non-payment of royalties to EU right-
holders.  The  EU  will  launch  a  substantial  programme  in  China  to  improve 
IPR  implementation  and  to  curb  the  production  and  trade  in  China  of 
counterfeit  and  pirated  goods  and  their  export  to  Europe.  The  EU  will 
cooperate more closely with key international partners in joint efforts in this 
field. 

The Commission will press China for improved transparency in its subsidy 
regimes and will insist that China abide by its WTO commitment to end the 
granting  of  prohibited  subsidies.  The  Chinese  banking  system  should  be 
reformed to work on a commercial basis, and soft loans and other forms of 
unviable  lending  should  be  discontinued.  The  Commission  will  urge  China 
to  allow  market  forces  to  operate  in  its  trade  in  raw  materials  and  energy 
goods such as coal, coke and rare earths. 

3.3. 

Supporting European companies 

  The Commission will take action to assist EU companies on the ground, in 
particular small and medium-sized enterprises. In doing so, the Commission 
should complement rather than duplicate initiatives taken by Member States 
or private operators.  

Protecting 
European IPR  

Working  through  existing  structures,  such  as  the  IPR  helpdesk  and  the 
network of European Information Centres, the EU will extend and strengthen 
the  existing  intellectual  property  rights  helpdesk  to  provide  training  and 
advice  on  protecting  and defending European intellectual property rights in 
China.  The  EU  will  also  work  to  develop  private-public  partnerships  with 
EU  industry  federations  and  others  to  improve  the  protection  of  IPR  in 
China. 

Supporting EU 
businesses in 
China 

The Commission will seek partners to establish a European Centre in Beijing 
to  provide  support  for  companies  wishing  to  start  exporting  or  investing  in 
China.  Preparatory  work  should  start  in  2006  to  analyse  the  feasibility  and 
possible structures for such support.  

Language 
training  

In  July  2006  the  Commission  launched  the  EU-China  Executive  Managers 
Exchange  and  Training  Programme  which  will  provide  the  opportunity  for 
200  European  managers  to  learn  Chinese  in  the  next  five  years.  The 
Commission will press for this programme to be extended beyond 2010.  

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Strengthening 
the 
Commission 
on the ground 

The  Commission  will  further  strengthen  the  focus  on  trade  activity  of  the 
Commission  Delegation  in  Beijing.  It  will  seek  to  reinforce  its  activity  in 
Shanghai and Guangzhou in order to be closer to Chinese authorities and EU 
business in key commercial centres. 

3.4. 

Defending the EU's interests: dialogue first 

WTO dispute 
settlement  

Using anti-
dumping and 
anti-subsidy 
instruments 

Where  trade  irritants  arise  between  China  and  the  EU,  the  EU  will  always 
seek to resolve them through dialogue and negotiation. However, where this 
fails, the Commission will use the WTO dispute settlement system to resolve 
trade issues with China and to ensure compliance with multilaterally agreed 
rules  and  obligations.  This  is  not  a  question  of  replacing  cooperation  with 
confrontation  but  of  creating  a  sound  relationship  based  on  objective 
application of agreed multilateral rules. 

Trade defence measures will remain an instrument to ensure fair conditions 
of trade between China and the EU, as with other countries. The EU will use 
these  instruments  carefully  but  rigorously  where  they  are  justified.  At 
present, the conditions for granting Market Economy Status (MES) to China 
for anti-dumping investigations are not fulfilled. The EU is actively working 
with  China  with  a  view  to  creating  the  conditions  permitting  an  early 
granting of MES. Recent progress has been made on some of the conditions. 
The Commission will continue to work with the Chinese authorities through 
the mechanisms we have established and will be ready to act quickly once all 
the conditions are met. An improving bilateral trade relationship should help 
create the environment in which this happens. China's policy of reform will 
be instrumental in fulfilling the technical criteria for granting MES.  

BOX 2: The role of dialogue  

In  recent  years  the  European  Commission  has  established  a  number  of  important  economic 
dialogues with China that have trade implications. The Commission, the European Parliament 
and the Economic and Social Committee have been at the forefront of this activity.  

These dialogues cover issues such as intellectual property, market access, macroeconomic and 
financial sector issues, agriculture, competition, regulatory and industrial policy, and general 
product and food safety. The EU has also concluded sectoral agreements with China such as 
the Customs Cooperation Agreement which provides for reinforced EU China cooperation on 
IPR controls and supply chain security. 

These dialogues help promote  regulatory cooperation and convergence and are important in 
managing  an  increasingly  complex  relationship.  They  can  also  play  a  crucial  role  in 
preventing difficulties before they become trade disputes. The Commission will maintain the 
focus on trade and economic issues. Some areas where further dialogue is important include: 
decent work, sustainable trade, China’s policy on raw materials and energy, illegal logging, 
China’s need to improve environmental protection and statistics.  

When it is useful and appropriate, EU and Chinese business, trade unions, NGOs and other 
stakeholders  should  be  involved  in  technical  and  high-level  meetings.  European  companies 
should play an active role in implementing the decent work agenda and improving social and 

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environmental  standards  by  adopting  European  norms,  eco-technologies  and  standards  of 
corporate social responsibility in their operations in China.  

The  cooperation  programmes  which  support  these  dialogues  should  be  continued.  The  EU 
China  Trade  Programme  which  supports  capacity  building  in  China  on  trade  policy  issues 
with €15 million for the period 2004-2009 should be renewed after 2009. Its scope should be 
extended beyond the Central Government to include local and regional government.  

3.5. 

Building a stronger global relationship 

  The EU’s partnership with China should be used to draw the two economies 

closer together and to engage China on global issues.  

Concluding a 
new EU-China 
bilateral 
agreement 

Increasing 
China’s 
engagement 
with the 
multilateral 
system  

At the heart of that partnership will be the new Partnership and Cooperation 
Agreement (PCA) with China. This Agreement will include a specific focus 
on trade and investment issues. A key objective of the PCA will be building 
on  China’s  WTO  commitments  to  remove  restrictions  on  investment  and 
foreign ownership in China, obtain better protection of intellectual property 
and  negotiate  mutual  recognition  of  geographical  indications.  The  EU  will 
also  seek  to  address  with  greater  intensity  sustainability  and  environmental 
aspects  and  impacts  of  its  economic  and  trade  relations  with  China  and 
enhance cooperation on safety and health standards.  

China is already a major beneficiary of the international trading system and 
would  stand  to  gain  even  more  from  a  successful  conclusion  of  the 
negotiations under the WTO Doha Development Agenda, particularly in the 
area of trade in industrial goods. But for the negotiations to succeed, greater 
leadership  from  China  is  necessary.  The  EU  calls  on  China  to  assume  a 
responsibility commensurate with the benefits it derives from the multilateral 
trading  system  and  to  make  a  substantial  contribution  to  reviving  and 
completing  the  WTO  Doha  round.  China  should  take  the  lead  in  offering 
better  access  to  its  own  markets,  including  for  key  developing  country 
imports  like  textiles  and  manufacturing  inputs.  The  EU  and  China  should 
strengthen  their  cooperation  in  the  WTO  and  in  other  multilateral  rule-
making organisations.  

Addressing 
macro-
economic 
challenges  

A major issue for the stability of the world economy is to ensure an orderly 
correction  of  the  large  current  account  imbalances  of  the  major  economic 
zones.  The  US  current  account  deficit  reached  the  unprecedented  level  of 
6.4%  of  GDP  in  2005,  while  current  account  surpluses  have  continued  to 
widen in the Middle-East oil-exporting countries and in Asia. China's current 
account surplus reached 7.2% of GDP in 2005. The EU, drawing on our own 
experience,  will,  in  the  appropriate  fora,  continue  to  encourage  China  to 
implement  fiscal,  monetary  and  structural  policies  that  would  rebalance  its 
growth pattern and ensure long-term sustainable growth.  

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Conclusion 

China's  re-emergence  will  continue  to  have  a  major  impact  on  every  part  of  the  global 
economy. It will be felt in people's daily lives, from the cost of petrol to the price we pay for 
our clothes. It entails major challenges for global sustainable development. Adjusting to the 
competitive  challenge  and  driving  a  fair  bargain  with  China  will  be  a  central  political  and 
economic  challenge  of  EU  trade  policy  in  the  decade  to  come.  Europe  and  China  will  be 
increasingly  compelled  to  cooperate  on  global  issues  as  responsible  trade  and  economic 
global leaders. 

China’s WTO accession in 2001 has provided it with extensive and stable access to foreign 
markets,  notably  in  Europe.  However,  European  companies,  while  gaining  from  China's 
growth,  continue  to  face  serious  barriers  to  access  China’s  market.  There  is  a  growing  risk 
that  the  EU-China  trading  relationship  will  not  be  seen  as  genuinely  reciprocal.  Political 
pressure  in  the  EU  to  resist  further  openness  to  Chinese  competition  is  likely  to  increase  if 
these problems are not addressed, as we are already seeing in the United States. 

European  trade  policy  towards  China  will  seek  to  promote  openness  and  cooperation  to 
mutual  benefit,  taking  into  account  the  significant  domestic  challenges  China  faces.  Europe 
seeks  reciprocity  from  China  in  a  trade  partnership  of  equals.  It  should  be  accompanied  by 
strong policies to assist those bearing the burden of economic adjustment in Europe. Europe 
should accept fierce competition. China should ensure that it is fair competition.  

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