About one month ago, namely, on June 16th, China Institute for Reform and Development (CIRD), China Public Diplomacy Association (CPDA) and Center for European Policy Studies (CEPS) jointly organized an international forum in Brussels on the theme of China-EU Free Trade Area: Vision, design, reforms, impact and adjustment. On July 18, after just one month, CIRD, CPDA, Chinese Mission to the European Union and Friends of Europe organized the 6th China-Europe Forum in Haikou.
Currently, either the Brexit referendum, or the farce of so-called arbitration of the South China Sea issue, reflects profound and complex changes in the economic and political landscape of the world. Against this particular background, regional economic integration and economic globalization are facing big challenges: First, the slow-down of the world economy has been lingering and the world trade growth has been significantly slower, with regional integration and economic globalization falling into a new predicament; second, the world is witnessing rising global trade protectionism, which brings new challenges to regional economic integration and economic globalization. It is in this unique situation that we organized the 6th China-Europe Forum on the theme of China, Europe and Economic Transformation: Prospects and Opportunities. I believe this forum is to have positive impacts on deepening China-EU economic cooperation.
Joint Efforts to Oppose Trade Protectionism
Firstly, trade protectionism has become a new challenge for deepening China-EU economic cooperation. I believe that Brexit referendum not only seriously affects the European economic integration process and increases uncertainties in economic globalization, but also objectively gives rise to trade protectionism. At present, the world is at a crossroads of resisting the rising trade protectionism and promoting the trade liberalization process. If a good choice is made, a new round of globalization with trade in service playing the key role will drive sustainable growth of the world economy; on the contrary, there will be a new round of worldwide trade wars with no winners, which would add more uncertainties to the global economic and political situations. To this we should be alert.
Confronted with serious challenges out of rising trade protectionism, both China and the EU should take joint actions and avoid a zero-sum game. We should join hands to promote trade liberalization and economic integration. Both sides should not only set an example by taking the lead in promoting Asia-Europe trade liberalization and in building an open and inclusive Eurasian market, but also work together to guide the development of new rules for global trade and investment to a more fair and sustainable orientation. In particular, we should oppose the practice of some countries imposing exclusive and discriminatory trade rules by taking advantage of their own advantages. Seemingly, they are promoting free trade, while virtually they are creating new trade barriers to exclude emerging economies and other developing countries.
Secondly, trade in service has a key role to play in deepening China-EU economic cooperation. With more and more servitization of the world economy, trade in services has become an important engine for a new round of globalization and trade liberalization. The growth of global trade in services has been higher than that of GDP and of trade in goods in most of the years between 2001 and 2014, with trade in services accounted for 1/5 of the total trade globally in 2015. With the rapid development of service trade, the hotspot and priority of global investment and trade have shifted the service sector, and the focus of global free trade agreement negotiations has also switched to service trade. "The first generation" of trade rules, which focused on trade in goods, is gradually upgrading to "the second generation" of trade rules, which focuses on trade in services. Following such a trend, service trade has become the focus of deepening China-EU economic cooperation.
At the same time, as service trade is more directly related to employment and livelihood than trade in goods, service trade has become the area worse hit by protectionism. Compared with barriers to trade in goods, barriers to trade in services are less visible and more difficult and much slower to be eliminated. This would inevitably hinder the development of service trade. Under such circumstances, to counteract against trade protectionism, China and the EU should focus on their joint efforts to oppose protectionisms the area of trade in services to break down service trade barriers, especially technical ones.
Thirdly, China is advancing “a second round of opening-up” with promoting service trade as the prioritized objective. In the face of the challenging protectionism and in order to adapt to the new of trade liberalization across the globe, China will, I believe, transform its opening-up strategy in a new phase of development to gear the priority of opening up its manufacturing sectors as the priority towards the opening up its service sectors as the priority. In this way, it will move from “the first round of opening-up” focusing on industrial market towards “the second round of opening-up” focusing on service market so as to speed up its efforts in building up a new system for an open economy in line with the new trend. This is not only needed by China’s economic transformation and upgrade, but also a critical choice for expanding its opening-up.
Establishment of a China-EU FTA
Firstly, establishing a China-EU FTA is an important strategic option for deepening China-EU cooperation. Not long ago, when meeting with EU leaders during the 18th China-EU Summit, president Xi Jinping proposed to enhance China-EU strategic mutual trust with great wisdom, to expand cooperation in a broader vision, and to resolve difficult issues with a broader mind. Premier Li Keqiang also said that both sides shall make joint efforts to reach an agreement on a high-level bilateral investment treaty and start the feasibility research on FTA as soon as possible.
FTA is an important approach and instrument in counteracting against trade protectionism for economic integration. To establish a China-EU FTA, on one hand, will give access for China to utilize EU's advanced technology and advanced management expertise to develop its own modern service industries and make breakthroughs in its economic transformation and upgrade; on the other hand, will enable EU to fully utilize China’s huge service market of nearly 1.4 billion people to speed up its economic recovery and promote its sustainable development. As preliminarily estimated, if China and the EU could initially integrate their service markets by 2020, the volume of China-EU trade in services could reach 200-220 billion Euros and the share in China’s total service trade would climb up from 13.2% in 2013 to 20%.
Secondly, China and EU should not miss the window period by 2020. The time between now and 2020 is a critical period rebalancing the world economic and economic transformation in both China and EU. With the rapid unleash of the potential demand of Chinese residents for services, economic complementarity between China and EU will further strengthened. Amid the profound and complex changes in the global geo-politics, China-EU relations are vital to global and regional security, stability and prosperity. So it is rather urgent to grasp this time window. Making the right choice needs great wisdom, broader vision and broader mind. Breakthroughs in the quality of China-EU relations of the next 5 years need to be made based on the good cooperation in the past 40 years. I believe the breakthrough in improving the quality of cooperation lies in officially establishing a China-EU FTA by 2020. The EU Commission recently announced “Elements for a New EU Strategy on China”. This document, though attaching more importance to negotiations for China-EU FTA, is still far away from the requirement of deepening China-EU economic cooperation. In the new situation after Brexit referendum, if EU sticks to economic integration, it needs to eliminate interruptions for speeding up the China-EU FTA process so as to have a larger market and a greater pattern for deepening China-EU economic cooperation.
As for how to grasp the window period by 2020 to achieve breakthroughs in deepening China-EU cooperation, CIRD has the following suggestions. Within this year or at the latest next year, China and the EU need to reach a framework free trade agreement, and specify negotiation targets, key issues in and time frame for negotiations, negotiating agencies and early harvest plans. In the next years from 2018 to 2019, the two sides need to conclude negotiations on important issues including trade in goods, trade in services, investment and at the same time accelerate harvesting the results of early harvest projects. And by the year of 2020, the two sides should have signed a comprehensive agreement.
Thirdly, it needs to merge FTA negotiations into BIT Negotiations. My personal view is that this is a realistic path leading to the establishment of a China-EU FTA. China and EU have been negotiating for BIT. Current progress shows that negotiating only for BIT without thinking of FTA has proved much more difficult and the results are limited. The BIT negotiations are confronted with disagreements directly related to opening-up service sectors, which have to be resolved under an FTA framework. As the ongoing BIT negotiations have already touched on some issues in trade in services, it’s practically feasible to merge the two negotiations. Moreover, with China accelerating its orderly opening-up of its service market, the mega-trend of a second-round of opening-up with trade in services as the priority is taking into shape. So conditions for merging the two negotiations are already in place. Therefore, it is proposed to merge negotiations for an FTA into those for BIT. The other option is to start joint studies of the feasibility of China-EU FTA right after the completion of BIT negotiations within the next year.
Structural Reforms on Both Sides
Firstly, structural problems are deep-rooted causes of trade protectionism. Objectively speaking, trade protectionism is comprehensive reflection of deep-seated structural problems in an economic system. For example, the EU is confronted with outstanding structural problems of labor market rigidity, slow technological advancements in some manufacturing industries such as iron and steel and excessive welfare. These problems have weakened the competitiveness of EU enterprises. Some people place hopes on trade protection to secure growth, employment and welfare. However, economic history shows that without solving structural problems, enterprises’ competitiveness is hard to be markedly enhanced. On the contrary, productivity and economic growth rate would decline in the end, and employment and welfare will become unsustainable.
Secondly, successful structural reform is the key to the establishment of a China-EU FTA. To establish a China-EU FTA, both two sides need to solve structural problems that constrain market vitality and enterprise innovation to improve their competitiveness. China has to deepen market-oriented reforms with further opening up of its service market as a priority, advance fiscal and taxation reforms with structural tax reduction as a major task, and promote regulatory reforms to transform its supervisory mode. While EU has to advance labor market reform, relax control of high-tech export to China, markedly reduce technical barriers to trade, and uplift barriers to movement of persons involved in labor service cooperation.
Thirdly, both China and EU need unswervingly advance structural reforms. It’s not only an intrinsic requirement for establishing a China-EU FTA, but also a permanent cure for trade protectionism and for global economic integration. Advancing structural reforms will inevitably shake the pattern of vested interests and hence will have to confront enormous resistance. In this situation, some countries hope to reduce enterprises’ burden by appropriately curtailing welfare, which, more often than not, leads to demonstrations, strikes and riots. So, many countries, including some EU member states, could hardly make any difference in structural reforms for a long time. Therefore, decision-makers need to be far-sighted and more determined to pragmatically advance structural reforms so as to form new drivers for economic recovery and growth.
To cope with new challenges out of trade protectionism, China and EU have to join hands and deepen their cooperation. In this process, think tanks in China and EU have no excuse to shirk their responsibilities. In the end, I would like to propose: First, think tanks in China and EU should jointly research on new trends of, new challenges for and strategic responses to trade liberalization and economic integration; Second, we should lose no time to jointly study of key issues concerning to the establishment of a China-EU FTA; Third, we should continue to organize the Europe-China Forum well to strengthen dialogues and exchanges among think tanks with the forum as an important platform; Fourth, we have to seek support from various sources and establish a foundation to support joint research of China-EU Think Tanks.
Chi Fulin is the president of the think tank China Institute for Reform and Development (CIRD) as well as the author of this article.
(Translated by Wei Wenfeng, Chen Luyun)