One hundred and fifty years ago, Britain laid the tracks of China’s first railroad. Last month, Britain agreed to allow Chinese firms both to build and operate rail lines and to design, own, andoperate a nuclear power station in Britain as part of a $23.8 billion set of trade deals betweenthe two countries. The deals are the crown jewel of the recent growth of Chinese investments in the United Kingdom. According to UK Trade and Investment, there has been more Chinese investment in the UK economy in the past 18 months than in the previous 30 years, with $13.5 billion spent from 2013-2014 alone. Within the European Union, Britain has clearly taken initiative in welcoming unconventional Chinese investments and building stronger trade ties, thereby bolstering its economy. The past month’s agreements on nuclear power and rail lines are unprecedented between the two countries, as they focus on investing in infrastructure instead of trade in services or goods. China has also gained advantages by opening up EU markets through the United Kingdom, a mutually beneficial transaction. Why, then, haven’t other EU members, or even the United States, been as eager in welcoming such unrestricted trade ties?
The EU and China: a Rocky Relationship
The Western world has long been interested in trading with China. Following lengthy multilateral negotiations to open up China’s traditionally communist, state-run economy with European states, Japan, and the United States, China joined the World Trade Organization in 2001. To do so, China had to liberalize its economy significantly, reducing tariffs and opening up its market, and has since dramatically increased trade with the European Union and the United States. According to the EU Commission, China is now the European Union’s second largest trading partner behind the United States, and the European Union is China’s biggest trading partner.
However, the European Union and the United States have cried foul many times since China joined the WTO, mostly from suspicions that the Chinese government is still favoring domestic firms by providing subsidies in order to dramatically reduce prices in the global market to a level at which other countries cannot compete. In one dispute last year, the European Union complained that Chinese solar panel producers had an unfair advantage in European and world markets because of alleged subsidies from the Chinese government. WTO officials, lead by Karel De Gucht, the EU Commissioner for Trade, proposed setting tariffs of up to 68 percent on Chinese solar panels to pressure Beijing to comply with WTO regulations.
Ultimately, however, the European Union was not so unified after all. Germany pressured its partners to drop the charges over fears that the Chinese would lash out by closing their markets to the European Union, which Germany could not afford. According to EurActiv, an organization dedicated to transparency in EU affairs, annual trade flows between China and Germany exceed Chinese trade with France, Britain, and Italy combined, totaling $180 billion in 2012. Then-newly-appointed Chinese Premier Li Keqiang made Berlin his only stop on his first visit to the European Union, and after negotiations with German Chancellor Angela Merkel and other officials, the German government decided to use its power as a member state of the WTO to oppose the commission’s proposed tariffs against China. This disunity severely hurt the European Union’s bargaining position in opposition to China.
More recently, the European Union and China began a negotiating a new investment treaty in November of 2013. Called the EU-China Investment Agreement, it is meant to eliminate restrictions for direct investors and protect their investments through a solid legal framework. The two sides, however, are having difficulty agreeing, because they each want different outcomes. EU countries desire to increase their untapped potential in Foreign Direct Investment (FDI) in China. In an interview with the HPR, Amy Studdart, deputy director of the Simon Chair in Political Economy of the Center for Strategic and International Studies, a nonpartisan think tank, said, “The EU is more interested in having its companies able to bid for government contracts in China on a level playing field, but the big problem is because of the state-owned infrastructure within China, there’s never a level playing field.” China, on the other hand, is pushing for a free trade agreement, which would eliminate tariffs, import quotas, and preferences for goods and services in each country altogether, allowing its firms to export goods and services below the price of domestically manufactured goods in the European Union. In other words, the Chinese government wants its subsidized exported goods to be sold without additional tariffs tacked on to them.
London Calling
Perhaps tired of the lagging multilateral negotiations, UK Prime Minister David Cameron attempted to make deals with China independent of the European Union. Cameron visited Beijing in December 2013 and began calling for an EU-China free trade agreement, a move widely seen as overstepping the bounds of an EU member nation, as Brussels holds the power to negotiate treaties for its members. “Some in Europe and elsewhere see the world changing and want to shut China off behind a bamboo curtain of trade barriers. Britain wants to tear these trade barriers down,” he said to the press. “Building on the recent launch of EU-China negotiations on investment, and on China’s continued commitment to economic reform, I now want to set a new long-term goal of an ambitious and comprehensive EU-China free trade agreement.”
Cameron was seen as attempting to circumvent the EU process on trade, and an irritated Brussels refused to consider negotiating a free trade agreement for all of the 28 member states. “We believe that it is premature at this stage to discuss a free trade agreement with China,” said Alexandre Polack, a spokesman for the EU Commission, to reporters. He said that the EU and China should stick to the investment treaty that was already on the table.
Cameron said after his visit to Beijing, “Britain is uniquely placed to make the case for deepening the European Union’s trade and investment relationship with China.” Indeed, for companies like Chinese telecommunications firms Huawei and ZTE Corporation, for which gaining a foothold in the European market has been a Herculean task, a stronger trade relationship with the United Kingdom would be a blessing, allowing them a consumer base on which to build upon. Additionally, notes Studdart, “If you have the UK as your hub within Europe, you usually have access to the EU market, and if you want to internationalize the RMB [China’s currency], the city of London is a good place as any to be involved in.” Therefore, China is killing two birds with one stone in building stronger ties with the British.
In a significant shift from the traditional, low-end manufactured goods and trade in services that Chinese firms usually provide to Britain, China is now heavily investing in infrastructure. Firms like the Chinese Development Bank, a wholly owned subsidiary of the government and one of the largest lenders in the world, are now allowed to build and operate high-speed rail lines such as the currently planned High Speed 2 in Britain. “Both sides agree to promote substantive cooperation between the United Kingdom and China on rail, including high-speed rail in areas including design, engineering, construction, supply operation and maintenance on projects in China and the UK,” said the two governments in a joint statement signed during Chinese Premier Li Keqiang’s visit in June. China is succeeding in its long sought-after goal of diversifying its markets by entering the high-speed rail industry, which Japan originally dominated. This will further spur economic growth, allowing China to avoid dependence on the resource-heavy industries it has traditionally invested in.
In the British energy sector, Chinese firms are already invested in the Hinkley Point C nuclear plant, and Chinese state-owned nuclear firms will be able to design, build, and operate nuclear power plants in Britain. As a joint statement read, “The UK Government welcomes investment and participation from Chinese companies in the Hinkley Point C project and progressive involvement more generally in the UK’s new build nuclear energy programme. This could include leading the development of other nuclear power station site(s) in the UK and the potential deployment of Chinese reactor technology in the UK, subject to meeting the stringent requirements of the UK’s independent nuclear regulators.” While controversial due to national security concerns, The UK government sidestepped this issue by stating that its involvement is part of its commitment to battling climate change, with both China and Britain signing a joint statement on it.
Additionally, nuclear power plant investment makes economic sense. Edward Chow, senior fellow in the Energy and National Security Program at CSIS, explained to the HPR, “When a country wants to promote its nuclear industry, it’s very important for the companies in that country to bid on worldwide projects given how capital-intensive the industry is. If you can do [foreign] projects rather than just projects in your own country, you have a commercial advantage because your per unit cost becomes a lot lower.” The United Kingdom provided an ideal opening for Chinese investors to expand their business, and in turn, the resultant trade has lightened British taxpayers’ loads.
In other sectors, however, the political landscape of the United Kingdom, the European Union, and China has had less impact on recent trade agreements, including the $19.85 billion BP (formerly British Petroleum) contract to supply state-owned China National Offshore Oil Corporation with liquefied natural gas for 20 years, and the Royal Dutch Shell energy agreement extension. Said Chow, “Because China is planning to import a lot of LNG, the fact that BP signed the deal doesn’t mean really anything to me as an industry analyst … [and] there’s nothing particularly British about the deal. The gas isn’t going to come from Britain, that’s for sure.” Rather, it seems that governments of both countries capitalized off of the Chinese premier’s visit to announce as much good news as they could in multiple industries, although these deals are not as politically charged as the nuclear power and high-speed rail agreements are.
The Benefits of Cooperation
After examining the facts, a free trade agreement, in addition to bilateral investment treaties between China and the West, could be ideal for all economies involved. Imagine if the EU and the United States lifted tariffs on Chinese solar panels—citizens of many nations would be able to afford clean energy and help their countries’ economies become less dependent on oil, gas, and coal. In fact, the WTO ruled last month that according to the 1964 Marrakesh accords, American anti-subsidy duties imposed against Chinese solar panels were unjustified, violating WTO regulations because Washington had not produced sufficient evidence that the state-owned enterprises that gave subsidies were public bodies. It would be better for consumers if governments let demand and supply determine prices of goods and services rather than politics.
Wary of Chinese dominance in domestic markets, the European Union and the United States have protested practices they deem as unfair, often countering with tariffs and trade restrictions. Ironically, by seeking to control commerce with government interference, they are undermining true market capitalism, the very system they seek to protect.