Europe and the International Economic Order - Essay Example

? Is it possible for EU Multinational investment in China to benefit both the EU and China? Contents Contents 2 Introduction 3 Background to EU Multinational investment in China 4 Is it possible for EU Multinational investment in China to benefit both the EU and China? 5 The Benefits of EU-China Investment and Trade Relationship 7 Key issues EU investors face in China 9 Can these issues be resolved to benefit both EU and China? 12 Conclusion 16 References 17 Introduction Developing and sustaining a stable trade relationship with the key emerging economies has become a strategic priority for the developed world. This, Oehler-Sincai (2011:74) notes can be attributed to the high growth rate in these economies and the high level of transformation from efficiency driven economies towards innovation driven economies. China in particular, has experienced the strongest growth among the emergent countries over the past three decades. This has been characterised with a high level of investment projects from various developed countries, the European Union (EU) the world’s leading source and host of foreign direct investment, being among them (Vanino, 2012:70). Both China and the EU are among the largest host and source of foreign direct investment in the world and the two countries have over the past years developed an integrated industrial and commercial relationship (Bustillo and Maiza, 2012: 355). Despite the continuously increasing trading relationship between the EU and China, increase investment flows between the two countries have remained limited in comparison. While the European investors agree and concur to the suitability of China as a desirable investment location that has high unexploited potential, there are still high concerns concerning a ‘lack of level playing field’ in the region as well as uncertainty and persistent barriers in the Chinese business environment (European Commission, 2012). In recent years, EU investment in China has reached about 20% of all foreign direct investment (FDI) in China. At the same time, China is also growing to be an active investor globally with a growing share invested in the EU market (Vanino, 2012:70). The high optimism on the growth potential within the Chinese market however does not translate immediately to EU confidence in China market as a predictable and sustainable investment environment. This is mainly because of the persistent barriers in China. Furthermore, the EU feels that China has obtained more benefits from their trading and investment relationship, as EU investment environment is more open to China, than China is to EU investors (Vanino, 2012:70; Bustillo and Maiza, 2012: 355). Taking into account the rising importance of China as an investment destination for EU investors, it is important to examine whether it is possible for EU investments in China to benefit both EU and China. Hence, this paper seeks to accomplish this purpose. Background to EU Multinational investment in China Over the past three decades since the Chinese reforms which liberalised the economy to adopt a more market based economy, China has rapidly experienced high growth rates, which has elevated economic development in the country (European Commission, 2011). Over this period, China has experienced a 9% annual average growth rates with its GDP rising exponentially to 5% of the global GDP. This growth resulted to the highest drop in poverty within a country in world history as the people living under a dollar a day reduced by 170 million between 1990 and 2000, and as the country experienced a sudden surge in middle class with a large purchasing power (Commission of the European Communities, 2006). The increased integration of China into the World’s trading system, mainly spurred by the country’s inclusion in the World Trade Organisation (WTO) in 2001, provided China with export markets that were open, hence elevating the country into a trading power. Furthermore, China became a major recipient of FDI with more than half of the exports from the country being from the foreign invested multinational companies (pp.4). Over the last two decades, EU-China trade and investment relations have increased in importance due to China’s growth potential and also due to the low cost business environment in China. The recent financial crisis which grossly impacted countries, especially within EU, which has been facing debt crisis, further highlighted the need to explore high potential investment markets such as China. Currently, China is the second largest trading partner to EU after the US, while EU is arguable China’s biggest trading partner. Data shows that China is the fastest growing market to EU exports with the EU having exported goods worth €82 billion in 2009, a 4% rise from 2008. This is despite the impact of the economic crisis. In overall, the EU exports to China have more than doubled at 121% over a five year period (2005-2010) (European Commission, 2011). However, this rise has been noted to still be below potential, mainly due to market restrictions in China. Is it possible for EU Multinational investment in China to benefit both the EU and China? The EU-china trade and investment relations have received much attention especially with increased Chinese investments into Europe. Most Europeans view the EU-china relationship as unbalanced with China benefiting more from the relationship. While it is true that indeed EU’s open market has contributed greatly to China’s export led economic growth, so has EU also benefited tremendously from the EU-China relationship with EU exports to china having more than doubled over the past five years as well as low competitively priced products from China made it possible to lower interest rates and inflation rates in Europe. Hence, though China presents challenges for EU companies doing business in China, such companies have also been able to gains significantly from China over the past years. Generally, foreign direct investment benefits an economy, whether it is the host or the investor, in various ways. First and foremost, FDI increases productivity for both the recipient and the investing company. In this case, China benefits from a number of resources such as technological and managerial knowledge gained from the experts. The knowledge transfer is considered as important in fostering growth and innovation in an economy. On the other side, the EU companies which get to invest in China get to increase their efficiency as they are able to gain access to low cost labour and resources abroad. Besides, as companies move abroad, they become more competitive, thereby expanding their operations. Such expansions create even more jobs both abroad and at home. Another key benefit of FDI is that it increases trade. In this case, EU-China trade and investment relationship develops a stronger link in both the EU and the Chinese market. Furthermore, successful global investments develop an efficient global value chain that makes business more efficient, faster and ensures that a country has access to capital for restructuring and growth (Bustillo and Maiza, 2012). In his research paper, Bose (2012) evaluate the advantages and disadvantages of foreign direct investment in China. He acknowledges that indeed FDI serves the interests of both the host country as well as the foreign companies in a number of ways. For host countries, FDI contributes to the Gross Domestic product, improves the balance of payment of an economy, and enhances capital formation. Research has strongly linked growth of the gross domestic product (GDP) to growth in foreign investment inflows (Lemoine, 2000). In this way, FDI not only stimulates the export market in a host country, but also helps in servicing debt payments. It further enhances transfer of technology as well as managerial and organisational skills (Bose, 2012). China being a host country for a percentage of FDI inflows over the past few decades, the country has experienced rapid economic growth. Over this period, China has experienced a 9% annual average growth rates with its GDP rising exponentially to 5% of the global GDP (Commission of the European Communities, 2006:4). The foreign companies are also able to get a wide array of benefits. Not only does FDI improve the domestic and global competitiveness of a foreign company by increasing the company’s market base, sales as well as lowering costs of doing business, but also enhances the potential to expand, having more stable markets in fluctuating seasons, increasing global market share as well reducing dependency on narrow markets (Bose, 2012:166). For a country such as China which has one of the largest market bases as well as one of the underexploited markets with great potential, such benefits to companies are even more magnified. The Benefits of EU-China Investment and Trade Relationship The integration of China in WTO which resulted into inclusion in the global investment and trading system has been highly beneficial to both China and the EU in various ways. On one hand, EU companies have brought capital investments into China increasing the countries capital formation, and have also increased technology and knowledge capacity in the country enabling the development of its productive capacity. Furthermore, the EU is a strong solid open and easily accessible market to the Chinese with about 19% of all China’s export goods targeting the EU market. On the other hand, China has helped increase the global competitiveness of EU’s companies through increased efficiencies in production which has promoted growth in the companies and jobs. EU exports to China rose faster by more than 100% over the past decade unlike in its exports in any other country. Furthermore, EU firms have also been able to remain competitive in cost minimisation as they accessed lower costs in China (Commission of the European Communities, 2006: 5-6). The EU-China trade and investment relationship has highly influenced the trend of trade between these two markets and other markets globally. For instance, while China gain has gained knowledge and technology enabling it to explode in the high technology sector such as mobile phones, laptop among others, EU has been strengthening its specialisation to high quality good. Hence though Chinese has grown competitive in low to middle income quality goods, the EU companies have focused on strengthening the quality of their products at lower cost. In particular, EU’s vehicles and machineries market has expanded considerably with its exports to China doubling over the past decade (Alexandru and Gabriela, 2009:64). Data shows that China is the fastest growing market to EU exports with the EU having exported goods worth €82 billion in 2009, a 4% rise from 2008. This is despite the impact of the economic crisis. In overall, the EU exports to China have more than doubled at 121% over a five year period (2005-2010) (European Commission, 2011). With the aftermath of the recent economic meltdown, the EU countries have also had been faced with a debt crisis, that saw a number of countries including Greece and Italy seriously affected. In such cases, foreign investment plays a very critical role in enhancing new capital formation within a country which can help in reducing debt burdens (Bustillo and Maiza, 2012). Despite the economic challenges facing the EU currently, it still remains one of the largest investment players in the world, with the EU being both the largest recipient and source of investment. Hence, as much as China is investing in EU market, this has mainly been in the backdrop of high EU investments in China. Gucht (2012) indeed notes that over 20% of foreign direct investment flowing into China since 2005 came from the EU. Furthermore, for majority of EU companies which have invested in China, about 10% of their overall revenues came from their businesses located in China. This clearly reflects the significance of EU investments into China especially at this moment when the EU needs more of cash inflows within its economy in terms of foreign earnings. Key issues EU investors face in China More than ten years after joining the WTO, China is yet to completely implement the core principles of the organisation of transparency, non-discrimination and national treatment. Significant market barriers are still in existence especially in technical and standardisation regulations. Furthermore, other core business processes such as long and burdensome certification processes and/ or inadequate intellectual property rights enforcement have been of great concern to the EU investors. An even growing issue has been the interventionist policy that China has adopted with regard to the forceful technology transfers required by businesses, the high level of import substitution as well as how preferential access to material is given to local businesses, for instance land grants, loans, subsidies, and input prices among others (European Commission, 2011:2). With regard to market restrictions in raw materials, China has put measures such as quotas and export duties that restrict the export of such materials. Such restrictions affected about 6% of EU’s import of the raw materials in 2009, and have particularly been an area of controversy in the EU-China relations especially where there is a short supply of such materials globally (European Commission, 2011:3). A case in scenario is China’s restrictions on rare metals, where about 90% of the world’s rare metal resources are located in the country. Such rare metals, as bauxite, zinc, and coke, which are critical in the manufacture of various electronic products such as phones, semiconductors, and cars, have been a cause for various WTO dispute. China restrictions on import of these metals impacted 62% of EU’s imports of such metals, and have caused a rise in the prices of such rare metal by up to 500% (Biedermann, 2012:8; European Commission, 2011:4). Inadequate intellectual property right legislations as well as the public procurement policies which favour Chinese firms over foreign companies have also been of concern to European investors. Such policies not only hamper access to key innovative resources to the European firms, but also places companies intellectual property rights at risk as it requires foreign firms to register their IPR as well as reveal sensitive commercial information to the Chinese authorities. However, the Chinese government has in the recent past re-evaluated the procurement preferences policies in order to develop level playing field between local and foreign countries in the country. These reforms though still remain non transparent and incomplete. Furthermore, the Chinese compliance and certification procedures are long and burdensome with some colliding with international standards which leave the foreign organizations at a disadvantage (European Commission, 2011:4). Such lack of transparency and higher complexity China’s regulatory environment makes the business environment in which businesses work uncertain for foreign businesses. Despite the continuously increasing trading relationship between the EU and China, increase investment flows between the two countries have remained limited in comparison. While the European investors agree and concur to the suitability of China as a desirable investment location that has high unexploited potential, there are still high concerns concerning a ‘lack of level playing field’ in the region as well as uncertainty and persistent barriers in the Chinese business environment (European Commission, 2012). In recent years, EU investment in China has reached about 20% of all foreign direct investment (FDI) in China. At the same time, China is also growing to be an active investor globally with a growing share invested in the EU market (Vanino, 2012:70). In the face of such issues, the EU feels that China has obtained more benefits from the EU-China trading and investment relationship, as EU investment environment is more open to China, than China is to EU investors. The Chinese business environment they noted had a ‘lack of level playing field’ for foreign businesses (Bustillo and Maiza, 2012). Hence with these issues and against a background view of China as one of the most desirable areas to invest, one wonders whether it is possible for EU Multinational investment in China to benefit both the EU and China. Can these issues be resolved to benefit both EU and China? Even though from the data it is quite clear that both EU and China have both benefited so far from their EU-China relations, a key area of concern that has been rising has been the question of balance and an equal playing field. A series of EU-china Summits of past decades attests to this (Vanino, 2012:70). Gucht (2012) indeed note that EU investments in China have been below its potential taking into account that both the two markets and economies are the largest in the world. This pointed to a problem with the EU-China investment relation. In the EU market, China’s investments account for only 3.5% of the total foreign direct investment in China. This is as compared 21% from American investors. On the other hand, EU’s investments in China are less that 2% of all its foreign direct investment, with a bigger chunk of that investment (about 30%) being held in the US (Gucht, 2012:3). This clearly demonstrates that despite the EU and China being high potential markets for each other, they have still not fully explored such potential. This is especially so for EU which is the world’s leading source of foreign direct investments. EU’s strategic approach to China relations has mainly been based on the belief that Europe would influence China to liberalise its market and economy, democratise its politics as well as improve its standards to international level. The underlying rationale on the European engagement strategy was that increased engagement with China would change China into a more EU friendly business environment. Hence this strategy over the years resulted to a serious of bilateral agreements and summits meant to draw China towards policies that are friendly to EU (Fox and Godement, 2009:2; Gucht, 2012). However, over the years China’s domestic and foreign policies have also evolved in a manner that has disregarded foreign influence. Fox and Godement (2009:2) notes in his analysis of EU-China power relations, that the EU’s policy of increased engagement with China with no conditions, has given China open access to significant benefits of the cooperation between the two while requiring less in return. The cooperation agreement concluded in 1985, he notes, has been the basis of conflicting bilateral investment treaties among the EU countries and China, as well the major cause of the various obstacles that face European firms operating in China contrary to non restrictive regimes that Chinese companies face in Europe. Furthermore, this approach to relations with China has also been attributed to be the reason behind EU’s ever rising trade deficit with China, which by 2009 had hit €169 billion. Such huge deficits imply that Europe is importing more from China that it is exporting which can in the long run be detrimental to the Balance of Trade (BoT) in EU. The huge trade deficits may be unfavourable to EU’s balance of trade, however, it has its benefits. The trade imbalance has made it possible for Europe to access low priced consumer products. This has helped the economies to combat rising inflation as well as increase real incomes. Furthermore, about 67% of the exports from China, mainly come from foreign owned businesses within China, or businesses that have a certain degree of foreign ownership, with most of the foreign ownerships coming from the EU (Farnell, 2012). Hence, the huge shift in trade deficit, also go hand in hand with increased foreign businesses in China, where such business are able to access low cost resources to produce low cost goods and sell them back to the EU markets. Just as China has benefited from increased capital formation, and high level of technology and skills transfer, so has EU firms operating in China also benefitted. Notably, the low cost industrial inputs in China have increased the competitiveness of EU firms within the global arena and have helped stimulate a significant industrial restructuring in EU companies towards a technology and service oriented sectors. As noted above, there are certain risks involved with operating in China such as restrictive procurement regime, insufficient IPR protection or burdensome registrations and certifications. Despite the risky areas, most competitive EU companies have been deterred and have been able to successfully launch in the Chinese market while others hold impressive stakes in the market, especially within the fashion, automobile, and machinery industry (Farnell, 2012:1). Some of the most profitable EU companies have significant stakes in China, with the subsidiaries in that market being among the most profitable. The recent Lisbon treaty has tried to address some of the key areas of contention between the EU and China. The treaty expanded EU competences with regard to foreign direct investments and more importantly intellectual property rights. A key area of the treaty was the development of a new Common Investment Policy which seeks to create an equal playing field for EU investors as well as ensuring negotiation of international investment agreements including investment protection and market access (Messerlin, 2010). This treaty also highlighted the lack of harmonisation in various bilateral investment treaties between individual EU countries and China. The bilateral investment treaties (BIT) between countries in EU and China regulate and stimulate investment flows between two countries. Such treaties include Italy –China BIT and the UK-China BIT. For instance, UK-China BIT which is mainly a tax treaty signed in June 2011, is meant to create a favourable investment atmosphere between the UK and China. The treaty would lower the rate of dividend withholding tax to 5% from 10%, with China not taxing any capital gains in UK holdings of 25% in Chinese firms. Such incentives are set to encourage investment flows both ways (Ross and Zhang, 2012). The different BIT between individual EU countries and China, however, limit the harmonious working of integrated EU investment agreements with China. Hence, a key step in resolving the investment issues between EU and China includes developing a uniform framework for the different BIT between China and the EU countries. This can improve the treatment of investors from EU and China and their assets including intellectual property rights and significant technologies. However, there are still areas of contention that need resolving. In a recent EU policy paper, notable areas that need correction in response to the core issues affecting EU businesses in China have included recommendation for openness of China markets as well as transparency and non discrimination within China’s legislative system. EU has also been urging China to enforce IPR laws to international standards in order to combat counterfeiting and piracy, and have also talked against forceful transfer of technology in the markets. Further, China has been increasingly urged to import from the EU so as to balance trade between the two countries (Commission of the European Communities, 2006; Gucht, 2012). Such areas of recommendation clearly show that the key issues that affect EU-China are yet to be resolved to ensure a satisfied trading relationship. Conclusion In conclusion, it can be noted that while both EU and China stand to mutually gain from EU investments in China, there are a number of issues that need be addressed in order to make the benefits mutually sustainable. While it is true that indeed EU’s open market has contributed greatly to China’s export led economic growth, so has EU also benefited tremendously from the EU-China relationship with EU exports to china having more than doubled over the past five years as well as low competitively priced products from China made it possible to lower interest rates and inflation rates in Europe. However, the cooperation relationship between Europe and China has not been all rosy. Key notable issues stem from the restrictive business regime to foreign companies that China has adopted which EU finds unfavourable as compared to the EU business environment that Chinese businesses face in EU. Key notable issues of contention are inadequate intellectual property rights enforcement in China, and the interventionist policy that China has adopted with regard to forceful technology transfers required by businesses, the high level of import substitution as well as how preferential access to material is given to local businesses. Such issues have made EU call out to China to adopt a more open trading partnership as well as develop a level playing field in China that align well with the WTO agreement on non-discrimination. Therefore, even though both EU and China have so far been able to benefit from EU investments in China, the above issues need be resolved between the two economies in order fully enjoy the potential of the EU-China investment and trade relationship as well as ensuring that it is sustainable in the long run. References Alexandru, B and Gabriela, S 2009, ‘Opportunities and Challenges of European Businesses in China,’ Annals of the University of Oradea, Economic Science Series. Biedermann, R 2012, ‘China’s Wealth is EU’s Needs: The Conflict on Rare Earth Elements,’ EU-China Observer, 1, Department of EU International Relations and Diplomacy Studies. Bose, TK 2012, ‘Advantages and Disadvantages of FDI in China and India,’ International Business Research, 5, 5, pp. 164-174 Bustillo, R and Maiza, A 2012, ‘An analysis of the Economic Integration of China and the European Union: The Role of European Trade Policy,’ Asia Pacific Business Review, 18, 3, pp. 355-372. 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