How Trump May Drive EU and China Closer on Trade: QuickTake Q&A

The European Union and China may be moving toward closer trading ties as President Donald Trump introduces an element of uncertainty into the U.S.’s trading relationship with the rest of the world. Some EU leaders have been encouraged by Chinese President Xi Jinping’s push back against Trump’s protectionist rhetoric. Though China still goes to great lengths to protect its domestic industries -- just one of the issues that divides the two sides -- some believe the time is right to seal an EU-China accord. It would be a milestone for two of the most powerful players in world trade.

1. How is Trump pushing the EU and China closer?

German Chancellor Angela Merkel has spoken about her concern with the rise of protectionism, while Chinese President Xi has likened protectionism to “locking oneself in a dark room.” Jyrki Katainen, a vice president of the European Commission, the EU’s executive arm, has predicted the relationship between Europe and China will deepen. Trump withdrew the U.S. from the 12-nation Trans-Pacific Partnership and is likely to end talks on a similar open-trade deal with the EU. That all leaves the EU and China freer to maneuver.

2. What could result from closer ties?

China and the EU are working on an agreement to liberalize investment and eliminate restrictions on investors in each other’s market. Katainen said Europe wants to speed up those talks. Currently, the EU accounts for about 16 percent of investment flows into China.

3. How much trading goes on now?

A lot. China is the EU’s second-biggest trading partner after the U.S.; the EU is China’s biggest trading partner. More than 1.5 billion euros ($1.6 billion) of goods and services move between China and the EU daily. That amounts to more than 500 billion euros a year. In all, China accounts for about 20 percent of EU goods imports and 10 percent of its exports.

4. Who has the edge on trade?

In 2015, the EU ran a trade deficit in goods of 180 billion euros with China. In services, the EU had a surplus of 10.9 billion euros.

5. Is the EU OK with that trade imbalance?

Not at all, which has made the EU’s relationship with China rocky. The trade deficit is at least partly due to barriers China has thrown up. In a laundry list laid out by EU Trade Commissioner Cecilia Malmstrom, these include non-tariff measures that discriminate against foreign companies, Chinese government support for state-owned competitors and poor protection of intellectual-property rights. Malmstrom says China’s Jinping needs to follow his words with action on free trade and globalization.

6. What does Europe want?

In a word, reciprocity. European companies want the same level of access to China that the EU gives to Chinese firms. The Chinese have made high-profile purchases in Europe, including German airports, the Port of Piraeus in Greece and Italy’s Pirelli & C. SpA. By contrast, European investors face barriers, including equity caps, forced technology transfers and licensing restrictions, Malmstrom said. European steelmakers must also compete with Chinese firms that benefit from huge subsidies, she said, adding that Chinese firms are treated impartially by European regulators but that isn’t always the case for European companies in China.

7. How has the EU reacted to these barriers?

In the last three months of 2016 alone, the EU expanded tariffs on steel pipe from China, imposed anti-dumping duties as high as 74 percent on two other types of Chinese steel and laid out plans to extend tariffs on imported Chinese solar modules for another two years. In all, China faces more European anti-dumping duties than any other country.

8. What does China say about all this?

It complains it’s being treated like a non-market economy -- meaning, the EU uses other nations’ trade and manufacturing figures to calculate anti-dumping levies against China. The EU says it does this because China’s subsidies distort the market by artificially lowering domestic prices, making them an unreliable indicator of a good’s “normal value.”

9. Is that allowed?

It’s up for debate. Under World Trade Organization rules, countries may consider a product to be dumped when it’s sold abroad at less than normal value. For the past 15 years, the WTO has allowed the EU to use “analogue” figures -- prices and costs from other countries -- when it calculates whether China is dumping products into Europe. This has made it easier for the EU to levy duties on Chinese imports. China filed a WTO complaint that, if successful, could prod the EU into relying on Chinese-provided costs and prices. That could reduce the EU’s ability to protect its domestic industries. The EU is proposing to scrap its analogue methods to meet Chinese demands while pledging other tweaks that it says would ensure European anti-dumping duties continue to protect against state intervention in China.

10. What happens next?

Chinese Premier Li Keqiang has accepted Merkel’s invitation to visit Germany for talks on economic and trade issues. No date has been set.

The Reference Shelf

Trump’s views on trade might be uniting the rest of the world.
China’s "Made in China 2025" program doesn’t please the EU.
This study by the Centre for European Policy Studies explores prospects for a new "silk road" between Europe and China.
The European Commission offers details on trade in goods between the EU and China.
A QuickTake explainer on China Inc.’s shopping spree of overseas acquisitions.

By: Dara Doyle - Bloomberg

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