Paving a new path with more bold moves

Although trade and investment ties between China and the European Union have grown in recent times, they have also been marred by friction and disputes.

In the absence of other effective vehicles to improve policy exchanges between the two sides, an investment agreement seems to be the best option for the EU to gain more market access in China and reduce the simmering tensions between the two sides. China also stands to gain from such an investment agreement because it contains provisions for market access and protection for both sides.

Such an agreement will also help channel more Chinese investment into Europe and also protect Chinese investors from the arbitrary and discriminatory actions of individual European governments.

The proposed EU-China investment agreement will also be the first time that the European Union negotiates an investment-only agreement on the basis of the new powers granted by the Lisbon Treaty. The common investment tool will give the EU more power to protect its investments and negotiate market access with countries such as China.

However, some member nations do not share the EU's enthusiasm for centralizing investment policy in Europe. They are concerned that a common bilateral investment treaty with China would dilute the protection provisions granted to the 28 member nations under their individual agreements.

This, however, seems to be a foregone conclusion. A critical part of the negotiations with China is the market access component and hence an attempt to establish symmetrical market relations. What this means is that European and Chinese firms should have equal market access. The EU also wants to operate on the basis of equitable and reciprocal rules with China. Such a symmetry will happen only by improving access to China's markets and not, as some suggest, by decreasing Europe's openness.

The EU has resorted to protectionist or confrontational approaches, as seen in the solar panel trade dispute with China, (and the potential case against Chinese telecoms equipment). Even if full symmetry is not achieved, a good EU-China investment agreement that paves the way for more market access in China will help disarm those who want the EU to take a tough approach.

At the same time, there are also those who are worried that, unlike the EU, China may not allow free market access. This is, however, not true because such an approach is not in China's economic interests.

China has proved several times in recent history that it can liberalize on an autonomous basis. Recent developments in Beijing suggest that new steps will be taken to free markets for greater competition. It remains to be seen how far the Chinese leaders are willing to go, but an interesting sign came recently when China expressed its desire to be part of the Geneva talks for a new plurilateral agreement on trade in services, the so-called TISA.

China is the EU's second biggest trading partner, but only 2 percent of the EU's investment goes to China. Chinese investment accounts for only 1.5 percent of inward foreign direct investment in the EU.

The World Bank's (STRI) and the OECD's FDI restrictiveness indexes point to China's joint venture requirements, equity caps, administrative barriers, local content requirement and regulatory requirements such as technology disclosures, as particularly burdensome for investors. A conservative estimate by the European Commission suggests that elimination of these barriers can increase the EU's FDI stocks in China by 2 percent and boost the EU's annual exports to China by 2 billion euros.

Structural change is now needed again - especially economic reforms for China's transition toward a consumption-driven growth model. China also intends to develop its capacity in services and R&D-based and high-end manufacturing sectors. Currently, these are sectors heavily dominated by State-owned and State-run enterprises. These sectors need reform if they are going to usher China toward a different growth model.

The author is a research associate at the Brussels-based European Centre for International Political Economy, an independent and non-profit policy research think tank. The views do not necessarily reflect those of China Daily.