Promoting World Economic Recovery through China-EU Economic and Trade Cooperation

THE Davos Forum themed “the Great Reset” will be held as scheduled in January 2021. With the outbreak of the COVID-19 pandemic worldwide, lockdowns and quarantine measures have severely impacted all economies, and how to recover the world economy as soon as possible has become the focus of global attention.

In its World Economic Outlook (WEO) report in October 2020, the International Monetary Fund (IMF) projected the global economy to contract by 4.4 percent in 2020. China’s economy was expected to grow by 1.9 percent, making it the only major economy that would see positive growth last year. Faced with the COVID-19 impact, China’s economy has become an important engine for world recovery and growth.

Why China?

Over the past 40 years of reform and opening-up, China’s economy has maintained high-speed growth at an average annual rate of over 10 percent, and has gained world-renowned achievements. After the outbreak of the international financial crisis in 2008, the growth of the world’s major economies slowed down significantly and even experienced a recession. The Chinese economy, however, still maintained a fairly high growth rate, and took the lead in rebounding, becoming a significant engine driving the world economic recovery. For the past few years, its economy has entered a new-normal stage, characterized by lower growth, which has still been higher than the average growth level of the world economy. According to data from the National Bureau of Statistics, China’s GDP in 2019 was close to RMB 100 trillion, accounting for more than 16 percent of the world’s total economy, and the contribution rate of its economic growth to that of the world is about 30 percent.

China continuously provides high-quality and inexpensive industrial products and medical supplies to other countries across the world. Facing the global shortage of medical supplies to fight the pandemic, the upstream and downstream of China’s industrial chain are linked in a timely manner to resume, expand, and switch production, and the capacity for COVID-19 prevention supplies has risen rapidly. As the world’s largest country with a complete industrial chain, China has produced and exported the most masks, ventilators, and protective equipment for the world.

China has taken decisive and effective measures and achieved strategic results in the fight against COVID-19. Production and business activities have quickly resumed, reducing the COVID-19 impact on the economy. Quick restoration of the normal order of production and life has not only contributed to the stability of the global industrial chain and supply chain, but also injected confidence and energy into global economic resurgence.

China’s imports have become a channel for various countries to share the Chinese market, which has strongly expanded world demand. With the growth in China’s economy and people’s living standards, its imports demand has rapidly increased, contributing to the prosperity of international trade and the recovery of the world economy. Since 2018, the country has successfully hosted the China International Import Expo (CIIE) for three consecutive years, actively opening its market to the world, and vigorously promoting the recovery and growth of an open world economy. Take service trade as an example — its service imports totaled US $4.5 trillion over the past 15 years, contributing 12.9 percent to the growth of global service imports. In 2018, Chinese President Xi Jinping predicted at the first CIIE that during the following 15 years, China’s imports services would exceed US $10 trillion. After the epidemic outbreak, China continued to comprehensively improve its opening up to the outside world, and promoted the new “dual circulation” development paradigm, with domestic circulation as the mainstay and domestic and international circulations reinforcing each other. This has allowed countries around the world to share the Chinese market.

China has further optimized the foreign investment environment to create business opportunities and convenience for foreign enterprises. China’s new Foreign Investment Law and its enforcement regulations have been implemented since January 1, 2020. Starting from April 1, 2020, restrictions on the foreign shareholding ratio in securities companies were lifted. According to the World Bank’s special report entitled China’s Doing Business Success: Drivers of Reform and Opportunities for the Future, China’s reform measures to optimize the business environment have provided a reference for other economies around the world for reform in this regard, and promoted the overall improvement of the global business environment. China’s ranking in the World Bank’s Doing Business has jumped from 78th to 31st, and has been among the 10 economies with the fastest improvement in the global business environment for two consecutive years. The business environment improvement has enhanced China’s attraction to foreign capital, created investment convenience and opportunities for overseas companies, and helped them survive the cold winter brought on by COVID-19.

Injecting Confidence and Momentum

China is the world’s largest developing country and emerging economy, and the European Union (EU) is the largest group of developed countries. Together, China and EU countries account for about one-10th of the world’s geographical area, and their combined population accounts for about one-quarter of the world’s total. Their economic output accounts for about one-third of the world’s total economy. Strengthening cooperation between China and the EU will not only help economic complementarity, allow for respective comparative advantages, and improve people’s living standards, but also inject confidence and vitality into the world economy and promote the recovery and growth of the world economy under the impact of COVID-19.

China and the EU are important trading partners. Since 2004, the EU has been China’s largest trading partner for 16 consecutive years. China has been the EU’s second largest trading partner and the largest source of imports for 15 consecutive years. In recent years, the annual bilateral trade volume has remained at the level of US $600 billion, with an average trade volume of more than US $1 million per minute. In 2019, in the context of increasing downward pressure on the global economy, the bilateral trade reached a new high, with total imports and exports of US $705.1 billion. The trade volume between China and the EU is still growing. According to data released by Eurostat, during the first seven months of 2020, the bilateral trade volume reached 382.7 billion euros, an increase of 2.6 percent year-on-year, making China the EU’s largest trading partner for the first time, surpassing the U.S., which is 5.2 billion euros higher than the total trade volume between Europe and the U.S.

The two-way investment has also grown rapidly. At the beginning of the establishment of diplomatic relations between China and the EU, mutual investment was almost zero. In the 1990s, a large number of European companies invested in China. According to the 2020 Statistics Bulletin of Foreign Direct Investment (FDI) in China issued by the Ministry of Commerce, in 2019 the EU established 2,804 foreign-invested enterprises in China, an increase of 15.6 percent year-on-year, accounting for 6.9 percent of the number of newly established foreign-invested enterprises in China that year. The amount of paid-in foreign investment was US $7.31 billion, a year-on-year decrease of 29.9 percent, accounted for 5.2 percent of China’s actual use of foreign capital. Since 2008, China’s investment in Europe has maintained a relatively rapid growth rate, with continuous innovation in investment methods and constant expansion of industries and fields. In 2014, China’s direct investment in non-financial sectors in Europe was US $9.85 billion, surpassing EU investment in China for the first time, marking a substantial change in the two-way investment relationship between China and the EU.

Prospects and Directions

China-EU economic and trade relations have a promising future. There is still room for improvement in promoting two-way opening up, giving play to the “twin engines” of the world economy, and stimulating world economic recovery and growth.

As China-EU economic and trade cooperation expands, it is normal to have trade friction. The key is that the two sides should actively explore mechanisms for properly handling trade differences through dialogue and consultation, so as to avoid abuse of trade remedy measures and a lose-lose situation. China and the EU have many common interests in infrastructure, industrial upgrading, technological innovation, green development, and especially urban integration, and potential for mutual investment is huge. Some European countries and politicians should abandon the erroneous concepts of “institutional rival” and “overdependence on China.” The two sides should speed up the negotiation of the China-EU investment agreement with a pragmatic and cooperative attitude, provide institutional guarantees for the investment of Chinese and European companies, continue to promote economic and trade cooperation, reach an investment agreement as soon as possible, and initiate the feasibility study of the China-EU Free Trade Area.

The EU has always adopted strict controls on China’s hi-tech exports, and the growth potential of bilateral hi-tech trade has not been fully explored. If the EU reduces the export restrictions on new energy, new materials, energy conservation, environmental protection, green and low-carbon technologies, and other high and new technologies urgently needed for China’s current development, and combines its scientific and technological innovation with China’s vast market, it will not only promote China’s industrial structural upgrading and the transformation of economic development models, but also inject new vitality into the European economy in the post-crisis era.

The debt crisis is the most severe test facing the European integration process. At this critical moment, China has always firmly supported the euro and European economic integration. By purchasing bonds and increasing imports, China has provided the EU with assistance within its capacity, and has played a positive role in helping the euro through the hardest time. Deepening China-EU monetary and financial cooperation is also conducive to promoting the RMB internationalization. Therefore, deepening financial cooperation is a highlight in the future development of China-EU relations. China can use the perfect financial infrastructure of European financial centers to promote the RMB internationalization, and major European financial centers can also use the RMB to increase their influence.

Although cultural exchanges and cooperation have gone beyond the scope of economic and trade cooperation, they are the soul of the development of bilateral relations and the guarantee for sustained and sound development of economic and trade relations. There are huge differences in values and ideologies between China and the EU. This is also the source of misunderstanding and mutual distrust between the two sides. Only when the two sides better know and understand each other can they become true friends. Strengthening cooperation in cultural and social fields will help them become real friends.

Both China and the EU are active advocates of global economic governance reforms, and there are many common standpoints in global economic governance. They should jointly promote the G20 to become the main platform for global economic governance and promote the institutionalization of the G20. China and the EU should also jointly promote the reform of international financial institutions, promote the diversification of the currency system, change the unreasonable situation of the dominance of the U.S. dollar, and strive to build an international currency system conducive to the healthy development of the world economy.

As important members of the global trading system, they are active advocates of global free trade, and should strengthen cooperation in the formulation of global trade rules, oppose any form of trade protectionism, and jointly safeguard multilateralism and the free trade system. In addition the two should jointly build an open world economy, and respond to the old and new challenges faced by the human society, and inject stability into an increasingly unstable world.

China and the EU have broad prospects for cooperation in the field of green development. The two sides have maintained long-term friendly cooperation in the field of climate change, and are committed to creating a high-quality green and low-carbon development model. The two parties have strong cooperation and complementarity in the fields of energy transition, carbon emission trading system, scientific research and innovation, and green finance, and have huge potential for cooperation in climate governance and promotion of green development. China and the EU should also cooperate closely to promote the establishment of multilateral mechanisms to address climate change.

Li Gang is an associate research fellow at the Guangxi Academy of Governance.