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  • Author: Uri Dadush, Pauline Weil
  • Publication Date: 05-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: Despite tensions over China’s discriminatory business practices, China’s trade continues to thrive, and the country has taken over from the United States as the first destination for foreign investment. American and European businesses continue to be engaged in China’s large and growing market, even amid a trade war between China and the United States. Drawing on surveys of companies and international comparisons, we show that – contrary to the prevailing narrative – China’s business practices have improved significantly in recent years. China’s business environment is today generally more favourable than that in other large countries at similar levels of development and, in some though certainly not all aspects, is in line with the Organisation for Economic Co-operation and Development average. Differences over geopolitics and human rights must be addressed, but it is clear that trade and investment agreements conditioned on accelerated reforms in China would yield substantial dividends. The benefits of such deals would accrue not only to foreign investors in China and exporters to China, but also to consumers and importers in the European Union and, especially, in the US, where punitive tariffs on China remain in effect. Critical aspects in the negotiations would include better access for American and European investors to China’s market for services and improved enforcement of rules and regulations in China. As in many middle-income countries, uneven enforcement of the law (rather than the law itself) remains a critical problem in China.
  • Topic: Development, Bilateral Relations, European Union, Business , Investment
  • Political Geography: China, Europe, Asia, North America, United States of America
  • Author: Uri Dadush, André Sapir
  • Publication Date: 04-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: The European Union is very open to foreign direct investment. By comparison, despite considerable liberalisation in the past two decades, foreign investors in China’s markets still face significant restrictions, especially in services sectors. Given this imbalance, the EU has long sought to improve the situation for its companies operating or wanting to operate in China. After eight years of negotiations, the EU and China concluded in December 2020 a bilateral Comprehensive Agreement on Investment (CAI). The text awaiting ratification aims to give foreign investors greater market access, enforceable via state-to-state dispute settlement. It does not yet, however, cover investor protection (such as against expropriation). Meanwhile, investor protection is covered by bilateral investment treaties between EU countries and China, which remain in force. The CAI has been met in some quarters with scepticism on economic and geopolitical grounds. The main criticism is that it provides little new market access in China, and that this small economic gain for the EU comes at the price of breaking ranks with its main political ally, the United States. Our assessment, which focuses on the economic implications, is different. It is true the CAI provides only modest new market access in China, but this is because China has already made progress in recent years in liberalising its foreign investment regulations unilaterally. The CAI binds this progress under an international treaty, marking an improvement for EU firms insofar as their market access rights can be effectively enforced. Most important, the CAI includes new rules on subsidies, state-owned enterprises, technology transfer and transparency, which will improve effective market access for EU firms operating in China. These bilateral new rules could also pave the way for reform of the multilateral rules under the World Trade Organisation, with the aim of better integrating China into the international trading and investment system – a goal shared by the EU, the United States and other like-minded countries. From an economic viewpoint therefore, the CAI is an important agreement, and one worth having. However, its ratification by the European Parliament is unlikely while China continues to apply sanctions against some members of the European Parliament and other critics of China’s human rights record.
  • Topic: Science and Technology, Bilateral Relations, European Union, Investment, Liberalization
  • Political Geography: China, Europe
  • Author: Alicia Garcia-Herrero
  • Publication Date: 02-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: As China’s economic weight continues to grow, so does the global impact of its companies. Chinese state-owned enterprises (SOEs) produce a large share of Chinese goods and services. Given their importance both in China and increasingly globally, it should be measured whether SOEs introduce distortions into markets and how significant those distortions are. Foreign governments negotiating trade or investment deals with China need this information so they can better measure how far China is from offering a level playing field to foreign companies on its domestic market. In this context, competitive neutrality is an important working concept that can be used to asses how far a market is from being a competitive environment. The Organisation for Economic Co-operation and Development defines a framework of competitive neutrality as one in which public and private companies face the same set of rules, and no contact with the state gives competitive advantage to any market participant. Quantifying the concept is difficult, but we provide a preliminary measure of the lack of competitive neutrality in relation to Chinese SOEs. In particular, we focus on debt and tax neutrality and compare the situation for Chinese state-owned and private firms on aggregate and sectoral levels. Our results support the view that China’s competitive environment is generally poor. The advantageous position of SOEs in China is true for most economic sectors, though to a variable extent, with the automotive sector one of the furthest away from competitive neutrality. A working measure of competitive neutrality applied in China could help improve the level playing field for foreign companies in China. It could also be applied globally given the very large size and global footprint of Chinese SOEs. The concept could even be introduced in a potential reform of the World Trade Organisation.
  • Topic: Business , Trade, Neutrality, State-Owned Enterprises
  • Political Geography: China, Asia
  • Author: Alicia Garcia-Herrero, Junyun Tan
  • Publication Date: 12-2020
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: After decades of increasing globalisation on every front, from trade – pushed further by the growing role of value chains – to technology, movement of people and investment, there now seems to be a turn towards slower globalisation if not deglobalisation, at least in some areas. Deglobalisation is not a new concept but rather a megatrend which has been seen before, for example right before the First World War. Signs of deglobalisation, measured by decelerating trade and investment, and smaller global value chains, started to appear already in 2008. But this trend seems to have accelerated because of the United States’ push to contain China in the context of the strategic competition between the two. Such containment is apparent not only in bilateral trade and investment flows but also in technology. COVID-19 has been a second very important factor contributing to deglobalisation. The most obvious impact has been in movement of people. However, the trend towards deglobalisation is much less evident for finance, with the exception of foreign direct investment, though increasing attempts by the US and China to decouple particular types of financial flows are emerging, including the delisting of Chinese companies from US stock exchanges and the imposition of sanctions for transactions with certain Chinese companies and individuals. Overall, it is too early to confirm the depth and the sustainability of the current wave of deglobalisation, but an increasing number of signals suggest a trend of deglobalisation is underway.
  • Topic: Globalization, Bilateral Relations, Geopolitics, Investment, Trade Policy, COVID-19
  • Political Geography: China, Asia, North America, United States of America