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Karel De Gucht

European Commissioner for Trade

EU-Asian Cooperation in an Era of Transformation

Foreign Correspondents' Club

Honk Kong, 16 February 2012

Ladies and gentlemen,

When a European spends time in Asia and compares its economic vitality with the news coming from home, he may be tempted, at times, to feel a little envious.

Standing here in this venerable institution, at the heart of this dazzling city, it might also be tempting to feel a little nostalgia – for a time when this part of the Asian economic miracle was, in some respects, also part of Europe.

But such sentiments would very definitely be misplaced.

The economic progress we all seek in Europe and Asia cannot be based on looking to the past. Today's economic challenges require adaptation and innovation. As Chris Patten noted on leaving this city in 1997, "sometimes we should remember the past - the better to forget it."

At the same time, any caricature of the economic present that depicts a steadily declining Europe and a uniformly prosperous Asia would be, at best, highly incomplete. Europe's present is challenging certainly. Parts of our Union are facing painful adjustments to a new economic reality. But Europe as a whole remains strong in many respects, not least in our continuing competitiveness in matters of international trade and investment.

By contrast, although Asia's success continues to elicit admiration, slow growth in the US and in Europe is affecting export-driven economies as well. Emerging markets now find that each new step on the way to greater prosperity is more difficult than the last.

What I feel standing here in Hong Kong is a sense of possibility.

As Europeans and Asians move now to revamp our economies in the face of deep global transformations we have an opportunity to do so in cooperation.

We must not jeopardise the open markets that have proven so valuable for our economies over the past decades. We must, instead, continue to fight protectionism and make the case for free trade. China has a particularly important role to play in this process, given its huge influence on and stake in the system.

We can also use this moment of change to strengthen our relationships - between the EU and China, but also between the EU and the wider region. Our partnership will only be reinforced however, if, as well as celebrating our achievements, we also seek to overcome our differences though frank discussion.

Finally, the economic situation in Europe also represents a possibility. In finding a way through we will have to deal with many structural weaknesses that we have waited far too long to address. Though the European economy has its difficulties, the reports of our death are greatly exaggerated.

Ladies and gentlemen,

It is of course standard practice for a European Trade Commissioner to speak up against protectionism.

I will not do so just because it is part of my job description, however, but because at this moment in time, after two years in the job and three years into the crisis, I am concerned that the risk of a return to protectionism remains undiluted.

If, all things considered, protectionism remained rather limited in the immediate aftermath of the economic crisis, affecting only about 1% of world trade, it has proven to be more persistent than was expected and seems to be further on the rise.

Instead of being dismantled, as the G20 countries have promised, the number of protectionist measures put in place since the crisis has increased. 425 of the potentially trade-restrictive measures that were installed since the onset of the crisis remain in force, whereas only 71 have been removed to date. Over the last twelve months a total of 131 new measures were introduced.

The G20 commitments to reduce them have not been sufficient. Instead, a new generation of protectionist measures is in gestation: the new industrial policies of several G20 members raise concerns about open trade and investment. They are, in many cases, based on import substitution, subsidies, domestic preference, local content requirements, restrictions in public procurement and pressure to transfer intellectual property.

We know the reasons for this. Slow growth translates into higher unemployment and persistent public deficits. These create anxiety and put to the test people's faith in the market economy and globalisation, as well in their governments' ability to do much about their problems.

Twenty years ago, some predicted the "end of history", as people in all parts of the world appeared to be embracing the liberal world order. Today, many are resentful of the excesses in markets - financial markets in particular - and doubtful of their gains from international trade and investment. State capitalism is enjoying increasing popularity.

Under such circumstances the basic tenets of economic policy will always be put into question. That includes the belief in free trade that has contributed so much to growth across the world over recent decades.

Now, I do not need to labour this point here in Hong Kong or in mainland China, since the best examples of trade-led growth are in this part of the globe. But allow me to say it nonetheless: It is vital that trade policymakers continue to make the case for openness, particularly in the face of pressures from our citizens, whose concern about free trade may be well-motivated, if misdirected. Paradoxically, it is only by embracing open markets that we will be able to alleviate their anxiety, by putting our economies on a path to renewed growth and development.

A prime source of people's anxiety is, of course, China, often the elephant in the room.

That is not the case just for Europeans or Americans. From Brazil to Mexico and Turkey to Korea, people are increasingly in two minds about cooperation and competition with China - a partner whose economic emergence has stupefied citizens and businessmen since it joined the WTO 10 years ago.

More and more people are asking whether the international economic and legal framework is still valid under the circumstances, especially since updating it has become much more difficult in a world of divergent interests that still requires consensus.

I do not underestimate these difficulties. But I do believe that instead of moving away from rules-based trade, we need to redouble our efforts to reinforce the framework and ensure that the current rules are fully respected.

No country more than China has benefited more from the current framework – whether in terms of share of exports or the benefits from trade in its domestic economy.

But as it gains prominence and in some areas even achieves dominance, China needs to adapt to its new position of strength and leadership. It must help ease anxieties about open markets among its partners by applying and underwriting the rules - even if this means changing long-held government practices. For the economic challenges China will face in the decades to come can only be met in a context of global trade and in cooperation with governments and businesses world wide.

We know of course that the move towards genuine free market economics is not and never will be an easy ride. The transformation of China's economy and society has already been enormous. The next phase of economic development will prove to be equally if not more difficult. Free markets are never as harmonious as we would like them to be, and it is easy to see how that can be a deeply unsettling thought for a country with China's outlook, past and priorities.

We in the West, and in other parts of the world, must not underestimate the challenges the Chinese system faces.

We must not underrate the gigantic changes that have already taken place.

And we must not undermine the commitment of the Chinese people to open markets; their belief that trade will be one of the main drivers of prosperity in the future, as it has been in the past.

These imperatives are fundamentally entwined: if China were to feel consistently marginalised by the rest of the world, misunderstood and mistreated, its enthusiasm for open markets could easily cool. It might try to seek a New Deal with its citizens that would no longer rely on international markets, firms and partners. And we would all be much the worse off as a result.

I will not be part of any such marginalisation.

There are some who say we are already in a trade war with China. I believe that they are wrong in their analysis of the present and downright reckless in light of the way our partnership with China should evolve in the future.

I will continue to do my utmost to make the relationship with China work. For I know how important and beneficial the strategic partnership is for both Europe and China.

Just two decades ago, China and the EU traded almost nothing. Today, we form the second-largest economic partnership in the world. In a remarkably short timeframe, our economies have integrated to a point where it is difficult to imagine one without the other. Our bilateral trade in goods reached € 428 billion in 2011. We now trade over € 1 billion a day.

EU exports in both goods and services in 2011 were up to €156.4 billion from €133.3 billion in the previous year. EU imports from China rose only slightly from 299 billion in 2010 to €308 billion in 2011, so our total trade in goods and services were €464.8 billion in 2011. This clearly shows the EU has reduced its overall trade deficit with China.

Our task for the coming years is to expand and deepen this progress into a broad long-term partnership. One area of untapped potential is investment. Europe still invests less in China than in Norway and China's investments in the EU amount, surprisingly, to less than €1 billion. The EU is therefore assessing whether it may be viability to open more formal discussions on investment issues. I also believe that as the EU and China become ever more dependent on innovation for growth, there is much we can do together to enhance the innovative capacities of our economies. There is considerable scope for discussions in the framework of an innovation dialogue.

Ladies and Gentlemen,

Our flourishing trade relationship is an achievement to be celebrated.

But as partners we also need to have clear sighted discussions about our differences in order to surmount them.

As I offer awareness, insight and respect to my Chinese counterparts, I expect nothing less in return. As we understand the strains of liberalisation among the Chinese people, so too must China grasp that European support for open markets can only be guaranteed if accepted by the public at large. And that acceptance requires a perception of fairness.

Regardless of the economic fruits of increasing trade, there is a general feeling among European companies and governments that economic openness in China is improving too slowly or not at all.

Let me quote two issues that raise a lot of eyebrows in Europe:

The first is raw materials. Last month, the WTO Appellate Body confirmed a panel ruling against China's use of export restrictions of certain raw materials, backing a case jointly brought by the US, Mexico and the European Union. The WTO found China's restrictive export regime in breach of its international commitments. It could not be justified on the basis of the environmental concerns cited, because these cannot be addressed simply by discriminating against foreign competition.

The decision is significant: for the first time, the Appellate Body has clarified the disciplines on export restrictions for the entire WTO membership. This is a recognition of the increasing relevance of the raw materials business, which currently amounts to 25% of total world trade.

We expect China to revisit its overall export restriction regime in the light of this clarification. The ruling is a verdict for open trade and fair access to raw materials. It has major implications for the much-discussed rare earths that are so essential for global hi-tech industries.

I sincerely hope that China will uphold its good record on implementation of WTO reports, and bring its rules unequivocally into compliance with its WTO commitments.

The second issue that is hotly debated in the EU is public procurement.

Small wonder. Purchases by governments represent 17% of the world economy and companies whose business depends on procurement represent 25% of EU GDP and 31 million jobs.

And yet in many countries this market is only partially open to foreign competition. To give just one example, only 5% of public procurement concerning metro networks in the EU's top 12 trading partners is legally open to competition under international agreements.

Not so in the European Union, which has one of the most open procurement markets in the world.

The EU has made more commitments to grant foreign access to its procurement market than any other member of the WTO Government Procurement Agreement. Whereas the value of EU public procurement open to bidders from outside the EU reaches €352 billion, the estimated value of US procurement offered to foreign bidders is just €178 billion, and that figure is €27 billion for Japan.

This openness has meant huge business opportunities for non-EU firms, including companies from China, in such key sectors such as rail and construction.

Now, while some in Europe might question this access, let me be clear: I strongly believe in an open procurement policy as it delivers the best value for our taxpayers' money.

But what I find much harder to explain are the barriers EU exporters face when they try to compete on procurement markets abroad. China is certainly not the only country where there are problems but problems there definitely are.

A recent study by the European Union Chamber of Commerce in China estimated the Chinese public procurement market to be as large as RMB 7,000 billion, or € 830 billion, of which only a small fraction is open to foreign business. The study found problems with access to information on tenders, unfair implementation and insufficient appeal mechanisms. It also noted that in infrastructure, a key of part the procurement market, new projects are frequently carried out through state owned enterprises and therefore by definition not open to competition.

It is in response to this type of imbalance that I am finalising, together with my colleague in charge of the Internal Market, Commissioner Barnier, a proposal for a new instrument to encourage open markets for procurement around the world.

We believe that the most effective route to liberalisation – here as in all areas of trade - is through negotiations. Negotiations only work, though, when both sides see something to be gained. The challenge for our negotiators is what to offer when the EU market is already open. What is needed is an incentive for cooperation, an incentive for opening on the part of our partners.

The aim of the new tool is to provide just such an incentive - by raising the possibility that current access might be lost if cooperation is not forthcoming.

Rest assured, those to whom the EU has made legal commitments have nothing to be concerned about. As ever, the EU will fully respect its international obligations.

It will only be if our partners refuse to agree to a fair solution that the EU would resort to blocking or complicating access. But is crucial for the system, and for our goal of open markets, that the Commission have the authority to close access to a sector for third country operators, wherever they come from, if this is what is required.

The door of free trade has to open both ways – otherwise public demands to shut it altogether will continue to gather strength.

That is decidedly not what I am working towards, so I hope we will find mutually agreed and beneficial ways to move forward.

Ladies and gentlemen,

With so much public attention focused on China, you could almost forget that Asia is larger than China alone. The European Union has not made that mistake.

Our trade strategy aims to strengthen our partnerships with countries in the region that harness a remarkable amount of economic potential. We are ambitious in pursuing that policy and in turn, these countries have recognised the potential of the European economy in fulfilling their own ambitions.

So much is happening within this region and among emerging markets world wide. Intra-emerging markets trade, which rose from only 6% of world trade in 2000 to 15% in 2010, is set to account for 27% of world trade in 2030 and 38% in 2050.

Europe, rather than seeing this as a threat, wants to use trade agreements and relations with these countries as a way to tap into these sources of growth. We do not intend just to watch from the sidelines.

Our free trade agreement with South-Korea was the first in a series of far-reaching FTAs we want to conclude. Negotiations with Singapore are progressing and we hope to conclude by the summer of this year. Next on the list is Malaysia. Outside the ASEAN region, we are already negotiating with India and are exploring possible negotiations with Japan. Of course, the best help to our trade with Asia – we remain convinced – would be a strong conclusion to the Doha Round.

This city, Hong Kong, plays a key role in our strategy towards both China and the rest of Asia.

It remains a strategic platform for EU companies trading and investing both in China and in other neighbouring countries.

Already, it is the largest foreign investor in China, contributing to around contributing to around 25% to 38% of the total realised FDI from 2000-2008. Also, Hong Kong is increasingly becoming the conduit for mainland Chinese companies 'going out', an expanding international financial centre and a regional trading hub. The rule of law in Hong Kong and the top-quality financial and related services are key to all of this.

This is an environment in which European companies feel at home – or at least: comfortably at work.

They already play a major role in the day-to-day business of Hong Kong, for instance in finance, shipping and logistics, and we expect that they will continue to have this opportunity, without regard to their nationality and on an equal footing with local or mainland Chinese competitors.

Ladies and gentlemen,

At first glance Asia's rise and vitality do contrast sharply with Europe's current predicament.

Not surprisingly, many people conclude that Europe is a spent force.

And it's not only people in emerging economies who think so.

A Transatlantic Trends poll showed that last year, for the first time, a slight majority of Americans feel that Asian countries were more important to their country’s national interests than were the countries of the EU.

At the same time a Pew Global Attitudes Survey pointed out that 63% of Chinese, 65% of Britons and even 46% of Americans believe China will soon be the world's leading superpower – indeed, many think it has already taken over from the US in that respect.

If that is your frame of mind, there seems little room for the EU to play a strong, positive role.

There is an element of schadenfreude in all this: having been on the receiving end for years of often unwanted advice, often linked to economic aid , some people in developing countries are not upset to see Europe – and the West more generally – eating a bit of humble pie. And on a personal level, who can blame them?

But this would be a premature assessment, and a politically unproductive one at that.

In terms of economic governance Europe will exit the current crisis stronger than before. And in terms of economic weight we will continue to play a major role.

It would be foolish to understate the trouble we are currently in but we should beware of simplistic conclusions about Europe's economic model and importance.

To be sure, parts of the euro zone, particularly the south of Europe, are going through a tough time. A painful adjustment process is working off the excesses that built up in the years before 2007, fuelled by cheap credit and capital imports and wages that outpaced productivity growth.

The shock of the financial crisis has raised the spectre of a messy default that would create huge panic in global financial markets.

These problems are very serious. We are, however, making good progress - through enhanced budget discipline and the erection of financial firewalls to prevent catastrophe.

But I feel I must point out that even today we are more than just on the right track. Despite initial appearances, the European Union as a whole and, for that matter, the euro are in pretty good health.

  • The EU remains the world's biggest exporter. The EU has a €207bn trade surplus in manufactures. The overall image is somewhat distorted because this surplus is offset by an even larger deficit in oil and gas;

  • The EU's share of world exports remained broadly stable over the decade. Over the same period, the US's share fell from 17.4% to 11.8% and Japan's from 10.7% to 6.5%;

  • The EU maintains its global leadership in high-value-added products (30% as opposed to 13.5% for the US and 9.8% Japan) and high-tech (16.9% in 2007, compared with the US' 13.5% and Japan's 8%).

More fundamentally, it is just plain wrong to say that Europe as a whole has a problem of competitiveness or that we live beyond our means. Just look at our current account, which is, by a small amount, in surplus. The euro remains and will stay the second reserve currency in the world. In Germany and countries in Northern and Eastern Europe, the feeling of economic crisis is very limited.

I do not pretend to downplay the frictions in the functioning of the monetary union. They are real and pervasive. But in terms of the fundamentals the European economy still exhibits considerable strength.

And, as is often the case the cloud of the crisis also has a silver lining. The crisis is giving governments the possibility finally to grasp the nettle and carry out many unpleasant structural reforms; reforms that are vital to boost our potential outputs in areas like pensions, labour markets, regulated professions, services and education.

Ladies and Gentlemen,

We are living through times of very rapid change; times of profound transformation. History is quickening its step, causing pain but also offering great opportunities.

The world economy is in a process of rebalancing and this will go on for a while. But let us not fear the future.

No matter how difficult the situation is, we will heed the advice of the American baseball player Yogi Berra:

When you come to a fork in the road, Take It!

Thank you very much.

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