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Karel De Gucht
European Commissioner for Trade
EU-China Investment: A Partnership of Equals
Bruegel Debate: China Invests in Europe Patterns Impacts and Policy Issues, Brussels
7 June 2012
Ladies and Gentlemen,
Jean Monnet is famous, in this town at least, for a great many things. But one of the most important is for his ability to push ahead even in difficult times. In his words, "what is important is neither to be optimistic, nor pessimistic but to be determined."
We are certainly at a moment in Europe when determination is required. The economic and political challenges before us are great enough for that.
In my field of work that means using all possible means to open markets so that they can, in turn, spur economic growth.
As Commissioner for Trade much of my job is naturally focused on easing the flow of goods and services across borders. But it is also, and increasingly, about the flows of investment between Europe and our key economic partners.
Foreign direct investment – whether as investor or recipient – benefits an economy in a number of ways.
First, it increases productivity. Recipient economies often benefit by gaining technological, organisational and managerial skills.
On the flipside, firms investing abroad increase their efficiency. Contrary to what is often asserted this is not about moving jobs overseas. When companies become more productive they become more competitive. When they become more competitive, they expand, and that expansion leads to the creation of new jobs – both at home and abroad. That is why, on balance, the overall effect on jobs of Europe's investments abroad is positive.
Second, investment increases trade. The foreign investor and the company taken over both provide links into their home markets, meaning the new whole is greater than the sum of its parts. Investments abroad, in fact, are the building blocks of the global value chains that drive trade today.
Third, investment provides access to capital to finance growth and restructuring. In Europe today, let us be frank:
We need the money.
On the one hand, as Member State governments privatise in response to the crisis, they need investors to buy what they are selling. On the other, new capital is the basis for new growth, whether through greenfield projects or funding to expand existing businesses.
Despite our economic challenges, it is worth remembering that the European Union is one of the world's major players when it comes to investment. Europe is the world's largest source of foreign direct investment and the attractiveness of the Single Market of 500 million affluent consumers makes Europe one of the largest hosts of FDI as well.
A first glance at China's situation could lead you to believe that it is in a very different position. Relative to its 10% share of the world's GDP China holds just 3% of the world's stocks of inward investment and 1.5% of the total outward holdings. China accounts for less than 5% of the world's outward flows and receives just 8.5% of the inward-flowing funds.
However, as we will learn from today's report, that situation is changing rapidly. Having had average outflows of just 2 and a half billion euro before 2005, China hit the 50 billion mark, and became the world's fifth largest foreign investor, in 2010. And this is just the beginning of a trend that will intensify. The report predicts that China will make between 800 billion and 1.6 trillion euros worth of new investments abroad between 2010 and 2020. That is a massive opportunity.
The nature of China's investment is also changing. The first wave of Chinese FDI was very small and focused on infrastructure to support the distribution of its exports. The second was in raw materials and as such was targeted mainly at developing countries. The key aspect of today's investment by China is that it increasingly involves companies that are much further up the value chain.
As a result, Europe is receiving significantly more investment, moving from an average inflow of less than one billion euro between 2003 and 2008 to over seven billion last year.
This change is a natural outcome of China's economic development and is a positive step for many reasons: Not least the fact that a more integrated China has a larger stake in an open international economy. In addition, and as I already mentioned, there are massive benefits to the European economy from these increased inflows. Europe needs to be in the game as China becomes a major global player on foreign direct investment over the next few years.
What is more, EU-China investment is a two way street. The growth of China's investments here happens against the backdrop of already significant European investment there. Europe has accounted for more than a fifth of all FDI flows into China since 2005, making us as one of its top sources of investment. European companies across many sectors are doing well in the Chinese market. A recent survey published by the European Union Chamber of Commerce in China found that for the majority of the companies asked, their China business represented 10% of their worldwide revenue.
Ladies and Gentlemen,
I would be delighted to stop my talk at this point and leave you with that positive image. If so, there would be no need for determination. We could all sit back and watch the money roll in.
But of course I cannot. Neither China nor the European Union can be satisfied with the status quo in our investment relationship.
And neither should we be.
Despite the rapid growth of China's investment in Europe, its stocks still only account for three and a half per cent of total FDI here. To give you a comparison, American investments here make up 21% of the total. In the other direction, Europe's investments in China add up to less than 2% of our total FDI abroad compared with nearly 30% in the United States.
Obviously, this is below potential considering we are two of the world's largest economies. And that means there is work to be done: We have to jointly clear the way for our investors so that we can take full advantage of the possibilities before us.
The good news is that we have a convenient way to do this – by moving quickly forward with the ambitious investment negotiations agreed at the last EU-China summit in February.
In our view those negotiations should lead to an agreement that does four things:
The first is to consolidate into a single, uniform framework the existing bilateral investment protection treaties that China has signed with all Member States but Ireland. This would also involve improving the treatment of investors and their assets – including key technologies and intellectual property rights.
The second is to address the question of a level playing field. For instance how can we ensure that firms compete on the same terms, regardless of their ownership structure or origin, both in Europe and in China?
The third is to add a set of commitments regarding corporate social responsibility, labour and environmental standards. These would safeguard the rights of both sides to make policy in these areas as well as committing us not to lower standards just to attract investment.
The final element is a crucial one for me. The agreement needs to secure existing openness and deliver new liberalisation of the conditions for accessing the investment market.
Such an approach would deliver concrete benefits for both sides:
Chinese investors coming to the Single Market are greeted by one of the most open investment regimes in the world. They say as much themselves. When Chinese companies are asked about the main obstacles to investment in Europe they highlight difficulties in understanding local markets or a lack of brand recognition. They do not focus on legal or political barriers,
However, that does not mean that China can be content with the way things are today. In fact, there are some very real improvements that an agreement would bring:
For one thing, China could take advantage of the changes in the Lisbon treaty to establish a single Europe-wide agreement on investment. That would mean moving from the current patchwork of 25 investment protection agreements towards a single set of standards across the Union.
That extra legal certainty would complement a broader reassurance that a new agreement would bring.
We live in a time when some are raising national security concerns about Chinese investments in Europe and others are asking questions over Europe's future openness to investment in the face of restrictions on European investment in China. There is a growing perception amongst Chinese investors and political leaders that these days they are less welcome in Europe than in the past.
I want to be very clear on this point. Europe is committed to openness in foreign investment because we believe in its benefits for our economy. At the same time we need to make sure that other countries – including China –increase their openness as well.
I believe it is right that genuine national security issues around specific investments are considered. In Europe, Member States have the mechanisms to do this and these mechanisms have to be narrowly applied and transparent. Having a more strategic overview of this at the European level could be useful. But at the same time, a full European security screening of new investments is neither desirable nor feasible in my view.
Above all, we cannot accept – in Europe or elsewhere – that national security concerns are used as a false pretence to justify the protection of vested economic interests.
An investment agreement would address this debate head on. It would reinforce legal certainty and transparency about the way foreign investments may be screened and would therefore benefit both China and the European Union.
Finally, China also stands to gain, of course, from an agreement that encourages European investments into its economy. One of the major development goals of the Chinese government is to rebalance the economy towards the innovation and modernisation provided by the private sector. European investors, with their cutting edge technologies and business practices, have an important contribution to make to that process.
Which brings me to the benefits for Europe. As I mentioned at the beginning European firms have been some of the most enthusiastic foreign participants in China's economic miracle. They have done well as a result.
Nonetheless, there can be no doubt that they do not always receive the same welcome in China that is offered in Europe.
In fact China is listed by the OECD as having the most restrictive regime for foreign investment in all of the G20.
When it comes to making new investments, obstacles range from the mandatory joint ventures that apply to cars to the outright bans on foreign ownership in large parts of the postal services market. In some cases the right to invest is conditional on forced technology transfer.
Once established, companies often find they are not competing on an equal footing with their local counterparts. Regulations may not be applied in the same way to all. Subsidies may give unfair advantages. State owned companies may use their close ties to officials to the detriment of competitors.
When all of these issues combine you get a perception that the climate for foreign investment in China is getting worse not better. The European Chamber of Commerce survey I already mentioned highlights this point – 40% of the companies questioned report that Chinese government policies towards foreign enterprises are less fair than they were two years ago.
This impression, whether correct or not, provides fodder for those that want to restrict investment into Europe. I am most decidedly not one of those people. But I do need arguments to defend Europe's openness against their attacks. If China were to take steps to open its investment market it would strengthen the case for continuing a liberal approach in Europe.
For all these reasons Europe believes we should start negotiating as quickly as possible.
Ladies and Gentlemen,
As you will hear in more detail over the course of the afternoon, investment flows are vital to the growth and development of both the European and Chinese economies.
An EU-China investment agreement would help deepen our ties, reinforcing us both. It would also send a positive signal: That we are firmly committed to building a partnership of equals.
I do not believe this will be an easy task. There are voices on both sides that will seek to block progress.
But neither am I pessimistic.
Rather, I remain, as Mr. Monnet suggested, determined.
Thank you very much for your attention.