Cheating tiger, tech-savvy dragon: Are Western concerns about 'unfair trade' and 'Made in China 2025' justified?

(article for the September Economic Review)

China is often accused of not playing by the rules governing world trade and of being ruthless in its push for technological leadership. But to what extent are such concerns supported by the data? And how has the EU attempted to address the challenges posed by China’s trade and investment practices?

Many Western observers believe that China has not fully lived up to the commitments it made upon joining the World Trade Organisation (WTO) in 2001, while since then the Chinese economic and political system has not seen the hoped-for convergence to a Western-style liberal market economy. Moreover, Europe and the US are increasingly feeling the heat of China’s vigorous pursuit of technological leadership, best captured by the ambitious Made in China 2025 policy plan. Tensions between China and its main trading and investment partners have risen as a result.

One should not be naive. When the complaints that Western policymakers and companies have voiced about China’s trade and investment practices are compared with the available data, it is evident that several of those concerns are indeed justified. On various occasions, WTO rulings in dispute cases have found China guilty of implementing unwarranted import and export restrictions and other discriminatory measures. Also, European and US firms face much more restrictive FDI regulations in China than vice versa, mostly because of foreign equity limitations. SOEs are still very much present in China’s strategic industrial sectors and, together with politically connected ‘private’ firms, continue to benefit from subsidies, low-interest loans and other government support, which distorts competition with other domestic and foreign companies. Some of China’s current policies aimed at international technology transfer seem to be problematic too, as they tend to ‘force’ rather than simply ‘nudge’ Western companies into sharing their know-how with Chinese partners. Involvement of Chinese nationals in industrial espionage and cybertheft, even without the knowledge of the Chinese government, is unacceptable. Meanwhile, a significant part of Chinese outward FDI into the EU does target strategic assets or valuable new technologies, which thus risk falling into the hands of the Chinese government, at the expense of European companies and consumers.

In contrast to the confrontational, unilateral approach of the present US administration to trade with China, the EU has chosen the path of multilateralism for now. It has already made various proposals to reform the WTO, including a thorough update of the existing, rather minimal WTO rules on issues such as SOEs, government subsidies and (forced) technology transfers, and greater enforcement of notification obligations, for example with respect to reporting on new subsidies. The EU also seeks solutions to the crisis surrounding the WTO’s Appellate Body. On the investment front, the most notable initiative has been the establishment of a common EU framework for FDI screening, which is above all a platform for the exchange of information on FDI that could negatively impact security or public order in one or more member states. However, individual member states retain the final say on whether or not to screen and/or eventually block an investment in their territories.

Going forward, continued engagement with China will be necessary, given that the country represents a market that is simply too large to be ignored, is already embedded in numerous multinational value chains, and is poised to become an indispensable partner in solving various global challenges. Since China can no longer be considered a developing country, it is reasonable for the EU and other advanced economies to demand greater reciprocity from China in its trade and investment relations. At the same time, China’s policies should not be seen only in a negative light. Provided the strategies are adapted to be better suited to Europe’s economic and political system, the EU can certainly learn from China, for example, in terms of the development of a clear long-term vision and the expansion of its industrial base and innovative capacity.