China and Europe: Trading for the Future

The European Union is China's largest trading partner, and despite growing protectionism on the mainland, optimism among EU businesses in China remains high, but for how long? While gains by some marquee European companies have strengthened ties between the EU and China, falling exports and rising barriers are causing problems.

The European Union recently filed a World Trade Organization complaint against China on the grounds that Beijing was unfairly helping domestic makers of steel, aluminum and chemicals by effectively blocking overseas exports of the raw ingredients needed for steel aluminum and chemical products. The complaint alleges that Chinese steel, aluminum and chemical companies are getting first rights on raw materials from domestic producers at super low prices. This is allowing them to compete unfairly against overseas companies who have to buy their raw materials on the open market, which are now arguably at higher prices because the lack of Chinese output is limiting availability of supplies.

The United States filed a similar complaint, saying that there appeared to be a "conscious policy to create unfair preferences for Chinese industries by making raw materials cheaper for China's companies to get, and goods more economical for them to produce."

 In response, China's Ministry of Commerce said in a statement: "The main objective of China's relevant export policies is to protect the environment and natural resources. China believes the policies in question are in keeping with WTO rules."

 Beijing is not expected to change its policy anytime soon as infrastructure projects launched as a result of China's huge stimulus package ramp up and begin to require the steel and aluminum products that are benefitting from the alleged unfair trade practices.

 The recent WTO filing is not the first time the EU has had issue with China's protectionist policies. In its 2008/2009 white paper, the European Union Chamber Commerce in China (EUCCC) stated that despite improvements in some sectors, European companies are still not granted fair and equal market access to China.

 "In too many areas, European companies are still waiting for free and equal access to the Chinese market in line with the World Trade Organization commitments and in the spirit of WTO membership."

 In June, Beijing introduced a new "Buy Chinese" policy that could agitate foreign trade relations and encourage protectionism. The new policy outlines that only Chinese products and services may be used for government procurement except when certain products or services are not available within the country or could not be bought on reasonable commercial or legal terms.

 The move was a response to reports from local industry associations complaining that local governments discriminate in favor of foreign suppliers for projects related to China's RMB4 trillion stimulus package. Since China's exports and foreign direct investment have been depressed in recent months, the economy has been coping largely because of the deployment of the massive stimulus package which has increased subsidies, lending by state-owned banks and infrastructure spending.

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