By Li Zhongzhou (China Daily)
Updated: 2008-02-26 07:28

The 1985 China-EU Agreement on Trade and Economic Cooperation has successfully steered bilateral relations toward two decades of fruitful trade and economic cooperation, making the EU China's largest trading partner, and China the EU's second largest.

European businesses have become major players in a number of key industries in China, among them the automotive, chemical, petrochemical and electronics industries. More than 80 percent of the EU companies that have invested in China have recorded increasing profits. Meanwhile, China has become a major source of supplies for manufactured goods for the EU market.

The 1985 agreement has contributed significantly to the bilateral relationship over the ensuing decades, but has now been overtaken by events, particularly China's accession to the WTO and the fast changing landscape of globalization.

China is now inextricably integrated with the world economy. And the China-EU relationship has stretched far beyond the scope of the 1985 agreement, which covered only trade in goods.

At the same time, the EU has expanded to include 27 states, which has made consensus-building more complex, particularly when it comes to foreign trade policy decisions. To best reflect the new reality, China and the EU have decided to jointly elaborate new mechanisms, to recast the bilateral relationship.

Both parties have demonstrated the political will to foster a closer bilateral relationship. However, this could be a formidable task simply because China is a dynamic emerging economy while the EU is a mature economy that is extremely sensitive to dramatic structural changes.

The EU must resist internal protectionist measures. China's accession to the WTO seven years ago led to a more than four-fold increase in the country's export/import trade, which made a clear contribution to the growth of the world economy.

Despite the fact that imports grew nearly four times, China still enjoys a large trade surplus in its favor. Because China is a low-income country, it would be nigh impossible for domestic demand to increase as rapidly as the EU might like. Trade policymakers from both sides must use their wisdom in finding creative solutions to rebalancing bilateral trade without suffocating the dynamism of the Chinese economy.

The new relationship has to be crafted in a manner that will ensure both parties conduct their business consistently, according to WTO rules, with a vision that anticipates constructive bilateral relations for the next 20 years.

This would involve China fully implementing its WTO accession commitments, while the EU eliminated any measures applied against China that are inconsistent with normal WTO rules, such as trade remedy instruments. China would probably expect the EU to open its market to Chinese investment as China does for European investment.

It is of paramount importance to create a mechanism for bilateral cooperation to strengthen the protection of intellectual property rights. China and the EU share common interests in strengthening IPR protections, which is a prerequisite for Chinese enterprises to invest in innovation as well as for efforts to attract European enterprises to move their research and development operations to China. A growing number of Chinese companies have called for strengthened protection of IPR, reflecting their strong interest in investing in innovation.

This is an encouraging sign for European businesses. It is also an essential part of China's efforts to take a step up the ladder of the industrial chain.

Finally, a new, updated agreement should highlight the importance of giving full play to the complimentary characteristics of the two economies, particularly in areas such as sustainable development, environmental and energy technology as well as trade in services.

These constitute the top priorities in China's 11th Five-Year Development Program and are areas in which European businesses can make significant contributions. For example, the EU's mature financial regulatory regime could offer a useful model for China's efforts to build an efficient and effective system of its own.

Policymakers from both sides are advised to resist protectionist pressure, steer away from rhetoric and get down to crafting a practical approach to securing mutual benefits from a fast-growing global economy.

The author is China's former senior WTO negotiator

(China Daily 02/26/2008 page9)