EU Chamber of Commerce President Jörg Wuttke published “Position Paper 2019/2020” that demands China to adopt “Competitive Neutrality” to end unfair protection and financial favoritism for its state-owned-enterprises (SOEs)—that is at the heart of the Sino-U.S. trade war.
China has sought to control the expansion of its trade war with the United States to other advanced Western economies since the start of the conflict. While trying to inflict retaliatory pain on the United States by pushing up the average tariff rate on U.S. goods from 8 percent to 21.8 percent on Sept. 1, China has slowly trimmed the average tariff rate for the rest of the world from 8 percent to 6.7 percent, according to the Peterson Institute for International Economics.
As the Sino-U.S. trade war ramped up, European business interest in China initially avoided taking sides. But with the Trump administration’s relentlessly raising tariffs toward 30 percent forcing China into negotiated truce, the EU Chamber is now demanding China move to “Competitive Neutrality” to end its policy that “favors state-owned over private first and foremost, and then local over foreign, the principle that the government should provide equal treatment to all enterprises, regardless of ownership.”
China and the 28 nation EU were ranked as the world’s two largest exporters in 2018. But the EU exported about $230 billion to China and imported about $435 billion from China, resulting in a $205 billion trade deficit. With EU imports from China growing twice as fast as its exports to China over the last decade, China holds one fifth of EU imports.
According to the EU Chamber “Position Paper,” the Communist Party leadership promised at the Third Plenum of the 18th China Central Committee (CCP) meeting in 2013 that “the market should play the “decisive” role in resource allocation. The CCP stated that “failure to address SOE reform and advance economic liberalization will leave the market burdened by a bloated and inefficient state-owned sector that weighs the country down as it attempts to climb out of the middle-income trap.”
The EU claims that despite supportive statements by Chinese leader Xi Jinping and other top leaders over the last six years, China market access shrunk, and CCP-sponsored competitive advantages granted to its state-owned-enterprises has increased.
Rather than making competitive reforms, the Chinese regime’s goal for SOEs has been to make them “stronger, better and bigger.” The percentage of China corporate loans from state-owned banks to domestic private firms plunged from 57 percent in 2013 to 11 per cent in 2016; while the China SOEs’ loan share skyrocketed “from 35 percent to 80 percent in the same timeframe.”
In the capital intensive telecommunications and automatic data processing goods trade, China SOEs now dominate 95 percent of the Sino-EU trade. The only trade the EU dominates is motor cars, but over 60 percent of EU car exports come from Germany. As a result, the China trade deficit percent and job losses are higher in smaller EU nations.
According to the EU, “the screws have also been tightened on the private sector with SOEs imposing abnormally long payment periods in their agreements, which act as de facto loans from suppliers.” EU firms were unfairly impacted because their Chinese private sector vendors have become unreliable, causing customer losses over slow deliveries.
SEOs also engage in conflicts of interest by their “executives and regulators frequently switching hats over time, which adds another layer of unfairness for private companies to overcome.” This explains why EU firms in China are subject to long licensing delays.
The EU “Position Paper” states that the best solution to create a level playing field for trade with China would be mutual respect and cooperation. But if China reform fails to materialize, the “Position Paper” threatens that “an EU industrial policy suited to its market economy” should be structured that adopts the same unfair protection and financial favoritism as “China’s industrial policy.”
Chriss Street is an expert in macroeconomics, technology, and national security. He has served as CEO of several companies and is an active writer with more than 1,500 publications. He also regularly provides strategy lectures to graduate students at top Southern California universities.