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Sep 2019

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Trade and cooperation between China and the EU to anchor global stability

Source: Asia Insurance Review | May 2019

A turning point in international cooperation has taken place with President Trump. Euler Hermes’ Mr Alexis Garatti looks at the ramifications of closer ties between China and the EU.
 
 
After WWII, and more extensively after the fall of Berlin’s wall in 1989, the US became the main supplier of world public goods (a public good is free of charge, and available to anyone without exclusion) by maintaining a global order based on military presence and NATO’s actions, promoting trade with the WTO, coordinating economic policies with international organizations (IMF, World Bank, G20) and accepting to participate in the Paris agreement on climate change. 
 
President Trump’s presidency has represented a turning point as the America First Policy led to a retrenchment of US-based multilateralism. 
 
From this point of time on, the US has refused to provide world public goods without counterparties for the benefits of US companies. In this context, EU and China have to revive multilateralism on the basis of a multi-sided cooperation ranging from investment, trade, finance, infrastructure projects and environment protection.
 
China and the EU have reacted swiftly
On 9 April 2019, the EU and China announced that they could sign a treaty on investment at the horizon of 2020 fostering reciprocity in access to domestic market, and control of strategic assets. 
 
On 16 July 2018, China and EU leaders committed to: (i) promote multilateralism and reinforce the current rules-based trading system; (ii) work together on climate change and clean energy; (iii) collaborate in order to tackle steel overcapacity; (iv) strengthen cooperation on foreign and security policy; and (v) increase cooperation to improve connectivity between Europe and Asia by continuing to build synergies between China’s Belt and Road initiative (BRI) and the EU’s initiatives.
 
China and EU could cooperate more in foreign exchange, trade and investment policies
As regards the internationalisation of their currencies, Europe and China have effectuated some progress albeit remaining far from USD’s influence, which still represents 60% of foreign exchange reserves or international debt. Europe and China could have a joint approach in internationalising their currency. 
 
This includes the development of renminbi clearing arrangements in Europe and more powerful bilateral currency liquidity facilities between the ECB and the PBoC. As regards foreign direct investment, the Chinese government plans to release a new ‘negative list’ to reduce the number of sectors restricting FDI. Financial integration between China and the EU should be at the forefront of that kind of initiatives in order to reduce an often destabilising dollar dependency. As regards trade, the two regions should promote the usage of the renminbi and euros as the main currencies for billing and transactions. 
 
China and the EU could increase synergies on the back of Belt and Road Initiative
China and the EU already have a common financing vehicle: The China-EU Co-investment Fund (CECIF). It has a total commitment of EUR500m of which Silk Road Fund and European Investment Fund have each participated on equal share. While the amount is relatively low for now, one could imagine an increase of the fund capacity going forward. Another idea would be to increase the synergies between Belt and Road financial capabilities and EU investment initiatives (e.g. Juncker plan worth EUR315bn).
 
China and the EU could coordinate their industrial policy better
Both markets could adopt a collaborative strategy on industries that requires large economies of scale and a large pool of financing. These include environment-related industries such as renewable, green energy but also transport equipment. For example, in an attempt to align ‘Industry 4.0’ and ‘Made In China 2025’ strategy, the German and Chinese government have developed high industrial parks (e.g., Sino-German Intelligent Equipment Manufacturing Park in Shenyang, Kunshan German Industrial Park). Similar approaches should be encouraged at the EU level as a real European Industrial Policy Strategy does exist. It is made up of 10 initiatives ranging from improving cyber security to modernising the EU intellectual property framework and bolstering the circular economy. A 
 
Mr Alexis Garatti is head of macroeconomic research with Euler Hermes.
 
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