European governmental spending for Chinese state-backed enterprises - In line with the European Union’s trade rules?

Term paper

Scientific Essay, 2011

18 Pages, Grade: 1,3



1 Introduction

2 Trade rules of the European Union

3 Individual member states’ China trade policy
3.1 Governmental investment projects involving Chinese companies
3.2 Motivation of China-involving EU countries

4 Trade policy analysis of the European Union
4.1 European Union’s China trade policy targets
4.2 Trade policy competences of the European Union and individual member states
4.3 EU’s trade rules surveillance and intervention mechanisms

5 Critical judgment and long-term outcomes of EU’s China trade policy

6 Conclusion


1 Introduction

The European Union (EU) is the world’s largest trading market regarding imports and exports per day as well as overall GDP.1 Due to the economic power of its 27 member states the EU offers an interesting market with a developed infrastructure network as well as a broad customer base due to its high level of welfare. To strengthen its negotiation position in a global world, the EU is willing to share one single trade policy, supplying the European Union with a strong negotiation power.2 Nevertheless, such common trade policy approach is a complex task as the individual interests of all 27 member states need to be united to a common voice with a collective policy.

In recent years financial crisis put pressure on the national budgets of the 27 member states. National spending has been restricted as well as cost-efficient governmental investment has become crucial to secure national financial stability and to comply with Maastricht criteria in future.3 This development in Europe matched the interests of Chinese investors. They increasingly started Outward Foreign Direct Investment (OFDI) to express China’s economic power as stated in the declaration of Chinese “Go Global Policy” from 2002.4

Recently, Chinese companies have also been chosen as preferred contractors in several governmental bidding processes. By now, Chinese companies are supplying national governments in three EU member states.5 All chosen Chinese companies have been given free access to European market. All of them are State-Owned Enterprises (SOE) or at least state-backed companies.6

Regarding the Chinese market liberalization process and the challenges European companies are facing, when willing to enter the Chinese market, this paper critically analyzes if the current member state trade policy is coherent with the European Union’s trade rules. Therefore, this paper first presents EU’s trade rules, second describes the behavior of member states with Chinese company involvement, third analyzes the European Union’s trade policy in depth, and finally judges about the coherence of EU’s trade policy, its trade rules and member states’ individual actions in chapter six.

2 Trade rules of the European Union

The European Union - as one of the leading global economic powers - has established a range of trade rules framing the borders of the EU’s trade policy and aiming to be accepted by its global trade partners. Several of those EU trading rules are related to those of World Trade Organization (WTO). Within this chapter the European Union’s trade rules shall be presented because they are crucial for further trade policy assessment.

Principle 1: “Standing up for fair and open trade for everyone”:[7]

European Union member states have been among the founding members of the modern international trade system of WTO. Therefore the European Union regards it as its major task to ensure that WTO trade system and rules continuously match the requirements of a fast-changing world. Realizing fair trade and open markets is therefore a key priority of European Union’s trade policy.8

Principle 2:“Creating opportunities for European companies and their employees”:[9]

While WTO trade principles are somehow vague on countries’ developments, the EU clearly states in its principles, that it is willing to promote European labor and companies. The creation of jobs, investment chances and growth options for European companies are clearly defined as EU’s major trade policy targets. Moreover the EU is also willing to open new markets for European exports through trade agreements by reducing tariffs and entry barriers for European goods and companies.10

Principle 3: “Making sure others play by the rules”:[11]

The European Union is also willing to tackle unfair competition damaging European companies and their workforce. Therefore the European Commission regards it as their task to represent and defend European rules inWTO.12

Principle 4: “Ensuring trade is a force for sustainable development”:[13]

The EU is also committed to a trade policy that actively creates employment opportunities and economic welfare in third countries. It is willing to use its trade policy as a tool to help developing countries to create advantage from trading their resources and products. Additionally, the European Union is also willing to use its trade policy as a tool to promote European values such as democracy, freedom of speech, separation of powers, equality or non-discrimination.14

The European Union aims at creating a friendly global trade world order by spreading its beliefs on trade rules around the globe. The judgment, if these trade principles are always beneficial for all players, shall be left open in this paper as the major target in the upcoming chapter is the trade value application to member states’ behavior.

3 Individual member states’ China trade policy

To further be able to judge about the European Union’s trade policy and trade rules coherence, an initial analysis of the developments in the individual member states involving Chinese companies is necessary. It shall be presented in this chapter.

3.1 Governmental investment projects involving Chinese companies

As a result of the financial crisis 2008 several European countries were forced to sell state-owned assets to private investors, in other countries the height of governmental spending was reduced enormously. This “tight budget policy” opened doors for Chinese investors and companies aiming at entering European prestige market. Governmental bids have also been targets of Chinese penetration strategy. Chinese OFDI abroad has increased faster in Europe than in any other region in recent years.15

As public investment in infrastructure has a high share of governmental budgets and also because it is transparent to access, this chapter presents governmental infrastructure investments of EU member states including Chinese companies as preferred contractors.

Poland: The first entry contract for a Chinese construction company to European Union’s market was signed in September 2009 by the Polish government: Chinese Overseas Engineering Group Company (COVEC) won a bid to construct a motorway between Warszawa and Lodz partly financed out of EU funding. COVEC convinced its Polish customers with a low cost offer: The Chinese construction company asked for only 30 percent of the overall estimated costs.16

Two years after the contract was signed, the Polish decision turned out to be a wrong choice: On June 16th, 2011, Chinese COVEC canceled the construction project due to unexpectedly higher costs exceeding COVEC’s initial plan by 76 percent.17 Reasons for the failure can be found in (a) the local production requirements of the Polish government and the resulting higher labor costs, (b) opposition of local competitors to supply the Chinese in the project, (c) an unknown legal environment resulting in a impossibility of using Chinese machines because of missing EU certificates and (d) probably also a lack of managerial experience to cope with such unknown situations in an unfamiliar environment.18

Greece:In June 2010 Chinese participation in Greece governmental projects was established by China Ocean Shipping Group Company (COSCO) which signed a contract worth 4.3 billion EUR to assure the management of Piraeus port for 35 years. Investments of 620 million EUR for improvements at the port and the construction of a new pier are supposed to be followed.19

Italy: In the beginning of 2011 Chinese state-backed China Ocean Shipping Company (COSCO) started also investment projects in Italy extending the harbor in Naples.20

3.2 Motivation of China-involving EU countries

For a very long time period trade policy was - until the agreement of the Lisbon Treaty entered into action in 2009 - sole decisions field of the EU member states. Consequently, member states pursue often until today an independent trade policy and decide on their own how to reach trade policy goals with individual agreements with trade partners such as China.21 Basically, one can differentiate their aims in short-term benefits and long term goals.

In the short-term perspective the most crucial advantage of involving Chinese companies in member- states’ projects are the low project costs relating from Chinese cost competitiveness. By that, tight national budgets shall be unburdened. A second short-term benefit relates to local employment rates: European Union trade policy often fleeces large-scale businesses due to their strong lobbying power. The EU’s decisions aim at achieving free and markets, they therefore often leave behind small- and medium-sized enterprises (SME) as they are not able to benefit from those compared to corporate groups with global footprint. If member states are able to address those unsatisfying developments for their SMEs by obligating Chinese companies in bilateral agreements to support local workforce, member state governments are able to achieve benefits often unlikely to be achieved by the European Union.

In the long-term perspective member states hope that BITs with partners such as China allow local companies to gain access to the world’s soon-to-be-biggest economy. Moreover, tight connections to Chinese government have proven to be helpful in crisis time: Chinese shareholders recently helped struggling European companies (e.g. Volvo in 2010 bought by Geely, a Chinese car manufacturer, today calls China its “second home market”).22 These connections finally result also in satisfying local voters by securing local employments. Last, when opening markets in China to EU companies, China demands similar access to European markets. As the European Union’s trade policy is still very disintegrated regarding this issue, EU member states seek to negotiate individual bilateral agreements with China that can be more profitable than common EU agreements.23

4 Trade policy analysis of the European Union

Within two decades of deregulation, liberalization and privatization the European Union is currently confronted with threats arising out of this development due to the fact that an open market is very attractive for rising economies such as China. This chapter discusses the above described developments of Chinese SOEs serving European member states’ demands and its underlying related EU trade policy areas as well as it tries to emblaze them from different perspectives.

4.1 European Union’s China trade policy targets

Regarding the historic development of the Europe-China relations in the first field of trade policy analysis, European-Chinese trade relations started in 1975 in the period of the Cold War. First exports of textile products followed in 1979. Up to now the only trade agreement between Europe and China, the Trade and Economic Cooperation Agreement (TECA), was signed in 1985 - officially it is still valid up to now.24 By entering the WTO in 2001 China expressed its motivation to exploit foreign trade.25 In 2004 the signature of an unofficial mature partnership agreement including strategic dimensions fostered the European-Chinese trade relations.26 In 2006 the first official descriptive paper of the European Union named “EU-China: Closer Partners, Growing Responsibilities” was published. It expressed requirements towards Chinese politics with a friendly rhetoric voice asking for mutual market-access liberalization.27 Recently, EU and China started negotiations on a Partnership and Cooperation Agreement (PCA) not signed until today.

illustration not visible in this excerpt

Figure 1: Targets of the European Union’s China trade policy

Source: Compilation by the author.

The goal of European Union’s China trade policy is continuously achieving changes in the Chinese law system and market settings: China is Europe’s biggest source of manufactured goods and fastest growing market for European exports.28 However, market access in foreign China is still a big problem for European companies as they are often forced to offer their technological advantages in a Joint Venture or via licensing-in to Chinese partners.29 The European Union consequently aims at liberalizing the Chinese market by the enforcement of competition rules. Today there is also still a strong connection between Chinese regulators and its enterprises resulting in unfair treatment of foreign companies and opacity.30

The rise of Chinese companies continuously transforming foreign knowledge into local capabilities also put heavy pressure on several European industries as Chinese companies continuously enter European markets (e.g. shipbuilding, railways or telecommunications). Tougher competition, industry shake-outs and consolidation processes are often closely related and regarded as a heavy problem by European companies. While investment of China in Africa or Latin America basically seek for resources those in Europe are strongly interested in strategic assets and markets.31 Until September 2008 China imported 28,794 technologies from the EU.32 Due to all those developments the European Union also wants Chinese government to formulate laws that foster the acceptance and security of European intellectual property.33


1 Cf. Jones, Robert A. (2001), p. 392.

2 Cf. European Union (2009), p. 3.

3 Cf. Mead, Charles (2011), p. 1.

4 Cf. Ku, Samuel C. Y. (2006), p. 4.

5 Sources and examples provided in chapter 3.

6 Cf. Nicolas, Françoise / Thomsen, Stephen (2008), p. 10.

7 European Union (2009)b, p. 3.

8 Cf. European Union (2009), p. 3 and World Trade Organization (2005), p. 1.

9 European Union (2009)b, p. 4.

10 Cf. European Union (2009)b, p. 4.

11 European Union (2009)b, p. 5.

12 Cf. European Union (2009)b, p. 5 and International Finance Corporation (2006), pp. 3.

13 European Union (2009)b, p. 5.

14 Cf. European Union (2009)b, p. 4; World Trade Organization (2005), p. 1; Woolcock, Stephen (2010), p. 13 and European Union (2000), pp. 1.

15 Cf. The Economist (2011), p. 1.

16 Cf. BBC UK(2009), p. 1.

17 Cf. China Daily Europe (2011)a, p. 1.

18 Cf. Free Republic (2011), p. 1.

19 Cf. China Daily(2011)a, p. 1 and The Economist (2011), p. 1; Assumption: Investment in public infrastructure involves governmental spending.

20 Cf. China Daily Europe (2011)b, p. 1; Assumption: Investment in public infrastructure involves governmental spending.

21 Cf. Dreyer, Iana / Erixon, Fredrik (2008), p. 3.

22 Cf. The Economist (2011), p. 1.

23 Cf .Dreyer, Iana / Erixon, Fredrik (2008), p. 11.

24 Cf. Dreyer, lana / Erixon, Fredrik (2008), p. 2.

25 Cf. Xin, Chen (2008), p. 15.

26 Cf. Xin, Chen (2008), p. 6.

27 Cf. Dreyer, lana / Erixon, Fredrik (2008), p. 8.

28 Cf. European Commission for Trade (2007), p. 2.

29 Cf. Dreyer, Iana / Erixon, Fredrik (2008), p. 14.

30 Cf. Dreyer, Iana / Erixon, Fredrik (2008), p. 14.

31 Cf. Nicolas, Françoise / Thomsen, Stephen (2008), p. 2.

32 Cf. Xin, Chen (2008), p. 20.

33 Cf. Dreyer, Iana / Erixon, Fredrik (2008), p. 14.

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European governmental spending for Chinese state-backed enterprises - In line with the European Union’s trade rules?
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Berlin School of Economics and Law
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Tobias Schmidt (Author), 2011, European governmental spending for Chinese state-backed enterprises - In line with the European Union’s trade rules?, Munich, GRIN Verlag,


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