January 31, 2013 3:06 pm

EU faces up to China over ‘mother of all cases’

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In September, the head of Europe’s biggest employers’ group presented a crystal horse sculpture to Wen Jiabao, the outgoing Chinese premier, at an EU-China business summit in Brussels.

The opulent gift capped a ceremony in which Mr Wen was feted for his enormous contributions to a commercial relationship that flourished during his leadership.

But when a vice minister from China’s ministry of commerce visits Brussels on Friday for a private meeting with EU trade officials, the mood is likely to be very different.

Top of the agenda is a simmering trade dispute over telecommunications network equipment that analysts fear could boil over into a fully fledged trade war.

EU investigators are already in China combing through its solar panel manufacturers to substantiate claims by European competitors of dumping and illegal subsidies. The case, which covers €21bn in Chinese exports in 2011, is the largest the bloc has ever opened, and could result in tariffs by June.

Both cases – and a host of smaller ones ranging from steel to ceramics – reflect a combative turn in EU-China trade relations.

“Brussels is shifting towards a confrontationist approach for lack of other effective means to counter what it sees as activist industry policy in China,” says Hosuk Lee-Makiyama, director of the European Centre for International Political Economy, a Brussels think-tank.

Mr Lee-Makiyama worries that an EU approach of “fighting fire with fire” could have unpredictable repercussions for both sides.

The tense atmosphere can be attributed in part to a weak European economy that has left many manufacturers feeling vulnerable while emboldening protectionist forces within the bloc – particularly along a southern rim stricken by the eurozone debt crisis.

European Union goods trade balance with China

Chinese companies have deepened the unease by climbing the value chain to make inroads in more sophisticated products, such as solar panels and telecoms equipment, far faster than expected. Adding to the mix is a pugnacious EU trade commissioner, Karel De Gucht, who has displayed greater willingness than his predecessors to confront Beijing.

“It’s not just Karel De Gucht, but it helps a lot that you have somebody with his personality and determination,” says Laurent Ruessmann, a partner at Crowell & Moring, who is advising European solar panel manufacturers.

Since taking over in 2009, Mr De Gucht, a Flemish Liberal, has launched a campaign to stamp out what he believes are illegal government subsidies at the heart of China’s export machine.

According to recent filings by Brussels, these come in the form of cheap land, loans and raw materials, which have allowed Chinese producers to undercut European competitors – even in products that have only a small labour component. China has repeatedly denied this. In the wake of the solar case, it has even hit back by challenging some EU renewable energy subsidies at the World Trade Organisation.

But it is the telecoms case that is most sensitive, because of the huge commercial and strategic value of the high-tech industry as countries around the world upgrade to 4G systems to handle next-generation smart phones and devices. It is often described in trade circles as “the mother of all cases”.

Mr De Gucht has also prosecuted it in unorthodox fashion. In a departure from typical EU practice, he has threatened to launch an investigation “ex officio” – or on his own initiative – and not at the behest of a company or industry complaint.

The commissioner has argued that this approach is essential to shield EU companies, such as Alcatel-Lucent, Ericsson and Nokia Siemens Networks, from the threat of retaliation by Beijing. Yet, in the words of one EU official, it also allows Mr De Gucht to enter negotiations with the Chinese with “a loaded gun on the table”.

“They have no leverage with China apart from these trade cases, and that’s what they’re trying to use to scare the Chinese to negotiate on these subsidies,” one Brussels trade lawyer says of the commission.

An EU diplomat agrees. “They see it as leverage with the Chinese,” he says. “I think they were frustrated for many years that they didn’t have any.”

In spite of Mr De Gucht’s new weapon, a handful of meetings over the past six months have yielded almost no progress, according to people briefed on them. In fact, the Chinese appear to have invested far more effort outside Brussels trying to undermine support for the commissioner in the EU’s 27 member states, whose backing is critical for any trade case to go forward.

Many of those governments are more focused on helping their constituents win commercial contracts in China or attracting lucrative investments than the principle of a united EU trade policy – particularly as they battle high unemployment.

The UK, for example, may be hard pressed to support trade action against Huawei Technologies, China’s leading telecoms equipment company, after it recently announced plans to invest $2bn in the country over the next five years, potentially creating thousands of well-paid jobs.

Beijing has stepped up its lobbying ahead of Friday’s meeting. Chinese diplomats this week delivered a demarche to at least one EU government, complaining that Mr De Gucht had made outrageous demands during a December meeting in exchange for dropping the case. These included a guaranteed 30 per cent share of the Chinese telecoms market for EU companies, and a commitment that Huawei and another company, ZTE Corp, raise their prices 29 per cent.

A senior EU official dismisses the Chinese account of the discussions as “inaccurate”, and expresses confidence that Mr De Gucht enjoys the member states’ full backing in spite of Beijing’s energetic lobbying. Others are less convinced.

“It’s a big gamble for the commissioner,” the trade lawyer says. “He started it all, and now he’s against the wall.” That is what is so worrying to trade experts in both China and Europe.

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