GMF - The German Marshall Fund of the United States - Strengthening Transatlantic Cooperation

The Stockholm China Forum, a semiannual gathering of American, European, and Chinese interests, is a useful venue to take the temperature of what is arguably the most important trilateral relationship in the world.

The eighth such meeting held here the last weekend in January showed continued U.S. and European concerns about Chinese military, diplomatic, and economic misbehavior. There was reassuring evidence of growing tactical cooperation between Washington and Brussels, particularly on mutual trade disputes. But, disturbingly, the gathering also highlighted the absence of a shared strategic game plan for future trans-Atlantic economic relations with China.

The trans-Atlantic gulf in military and diplomatic interests involving China might be unbridgeable. Thanks to geography and history, America has Pacific security equities that Europe will never share. Yet, in a global economy, there is a growing commonality of interest on business and commercial issues. There is a shared frustration with Beijing’s recent actions constraining U.S. and European businesses in China. And there is a common set of problems involving Chinese investment and government procurement that Europe and the United States can work together to solve.

“Foreign businesses are restricted from participating in a variety of Chinese industries,” U.S. Commerce Secretary Gary Locke complained in a speech in New York City on February 2.  “In others, the Chinese select national champions in key industries like mining, power generation, and transportation, and effectively shut out foreign competition.”

This development contradicts official expectations in both Washington and Brussels of Beijing’s trajectory when China joined the World Trade Organization and ostensibly embraced Western free-market values, in 2001.

Experience suggests that the Chinese have no intention of using the spirit of their WTO commitments—contestable markets and a limited government role—to set the future course for their economy. China has to be held to the spirit as well as the letter of its WTO commitments.

The most pressing issue is foreign investment. U.S. and European firms face investment caps, forced joint-venture partnerships, and other restrictions in the Chinese market. At the same time, Chinese investment in both Europe and the United States is just beginning to take off, raising concerns about national- and economic-security implications.

Brussels and Washington need to negotiate investment rules of the road with Beijing.

The first principle should be reciprocity of market access. If China refuses to allow majority foreign ownership of firms in certain sectors of its economy, then Europe and the United States should deny Chinese investors that same access.

The slow-growing U.S. and EU economies unquestionably need Chinese capital. The Chinese will attempt to exploit that weakness if the West allows them to do so. Washington and Brussels need to make it clear that their goal is to open the Chinese market, not to close the American and European markets. But they also have to be ready to mirror Chinese investment restrictions if necessary.

The second investment principle should be to favor job-creating investment over mergers and acquisitions. All three societies need job creation more than changes in ownership and management. While the purchase of existing firms often saves them from bankruptcy, it also raises questions about the investor’s intentions. Is a company being acquired simply to obtain its technology? Will the acquired firm eventually be shut down? Brussels and Washington should put their thumbs on the scale to encourage green-field investment when ever possible.

Reciprocity should also frame a trans-Atlantic approach to government procurement. During the recent Washington visit of President Hu Jintao, the Chinese promised to make it easier for foreign firms to participate in government procurement. They also pledged not to require that technologies imbedded in such goods be based on Chinese intellectual property. American and European officials have welcomed this pledge. But, as Locke warned in his New York speech, “even when Chinese leaders make strong statements of principle to take action on an issue of concern, those principles don’t always turn into binding law. And even if those laws are written, actual implementation at the local or provincial level is often left wanting.”

European Commission officials plan to propose that Chinese firms be denied access to the EU public-procurement market to the degree that European companies have limited access to the Chinese market. Such action would have greater leverage with Beijing if it was taken jointly by Brussels and Washington.

“We need a stronger sense of direction on China,” said an EU official. “If we don’t get the right cooperation on China, the Chinese will divide us.”

The time for a strategic trans-Atlantic economic game plan on China is long overdue. And the political will to achieve it in both Brussels and Washington might finally be at hand. If Europe and the United States fail to seize this opportunity, they may long regret it.