European Companies Doing Business in China: The Complications Which Ultimately Lead to the Rewards

Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/economia/aziende-europee-cina-problemi-futuro

With the recent conclusion of the Beijing 2022 Winter Games further showcasing the attractiveness and unifying quality sport can have across nations, witnessing the hosts hand the flag over to their European counterparts for the Milano Cortina 2026 Winter Games, with the motto of "Duality, Together", very fitting for the sporting spectacle that also promises to raise awareness of sustainability.

However, when we examine the comparison between the medal haul of China and that of the entirety of European nations this year, it is clear to all that there is still a considerable disparity between both regions. Similar sentiments are reflected in the trade relationship between China and the E.U (even more significant considering that China is now the EU's biggest trading partner, overtaking the US in 2020).

An important feature of bilateral trade since China joined the WTO has been China’s sustained capability to maintain a trade surplus with the EU, with soaring energy prices recently taking a significant toll on the eurozone economy, combining with a jump in Chinese imports to drive the bloc’s trade deficit in goods to a 13-year high in December of last year. China is expected to conform to fair trade practices, to respect intellectual property rights, and to meet its obligations as a member of the World Trade Organization (WTO), however uncertainties linger on several of these aspects.

A Balancing Act for European Companies

Still, opportunities for both Italian and European companies are abound within the Chinese marketplace, as Covid-19 recently forced many European nations to fundamentally rethink the risks of over-reliance on Chinese investment and supply chains, in a post-pandemic global business environment, it can clearly be seen that European companies have no intention of decoupling from China.

As evidenced by the data found by The European Chamber of Commerce in China’s annual Business Confidence Survey, proposing the question in 2021: “Is your company considering shifting current or planned investments in China to other markets?” With the number of respondents outlining a positive indication to the query the lowest it has been in many years (with only 9% of the European companies considering moving their current or planned investments out of China.)

That is not to say that there aren’t significant challenges within such a large and vast marketplace, including intellectual property theft, “negative lists” barring them from certain industries as well as unfair competition from state-owned enterprises, but with China the only major economy to grow in 2020, European investors clearly see growth opportunities optimism about their company’s future in the Middle Kingdom.

Speed Bumps Along the Foreign Investment Road

China’s business practices have improved significantly in recent years and thus European companies have flourished in this market. China’s business environment is today generally more favorable and, in some, though certainly not all aspects, is in line with the Organisation for Economic Co-operation and Development average. As we can see, China is moving in the right direction in terms of its foreign investment acumen, however, there are still significant areas for improvement,

Certain aspects of China’s integration into the global economy over past few decades has been cautious to say the least, with detractors claiming elements of protectionism, whereas the interests of its domestic players are favoured over foreign competitors. In short, we may outline that China, in collaborating with and opening up to other countries, comes with many strings and red tape attached.

Prevalent recent examples can be seen in the case of Lithuania, when China stopped buying beef, dairy products and beer from the EU member state with China's General Administration of Customs citing a "lack of documentation" and the allegations that the Chinese courts have been preventing European companies from protecting their telecom technology patents. We’ve since witnessed the correct approach to such practices taken up by the European Union, which has since initiated cases against China to the World Trade Organization in January and February respectively. alleging discriminatory practices towards its member state and to safeguard the standard-essential patents (SEPs) of European companies.

An open discussion utilizing the WTO dispute resolution process is an important aspect of the global business environment, of which, both the E.U. and China are important players. Such mechanisms act as important anti-coercion instruments but should only be brought to use in the event of actions which are not in line with the provisions of the WTO Agreement and under normal non-discrimination rules.

Decarbonization - Road Mapping the Future Together

The 14th Five Year Plan (a series of social and economic development initiatives issued by the Chinese Communist Party since 1953) published last March established binding targets for reducing both carbon and energy intensity in the country, a critical step in decreasing China’s reliance on coal. President Xi Jinping himself declared that China would peak carbon emissions by 2030 and aim to achieve carbon neutrality by 2060.

Since the announcement was made, multiple industries and municipal and regional governments have begun increasing action related to decarbonization along with further elaboration regarding how China will achieve its 2030 and 2060 carbon reduction goals. For European investors, such action towards climate change represents complicated new opportunities and challenges, with companies obligated to evolve their compliance and efficiency strategies more rapidly than ever before within the market.

However, these measures, supported by a growing interest in environmental, social and governance (ESG) can be leveraged by European companies, as the European Union has long since set out its strategy to become climate neutral by 2050 and has implemented some of the world’s most advanced climate policy tools (the European Union Emissions Trading System and the European Green Deal).

As climate action becomes more material to economic interests, European companies may be of great assistance in the construction of even more resilient and sustainable supply chains for low-carbon technologies and developing standards for a sustainable economy.

The Path Forward

In outlining such a broad range of macro-economic factors, we must once again stress one simple fact, the E.U. and more specifically, European companies, continue to invest in China. Nearly 60 percent of European companies plan to expand their businesses in China as outlined in the aforementioned Business Confidence Survey, an increase of nearly 10 percentage points from the previous year.

China's economic growth is likely to still see growth of 5.2% in 2022, with positive investment trends continuing. However, the lifting of the existing sanctions on EU officials is imperative in order to continue the discussion and ratification of the EU-China Comprehensive Agreement on Investment, which has been on hold for an extended period of time, damaging Sino-European relations and denying EU companies greater access to China.

A final aspect of commercial hindrance to European companies in China comes in the form of the strict travel restrictions imposed since March 2020 which has greatly affected the soft business skills of collaboration and communication which has been shared between European and Chinese businesses alike for many years. Therefore, with the easing of such measures we look forward to meeting face to face to resolve the abovementioned issues and strive to share in the global business environment together once more.