Asia has presented many opportunities for European companies and investors in the past few years, but with trade agreements stalling and protectionism growing the world over, what future do the regions have together? Finance Director Europe asks Alicia Garcia-Herrero, chief economist for Asia-Pacific at NATIXIS and senior research fellow at Bruegel.
Just three days before the inauguration of Donald Trump as the 45th president of the US, Chinese President Xi Jinping made his way on to the stage at the 2017 World Economic Forum in Davos.
In an hour-long keynote speech, Jinping – the first Chinese president to visit the snowy Swiss ski resort – put forward a defence of globalisation that not many could have predicted a few years, or even months, earlier.
“Pursuing protectionism is like locking oneself in a dark room,” said the 63-yearold, in a thinly-veiled broadside at the new president in Washington. “We must remain committed to developing global free trade, and say no to protectionism.”
From her office in Hong Kong, Alicia Garcia-Herrero, chief economist for Asia-Pacific at NATIXIS, was personally “insulted”.
“China is not a champion of multilateralism or openness,” she tells Finance Director Europe in a frank interview. “It would have been good if Jinping had said ‘we are ready to contribute to the world not closing up’ or ‘China is ready to put something on the table’. But that wasn’t his speech at all.”
The EU question
For European companies and finance directors active or looking to do business in China, Garcia-Herrero’s concerns will be all too familiar. Far from defending globalisation, the world’s third-largest economy is better known to many for its protectionism and hostility to foreign capital.
“China has always been like this, in many sectors,” says Garcia-Herrero. “Take financial services, for example: there’s no way you can buy a bank in China, and yet, Chinese banks are now competing for full control of a Portuguese bank… There’s just no equal footing.”
Over the years, these protectionist tendencies have arguably been the biggest barrier to European companies and investors looking to strengthen their ties with China – the biggest market in the Asia-Pacific region.
While talks between the EU and China over a bilateral investment agreement were first launched at the end of 2013, leading to hopes among European companies of improved market access, evidence of progress is hard to find three years on.
“There has been a lot hesitation,” says Garcia-Herrero. “At the moment, we are stuck, and it seems to me that if you can’t agree on a bilateral investment agreement, it will be very difficult to start trade negotiations with China.”
Unfortunately, the situation facing European companies working in China appears to be getting worse.
“It doesn’t matter which trading partner you talk to – be it Japan, the US or neighbouring countries, or European countries,” said Michael Clauss, the German ambassador to China, in a recent interview with CNBC, “they all feel the same, that there’s a growing protectionism here.”
Figures from the EU Chamber of Commerce in China’s 2016 Business Confidence Survey confirm this. The lobby reported that its member companies were increasingly pessimistic about the business climate in China, with just 47% of survey participants saying they plan to expand their operations in the country, down from 86% in 2013.
Faced with such obstacles, many European companies and investors are now looking at other parts of the Asia- Pacific region. They received something of a boost on 23 January, when Trump signed an executive order withdrawing the US from the Trans-Pacific Partnership (TPP) – which includes Japan, Malaysia, Singapore and Vietnam. On top of Trump’s existing threat to impose a 40% import tariff on Chinese goods, many analysts and politicians have pointed out the possible advantages for the EU.
“We have seen that many of the TPP countries are now approaching us and saying ‘we still want to do deals’,” said Cecilia Malmström, EU trade commissioner, in an interview with German business newspaper Handelsblatt. “We are engaged with basically all of them, either negotiating already having a deal, or preparing negotiations.”
Recent reports suggest the Japanese Government plans to speed up talks with the EU – ongoing since 25 March 2013 – with the aim of signing a free-trade agreement (FTA) as soon as possible.
“We will need to continue working in the next few weeks to bridge the remaining distance and reach an agreement in principle, with the right balance, as early as possible next year,” the EU’s chief negotiator, Mauro Petriccione, said recently.
According to Fraser Cameron, director of the EU-Asia Centre, several other countries in South East Asia “are now keen to accelerate FTA negotiations with the EU”, too.
“All this activity shows that Asia still regards the EU as a serious player,” he added.
Garcia-Herrero is less optimistic, however. In the aftermath of Trump’s executive order, she says that Asia- Pacific countries are more likely to turn their attention to each other, with the Regional Comprehensive Economic Partnership (RCEP) – a trade deal that includes China, India, Japan and South Korea, and excludes the US – currently under negotiation.
“They’ll be busy negotiating it among themselves and China,” she says. “And if they conclude RCEP, it’s possible they won’t come looking for us.”
The EU’s track record of negotiating trade agreements – and complete absence of strategy over the UK’s exit from the EU – makes the region unattractive to Asia-Pacific states, Garcia-Herrero adds.
“I think Asia feels that the EU is in a mess right now,” she says. “It hasn’t started dealing with Brexit and, if you were an Asian economy, would you have any faith that negotiations will start in the next five years?
“Just look at Europe’s history of negotiation with MERCOSUR [a trade bloc founded by Argentina, Brazil, Paraguay and Uruguay], which was never signed or ratified, or with Singapore and Vietnam, neither of which have been ratified either. I do think Europe should be looking at Asia, but it’s not reacting quickly enough to the new Trans-Atlantic reality. To me, it is very unlikely anything will happen now.”
Invest in infrastructure
Away from the world of trade deals and Davos, however, it’s not all doom and gloom. While bilateral investment agreements may be absent, there is trading between the regions. It’s not like Europe is not engaged in Asia, Garcia-Herrero says. China, for example, remains the EU’s second-largest trading partner, and cross-border banking from Europe into Asia is still very large.
Going forward, urbanisation presents perhaps the greatest opportunity for European investors, with many Asian cities experiencing large population growth but failing to adequately invest in infrastructure. According to a recent report by the Asian Development Bank, if the region fails to invest $26 trillion by 2030, economic growth will be severely damaged.
One of the largest infrastructure projects currently under way in the region is China’s One Belt, One Road initiative. Unveiled in September 2013, the plan is to establish a new overland and maritime economic network between China and Europe, in the mould of the country’s ancient Silk Road. According to the think tank Friends of Europe, it is the “largest infrastructure and commercial project of the 21st century”.
While current Silk Road projects are mainly financed by Chinese banks, according to Garcia-Herrero, “many of those banks are now reaching their limit because of capital outflows from the country”.
“That leaves considerable room for Europe, which could play a large role through its banks and capital markets,” she adds. “In Europe, we are high-saving and always looking for good investments. Banks and institutional investors all need to find high-yield opportunities, and Asia offers that because of nominal growth. I think China is open to co-financing these projects in some circumstances.”
Of course, the success of future trade between Europe and Asia on the Silk Road and beyond depends, to a large extent, on political unknowns. Jinping’s primary target at Davos may have been Trump, but fear of populism and nationalism is gripping Europe, too. The recent Dutch and French election results may have held back the populist tide, but with more elections creeping up, there is still much to worry about.
The end game
Anti-immigrant sentiment and fallout from the 2015 refugee crisis may be partially to blame for resurgent European nationalism, but so too is long-standing disaffection with globalisation. Here, Garcia- Herrero says, China should do some of its own soul-searching.
“Those advocating for autarky have a point when they say that there is no reciprocity; that we are open and they are not open,” she says. “People see that China is substituting our exports without opening new markets for us, and that is obviously fuelling negative sentiment.”
However rational parts of the narrative might sound, in the end, Garcia-Herrero argues that European populist protectionism would be an act of economic self-harm.
“If you start producing at a higher cost and paying higher wages, then the consumer will be worse off,” she says. “The only way for consumers to be better off would be to produce at the same prices as China. There is no advantage in autarky. I think China should wake up and say ‘I am open before you close’ – because if we close, China will suffer too.”