The European Commission issued its internal Trade Policy Review (COM(2021) 66 final) on February 18, 2020, setting out an “open, sustainable and assertive trade policy” to ensure “open and fair trade with well-functioning, diversified and sustainable global value chains.” The document was released soon after trade data showed that in 2020 China became the top trading partner of the EU, although the timing was coincidental.

The 23-page report identifies China’s rise as the number 2 factor causing global uncertainty, along with factors such as technological evolution, climate change, digital transformation, and the COVID 19 pandemic.

While stressing the priority of strengthening the transatlantic relationship with the United States, and the need to “diversify its relations and build alliances with like-minded partners,” the report describes the relationship with China as both “important and challenging.” It elaborates as follows:

The EU’s policy is based on a combination of active engagement, both at bilateral and multilateral level, and of parallel development and implementation of autonomous instruments necessary to protect the EU’s essential interests and values – in full compliance with its international commitments. Building a fairer and rules-based economic relationship with China is a priority. Ensuring that China takes up greater obligations in international trade, and dealing in parallel, with the negative spillovers caused by its state-capitalist economic system will be central to the EU’s efforts to rebalance the bilateral trade relationship. The recent political conclusion of the negotiations on a Comprehensive Agreement on Investment is part of these efforts. The work to ratify it will require a clear engagement towards the effective implementation of the agreement, on market access, level playing field commitments and on sustainable development.

The report outlines three of the EU’s medium-term policy goals: Green and digital objectives; a more sustainable and fairer globalization; and an increase in capacity to pursue interests and enforce rights.  It then lays out specific actions in six areas: WTO reform, responsible and sustainable value chains, digital transition and trade in services, the EU’s regulatory impact, the EU’s partnership with other nations and regions, and implementation and enforcement of trade agreements.

With regard to WTO reform, the report emphasizes launching negotiations on “reinforced rules to avoid distortions of competition due to state intervention.”  The Annex to the report elaborates on the areas where reforms are needed, including industrial subsidies and force technology transfer. These proposals likely target China, as both issues are long-term complaints about China. It further proposes that China not claim Special and Differential Treatment in “any ongoing negotiation.” Moreover, it calls for “further liberalisation by China” since “China’s market access and other commitments do not sufficiently reflect its growth.”

With regard to implementation and enforcement, in addition to resolving issues through existing dispute settlement mechanisms, the report highlights the use of the Enforcement Regulation, which allows the EU to take countermeasures when a dispute party blocks an international adjudication.

It also pledges using FDI screening and export controls to protect security and other policy objectives, which are the same tools that the United States has increased the usage of over the past several years in dealing with China. (To counter China, in 2018, the U.S. Congress passed the National Defense Authorization Act for Fiscal Year 2019, which tightens rules on foreign investment and export controls.)

In addition, the report introduces a soon-to-come legal instrument for trade distortions in the EU market caused by foreign subsidies. This effort began last year, when the European Commission issued the White Paper on Leveling the Playing Field as Regards Foreign Subsidies in June. The White Paper outlines approaches to addressing foreign subsidies within the single market regarding the following:

• the general market operation of economic operators active in the EU;
• acquisitions of EU undertakings;
• public procurement procedures;

According to the White Paper, the first approach (Module 1) is to address subsidies in the single market generally. It proposes to establish a mechanism, under which the authorities would identify a foreign subsidy, evaluate the impact, and then impose measures to remedy the likely negative impact, including redressive payment and fines.  Module 2 is intended to address distortions that facilitate acquisition of EU companies. It could lead to a ban on the acquisition or commitments from the involved parties, to effectively remedy the distortion. Module 3 targets foreign subsidies that would have a harmful impact on EU public procurement. In a worst case scenario, the bidder that is found to receive a foreign government subsidy would be excluded from the procurement procedure.

To combat human rights violations, the Trade Policy Review mentions the use of sanctions and mandatory due diligence, including “to require that imported products comply with certain production requirements.” It sets out policy tools that the EU could employ in response to Chinese imports that have involved forced labor.

Subsequently, when European Commission Vice-President Valdis Dombrovskis spoke to the European Parliament’s International Trade Committee about the Trade Policy Review, he reiterated that:

When it comes to China, we need to restructure our partnership to be reciprocal, balanced and fair. Your resolutions on China have consistently called for this to be a priority.

The recent conclusion of negotiations on the Comprehensive Agreement on Investment must be seen through this lens, as one element of the wider China strategy.

This strategy has to do justice to the complexity of China and to the EU’s relationship with this country, which is at the same time a negotiating partner, an economic competitor and, increasingly, a systemic rival.

To this end:

CAI enshrines sustainable development commitments, including the fight against climate change and respect for core International Labour Organisation principles. This is the first time China has agreed to such concessions in a deal with a global partner.

However, since “CAI … is not a panacea to deal with all the challenges presented by China,” Dombrovskis outlined several ways to put more pressure on China through both engagement and autonomous measures:

We will work closely with like-minded partners, including the U.S. on levelling the playing field as well as other issues of concern like human rights and forced labour.

And we will continue to press ahead with our autonomous measures:

• First, to protect our security through FDI screening and export control;
• Second, to protect against unfair competition through the use of trade defence, a new legal instrument on foreign subsidies in the internal market and the International Procurement Instrument; and
• Third, to defend and promote human rights and core labour standards through, amongst others, due diligence legislation;
• Finally, the new EU Global Human Rights Sanctions Regime will enable us to target individuals and entities committing human rights abuses worldwide.