SNAPSHOT

22 MAY 2013

WALKING NOT TALKING

KAREL DE GUCHT, EU TRADE COMMISSIONER, TOOK THE UNPRECEDENTED STEP OF WARNING THAT ACTION COULD BE TAKEN AGAINST CHINESE COMPANIES EX OFFICIO. FTI CONSULTING, BRUSSELS, EXAMINES THE POLITICS AND THE POLICY BEHIND THAT DECISION AND ITS IMPLICATION.

SWITCHING THE GEAR

EU Trade Commissioner Karel de Guchts announcement on 15 May that the European Commission had decided in principle for the first time ever to open an ex officio anti-dumping and antisubsidy investigation into imports of mobile telecommunications networks and their essential elements from China seemed a logical step. An exofficio case -- one launched of the Commissions own accord and without a complaint from industry -- is designed to act as a shield for European companies, if they fear retaliation. The Commission has hidden the iron fist of trade defence instruments within a velvet glove to allow time for a negotiated solution with the Chinese.

ranging from healthcare to water utilities are increasingly dependent on cheap, state-subsidised Chinese wireless technology. There are other ongoing EU trade investigations, ranging from solar panels to agricultural products to steel tubes. In the starkest example to date, the Commission will from June levy billions of euros (up to 68%) of duties on imports of solar panels from China after a year-long investigation. Again, Germany is alarmed, vice-chancellor and economy minister Philipp Rsler saying it would be a grave error.

TWISTED RELATIONS
The EU has a complicated attitude to its relationship with China. Ready to do business, when it suits Europes interests. But when it comes to trade into the EU which could harm European companies, the EU is understandably more cautious. A raft of countries are currently queuing to enter into Free Trade Agreements with the EUand negotiations are making progress. But China is not yet involved in negotiations, leaving it in a precarious position, and De Gucht appearing to hold all the cards.

THIN LINE IN EUROPE

Yet the decision was not taken lightly. It was in fact against the express wish of several member states, notably Germany, the EUs biggest exporter to China. The timing is delicate for Germany. Chancellor Angela Merkel will on Sunday be the only EU head of state to host new Chinese premier Li Keqiang on his first foreign tour. The Netherlands and the UK also opposed the move on the grounds that Chinas Huawei and ZTE provide jobs, while France and Italy were strong advocates. The impetus to open the investigation could be linked to the products involved. Huawei and ZTE were little known in Europe a decade ago. Yet now, the Commission says the growth in their market share poses a potential security risk, as EU industries

IMPACT ON GROWTH
China is the worlds second-largest economy, and the EU is its largest trading partner. China is the EUs second-largest trading partner. But Chinas economy has slowed dramatically in the last year, as the EUs has seen stagnation or minimal growth. China has made repeated calls to enter into a Trade and Investment Agreement with the EU. Different expectations of how such agreements should function

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MAY 2013

have made for slow movement on the dossiers. An EU-China summit has, however, been tentatively scheduled for the end of this year. Theres a lot to play for, on both sides.

Claire Harris
Senior Director

FTI Consulting

HIGH STAKES FOR CHINA

China has said that European mobile telecom equipment firms Alcatel-Lucent, Ericsson and Nokia Siemens Networks enjoy a much bigger share of its market share than Chinese companies Huawei and ZTE have in the EU. Beijing has also warned that it would take assertive action to defend its rights if the EU goes ahead with an investigation. The Chinese foreign ministry has called on the EU to provide a "fair, equitable and transparent environment" for Chinese companies. The fact that the telecommunications sector is among the strategic sectors identified in Chinas last five-year plan heightens the impact of these trade defence measures on China. There is a real risk that China will introduce retaliatory measures across different sectors. Against this background, an ex officio case seems like a shot across the bows, which is intended to leave enough room for manoeuvre for both sides to reach a compromise position which will not escalate tensions even further. Whether the Commission decides to open an investigation depends on political factors that extend beyond the particular industrys concerns. It is a delicate balancing act. Europe cannot stand by and let companies fall victim to unfair trade practices. But equally it must take care not to land those same companies in deeper trouble. China could well decide not to take even this apparently nuanced move lying down.

Avenue Marnix 23 1000 Brussels +32 2 289 0944 Claire.Harris@fticonsulting.com

Pablo Lopez-Alvarez
Senior Director

FTI Consulting
Avenue Marnix 23 1000 Brussels +32 2 289 0938 Pablo.Lopez.Alvarez@fticonsulting.com

FTI Consulting