China has been busy on the diplomacy front, with French President Emmanuel Macron and European Commission President Ursula von der Leyen’s visit to China making headlines. During their meeting with President Xi Jinping, the Chinese leader stressed the need for cooperation on multiple fronts and expressed a desire for in-depth dialogue to address economic and trade issues, with the goal being to reach a mutually acceptable arrangement. Von der Leyen echoed these sentiments, conveying her eagerness to strengthen dialogue with China, restart the three dialogue mechanisms promptly, and engage in more mutually beneficial cooperation.
In this favorable atmosphere, many eagerly await a resolution to the deadlock on the China-EU Comprehensive Agreement on Investment (CAI). This agreement is of vital importance for stabilizing China’s foreign trade and investment and propelling future institutional openness.
Stabilizing foreign trade and investment was incorporated into China’s six macro-economic goals specified in 2018 amid a stern external environment, but challenges persist. A Ministry of Commerce official recently acknowledged a severe and complex foreign trade landscape in 2023. Customs data for January and February show that China’s foreign trade has been in decline. The official and Caixin China manufacturing purchasing managers index surveys for March both showed a drop in the measure for new export orders. While some provinces have seen signs of a recovery in orders, the overall difficult situation remains unchanged. Stabilizing foreign investment has become an urgent priority. Although China has attracted more foreign investment than any developing country for many years running, complacency should be avoided. In 2022, foreign direct investment in China amounted to $190.3 billion, a significant decrease from $334 billion in 2021 and $253.1 billion in 2020. The balance of payments data, accounting for the withdrawal of foreign investment, presents an even grimmer picture than the Ministry of Commerce’s data.
Some would argue that the difficulties China faces in foreign trade and investment stem from the ongoing global economic downturn as the outlook for neighboring economies is also less than promising. While this perspective has merit, it is not entirely accurate. The challenges in stabilizing China’s foreign trade and investment predate the current global economic slowdown. Furthermore, expectations for China’s foreign trade and investment are grounded in its tremendous potential. As such, it is crucial to examine the barriers to stabilizing foreign trade and investment and strategize their removal, especially in light of recent pandemic policy adjustments.
We believe that the challenges in stabilizing foreign trade and investment are strikingly similar to those in enhancing the confidence of private enterprises and improving their prospects. Craig Allen, president of the US-China Business Council, recently noted that favorable treatment of private enterprises would bolster foreign investors’ confidence in China, highlighting the connection between these two issues.
Eliminating barriers to stabilizing foreign trade and investment requires a three-pronged approach addressing the system, policy and perception. This year’s government work report proposes “greater efforts to attract and utilize foreign investment, broaden market access, and intensify the opening-up of the modern service industry.” The work report said that China aims to improve the treatment of foreign enterprises ... to enhance services for foreign enterprises and promote the realization and construction of foreign investment landmark projects.” These tasks encompass both system and policy. It is crucial to recognize that a country’s appeal to foreign investment increasingly hinges on its rules and institutions rather than solely profit opportunities and market size.
In addition to avoiding contractionary policies, governments at all levels should focus on improving the system and mechanisms that allow the market to play a decisive role in resource allocation while also enhancing the government’s role. Currently, it is particularly important to vigorously address the systemic and institutional damage caused by the three-year-long pandemic.
Additionally, it is crucial to prioritize the elimination of cognitive barriers hindering the stability of foreign trade and investment.
In the early stages of China’s reform and opening-up, the nation grappled with capital shortages, making foreign investment a necessity. However, as China’s economy surged and domestic enterprises became more competitive, certain individuals and financial officials developed a sense of complacency, believing that China no longer needed foreign capital. This shift in perception led to the notion that foreign investment in China was solely about capturing market share and competing for resources. This attitude, however, is unwise.
It is essential to reevaluate the distinct and significant role of foreign investment. It acts as a vital connection between domestic and global markets. Foreign enterprises not only help fill the domestic capital deficit but also introduce advanced technology and management expertise, as well as facilitate the flow of information. China’s quest for high-quality development and the creation of an economy built on innovation cannot be realized without the participation of foreign capital. The new development landscape suggests that if international circulation falters, domestic circulation will take a hit.
The China-EU CAI serves as an illustrative example. After 35 rounds of talks spanning more than seven years, negotiations were finally concluded in late 2020. This balanced, high-standard, and mutually beneficial agreement was hard-earned. For China, the agreement not only facilitates the introduction of European advanced technology and management experience but also aids Chinese enterprises in expanding their investment in Europe, particularly by reducing potential barriers such as national security reviews during EU company acquisitions. More importantly, the agreement emphasizes institutional openness and high-level fair competition rules, providing an improved business environment for bilateral investment. It also offers fresh impetus for “promoting reform through openness,” assisting China in constructing a more comprehensive market economy system.
It must be acknowledged that trade relations are inevitably influenced by geopolitics, as well as bilateral and multilateral relations. The impasse in ratifying the China-EU CAI exemplifies this. To break the deadlock, China has exhibited a more proactive approach, warranting a response from the EU. Some observers naively assume that by expanding into other markets, China’s foreign trade and investment would be sufficient. In reality, however, China’s trade relations with developed countries are irreplaceable, and any attitude of indifference toward the foreign markets that Chinese companies have captured over the last 45 years of effort is unwarranted.
Decision-makers have repeatedly emphasized that China’s economy is deeply integrated within the global division of labor. Regardless of international ructions, China remains committed to only growing more open. The stability of foreign trade and investment should be considered from this perspective. We anticipate that the Chinese government will remove obstacles and actively promote the swift implementation of the China-EU CAI, driving comprehensive, high-level institutional openness with increased vigor. By sticking to the principle of competitive neutrality, the government should treat all types of enterprises equitably. With these measures in place, the stability of foreign trade and investment will naturally follow.
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