EU and the BRIC economies

1. EU and the BRIC economies Brazil, Russia, India and China

2. What are the BRICs? • Moving from closed to open economy • Perhaps from state to market economy • Developing key market economy institutions • Undergoing economic reform • Rapid economic growth

3. Europe and Brazil

4. EU–Brazil • Brazil is world’s 7th largest economy and 5th biggest population • GDP growth below that of China and India but Brazil’s GDP per head significantly higher than both • More mature market than other BRICs → greater potential for export of consumer and higher value-added goods?

5. EU’s trade with Brazil, €mn Source: Eurostat

6. EU–Brazil • EU imports from Brazil largely primary products – i.e. agricultural and fuel and mining products • EU = Brazil’s most important trading partner and biggest source of inward FDI • EU’s stocks of FDI in Brazil bigger than those in India and China • Stocks of Brazilian FDI in the EU almost 4 times greater than those of Chinese stocks in the EU

7. Formal EU–Brazil relations • 2007 launch of Strategic Partnership between the two and annual summits • EU–Brazil aviation agreement near? • More comprehensive trade and investment agreement likely to come through regional agreement with Mercosur (of which Brazil is a founder member) than bilaterally

8. Europe and Russia

9. EU and Russia have common interests… • Neighbours • Key economic links • Energy … but relationship not always easy … • Mistrust • Russian policy – Chechnya, Georgia • Gas interruptions • No common vision of future … and now Ukraine

10. Role of trade and investment • EU is easily Russia biggest trading partner in 2013: • 43% of Russian imports from EU – China in 2nd place with 17% • EU accounted for 54% of Russian exports to China in 2nd place with 6.8% • Russia relatively less important to EU in 2013: • 3rd most important source of imports (mostly energy) at 11% • 4th most important export destination – 6.1% of EU exports • Nevertheless, Russia remains a significant amount in terms of value and key role as energy supplier. Development of fracking in Europe would change this • EU firms are biggest foreign investors in Russia but FDI there has proved problematic (BP example) and made more problematic by sanctions

11. EU’s trade with Russia (€ bn) Source: Eurostat

12. Formal EU– Russia Relations • 1989: Agreement on Trade and Commercial and Economic co-operation • 1994: Partnership and co-operation Agreement (the PCA) (came into force on 1 December 1997) – set up institutional framework for co-operation across a wide range of themes • The PCA, concluded for an initial duration of 10 years – extended automatically after 2007 – work to replace PCA began 2008 – soon halted • 2015 EU economic sanctions on Russia starting to bite – fall in energy prices making Russia’s economic situation worse

13. 2014 Ukraine crisis – EU measures • Talks on new agreement and most co-operation programmes suspended • EIB and EBRD suspends signature of new financial operations in Russia • Freezing of assets and visa bans on 119 individuals and 23 entities • Ban on new investment and infrastructure projects in Crimea and Sebastopol • Ban on sales and services surrounding certain bonds, equities and other financial instruments • Ban on loans by EU nationals and companies to 5 Russian state banks • Embargo on arms and dual use technologies • Bans on supply of services for deep-sea Arctic and shale oil exploration and production

14. The future? • Very uncertain – both sides have a lot to lose • Escalation or de-escalation? • further developments in Ukraine? • other potential hotspots? • Putin’s long term vision? – back to Russia’s role • EU needs to review its own strategy re Russia – whatever the outcome of the current situation

15. Europe and India

16. EU trade with India Source: Eurostat

17. Role of trade – 2014 • India responsible for: • 2.2% of EU imports (rank 9) • 2.1% of EU exports (rank 11) • EU responsible for: • 11% Indian imports (rank 2nd behind China) • 16% Indian exports – India’s biggest export market BUT • Given the size and growth of India’s economy – much unfulfilled potential – current and future • Services trade – approx. one third of goods trade but growing significantly

18. Foreign direct investment • EU = largest foreign investor in India and is main destination for Indian FDI but overall flows relatively small • Indian companies in Europe include Infosys, Tata Consultancy Services, Wipro, Tata Steel, Tetley, Bharat Forge, Jaguar Land Rover, Ranbaxy

19. Formal trade relations – and Global Europe • India = rapidly growing economy but relatively low EU trade • 2007 – negotiations begun for comprehensive FTA between the EU and India • trade in goods and services • investment • trade facilitation • public procurement • intellectual property rights • competition

20. In line with WTO+ i.e. comprehensive agreement – ‘shallow’ to ‘deep’ integration • Market access – India reforming since 1991 but still many restrictions – tariffs, import licensing, mandatory testing, investment restrictions (telecomm, retail distribution, insurance, banking, legal services) • Trade in goods • 14 vs. 4 % average tariffs • coverage 90–95 % • symmetry or not? • Exceptions • Trade in services • financial and telecom – particular issues

21. Investment • EU wants market access, national treatment and free flow of payments and investment-related capital movements • Particularly wants access to telecoms, retail distribution, insurance, banking and legal services • Indian concerns that above will lead to EU dominance of Indian financial services – poor and high risk customers will be left to local institutions

22. Regulation: potentially substantial regulatory impact in many areas • Regulatory convergence – technical barriers to trade (TBT) and Sanitary and phytosanitary measures • Mutual Recognition Agreements, rules on conformity assessment, equivalency, or other means • Treatment of private standards • Government Procurement • 10-13% of EU and India GDP • Competition • Customs and trade facilitation

23. Other challenges: sustainability • Trade and environment, trade and climate … • possible to agree on climate friendly products? • Role of sustainable development … • important to the EU, rejected by India in an FTA • Trade and labour rights – non-starter for India

24. Potential benefits • Simulations show small but not insignificant increase in EU and Indian production after entry into force of ‘shallow FTA’ … • … but larger gains to be made through deeper integration, including coverage of regulatory issues and investment • Significant increase in FDI possible • Gains through improvements in government procurement and trade facilitation, including through transparency • The evidence points to considerable benefits but are the respective political systems ready to realise them?

25. Political challenges in India… • Affected interest groups resist tariff cuts and regulatory reform which they claim is costly for them • Differences over ‘non-trade issues’ – a potential stumbling block and slow down the negotiations … and in the EU • Lisbon Treaty changes the EU ‘trade game’ – increasing powers to the European Parliament • calls for issue of child labour to be addressed • wants India to sign the Non-Proliferation Treaty

26. Excellent very recent article on issues between EU and India: Khorama, S. and Garcia, M. (2013) ‘European Union – India Trade Negotiations: one step forward, one back’, Journal of Common Market Studies,Vol. 51, Issue 6, pp. 684–700.

27. Europe and China

28. Evolution of formal EU–China links • 1975: formal EU–China relations begin following normalisation of US–China • 1979: Commission President Roy Jenkins to China • 1980s: broadening of bilateral co-operation, e.g. • scientific co-operation, business management training, rural development • 1985 Trade and Economic Co-operation Agreement • 1988: EU delegation opens in China • 1989: Tiananmen – relations frozen and sanctions

29. By 1992: relations normalised – arms embargo remains • 1998: First EU–China summit • 2001: China joins WTO • 2007 negotiations begin on Partnership and co-operation Agreement • 2014 Launch of negotiations on EU–China investment agreement • China floats idea of free trade area with EU – EU member states divided on the issue

30. EU trade with China € mn Source: Eurostat

31. Why does China matter to Europe? • Rapid economic development • Large private sector • Growing middle class and consumer market • Biggest telecommunication market/largest steel consumer • 2nd largest energy consumer behind US • About half of China’s exports are currently capitalised by foreign companies, mostly by neighbouring Asian countries – relatively little from the EU • EU generally underperforming

32. EU–China trade • 1987: EU–China trade negligible • By 2014 • China = EU’s 2nd biggest trading partner (biggest source of imports) • EU = China’s biggest trading partner • EU imports € 301bn goods from China • China is Europe’s biggest source of manufactured imports • EU exports €165bn goods to China • EU running large trade deficit with China • Market access issues remain for EU companies

33. What does China want from Europe? • Wants polycentric rather than unipolar world order (like Chirac) • Access to Europe’s markets • “The common ground between China and the EU far outweighs their disagreements” China’s EU Policy Paper • Political, economic and cultural objectives

34. China’s political objectives • Strengthen high-level visits and political dialogue • ‘Strictly abide by the one-China principle’ • Encourage Hong Kong and Macao’s co-operation with EU • ‘Promote the EU’s understanding of Tibet’ • ‘Continue the human rights dialogue’ • Strengthen international co-operation • Enhance mutual understanding between Chinese and European legislative organs • Increase political exchanges between political parties and the EU

35. Other EU trade issues with China • Standards: China requires compliance with its domestic standards – often involves burdensome testing and certification procedures and differ from international standards and practices • Intellectual property rights: • IPR infringements remain a serious problem for European business in China • Public Procurement: EU companies complain of access problems, lack of transparency, unfair implementation, and unsatisfactory appeals system • Subsidies: state banks offer preferential treatment to domestic firms • Export restrictions: especially on raw materials – problematic where there is neither an alternative supply nor close substitute, resulting in 2012–14 rare earth metals crisis

36. What does China want? • Economic co-operation and trade, e.g. • Ease restrictions on high tech exports • Reduce and abolish anti-dumping duties • Boost EU–China co-ordination in WTO negotiations • Strengthen dialogue on investment • Greater co-operation across many economic sectors • Free trade area

37. Causes of tension • EU – largest trade deficit with any • Chinese intellectual property policy • EU wishes to remove obstacles to trade (price controls, standards, etc.) • Obstacles to investment – geographical restrictions, joint venture requirements, discriminatory licensing procedures, closure of sectors to foreigners) • Occasional high profile trade disputes • 2005 ‘bra wars’ • 2012–14 rare earth dispute • 2012 solar panels anti-dumping case

38. The future? • Progress on investment treaty? • Free trade area – will Europe resolve its internal disputes? • The future of China itself • Many commentators have described the 21st century as ‘the Chinese century’, assuming impressive growth of recent decades will inevitably continue But • nothing inevitable about this. China came through 2007– financial crisis apparently unscathed but only through large scale pump priming of the economy. Imbalances now evident and economy is slowing down. Summer 2015 – stock market falls and controversial currency devaluations. A temporary slowdown or sign of long term problems? Consequences if the latter?

39. BRIC conclusions • EU regards itself as underperforming in trade and investment in BRICs • BRICs often seen as rapidly markets with great market potential – and with some justification but • The BRICs are not homogenous and face their own political and economic challenges which, in turn, pose potential challenges for European business • European business needs to up its game in the BRICs but competition will be great and the BRICs themselves could face some difficult times