Transcript EU and the BRIC economies

EU and the BRIC economies
Brazil, Russia, India and China
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
Europe and Brazil
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?
EU’s trade with Brazil, €mn
Source: Eurostat
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
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
Europe and Russia
EU and Russia have common
interests…
• Neighbours
• Key economic links
• Energy
… but relationship not always easy …
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Mistrust
Russian policy – Chechnya, Georgia
Gas interruptions
No common vision of future
… and now Ukraine
Role of trade and investment
• EU is easily Russia biggest trading partner in 2013:
o 43% of Russian imports from EU – China in 2nd place with 17%
o EU accounted for 54% of Russian exports to China in 2nd place with
6.8%
• Russia relatively less important to EU in 2013:
o 3rd most important source of imports (mostly energy) at 11%
o 4th most important export destination – 6.1% of EU exports
o 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
EU’s trade with Russia (€ bn)
Source: Eurostat
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
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
The future?
• Very uncertain – both sides have a lot to lose
• Escalation or de-escalation?
o further developments in Ukraine?
o 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
Europe and India
EU trade with India
Source: Eurostat
Role of trade – 2014
• India responsible for:
o 2.2% of EU imports (rank 9)
o 2.1% of EU exports (rank 11)
• EU responsible for:
o 11% Indian imports (rank 2nd behind China)
o 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
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
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
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trade in goods and services
investment
trade facilitation
public procurement
intellectual property rights
competition
In line with WTO+ i.e. comprehensive
agreement – ‘shallow’ to ‘deep’
integration
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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
o 14 vs. 4 % average tariffs
o coverage 90–95 %
o symmetry or not?
o Exceptions
• Trade in services
o financial and telecom – particular issues
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
Regulation: potentially substantial
regulatory impact in many areas
• Regulatory convergence – technical barriers to
trade (TBT) and Sanitary and phytosanitary
measures
o Mutual Recognition Agreements, rules on conformity
assessment, equivalency, or other means
o Treatment of private standards
• Government Procurement
o 10-13% of EU and India GDP
• Competition
• Customs and trade facilitation
Other challenges: sustainability
• Trade and environment, trade and climate …
o possible to agree on climate friendly products?
• Role of sustainable development …
o important to the EU, rejected by India in an FTA
• Trade and labour rights – non-starter for
India
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?
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
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calls for issue of child labour to be addressed
wants India to sign the Non-Proliferation Treaty
• 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.
Europe and China
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.
o scientific co-operation, business management training,
rural development
o 1985 Trade and Economic Co-operation Agreement
• 1988: EU delegation opens in China
• 1989: Tiananmen – relations frozen and sanctions
• 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
EU trade with China
€ mn
Source: Eurostat
Why does China matter to
Europe?
• Rapid economic development
o Large private sector
o Growing middle class and consumer market
o Biggest telecommunication market/largest steel
consumer
o 2nd largest energy consumer behind US
o About half of China’s exports are currently capitalised
by foreign companies, mostly by neighbouring Asian
countries – relatively little from the EU
o EU generally underperforming
EU–China trade
• 1987: EU–China trade negligible
• By 2014
o China = EU’s 2nd biggest trading partner (biggest
source of imports)
o EU = China’s biggest trading partner
o EU imports € 301bn goods from China
o China is Europe’s biggest source of manufactured
imports
o EU exports €165bn goods to China
o EU running large trade deficit with China
o Market access issues remain for EU companies
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
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
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:
o 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
What does China want?
• Economic co-operation and trade, e.g.
o Ease restrictions on high tech exports
o Reduce and abolish anti-dumping duties
o Boost EU–China co-ordination in WTO
negotiations
o Strengthen dialogue on investment
o Greater co-operation across many economic
sectors
o Free trade area
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
o 2005 ‘bra wars’
o 2012–14 rare earth dispute
o 2012 solar panels anti-dumping case
The future?
• Progress on investment treaty?
• Free trade area – will Europe resolve its internal
disputes?
• The future of China itself
o Many commentators have described the 21st century as ‘the
Chinese century’, assuming impressive growth of recent
decades will inevitably continue
But
o 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?
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