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Newsletter No. 20 Fall 2013

Inside click to see article

Editorial Jan Eggert FTA Director General . . . . . . . . . . . . P .1

Top Story China: A Changing Business Landscape . . . . . . . . . . . P .2

FTA Meets... Interview with John Russell Managing Director, North Head . . P .4

News FTA News . . . . . . . . . . . . . . . . . . . . . . P .6 European Trade Activities . . . . . . . P .7

Editorial

Welcome to the latest edition of Trade Perspectives, the trimestral publication of the Foreign Trade Association (FTA) . This edition focuses on trade-related issues in China . Not only is China the major sourcing country for FTA members but it also features quite prominently in the headlines, on major trade-related issues .

Positively, on 18 October 2013, the European Council approved the launch of investment talks with China, only a few weeks prior to the 16th EU-China Summit that took place in Beijing on 21 November . The Summit was also an opportunity for the EU to meet the new Chinese leadership and to lay the foundations that will shape cooperation between the parties in the coming years .

However, this positive development is in stark contrast with other reports on China . The collapse in late November of negotiations that sought to expand the World Trade Organization’s (WTO) Information Technology Agreement (ITA) was imputed to China’s desire to exempt a lengthy list of products from the ambit of this agreement .

A similar absence of ambition has been invoked by those parties currently negotiating the Trade in Services Agreement (TISA) to block China from joining the negotiations . Yet, it is clear that China is serious in pushing its service industry as a key instrument in shifting the economic makeup of the Chinese economy .

In this issue, we have tried to put these developments into perspective . Our lead article therefore looks at the changing business landscape in China . To gain a clearer picture of the impact of these trends on businesses, we also interview John Russell, Managing Director of North Head, a strategic PR and communications consultancy . We hope you enjoy this edition .

Please do not hesitate to get in touch to provide your feedback on any issues discussed within .

Jan Eggert FTA Director General

Jan A . Egger t FTA Director General

ContributorsPierre GröningTrade Policy Advisor

Stuart NewmanLegal Advisor

Philippe VandendaeleManaging Director, Public Affairs

Stefan WenglerFTA Senior Advisor, Customs and Procedures

For all questions related to articles or news items published in this edition, please contact our expert team .

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TOP STORY

China: A Changing Business Landscape

In late September 2013, the media reported that China was knocking on the door of 23 WTO Members, negotiating the Trade in Services Agreement (TISA) which, if agreed, will cover about 70 per cent of global services . This recent move was interpreted by some as a sea change in China’s strategy since its 2001 WTO accession, which privileged the multilateral trading system . The news triggered concerns about China watering down the TISA commitments and elicited opposition from countries that have more recently imputed the failure of the Information Technology Agreement (ITA) to China’s equally modest level of ambition in the field of ICT .

Be that as it may, China’s desire to be party to TISA should come as no surprise to those who have kept a watching brief on the objectives of the 12th five-year plan endorsed by China’s legislature, the National People’s Congress, on 14 March 2011 . This plan sets the nation’s course for the next five years .

The 12th Plan seeks to rebalance China’s economy in order to achieve sustainable growth across the country, reduce the income gap and mitigate environmental concerns . The Plan is often seen as a way to address the growing social discontent in China . But there is more to it . The approach behind this plan also seeks to capitalise on China’s growing middle class, pre-empting the consequences of a growth model based on exports and investments in times of bleak economic prospects in some of China’s key export markets .

Looking at private domestic consumption as a new primary market feature was therefore vital in building a stable Chinese economy . This shift partially explains sustained increases in minimum wage levels projected by the five-year plan . Whilst this should result in significantly higher aggregate disposable incomes and a much larger market for retail and consumer goods companies, the cost of production is also poised to rise . There are other factors that will fuel this trend, ranging from temporary labour shortages due to demographics, to worker activism .

With rising labour costs, Chinese goods could become less competitive in global markets, potentially raising export shares elsewhere . Rising Chinese prices could pass through to trading partners that rely heavily on imports from China .

Another ambition of the Plan is to tackle environmental challenges that resulted from the prior emphasis on manufacturing . The Plan presents key projects including emission reduction, improvement of welfare and the

environment, rural environmental protection benefiting the people, protection of eco environment, prevention of environmental risks of key fields, ensuring nuclear and radiation safety, public service of environment infrastructure, ensuring the capacity in environmental supervision and development of talents .

This environmentally conscious approach also informs the Plan’s more critical attitude to foreign investment, emphasising quality, rather than quantity . Government officials are no longer solely concentrated on GDP growth, and policies towards foreign investment have become less favourable than some years ago . This probably explains why the EU was keen to launch negotiations with China on 18 October for the conclusion of the Bilateral Investment Treaty (BIT) .

In light of these trends, the move towards the development of the service industry should come as no surprise . The service industry is a key instrument in shifting the economic makeup of the Chinese economy and TISA can act as a catalyst . Looking at retail and distributive services in particular, it is clear from the Work Report of the Government of March 2011, that these are a priority . The retail sector in China is seen as an infrastructure for encouraging increased private consumption domestically . Also, retail is a job-producing sector with less impact on the environment .

The declared ambition of this plan combined with the appointment of the 18th Central Committee of the Communist Party of China (in session from 2012 to 2017) will have a lasting impact on the business landscape, both within China and in countries that do business with China .

FTA Position Paper on ChinaTo read the official FTA Position Paper regarding trade relations between the EU and China, please click here .

"The growth model that has brought the country to the gates of prosperity will not be the one that takes them through"Karel de Gucht (EU Trade Commissioner), September 2013, at EU Chamber of Commerce in China .

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EU - China Trade Statistics

In 2012 and the first half of this year, it was easy to see the distinctive difference of the trade flow between the EU and China; imports were roughly double that of exports . Imports in 2012 totaled EUR 290bn, dominated by machinery, computers, clothing and telecommunications equipment . In the first six months of 2013, total imports were EUR 71 .4bn and were again dominated by the same products . Exports to China in 2012 were EUR 114bn, with motor vehicles accounting for more than 20 percent of that total . Chemicals and base metals (particularly scrap) were also prevalent . The first half of 2013 saw a similar trend .

Imports of technologically-advanced products have increased in recent years as many countries,

particularly from Asia, use China as an assembly plant, exporting the components to China to be made into the final products before they are exported to the EU and other countries . European companies on the other hand, tend to process in China for the Chinese market . However, the traditional low-cost products in clothing and textiles are still a very important market . As for exports, there has been a significant rise in high value European products such as cars, which indicates the growing middle income population in the country . Over the coming years, this is likely to increase in line with the continuing rise in wages, which may have the consequence that imports of the traditionally low-cost products may fall .

EU EXPORTS - MAIN PRODUCTS (€ BN)

VARIOUS MACHINERY

AIRCRAFT

BASE METALS

CHEMICALS

ELECTRICAL GOODS

MOTOR VEHICLES AND PARTS THEREOF

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20

40

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100

120

2012 2013 (Q1/Q2)0

50

100

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EU IMPORTS - MAIN PRODUCTS (€ BN)

2012 2013 (Q1/Q2)

VARIOUS MACHINERY

FURNITURE

TOYS

TRANSISTORS AND SEMI-CONDUCTORS

TEXTILES

BASE METALS (AND ARTICLES THEREOF)

TELECOMMUNICATIONS EQUIPMENT

CLOTHING

COMPUTERS

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EU IMPORTS - MAIN PRODUCTS (€ BN)

2012 2013 (Q1/Q2)

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FURNITURE

TOYS

TRANSISTORS AND SEMI-CONDUCTORS

TEXTILES

BASE METALS (AND ARTICLES THEREOF)

TELECOMMUNICATIONS EQUIPMENT

CLOTHING

COMPUTERS

EU EXPORTS - MAIN PRODUCTS (€ BN)

VARIOUS MACHINERY

AIRCRAFT

BASE METALS

CHEMICALS

ELECTRICAL GOODS

MOTOR VEHICLES AND PARTS THEREOF

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20

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2012 2013 (Q1/Q2)

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FTA Meets . . . John Russell, Managing Director, North Head

In this interview, John Russell, Managing Director, North Head, shares his insight

into the transformation of China both demographically and economically. He explains the significant impact of these developments on trade issues, underlining the effect this

will have on Western businesses. He also describes three attributes

required for fruitful trade with China in the current climate.

What are the major changes affecting Western businesses operating in China these days?

The Chinese government is implementing a policy mix for change management of the economy . This transformation seeks to reconfigure the economy from being export-oriented, based on low labour and energy costs, towards greater contributions from domestic consumption and services . Another wave of urbanisation will be a key driver of this shift . Concurrently, it is investing heavily in innovation . With rapid growth in past years of funding, China is now the second largest R&D market after the U .S . with 12 percent of global spend .

The Third Plenum of the Chinese Communist Party’s Central Committee in November announced a raft of economic reforms that are expected to facilitate these changes . A common thread is the increased use of market mechanisms which should be welcomed by Western businesses .

However, China is not on a trajectory to evolve towards North American-style markets . State-owned enterprises (SOE) will continue to play a predominant role in many sectors, with an emphasis on making them more efficient via market disciplines . Efforts to promote markets will give more space to private capital and increased latitude to private businesses, including Western companies .

China’s middle income population is growing quickly and as a result, China is poised to become the largest consumer market on the planet. How can Western businesses take advantage of this opportunity?

The rapid expansion of Chinese consumers creates a fast moving target for businesses . Profitability of the majority of western businesses in China is higher than in their home markets . But it is also increasingly unsettling for large multinational corporations (MNCs) where their

corporate processes are more tailored to low-growth, mature markets .

Recent experiences of retailer, FMCG, mobile phones and electronic devices sectors are cases in point . China is leap-frogging or redefining logistics models and product innovation cycles . E-commerce is an excellent example of this . In the third quarter of 2013 online shopping surged to over EUR 55 billion, an increase of over 42 percent from Q3 2012 . Two factors are contributing to this surging trend, online shopping in third and fourth tier cities and better B2C marketing .

Products and services need to be tailored to the needs and wants of Chinese consumers . The Head of P&G research in Asia summed up the challenge as follows: Chinese consumers are “modernising but not westernising” . Product cycles need to be shortened, systems built to enhance customer intimacy and distribution extended into third and fourth tier cities . MNCs are coming under increasing competitive pressures . Success requires flexibility and sufficient agility in the market .

According to estimates, the supply of labour in China will drop in the coming years, whilst the production costs rise. Do you see it losing its traditionally competitive advantage in labour intensive manufacturing?

For labour intensive manufacturing, its competitiveness is falling, especially for the Eastern seaboard provinces . Companies dependent solely on cheap labour and cheap energy can have some relief by moving their operations outside China or to lower cost locations within China .

China is a large and complex country; geographically, it is over twice the size of the EU and with almost three times the population . Just like the EU, where prosperity levels vary from west to east and from north to south, China has wide variations between provinces and regions for income per capita, wages and costs of doing business . Central and western regions have lower costs and faster growth than the eastern provinces and are looking to develop stronger links with Central Asia .

“China should not be treated as a single market but as a series of distinct regions and a spectrum of consumer/customer segments .”

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For the eastern provinces there are steady improvements of economic efficiencies . Over the past decade productivity across China grew in the order of 10 percent, faster than other BRICS . It has been a boom time for companies such as ABB, Rockwell and Honeywell . Yet there are still gains to be made when Chinese productivity overall is compared to that of the U .S ., Japan or even Hong Kong .

Why do you think there is no free trade area (FTA) between the EU and China?

I think the pre-conditions in both the EU and China have not been in place for a free trade area (FTA) . Normally FTAs occur when both sides believe that it is in their mutual benefit to take a step towards greater economic integration . Also there is a matter of competing priorities and limited “bandwidth” for negotiations . For China the priority has been to consolidate FTAs in East Asia and the acquisition of necessary resources from Central Asia and elsewhere . In North Asia a priority is the FTA negotiation with Korea and Japan, and the various negotiations configured around ASEAN to the south . The latter includes negotiations in the context of APEC and its Regional Comprehensive Economic Partnership (RCEP) . To the west, China has initiatives with central Asia for greater economic integration via the new Silk Road “economic belt”, under the umbrella of the Shanghai Cooperation Organization (SCO) .

From a Beijing perspective, the EU has appeared preoccupied with agreements with its near-abroad to the East and South . There has also been in the past year a wave of enthusiasm in Europe to move forward with the Trans-Atlantic Trade and Investment Partnership (TTIP) . Moreover, there have been many mixed signals coming from Europe . Until the last 12 months, Brussels and the Member States were not aligned .

In the past five years there was a raft of high profile anti-dumping (AD) and countervailing duties (CVD) cases by the EU . Those cases had a chilling effect here in China . Visas were cumbersome and created practical hurdles for the Chinese to do business, trade and invest in Schengen, the UK, or elsewhere . Lobbies were being organised in Brussels to counter Chinese encroachment . The overall impression in Beijing was that Brussels was happy for European companies to operate in China and be profitable, but it preferred to keep China at arm’s length, away from its European markets . Yet simultaneously, it seemed that a week did not go by when a Member State head of government or ministerial delegation was not visiting China seeking to attract increased trade and inward investment .

The results of the recent EU-China summit on 21 November are definitely moves in the right direction . The decision to start negotiations on an investment agreement and to “explore a subsequent FTA” should be welcomed by all those seeking to strengthen Sino-European ties .

Any tips for those doing business in China today?

Agility, adaptation and sound risk management are important attributes . Firstly, agility, because the pace of change of China’s markets is remarkable, and sticking to tried and tested corporate processes for decision-making of low growth, mature markets such as Europe or North America quickly evolves into a competitive disadvantage . The length of decision-making and product and project implementation needs to be shortened .

Adaptation is important because China should not be treated as a single market but as a series of distinct regions and a spectrum of consumer/customer segments . Rather than just selling foreign products, product and service offerings now require true customisation to the needs and expectations of various Chinese customers . Often this entails going back to the start of the product or service production cycle, even back into the R&D phases . Marketing, sales and distribution often operate through different channels than mature markets . Channels and geographies change over time at a rate that is often disconcerting to Europeans and Americans .

Finally, risk management is a necessary ingredient because by its nature, which involves high growth and profitability, China also has commensurate risk . It is a market of frequent corporate crises . Implementing effective governance and compliance systems are necessary, focussed on the demands of Chinese authorities rather than solely EU or U .S . requirements . It is a thorny but growing issue .

John Russell is Managing Director of North Head, a public affairs and strategic communications consultancy headquartered in Beijing and with offices or affiliates in Shanghai, Singapore, Washington, Ottawa and Brussels . In December 2013 North Head received the Public Affairs Asia magazine’s award Consultancy of the Year for public affairs and strategic communications . Further information can be found at www .northheadcomms .com, and trade issues relevant to Asia at www .asiatradewatch .com . John Russell can be contacted at jrussell@northheadcomms .com .

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News

FTA ACTIVITIES

• FTA Participates in Discussions About EU-Bangladesh Trade Relations (17 September 2013) On 17 September FTA was invited, among other key stakeholders, to take part in the International Trade (INTA) Committee exchange of views on ‘Labour conditions and health and safety standards at work in Bangladesh and its possible impact on EU-Bangladesh trade relations’ . The participation of the FTA in the INTA Committee follows a breakfast meeting organised last July in the European Parliament on recent factory tragedies in Bangladesh .

• FTA Joins WTO Trade Policy Panel (1 October 2013) Represented by its Managing Director of Public Affairs, Philippe Vandendaele, FTA participated in a panel billed as "Made in the world: how can trade policy be adapted to global value chains?" The discussion considered the fact that businesses are increasingly organised in international or global value chains, yet the regulatory environment under which they operate is either out of step with this reality or shaped by bilateral or plurilateral arrangements .

• European Parliament Holds Public Hearing on MTDI (7 November 2013) FTA represented retailers, importers and distributors at the European Parliament’s International Trade Committee (INTA) public hearing (7 November 2013) which discussed EU proposals to modernise anti-dumping and anti-subsidy regulations . The panel was headed by the EU Trade Commissioner, Karel de Gucht . Before an audience of MEPs, EU government representatives, EU trade associations and other Brussels-based organisations, FTA Legal Advisor Stuart Newman highlighted concerns about the removal of the “lesser duty rule” and expressed support for the proposal to permit the reimbursement of duties paid during an expiry review that concludes with the termination of duties . He also supported the principle of pre-notification of provisional duties - though for six weeks, not the proposed two - and suggested that goods being shipped whilst duties came into force should be exempt from those duties .

• FTA Signs Joint Statement on EU-Japan Trade Relations (19 November 2013) FTA signed a joint statement on the ongoing EU-Japan trade negotiations reiterating strong

support for a deep and comprehensive free trade agreement . The declaration, which was co-signed by a dozen European business associations, furthermore called on EU and Japanese leaders to remain committed to the talks, keeping the envisaged agreement among their key priorities . Read the statement .

• FTA Organises Round Table Debates (28 November 2013) On 28 November, FTA organised the third in a series of roundtable debates entitled "Campaigning for Free Trade, European Growth and Competitiveness - European Elections May 2014" . Lucian Cernat, Chief Economist, DG Trade; Hubert Escaith, WTO Chief Statistician; and Marc Jütten, Advisor on External Policies to the President of the European Parliament, were invited as panellists . For the FTA, the objective of the debate was to stress the importance of a strong trade agenda in the electoral campaign, especially at a time when the European economy faces difficult challenges . The debate, moderated by Rebecca Christie, Brussels correspondent for Bloomberg, took place against the backdrop of the official launch of the electoral campaign for a new European Parliament to take place in May 2014 .

• 9th WTO Ministerial in Bali Ends in Success (3 December 2013) At a high-level trade policy dialogue meeting, FTA, along with SME Global and EuroCommerce joined forces to issue a joint statement expressing strong support for ongoing WTO negotiations in particular on trade facilitation . The meeting took place in advance of the official start of the 9th WTO Ministerial Conference in Bali . FTA reinforced the strong call for a deal on Trade Facilitation . "In times of immense economic challenges, business worldwide is waiting impatiently for negotiators to show leadership and demonstrate the ability of the WTO to really deliver . The current trade rule book is not adequate to keep pace with quickly transforming business realities", said Pierre Gröning, Trade Policy Advisor, FTA .

FTA Position PaperTo read the FTA Position Paper on EU-Japan Relations, please click here .

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News

EUROPEAN TRADE NEWS

• Legal Uncertainties Remain Over EU Biocides Regulation (1 September 2013) The EU Biocidal Products Regulation, which became applicable on 1 September 2013, concerns the placing on the market and use of biocides . Major modifications in comparison with the previous regime are the enlarged scope of the legislation, which is now also covering imported products, and a new definition of biocidal products . According to the European Commission, more retail products are concerned by this legislation than by the REACH regulation . Unfortunately, there are still legal uncertainties about important aspects of the new regulation, such as the definition of primary biocidal function and the transitional period, leaving it to administrations to interpret this complex piece of legislation .

• Commission to Negotiate New Trade Agreement With China (18 October 2013) The European Commission was mandated to negotiate an investment agreement with China which should include both investment protection and improved access to the market for investors . Furthermore, EU trade representatives adopted an updated mandate allowing the Commission to open talks on investment protection provisions with ASEAN countries as part of ongoing or upcoming free trade negotiations . Trade relations and economic cooperation with the Eastern neighbours and the undisguised Russian pressure on Ukraine, Moldova and Georgia were also under debate .

• New Union Customs Code Enters Into Force (30 October 2013) On 30 October 2013, the UCC came into force to replace the modernised Customs Code which, however, was never applied in practice . For the time being, the new code does not produce any legal effect for economic operators . All substantive provisions of the UCC will only applicably come into force on 1st June 2016 . Before then, the old Customs Code of the Communities of 1992 remains in effect .

• Towards a Strategic EU-China Partnership (20 November 2013) Premier Li Keqiang of the State Council of the People’s Republic of China, Herman van Rompuy, President of the European Council, and José Manuel Barroso, President of the European Commission, met at the 16th China-EU Summit (20 - 21 November 2013) to discuss strategic partnership and the economy, trade and investment relations, and bilateral cooperation, amongst others . China and the EU announced the launch of negotiations of the China-EU Investment Agreement . Both sides jointly adopted the China-EU 2020 Strategic Agenda for Cooperation, setting out shared aims to promote cooperation in peace and security, prosperity, sustainable development and people-to-people exchanges . The meeting was preceded by the EU-China Roundtable on 18 – 19 November 2013 which emphasised the need for an investment agreement that includes sustainable development taking into account the impact that business has on social and environmental protection, including corporate social responsibility . The FTA Position Paper on EU-China Relations can be read here .

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About the FTA

FTA is Europe’s premier association for trade policy and global supply chains . FTA represents more than 1,300 retailers, importers, brand manufacturers and national associations in the political arena and in public to promote and defend free trade and sustainable supply chains . Through its Trade Policy services, FTA works with key interlocutors in Brussels, Geneva, member states and supplier countries to represent its members interests, provide them with the latest information and offer expert legal advice on international trade issues . Through the Business Social Compliance Initiative (BSCI) and the Business Environmental Performance Initiative (BEPI), the association supports its members to improve social compliance and environmental production conditions in the international supply chain . www .fta-intl .org .