The Difference One-fifth Makes

Starting in 2013, Chinese companies were encouraged, some may even say pushed, by the government to go abroad and expand their footprint into other markets. This ‘go out’ campaign expressed itself in a variety of different ways. Headlines in the EU, and eventually back in China, were often dominated by trends like the massive shopping spree of Chinese investors buying up European football clubs or concerns about state-directed capital buying up Europe’s technological and industrial ‘crown jewels’ like Kuka. However, as Jacob Gunter, Policy and Communications Manager at the European Chamber notes, another trend could ultimately present a major threat to European business if left unchecked. This trend is connected to the ‘go out’ campaign, but even more so to the subsequent development of the Belt and Road Initiative (BRI), with both pulling China’s national champions into global markets. 

China’s national champions have grown and developed under the protective shield of a system that erected barriers to foreign competition. Initially, this was an issue for the foreign companies that were eager to bring their goods and services to China’s consumers. Being blocked out meant lost opportunities to do business with one-fifth of the world’s customers, but it didn’t have a large effect beyond China’s borders.

However, this has fundamentally changed. European companies can no longer view a market access barrier in China as just a lost opportunity, but must instead treat it as a threat to long-term global competitiveness. This is for the simple reason that Chinese firms in key sectors can build scale, leverage cheap domestic financing and enjoy the benefits of innovation driven by 20 per cent of the world’s population that foreign companies cannot access.

For example, when China was first building its high-speed rail network, barriers to foreign competition through opaque procurement measures, as well as serious intellectual property infringement for anyone daring enough to try to participate, meant lost potential revenue. Years later, Chinese firms that build railways and the trains themselves are now scaled up from their protected market and fueled by favourable financing back home. When they compete for tenders in other markets, or simply win them without competition like in many BRI projects, the Chinese firms come with a scale and purse large enough to be able to shockingly low bids. Essentially, market access barriers in China have gone from a local problem to a global one.

This also becomes a major concern in terms of interoperability. Protectionism in China is often found not only in direct barriers like the negative list for foreign investment, but also in indirect ones like licensing and administrative approvals. This is especially pronounced in the tech sphere through barriers like the Great Firewall and administrative hurdles like those required for value-added telecom services (VATS) providers. Historically, these made it a challenge to develop market share within China, but they now present a considerable challenge as interoperability is a key advantage for those providing digital solutions.

At first glance, accessing a VATS licence may seem a problem that affects only telecoms service providers and some tech companies. In reality, VATS cover many of the emerging technologies that will leave few, if any, industries untouched. Cloud services, which fall under this category, are coming into use even in highly traditional sectors like shipping. In conjunction with other services like blockchain, cloud offers digital solutions that can more efficiently sort cargo, move containers through customs more swiftly and improve tracking for customers.

A European shipping company that develops digital solutions to gain a competitive edge needs to be able to get a corresponding VATS licence to make their system interoperable in China. Otherwise, not only will they miss out on a fifth of global producers and consumers, but also nine of the world’s twenty busiest ports.

If Chinese shippers were mainly focused on shipping between China and other markets exclusively, that would already represent a significant lost opportunity. However, through the BRI, Chinese shippers like COSCO are cementing stronger footholds in other markets to provide shipping services not only between, say, Pakistan and China, but also Pakistan and third markets. If COSCO then provides the same sort of digital solutions, for which the state-owned shipper can easily obtain a VATS licence from the very government that owns it, then it suddenly has unique access to the China market. At that point, a customer with global shipping needs has to decide between a Chinese shipper that can access all consumers or a European one that can access only four-fifths of them.

Essentially, market access barriers in China, be they direct like in the negative list or indirect through opaque procurement systems or arbitrary licensing requirements, are now allowing China’s national champions to uniquely leverage a protected home market as they begin to compete in third markets.

Grappling with this issue raises serious questions that will challenge the European approach. Doing nothing is no option, lest European companies steadily lose out to scaled-up, protected competitors. However, choosing what to do will inherently require a questioning of some of the core economic values of the European Union. At the extreme end of the spectrum of responses is for Europe to play China’s game: to roll back competition law and allow European champions to scale up, while imposing market access barriers to Chinese competitors.

Such extreme steps would be a betrayal to European values and a race to the bottom. However, intermediate options also exist that can be implemented with due process and in a pin-point way. Europe does not need a wall, which blocks anything and everything trying to come in, but instead needs a shield that can selectively be raised against unwanted behaviour. Stronger investment screening to identify non-competitive and state-directed moves—especially by state-owned enterprises—and tools like the proposed International Procurement Instrument (which would leverage Europe’s procurement markets to push for positive reciprocity for European firms in other markets) would be good to add to the toolkit.

Further along the spectrum would be targeted reciprocity review mechanisms to allow European companies that find themselves blocked out of certain markets, by something like an arbitrary VATS licensing process, to seek redress in Europe through due process. If ruled appropriately, such a mechanism could allow for targeted restrictions to be imposed on companies from the offending market until positive reciprocity is achieved.

Balancing European economic values with the need to find ways to address the concerns of China’s scaled-up national champions and how they impact European competitors in third markets will not be an easy conversation. However, the longer such topics remain completely off the table, the more market share and scale China’s industrial hegemons will be able to secure. Better to have that talk sooner rather than later.

Note: The views expressed in this article are not necessarily the views of the European Union Chamber of Commerce in China.