Reform at home means different things to China and the EU, as their predicaments radically differ. The EU is mainly interested in engaging in structural reforms to limit the over- indebtedness and fiscal unsustainability of EU member states, render labour markets more flexible (without losing social basics, so typical for Europe) and make services markets more efficient (helped by a further intra-EU opening up of the single services market). Adding to these are its interests in reducing the role of government where no obvious case can be found (hence, some privatisations in Greece, for example) and pursuing upskilling and intrusive education policies in EU countries that are far below the EU average in high-skilled and medium-skilled intensive output.
In China, the reform process means something far more radical as the starting point is so different. China has had almost 35 years of high growth based on gradually allowing in new private firms, while leaving the SOEs more or less untouched, until the country began to prepare for WTO membership. In the late 1990s, SOEs began to be disciplined by drastic measures, such as the end of the SOE-based social security, sickness insurance and basic education for their workers, and massive lay-offs.18 When entering the WTO (in 2001), the
17 Principal sources: (i) Chi Fulin et al. (2015), (ii) OECD (2015) and (iii) the European Chamber of
Commerce in China (2015) (p. 430).
18 The numbers are unheard of, a consequence of the transition towards a more market-based
TOMORROW’S SILK ROAD:ASSESSING AN EU-CHINA FREE TRADE AGREEMENT │ 47
economy opened up considerably in goods markets though barely in services. Recently, China’s model – of heavily investing in large-scale industries (in particular by SOEs, barely constrained by financing issues) and massively relying on cheap labour coming in from the central and Western countryside (with few rights, and without full, urban hukou privileges as for local citizens in Eastern cities) to many free export zones or elsewhere, with phenomenal growth in trade and output – has been rapidly running out of steam.
Thus, China became the world’s factory where the GVCs (global value chains) often ended for purposes of final assembly, and this worked well for a while. Once the labour inflow reduced (due to ageing and local development) and wages started to rise structurally, the severe limits of this system became apparent. Now China is saddled with enormous overcapacity in many sectors and says it wants to cut seriously; however, mixed signals are heard and observed. In October 2013, the State Council issued guidelines on reducing excess capacity in steel, cement, aluminium, flat glass and shipbuilding, but when the authors were in Beijing in December 2015, Mr Li once again promised to cut overcapacity. It is critical for China to render this promise credible, but it is also relevant for the EU as most of these are typically sectors where (anti-)dumping can be expected and has occurred. For most of the overcapacity SOEs are involved and many workers will have to be laid off, not to speak of writing off capital and equipment. This would seem to be the principal reason why overcapacity is not reduced as quickly as possible. The massive lay-offs of the late 1990s cannot be repeated. Still, there are two reasons why the overcapacity issue might, socially, not be as dramatic in the medium run as one might think. First, there are good possibilities for workers to move into the fast-growing services sectors, in some cases with retraining and up-skilling. Second, there may well be possibilities for labour to be reallocated to other manufacturing sectors, because during the last few years, the intra-China west–east labour flows have been steadily shrinking at the rate of some 3 million workers per year.
Compared with the last decades, China wants to boost services and middle-class spending. Rather than pure assembly, it wants to move up the value chains to higher value added in the products that it exports. This creates a direct link with boosting services, as higher value added is usually connected with high-quality services. In turn, that almost certainly requires better performing services markets, less restrictive service regulations and opening up to world competitors in domestic services markets. Central and local governments have announced that labour from the countryside will also receive hukou privileges and allow farmers to become citizens of cities with all the (health, social and educational) rights. Reforms aim at transforming the SOEs more convincingly into normal enterprises without special access and privileges in financing, but the Third Plenum also underscored that SOEs are vital to China’s economic development and will have to be protected! Foreign and local elsewhere. The size of China renders 40 million a smaller share than in most countries; nevertheless, the mere scale of this imposed adjustment has been enormous. See also chapter 14.
48 │ PART I.THE GLOBAL AND BILATERAL CONTEXT
observers applauded the Third Plenum intentions but often concur in that factual reform activities are scattered and irregular, not yet making a genuine reform path towards the avowed socialist market economy.19
The question is whether an FTA with China can fruitfully interact with the domestic reforms. In what areas are the Chinese reforms going to liberalise (e.g. services?) or discipline SOEs, and will this make the FTA easier to negotiate and also ‘deeper’ in terms of commitments? Conversely, can such an FTA boost the internal reform process and induce commitments to effectively implement these reforms, as Chinese authorities suggest? The FTA could, in their view, work as a credible form of external pressure while coming from a cooperative partner in an agreed WTO-based bilateral setting.