LESSONS FOR S&ED - SWAGGER OVER SUBSTANCE AT 2ND

C O N F I D E N T I A L SECTION 01 OF 04 BEIJING 001333 SIPDIS STATE FOR S/P -- GREEN, CHOLLET STATE FOR EAP/CM -- FLATT, THOMAS, HABJAN, SHEAR, THORNTON STATE FOR EAP FO -- NORRIS STATE FOR EUR/ERA STATE FOR EEB/OIA -- SCHOLZ, TRACTON, HICKS, YAJNIK STATE FOR E -- YON STATE FOR D -- PARK STATE PASS USTR FOR STRATFORD, WINTER, BAHAR, KALLMER STATE PASS FTC FOR KALLAY, TRITELL, DAMTOFT NSC FOR -- LOI DOJ FOR -- CHEMTOB PARIS PASS OECD COMMERCE FOR -- KASOFF TREASURY FOR -- HWANG, DOHNER, PAU E.O. 12958: DECL: 05/18/2019 TAGS: ECON EFIN EINV EAID ETRD WTRO PREL CH EU SUBJECT: LESSONS FOR S&ED - SWAGGER OVER SUBSTANCE AT 2ND EU-CHINA HIGH-LEVEL ECON DIALOGUE Classified By: Robert S. Luke, Minister Counselor for Economic Affairs, for reasons 1.4 b, d Summary -------------- ¶1. (C) China used the second High-level Economic Dialogue (HED) with the EU in Brussels May 7-8 to secure a vague commitment to &resist protectionism8 and take a dig at the United States and missed the chance to make substantive concessions on the numerous trade and investment barriers the EU raised, EU Mission Counselor Miguel Ceballos told Emboffs May 13. The EU was focused on &positive atmospherics8 and wanted to &avoid confrontational issues8 at the ministerial, as Trade Commissioner Catherine Ashton determined the key goal was to &set the tone for a positive relationship8 to facilitate cooperation on the global financial crisis. China pushed for market economy status and called visas a trade barrier. China sought to wall off from discussion an array of topics including &WTO-plus8 topics like services and investment, WTO compliance, and the May 20 EU-China Summit. The ministerial consisted of a recitation of talking points &with little real dialogue.8 Ceballos added that the EU detects a China that is &more assertive, arrogant, and self-confident,8 believing the economic crisis has validated China,s state-directed economic growth model. Chinese Vice Premier Wang Qishan told Ashton that in the GFC, China &had seen its teachers fail.8 End Summary. More China Hypocrisy on &Protectionism8 -------------- ¶2. (C) Vice Premier Wang Qishan and Commerce Minister Chen Denming restated broad pleas against protectionism and criticized the U.S. stimulus packages and those of other western countries. China claimed its stimulus package is fully open to foreign participation, &within Chinese rules.8 Ceballos expressed EU frustration with China,s repeated reference to &Chinese rules8 as a condition of openness, assessing this amounts to a black box within which China can adopt protectionist measures while staking the high ground in public. EU Invests in Positive Atmosphere -------------- ¶3. (C) Ceballos noted the EU worked hard to establish a positive atmosphere, holding the event in a Belgian castle that played to Wang Qishan,s historical interests, with a live classical music performance over dinner. Ceballos added that Ashton knows how to pull off formal events as she was a protocol expert for the UK royal family. Ceballos concluded that the effort the EU put into the elegant atmosphere paid off in &good feelings8 among participants. In an internal report on the HED provided to Emboffs, the EU assessed that the high-level Chinese delegation led by Vice Premier Wang Qishan &confirmed the strong political commitment to making the HED a forum for strategic discussion that sets directions for the future while producing regular and concrete results.8 EU Pushed for Liberalization ) Status Quo &Not Good Enough8 -------------- -------------- ¶4. (SBU) Although the plenary produced no fireworks, Ceballos pointed out the EU was more aggressive during the HED,s lead-up. In preparatory talks, the EU told China its commitment not to adopt new protectionist measures was BEIJING 00001333 002 OF 004 insufficient because China,s existing protectionist restrictions far exceed those of the EU. The EU asked China to take affirmative steps to open its markets. China,s New Swagger -------------- ¶5. (C) Ceballos said the EU detects a China that is more assertive, arrogant and self-confident than it was at last year,s HED. Since then, China has been emboldened by its &successful8 response to the Sichuan earthquake, the Olympics, and the troubles faced by Western economies. China referred positively to Europe,s post-WWII development model characterized by &massive state intervention,8 Ceballos said. In sum, China is more confident about the role of the state. The main victim of the crisis in China is the private sector, he added. China Wants to Use Financial Crisis to Take Market Share -------------- -------------- ¶6. (SBU) Ceballos relayed a &terrifying8 comment by NDRC Vice Minister Zhang Xiaoqiang, who acknowledged overcapacity in some sectors, but said this was offset by &under capacity in others.8 He added that the EU learned at the HED that China,s goal is to stimulate internal demand now while preparing its firms for the recovery of external demand so that they can claim greater market share once export markets recover, especially in the energy, oil, steel, and chemicals markets. China explained that it wants to &stabilize exports,8 but Ceballos noted that in the face of a huge external demand drop, stable exports amounts to increased market share. He added that EU steel firms are now operating at 50% capacity while China,s are operating at 80%, which is the same level of capacity that they were operating at prior to the financial crisis. Value of WTO Complaints -------------- ¶7. (C) Separately, Ceballos added that the EU believes the Xinhua case illustrates value of using WTO dispute settlement mechanisms to address problems in China and is seeking to convince its leadership to consider using the WTO more. China Declines to Discuss Competition Policy -------------- ¶8. (SBU) Ceballos highlighted the fact that the EU had sought to discuss the impact of subsidies on competition and trade, which China refused to discuss. However, he added, the EU has a robust program of cooperation with China on competition policy, including good relationships and training programs. He said China looks to EU competition law as a model. The EU has translated all competition-related statutes into Chinese, along with relevant case law. Moreover, Ceballos noted China had approached the EU with specific questions that appeared to be related to the Coke-Huiyuan case. The EU also offered to support China,s membership in the International Competition Network, which China declined. (Note: In the past China has appeared to be concerned about the fact that Taiwan is a member of that body. Other non-state markets are also members.) Despite China,s Efforts, Trade Issues Come to a HED -------------- -------------- ¶9. (SBU) Ceballos added that that China sought to take BEIJING 00001333 003 OF 004 several other items off the agenda and expressed unwillingness to address contentious issues, claiming that the HED is not an appropriate forum to discuss &political matters.8 The EU insisted on raising the trade-related concerns outlined below, even if China declined to respond. ¶A. On investment, the EU: -- Welcomed Chinese investment in Europe, including investment by sovereign wealth funds -- Complained of investment barriers in China faced by EU construction companies -- Encouraged China to participate more actively in international standards setting rather than establishing its own standards ¶B. On energy, the EU and China agreed to sign an MOU on energy efficient housing. ¶C. On product safety, the EU asked for better reporting and follow-up to EU concerns about product non-compliance ¶D. On agriculture, the EU complained about the lack of market access for animal products, fruits, and vegetables ¶E. On Sanitary and Phytosanitary (SPS) measures, the EU: -- Called for acceleration of SPS protocol negotiations -- Called for a sampling system to simplify the verification process ¶F. On health issues, the EU raised concerns on medicine price setting. ¶G. On transport, the EU raised concerns that: -- China,s airline computer reservations systems market does not comply with its WTO obligations -- Chinese ports are not open for transshipment ¶H. On innovation, the EU: -- noted &very tough8 IT sector complaints on lack of market access -- Raised concerns about increased online piracy -- Complained about new barriers to evidence collection embedded in China,s new copyright law, which requires notarization and legalization of a power of attorney -- Hailed an IPR pilot project in which the EU Competition Commission, together with China,s MOFCOM, jointly set up a voluntary dispute resolution procedure at trade fairs in Europe. The EU asked China to offer a similar service at Chinese trade fairs HED Fact Sheet -------------- ¶10. (U) According to the HED press release, the theme of the second HED was &improving business opportunities in times of crisis ) openness in trade and investment as a catalyst to revive economic growth.8 China and the EU also agreed to BEIJING 00001333 004 OF 004 implement the G20 consensus; fight trade and investment protectionism; enhance investment cooperation and open stimulus projects to bids from the other side; support SME development, facilitate EU establishment of an SME Center in China, hold an EU-China SME Dialogue in Guangdong in September 2009; and cooperate in energy, environment, high-tech trade, IPR protection, food and product safety, and customs and transportation. YY WEINSTEIN