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

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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

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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

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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