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Ben Miller, Aljoscha Nau, Clémence Lizé

Brussels and Beijing should use their trading clout to forge new rules for online shopping and create new momentum for WTO-reform, argue Ben Miller, Aljoscha Nau and Clémence Lizé.

This article is part 2 of a mini-series to present the outcomes of the MERICS European China Talent Program 2019.

E-commerce

Reform of the World Trade Organization can wait no longer. The WTO needs to modernize rules for the digital era and China’s vast state-led economy is central to this endeavor. As China’s biggest trading partner, reform has to be a priority for the EU as digital trade plays an increasingly bigger role in Sino-European trading relations. EU-China cooperation in regulating this new form of trade is an opportunity to take the lead in shaping the ‘fourth industrial revolution’. Beyond creating a firm legal framework, the EU and China should act as anchors for WTO modernization. Having agreed at April’s EU-China summit to conclude long-running talks about an investment agreement next year, the political will is there.

The WTO is not equipped to deal with state capitalism. A report from the think tank Bruegel argues China is eroding the implicit “understandings” of international trade and its legal order by defending its own economic model beyond its borders. China’s geopolitical ascent demands a reassessment of these “understandings” to take into account China’s own positions and the nature of its economy. But within the WTO there remains a gulf between liberal market economies and China on issues ranging from the lack of a “level playing field” and market access to state-owned enterprises (SOEs). The EU and China should co-operate on digital trade rules as a vital prelude to tackling these thornier issues.

The EU is arguably the only player able to bridge the gap between liberal market economies and China

Services are underrepresented in the WTO framework, accounting for only 25 percent of rules while representing 75 percent of the global economy.1 Addressing this deficit is crucial for the future of global trade. The EU is an influential global standard-setter (as seen with the General Data Protection Regulation) and arguably the most open market in the world.  For its part, from 2001-2017, China’s trade in services grew by 16.7 percent, 2.7 times more than the world average, and in 2018 alone, mobile payments totaled 41.5 trillion USD. The EU and China have seats at the top table for the debate over the governance of digital trade.

Any partnership should seek agreement on e-commerce standards and definitions, rules for the ‘fourth industrial revolution’. The United States and others will be key, and the EU is arguably the only player able to bridge the gap between liberal market economies and China. Ensuing agreements should cover issues from privacy to the free flow of information to sovereignty and citizens’ rights. As digitization increases the importance of free-flowing data, there is the danger that restrictive localization requirements and novel definitions of sovereignty will break up global value chains. A study by the European Centre for International Political Economy has shown the potential cost to business and trade.

Engagement is crucial for the EU to avoid being sidelined in any Sino-American deal

Ongoing trade tensions and touted bilateral solutions currently risk undermining the multilateral trading system. As two of the world’s biggest trading blocs, the EU and China have to search for common ground that will allow the technical cooperation necessary to save the global digital economy. As US-China trade tensions rumble on, engagement is crucial for the EU to avoid being sidelined in any Sino-American bilateral deal. China’s avowed willingness to work with the EU is a hedge as this trade dispute continues. But Chinese sources report increasing willingness in Beijing to cooperate with the EU on e-commerce regulation - a significant shift from two years ago, when China stood apart from the US-EU-Japan coalition on the matter. This is an opportunity the EU should use.

The ultimate political imperative for progress is reducing the “digital divide” in access to online products and services. G20 statements in June stressed its importance - and both China and the EU are in a position to make huge contributions. The EU is a world leader on digital regulation for citizens’ rights and leads in ‘business-to-business’ commerce. China is highly influential among the WTO’s developing nations and is a pioneer of integrated services and platforms like Alipay that focus on business-to-consumer commerce (B2C). As the EU and China complement each other, digital trade has proved less contentious than other areas. There is clearly momentum for finding a common approach. 

Data localization and forced disclosure of source codes are particularly contentious

But there are sticking points. More restrictions on data localization or forced disclosure of source codes are particularly contentious, as they would reduce Beijing’s access to foreign companies’ data in China. Beijing might tolerate an agreement not to collect data on territorial basis, but all big players would have to agree – so the US as well as the EU. China regards the issue as one of ‘national security’, whereas for the EU and its companies, it is about the free flow of data, and reducing non-tariff barriers and intellectual-property theft.

There is much pessimism about the WTO, but the EU can change that through e-commerce co-operation. China did not help write the WTO rulebook, and working with it on rules for digital industries could help the EU dispel misunderstandings and build the trust for good long-term relations. It could endorse China’s “emerging institutional statecraft,” signaling Beijing’s shift from rule-taker (or rule-breaker) to rule-maker. Involving China in writing the new “rules of the game for global governance”2, would help draw Beijing away from casting itself as a victim of trade rules and increase the likelihood it adheres to them. This would help everyone and strengthen the legitimacy of the WTO in China – and globally. 

1 | Presentation by Dr. Christopher Kiener, Head of Services of the Digital Trade Unit, DG Trade, EU Commission at the British Chamber of Commerce, 21 May 2019.

2 | Callahan, William A. (2016): China’s ‘‘Asia Dream’’: The Belt Road Initiative and the new regional order, Asian Journal of Comparative Politics, 1 (3), pp. 226–243

About the authors:

Ben Miller is Partnerships Adviser and Program Manager in the Department for International Development of the British Embassy in Beijing.

Aljoscha Nau is European Affairs Coordinator at the German Economic Institute (IW) in Brussels.

Clémence Lizé is an Executive at the global advisory firm Brunswick Group.

The authors participated in the fifth annual MERICS European China Talent Program in May 2019, during which parts of the argumentation presented in this blogpost were developed. The authors bear sole responsibility for the content.