CTM recently had the honor of sitting down with former European Commissioner for Trade Cecilia Malmström, to talk about current and future EU trade policy on China, as well as the EU's broader trade policies relating to subsidies, carbon emissions, and human rights. Malmström is a nonresident senior fellow at the Peterson Institute for International Economics.

CTM: You served as the European Commissioner for Trade between 2014 and 2019. How do you see the EU trade policy toward China having changed since you left office in 2019?

Malmström: I think it started to change gradually. It changed a little bit while I was in office, where we introduced some elements, such as the regulation on investment screening, which were not only related to China, but of course, China was a part of it.

I would say both the events in China and COVID have affected the European view on China, so did the war in Ukraine. The events in China, for instance, in the Xinjiang province and the prosecution against the Uyghur minority, and in Hong Kong, have led to an increased skepticism in the European Union. We have seen some of the "Wolf diplomacy" of China, which has turned really bad in light of the EU citizens' view of China. When COVID came, the zero COVID policy of China led to the closing of ports, factories, and so on. It was normal under the circumstances, but I think that made many companies and citizens in Europe realize how dependent we are on China, for good or for bad. With the Ukraine war, there was a realization in some countries that we are too dependent on Russia for energy, and that we are very dependent on China, not only for normal trade, but on some key components, notably rare earth metals.  Politicians are talking about how we can become less dependent on Chinese rare earth metals, which are critical to the semiconductor industry, because if anything goes wrong, for instance, if China invades Taiwan, then there will be sanctions, boycotts and distorted trade, which will disrupt companies’ access to the raw materials and cause semiconductor problems in the world.  All these factors have resulted in companies searching to diversify, to become less dependent on one country, to be more flexible and more resilient, when it comes to their supply chains.

All these factors have played into, I would say, a much tougher strategy and geopolitical view vis-à-vis China. Although member states in the European Union have different histories and economic relations with China, there is a process in the EU to formulate or to update a new policy vis-à-vis China. The EU has said that it will update its EU strategy where it says that China is a partner but also a systemic rival. There have been talks about updating this spring, but I haven't heard a date. And some individual countries such as Germany and France are also updating their China policies.

CTM: The EU recently filed two new WTO complaints against China on a somewhat narrow and specific set of issues. What do you think of the prospects for filing complaints under broader WTO obligations, such as those on the behavior of state-owned enterprises in China’s accession protocol, to press for systemic changes in China’s economic practices?

Malmström: This was discussed within the EU for a long time and at that time the EU decided not to pursue that route. There is a feeling in the European Union that there were promises made when China entered the WTO 20 years ago that have not been kept, on moving towards a more market economy, less subsidies, more transparency, and so on. There were movements in the first two years, but now that has been rolled back. That feeling is shared in the EU and with the US and many other partners as well. But what to do about it? Taking it to the WTO when the real Appellate Body doesn't really exist is a bit complicated. And there are lots of things that need to be modernized with the WTO.

Even if the EU and China have had some differences in the WTO, there has been rather good cooperation in the past, because I know that the WTO is really important for China as well [as for the EU]. When China loses cases in the WTO, it follows the rulings. We would really want to engage with China on the WTO and see how it can be strengthened. That also means China taking leadership and showing some willingness to reform. The subsidy issues are really acute right now, not only in China. Subsidies are discussed very much in Europe and in the [U.S.] Inflation Reduction Act (IRA) issue as well. If you want to criticize a country, you have to make sure that your background is clean. In this case, it's certainly not. So I think at the moment bringing WTO cases against China's SOEs or subsidies is not on the agenda.

CTM: Talking about subsidies, the EU recently adopted the Foreign Subsidy Regulation (FSR), which aims at preventing foreign subsidies from creating market distortions. What would be the impact of FSR on Chinese companies?

Malmström: The impact remains to be seen because it hasn't entered into force yet.

The discussion of the FSR started before COVID. Now with COVID, the green investments and the IRA, there's a whole new discussion about state aid and state subsidies. During COVID, countries could support their companies in order to survive, and now lots of ministers are calling for the EU rules on subsidies to be more flexible. So we have to see it in that context as well.

The goal of the FSR is to create equivalence and reciprocity, and it has to be aligned with the regulations for EU countries. I think it can have an effect on China and Chinese companies, but we need to see how it is put into action, and what else is happening with the state aid and the subsidy regulations within the EU.

CTM: You mentioned the IRA. The EU has been in talks with the US about the IRA. Are you hopeful that the two sides will reach some sort of agreement on that soon?

Malmström: This has become a really tricky issue between the EU and the US, because the EU welcomes very much the green investments that are outlined in the IRA, but it is done in such a way that is discriminatory, and that's what the EU has complained about. We can jointly invest but not at the expense of others, because that will create a lot of tensions, which we don't need right now. There are lots of talks going on. If we can find some way of accepting Europe, and possibly Japan and South Korea, the same way as Mexico and Canada are included, that would be very good.

CTM: The EU and US have created the new Trade and Technology Council (TTC). Do you think they are making good progress under the TTC, especially in terms of formulating a coordinated policy toward China?

Malmström: The TTC is not a trade agreement, and we need to have very realistic expectations about that. It is a way to build trust. It's a way to identify a variety of areas where we could possibly cooperate.

The TTC will touch upon China issues, but the EU does not consider TTC as an anti-China forum. It is a forum for the EU and US to work together. On some limited areas, such as labor, there have been talks: How can we jointly work together on our different forced labor acts, and in this case, notably what happens in the Xinjiang province. But for the rest, it is more constructive for the EU and US to work on how to find ways forward on artificial intelligence, on supply chains, on technology and environmental standards. There have been a few deliverables, not very dramatic headlines, but the two sides are moving steadily towards identifying a few concrete areas where we can both benefit.

Overall, the work under the TTC is not going very quickly. It could be difficult. I think we could do more when it comes to standards and mutual agreements and so on. But it has to move in a politically feasible way. And in the US right now, they are not into at all discussing trade and market access and facilitation. So, this is what we have.

CTM: You said labor issues are an area where the US and EU have overlapping interests, but noticeably the EU and US are taking different approaches in dealing with products related to forced labor from China. Do you think the EU approach is more effective at addressing forced labor issues?

Malmström: The U.S. Uyghur Forced Labor Prevention Act is obviously against China, but the forced labor regulation from the EU is also about Bangladesh, Senegal, and lots of other countries all over the world, and based on the ILO conventions. It remains to be seen whether it will change China since China denies that any kind of forced labor is happening. Then you will have to change your trading patterns and say, okay, then we don't trade with this region. You can either just boycott or you could force importers to be fully transparent on the whole value chain in every part of it.

CTM: Other than human rights, we know the EU also focuses on environmental issues. Bloomberg reported last month that the EU and US are also talking about using tariffs to address overcapacity and carbon emission problems in China as well as other parts of the world. So, what are the prospects here? Do you think they are actually going to agree on something? How do you think developing countries like China and India will respond to that?

Malmström: Last month, the European Parliament and the Council agreed on a proposal that has been discussed for a couple of years, which is called the Carbon Border Adjustment Mechanism (CBAM). This will force countries outside of the EU to apply for a certificate, they have to be totally transparent, and they will have to pay a carbon fee or tax at the border if they don't comply with the rules of having a carbon free production process. But CBAM will affect not only China; it will affect Russia, South Africa, Brazil, India, and all countries who do not have a similar ETS or emission trading system.

Regarding the tariffs mentioned in the Bloomberg piece, as far as I know, this is not a concrete proposal yet. The EU and US are discussing overcapacity, but I think that the EU would rather do it within the CBAM system than inventing something totally new. Some countries already claim that the CBAM is not WTO compliant. Introducing a totally different system in parallel is not really in the EU's interest.