EU-China trade – leveling the playing field at last?

The first in a new series of EU trade-defense instruments will be a good measure of the bloc’s resolve to recalibrate the EU-China economic relationship, says Eleonora Sartori.

The International Procurement Instrument (IPI) looks set to become an important test of the EU’s resolve to achieve strategic autonomy from other countries and more assertiveness towards China. The IPI is meant to restrict the access of foreign players to EU public procurement if their home markets are not open to EU competitors in the same way. The European Commission estimates 250,000 public authorities in the EU spend EUR 2,400 billion, or 14 percent of gross domestic product, on goods and services each year. If properly designed, the IPI could become an important tool to make international trade more reciprocal.

The EU is studying a set of new trade defenses to strengthen its internal market and protect it from the impact of unfair economic practices of other countries. With the proposed regulation on foreign subsidies, and anti-coercion and due-diligence mechanisms, the EU is working on three other fronts to build up its ability to grow more assertive when giving access to its internal market. But it is the IPI that is most advanced and will soon demonstrate the orientation of the EU’s new approach to economic relations with China. With negotiations on the Comprehensive Agreement on Investment (CAI) shelved and an EU review of its China policy looming, IPI is firmly on the agenda, a decade after its proposal.

EU public procurement contracted to China has skyrocketed

IPI is meant to grant the EU the power to limit or exclude access to its public procurement market to foreign companies if reciprocity is not in place in the country of origin. The volume of EU public procurement contracted to China skyrocketed to just under EUR 2 billion in 2020 from EUR 750 million in 2019. But European companies remained essentially excluded from the Chinese market – a fifth of the size of the EU’s, but still with a volume of around EUR 500 billion – as a result of Chinese public procurement rules that heavily favor domestic companies. Calls from the EU and promises from Beijing to change this have had no effect.

IPI was first proposed in 2012 but EU member states could not agree on pursuing it. The project was revived after the publication of Brussels’ EU-China Strategic Outlook in March 2019. France and Germany jointly lobbied for more reciprocity in public procurement, citing China’s growing infrastructure ambitions and EU’s exclusion from these projects. Even then, IPI took a back seat as CAI talks continued and led to a preliminary agreement in December 2020 – European politicians worried that work on IPI would have hindered the CAI talks.

Under IPI, the EU and its member states will be able to investigate bidders for procurement contracts and impose restrictions on companies from third countries that don’t ensure reciprocity to the EU companies. Countermeasures proposed by EU member states would allow the EU to enforce price adjustments or the exclusion of tenders (or a combination of both). But European Parliamentarians are discussing whether IPI needs both options or could make do with the price adjustment system. Another point of debate is whether foreign companies will be able to bid for up to 50 percent of public-procurement contracts, or less. 

The trade playing field could finally be leveled 

The EU’s leverage would come from the possibility of lifting any measures it imposes. The IPI proposal states that any third country sanctioned in either way would see EU restrictions dropped if it took satisfactory corrective measures immediately or within an acceptable timeframe. By losing access to the EU’s huge public procurement market, delinquent third countries would have an incentive to open their domestic procurement markets, ultimately opening the perspective for EU companies that the trade playing field can finally be leveled.

Differences of opinion between member states are still likely. More liberal EU states have worried the IPI distorts competition and stifles innovation. Smaller EU countries have suggested it will benefit the big member states with experience of big public contracts and with companies that bid for them. But France is optimistic its EU Presidency in the first half of 2022 will make progress. An ambitious IPI would signal the EU is serious about becoming a more assertive international player.

About the author:

Eleonora Sartori was an intern in the Economy team at MERICS from July until September 2021. She holds an MSc in China and International Relations from Aalborg University and a BA in Asian Languages, Markets and Cultures from the University of Bologna. Prior to starting her internship at MERICS, she was a Bluebook Trainee at the European Commission where she focused on issues related to customs and taxation between the EU and China. 

The views expressed in this article are those of the author and not necessarily reflect those of the Mercator Institute for China Studies.