Commission position paper on the Trade Sustainability Impact Assessment of the Negotiations of a Partnership and Cooperation Agreement between the EU and China 1. INTRODUCTION This paper provides the Commission services' position on the Trade Sustainability Impact Assessment (Trade SIA) of the Negotiations of a Partnership and Cooperation Agreement (PCA) between the EU and China, carried out by a consortium of independent consultants, namely Emerging Markets Group and Development Solutions. The Trade SIA is an important tool for negotiators and serves to identify the potential economic, social, and environmental impact of a trade agreement. It provides a range of possible outcomes based on expectations at the time of analysis and drafting; policy recommendations suggest possible ways to prevent, mitigate, or enhance potential impacts. The final Trade SIA report is available publicly and the process leading up to it included extensive consultation both in the EU and in the partner country. The public availability of the report means it can also serve as an orientation tool for Chinese negotiators, as well as being accessible to stakeholders and civil society in both the EU and China. The report can be found on the following websites: http://www.euchina-sia.com http://ec.europa.eu/trade/issues/global/sia/studies_geo.htm#china After a process launched in 2007, the final report was presented in September 2008. As consultation is a main feature of the Trade SIA process, public meetings and workshops with representatives of civil society, as well as with key experts, took place at the report's different stages in Brussels namely through the DG Trade civil society dialogue as well as in Beijing in autumn 2007 and in spring 2008. The final report of the Trade SIA has been technically approved by the European Commission; the views expressed therein are those of the Consultant. This paper sets out the Commission services' views on the findings and recommendations set out in the final report. This paper is publicly available. 2. REMARKS ON THE PCA Negotiations on a PCA with China started in early 2007, after being agreed upon at the 2006 EU-China Summit in Helsinki. The PCA will cover the political as well as the economic dimensions of EU-China relations and involve an upgrade of the 1985 Trade and Economic Cooperation Agreement. In particular, trade and investment will form an important part of the agreement through the inclusion of TBT, SPS, investment, competition, IPR, and public procurement, among other issues. On sustainable development, the EU advocates inter alia the inclusion of commitments and cooperation on key issues with appropriate references to ILO core labour standards and Multilateral Environmental Agreements, coupled with commonly agreed monitoring mechanisms.

It is important to note that a PCA is not a preferential trade agreement (hence it does not include tariff reductions or services commitments) but rather an instrument designed to create a framework for further liberalisation of trade and investment in addition to the political part of the agreement. In that sense, the Commission services are pursuing an ambitious agenda regarding the PCA and continuing to engage China with the aim of concluding an agreement that adequately reflects the depth and the breadth of contemporary EU-China relations. 3. OVERVIEW OF THE TRADE SIA'S FINDINGS The methodology for a Trade SIA is generally based on a four-step approach. At the very beginning of the exercise, a screening process identifies the sectors and issues that are relevant in the context of the ongoing trade negotiations. The sectors and issues are selected by applying a core group of quantitative and qualitative indicators with social, environmental, and economic components. In a second stage, the terms of reference are determined by deciding what appraisal methods and consultations procedures should be used. Then the potential impacts of each measure and of the agreement as a whole are assessed. In the fourth stage, flanking measures are identified that could mitigate any negative impacts or enhance any positive impacts on sustainable development as a result of the foreseen trade liberalisation. Further details of the methodology are available in the Handbook for Trade Sustainability Impact Assessment: http://trade.ec.europa.eu/doclib/docs/2006/march/tradoc_127974.pdf To conduct an ex ante assessment of likely economic, social and environmental impacts, a Trade SIA needs to make a series of basic assumptions, which, however, can change over time. It draws up a set of different scenarios that are considered likely to be representative of the range of possible outcomes of the negotiations, 'all other things being equal'. Negotiations can be lengthy, however, and unexpected external events can have a substantial impact on the process. Economic The Trade SIA rightly points out important imbalances, such as the rural-urban divide in China, and relatively low domestic demand contrasting with and fuelling surges in exports. Therefore, it questions the sustainability of the current Chinese growth model. However, the report concludes that trade liberalisation will bring overall economic benefits to both the EU and China. For the EU, terms of trade were likely to improve, whereas China would experience above all a rise in productivity, as well as in welfare of the individual citizen. The computable general equilibrium (CGE) model included in the Trade SIA highlights that a reduced bilateral trade imbalance and modest yuan (RMB) appreciation would have positive welfare effects for both China and the EU. It would also create a more sustainable basis for China's future growth and development. 2

Social According to the Trade SIA, economic imbalances in China are recreated on the social level and result in the increasingly unequal distribution of wealth, particularly across regions and provinces. It points out that millions of people enter the labour market each year, which demands continuous job creation by the Chinese economy. Also, access to clean water, sanitation facilities, and medical treatment was not a given throughout the Chinese population. But the EU presented social imbalances as well which, the Trade SIA claims, could potentially become more pronounced, especially in Southern and Central Europe, given China's competition in the labour intensive and low-cost segments of industry. Environmental The study points out the links that can exist between economic growth and domestic and global environmental degradation, in particular in the absence of appropriate legislation and enforcement. Although recent political measures to improve environmental resource management have been taken, symbolised by the upgrading of the State Environmental Protection Administration (SEPA) to the ministerial level, the implementation of environment policy in China is still in its infancy. The Trade SIA describes how many local authorities prefer economic growth over environmental sustainability and by-pass the central government's initiatives. The study further states that, generally, Chinese industry is characterised by high energy intensity, coupled with low efficiency, which leads to excessive CO 2 emissions and water pollution. On the other hand, China has substantial production of and export capacities in some environmental goods, notably related to renewable energy (e.g. solar cells). The EU's industry is as a whole more energy efficient and it has developed a comparative advantage in the production and provision of some environmental goods and services. Technical cooperation in the area of those goods and services would reap benefits for all and ensure levels of measured growth that will outlive advantages perceived in the short term though depending on responsible end use practices and safety management. 4. DISCUSSION AND VIEWS OF THE COMMISSION SERVICES ON THE TRADE SIA'S FINDINGS AND POLICY RECOMMENDATIONS General Remarks Sustainable development is an overarching policy objective of the EU, as stated by the European Council in June 2006. It consists of three main pillars, namely economic, social, and environmental aspects. In this context, the challenge is to make trade and sustainable development mutually supportive. This linkage presents an opportunity to improve the welfare of the people concerned and to foresee, prevent, and mitigate potential conflicts between the above mentioned three pillars, as well as to enhance new or existing synergies. The successful integration of China into the world trading system is an objective of the EU-China Trade Project (EUCTP), a cooperation project between the European Commission and the Chinese Ministry of Commerce. Sustainable trade is one of the policy areas covered by the EUCTP, which also provides support to the Sustainable Trade Task Force, a platform set up in 2006 between the European Commission's 3

Directorate General for Trade and the Chinese Ministry of Commerce to discuss common challenges and opportunities in the context of sustainable trade. Generally speaking, it is important to develop common commitments while leaving both parties the freedom to regulate according to their own collective preferences. Cooperation remains essential, such as sharing scientific information on the environment and promoting the Decent Work Agenda, and also conducting cooperation activities that focus on policy-dialogue, on local and global environmental issues, and on human resources development. In this sense, the Commission services do not aim at the harmonisation of social and environmental provisions with parties to trade agreements it is negotiating, but rather at progressing through dialogue and cooperation with them to make our economic and trade-related endeavours sustainable in the long term. Methodology The Consultant presents a series of policy recommendations based on extensive quantitative analysis, complemented by further qualitative reasoning. The study therefore produced different scenarios depicting possible outcomes of further trade liberalisation. It should be pointed out, however, that the relevance of potential tariff cuts under the WTO's Doha Round is rather limited in the context of the PCA negotiations. Given the situation in the DDA negotiations, when evaluating the findings of the Trade SIA, one should bear in mind the volatility of any reasoning based on Doha tariff cuts. But, as mentioned above, it has to be recalled that a Trade SIA is but a snapshot in time. Therefore, the following commentary will take into account the fact that the Consultant had no means to foresee the evolution of the DDA, nor the unfolding of the global financial crisis, the consequences of which could influence the economic background against which the PCA's effects could be seen and measured. Additionally, it should also be borne in mind that the topic of anti-dumping or antisubsidy measures is of limited importance in assessing the potential impacts of the PCA. Therefore, neither the study nor this paper uses them as a variable in their analysis. Sectoral and Horizontal Studies Machinery Both the EU and China are heavily involved in the manufacturing and trading of machinery and related equipment. The sector's economic importance is multiplied by its role in employment and potential impacts on the environment. While machinery is not foreseen to be covered per se in the PCA, there might be potential effects on trade occurring through the abolition of non-tariff barriers to trade (NTBs), as well as through enhanced registration procedures and standards. The Trade SIA refers to the European Social Fund (ESF) as a possible vehicle for mitigating the consequences of any potential employment dislocation in the EU. The Commission services fully support the objectives and the rationale of the ESF, although the allocation of funds through this mechanism will have to be decided jointly by Member States, the European Parliament, and the European Commission. The Commission services also recall the European Globalisation adjustment Fund (EGF) specifically designed to absorb trade shocks. Adopted in 4

December 2006, it can fund active labour market policies focused on helping workers affected by globalisation-related redundancies. On the Chinese side, the Consultant recommends resource redistribution through a modernised social security system which inter alia would help offset negative impacts of trade liberalisation on employment. The Commission Services recall that the results of the Trade SIA are available also to Chinese policy makers and that responsibility for the development of any system of social protection in China belongs to the Chinese authorities. Similarly, the degree of protection afforded by any such system should reflect the priorities and preferences of the Chinese government and people. The Consultant further mentions an enhanced political EU-China dialogue on technical regulation. In this context, the Commission services would like to stress their existing EU-China Regulatory dialogue with the General Administration for Quality Supervision, Inspection and Quarantine (AQSIQ) put in place in 2001. It promotes regulatory convergence between the EU and China, with the aim of facilitating the free and safe circulation of goods, the elimination of obstacles to trade and investment, and the improvement of the quality and safety of Chinese goods on the EU market. Also, the EU- China Industrial Policy Dialogue with the Chinese National Development and Reform Commission (NDRC) put in place in 2003 provides for a platform to enhance mutual understanding of current and forthcoming policy approaches, legislation and related issues in the industrial sector. Furthermore, the promotion of work safety and environmental standards through a successful PCA is a prominent objective of the ongoing negotiations with China and the Commission services will continue to engage their Chinese counterparts in that regard. In the same logic, the restructuring of State-Owned Enterprises (SOEs) and Chinese SMEs is seen favourably by the Commission services, who remain convinced that only a reformed, open, and predictable Chinese economy is sustainable in the long run. Environmental Goods and Services The Consultant identified environmental goods and services as a high-impact sector in terms of sustainability. Action in this field would fit in and reinforce the Commission services' proposal to reflect trade and sustainable development aspects as a cross-cutting issue throughout the PCA. Sustainability is an overarching policy objective of the EU and the Commission services pursue this goal in terms of domestic policies as well as in external relations. In principle, further efforts of classification and international standardisation of environmentally friendly goods and services in order to promote and facilitate trade therein are actions supported by the Commission services. Further, as part of the overall goal to reduce NTBs, the Commission services endorse a special focus on obstacles affecting trade in environmental goods, services, and problems surrounding technology transfer. Particular attention should be paid to the potential for trade in environmental goods and services, as well as cooperation on technological research and development to support climate change objectives. The concept of 'green loans' for companies working on infrastructure-related projects in China is of particular interest. The Commission services note the relevance of such a project and stress the importance of equal and fair market access for foreign (or foreign-owned) companies, based on the principles of nondiscrimination and national treatment. European companies' expertise in environmentally 5

friendly projects is extensive and their participation under fair conditions in such endeavours would benefit China too. In so far as tariff measures are concerned, it should be pointed out that such measures would fall outside the scope of the envisaged PCA. This notwithstanding, a bilateral dialogue can be useful in order to identify and define common approaches wherever possible, for further discussions in the appropriate international fora. Financial Services The Commission services agree with the Consultant's view that financial services liberalisation should be based on reciprocity and benefit all parties concerned. However, as the PCA is not a preferential agreement bringing along new market access, financial services are only covered by general transparency and regulatory provisions and have not emerged as a topic of intense discussion in the PCA negotiations. That being said, the Commission services remain convinced that financial sector reform in China is an essential step for further economic and social development and that the issue should be tackled as soon as possible. Chemicals While chemicals are not foreseen to be covered per se in the PCA, there might be potential effects on trade occurring through the abolition of NTBs, as well as through enhanced registration procedures and standards. Regarding the Consultant's recommendation on assisting Chinese SMEs in regulatory compliance with REACH (Registration, Evaluation, Authorisation and Restriction of Chemical Substances), the Commission services would like to stress that interested parties from industry both from the EU and beyond were free to provide their input from the early stages of the legislative process establishing the REACH programme; and in that regard, Chinese stakeholders adopted a very active approach indeed. The European Chemicals Agency (ECHA), the Community Agency charged with the administration of REACH, offers numerous support activities to industry (including companies from third countries) through its help desk and continues to do so. Projects such as the EU-China Regulatory Dialogue and the EU-China Environment Dialogue have provided interested Chinese stakeholders with many opportunities to familiarise themselves with REACH. In that context, the Commission services disagree with the Consultant's proposal to establish a 'single body' assisting Chinese SMEs with REACH compliance, given that this is neither an objective nor a task of the European Commission, and related work is undertaken in existing dialogues. Agriculture On agriculture, potential trade facilitation could occur through measures on sanitary and phytosanitary (SPS) standards, through further information exchange, as well as through enhanced cooperation in the area of agriculture and rural development. The existing annual EU-China Dialogue on Agriculture which promotes bilateral cooperation is a forum designed to facilitate communication on agro-environmental issues. Furthermore, the Commission services endorse the Consultant's view that the rural-urban divide in China has to be tackled successfully in order to mitigate unsustainable societal and environmental impacts. The Consultant further recommends proper monitoring and enforcement of existing EU legislation in the context of sustainable fisheries and aquaculture. The Commission 6

services would like to point out that the Common Fisheries Policy attributes this role to the EU Member States. From a broader point of view on a sustainable and responsible long-term marine and fisheries policy, the Commission services will continue to engage China on the participation and the application of the rules related to Regional Fisheries Management Organisations, as well as the fight against Illegal, Unreported and Unregulated (IUU) fishing. Government Procurement The Commission services support the Consultant's recommendation that China step up its efforts to join the WTO's Government Procurement Agreement (GPA) framework and will continue to press their Chinese counterparts on that point. Also, the Consultant's view on the link between liberalisation in the government procurement sector and longterm beneficial effects on employment and business is in line with the Commission services' perspective. The Commission services would like to underline that transitional measures under the GPA provide for extensive exemptions and would allow China to take into account some low-performing sectors if it wishes to do so. Intellectual Property Rights (IPR) The Consultant's recommendations regarding IPR protection in China include trust building measures, public education campaigns, and setting up an independent regulatory body overseeing IPR infringements. In this context, the Commission services would like to stress that an important feature of an IP protection framework is the proper enforcement of existing laws and international commitments. Stricter penalties for IPR infringements, as the Consultant suggests, are a first step in that direction. The Commission services also intend to strengthen the role of customs in the context of IPR enforcement, including through the recently concluded EC-China IPR enforcement Action Plan. Additionally, the Commission has funded ambitious cooperation activities in the field of IPR protection, such as the EU-China project on the Protection of Intellectual Property Rights (IPR2), aiming at the adaptation of China's IP system to international standards. Regarding the Consultant's suggestion to establish SME networks in China in order to assist EU companies with IPR issues in China, the Commission services want to point out their projects such as the IPR SME Helpdesk that opened in early 2008 and the envisaged EU Centre for SMEs in Beijing, expected to be operational in autumn 2009. This Centre is meant to collect and distribute information on doing business in China, host business-related events and support networking activities. 5. CONCLUSION The Commission services remain convinced that trade can make an important contribution to sustainable development and that it offers an outstanding opportunity to tackle issues characterising contemporary EU-China relations. The study suggests there is much scope for positive development therein, pointing to better energy efficiency, a reduced carbon footprint, and welfare gains as key elements in shaping lasting, stable, and mutually beneficial bilateral relations. The PCA offers a framework to put these elements on a solid legal basis. The Commission services share the Consultant's overall view that imbalances in the context of EU-China relations do not appear sustainable in the long term. Issues such as 7

investment, access to government procurement and IPR enforcement remain on the top of the list when addressing these imbalances. Efforts to enhance trade and sustainable development have to be coupled with the proper implementation of existing legislation, which is also reflected in the design of EU-funded cooperation activities. The Commission services note these main findings of the study and will consider them in the ongoing PCA negotiations. The study highlighted the intertwined nature of imbalances in the economic, social, and environmental spheres. The Commission services will continue to advocate an ambitious agenda regarding sustainable development in the ongoing PCA negotiations. By promoting progress on the implementation of internationally accepted levels of social standards and environmental protection, the Commission services remain committed to sustainable development as one of their overarching policy objectives when dealing with China. February 2009 8