Most significantly, on Monday China inked its first free trade agreement with a European country when Premier Li Keqiang signed an FTA with visiting Iceland Prime Minister Johanna Sigurdardottir.
Although the agreement was six-years in the making, it is difficult to believe that China was motivated by a desire to expand bilateral trade with Iceland, which was just US$424 million last year. As the Economist pointed out, Iceland’s entire population is just one-tenth of the population in the district of Beijing where Iceland’s embassy is located.
Instead China’s motivations for deepening relations with Iceland relate to its long-term strategy to gain access to shipping routes in the Arctic. Beijing is currently one of the three Asian powers (the other being Japan and South Korea) that is seeking permanent observer status at the eight-nation Arctic Council, whose membership is made up of Canada, Denmark, Finland, Iceland, Norway, Russia, Sweden and the United States.
Iceland is already proving critical to advancing China and other Asian powers’ interests in the Arctic. On the same day that Iceland’s PM was in Beijing signing the FTA, Iceland President Olafur Grimsson announced a more inclusive “international assembly” to rival the Arctic Council—called the Arctic Circle—which will include nations without direct access to the Arctic but with an interest in the warming waters. The organization will hold its first meeting in Reykjavik, Iceland in October.
The driving force behind China’s interest in the Arctic is to reduce shipping routes to places like Europe, which will allow Beijing to increase its trade and investment with countries in the region. It is hardly waiting for the Arctic ice to melt, however.
A new survey released this week by private-equity firm A Capital estimated that China’s Mergers and Acquisition (M&A) investment in Europe was up 21 percent in 2012 year-on-year.. The firm calculated that at US$12.6 billion, Europe was the top destination for Chinese outbound M&A investment, accounting for a third of the country’s total and more than double what China invested in the U.S. By contrast, Asia was the destination for just 8 percent of China’s M&A investment in 2012, a 65 percent decline from the year before.
As A Capital founder and chief, Andre Loesekrug-Pietri, remarked in reference to the report, “The Chinese seem to have more faith in European industry than the Europeans themselves.”
This greater interaction is not without its tensions, however. Last month the EU imposed tariffs on Chinese steel which it claimed were necessary to counter state subsidies the Chinese government gives to domestic companies. The duties are expected to be as high as 44.7 percent.
This was not the first time the EU imposed anti-subsidy tariffs on China. In May 2011, the international organization levied a 12 percent tariff on Chinese paper products citing government subsidies for Chinese paper companies. The EU is also considering imposing similar tariffs on Chinese solar panels and bicycles, according to Bloomberg News.
There has also been considerable tension between the EU and China over EU companies’ access to China’s telecom market. In January it was reported that Brussels has been demanding a 30 percent stake in China’s domestic telecom market in return for ending an investigation into Chinese subsidy policies. Chinese diplomats also accused EU Trade Commissioner, Karel De Gucht, at the time of demanding that Huawei Technologies and ZTE Corp raise the price of their exports by 29 percent.
Apparently unhappy with how China responded to these demands, Reuters is reporting today that De Gucht will seek to persuade EU Foreign Ministers to agree to an investigation of the subsidies both Chinese companies receive. Such investigations are usually prompted by complaints filed by European companies. In this case the EU companies have refused to file such a complaint out of fear that China will respond by cutting them out of the Chinese market. De Gucht has therefore decided to take it upon himself to launch such an investigation.
This will give Xi Jinping and French President Francois Hollande a lot of talk about when Hollande pays a state visit to China at the end of this month. In announcing the trip on Monday, a Chinese Foreign Ministry spokesperson said Hollande would also meet with Premier Li and Zhang Dejiang, the chairman of the Politburo Standing Committee.