Road to deal with EU has many hurdles

Establishing a free trade agreement between China and the European Union would bring great benefits to businesses from both sides, but numerous challenges still exist, experts say.

China has established free trade agreements with two European countries, Iceland and Switzerland, and Chinese leaders have been keen to advance discussions for a comprehensive agreement with the EU.

"A new, unified EU-China free trade agreement will open doors for both European and Chinese investors and will undoubtedly create job opportunities for both," says Cui Zhijian, assistant professor of operations management at IE Business School in Spain.

The real estate, banking, luxury products and high-tech sectors in Europe could benefit most from such an agreement, Cui says.

"Broadly speaking, such an agreement would also deepen the mutual trust between Europe and China in a much wider spectrum."

In 2013, China and the EU agreed to negotiate an investment treaty to grant foreign investors access to each other's markets, without unsettling the balance between investors' protection and the ability of host states to regulate foreign direct investment in the public interest.

Last year, President Xi Jinping won a promise from the EU to consider a free trade agreement, although details of such an accord have yet to be discussed.

Maurizio Zanardi, reader in economics at Lancaster University Management School, says it would be difficult to embark on talks on a free trade agreement in the next few years because the investment agreement would need to be finalized first.

Furthermore, the EU is now negotiating a trade agreement with the United States, which is absorbing a lot of time, effort, and political capital on both sides, Zanardi says.

But at the same time, progress the EU has made on negotiating free trade agreements with other countries will also increase the incentive for China to negotiate an agreement with the EU so as not to be isolated. World Trade Organization multilateral negotiations also do not seem to be coming to a conclusion.

Zhang Ying, associate dean for China business and relations at Rotterdam School of Management at Erasmus University, says a potential EU-China free trade agreement would force Chinese companies to become more competitive in more high tech and value added sectors, as a result of competition from EU firms.

However, Chinese companies would gain in the long term because they would connect to the next level of technology and produce highly innovative products to satisfy middle class consumers that are compatible with European products.

For European firms, the gain is in both the short and long term, and it is great, given that Europe now has high unemployment rates, Zhang says.

Chinese and European governments are keen to take collaboration to the next level, and an effective political relationship will help advance the cause of a free trade agreement, she says.

"As long as the political relationship is great, if this conversation is smooth, friendly and nice, then economic agreement can easily be reached and problems that are in the future will be easily resolved."

Esther Kessler, a senior lecturer in the department of international business at Zurich University of Applied Sciences, says one key challenge to establishing the EU-China free trade agreement is the difficulty of drafting an agreement that suits each EU country.

"For example, ministers in France would be against liberalizing the food sector because France is a big agricultural producer. This is always very political. People would go onto the streets in France to protect their industry.

"This is not a challenge specific to China; it could also happen for the US. China is a big country, so some people see it as a threat. This is why with the China-Switzerland agreement there is a review period of five years, to see how well it goes, and only if it goes well that you would liberalize further."