Preferential trade agreements may refer to different accents from unilateral, bilateral or regional arrangements for the extension of tariff and other non-tariff preferences.
Free Trade Agreements today are not an unknown tool, for example, we may take the North American Free Trade Agreement (NAFTA) or the US-Australia Free Trade Agreement (FTA.1). The World Trade Organization (WTO) allows the parties to enter into free trade agreements under certain conditions under quite elastic criteria.
The framing that follows from the trade agreement tends to be a constructive block or an obstacle to the further multilateral trade liberalization.
If, after signing the agreement, additional conditions and opportunities are created for more trade, for example by giving the possibility of re-directing production to more competitive producers than local ones or by redirecting trade from lower-cost partners outside the region to members of the pact even if they have Higher costs, but due to tariff preferences that apply to them, trade between members is more profitable. In such or similar cases, agreements of this type are considered as building blocks and beneficial and complementary to the global trading system.
On the other hand, the preferential trade agreement (PTA) may create barriers to the multilateral trading system. It is difficult to determine unequivocally, quantitatively and in advance whether the dominance of free trade without preferential regulation is a better option than regulating trade through an agreement.
This is because the effects on patterns of trade and investment depend on the content of the agreement as well as on the size and scale of the reduction of barriers to trade.
Recently, there has been an expansion of such agreements, which are becoming an essential element of trade and an instrument of global economic diplomacy. One of the reasons is that countries seek to improve access to foreign markets for their exporters and investors.
We see the backdrop and weakening impulse for the multilateral trade liberalization, which requires very complex and sometimes almost impossible international political coordination and understanding and preferential trade agreements are appropriate tool.
The preferred form is the free trade agreements that are gaining popularity and are growing in recent years more and more. Since 1995, with the establishment of the World Trade Organization (WTO), the number of PTA notifications has been on average 20, as opposed to less than 3 per year for GATT 1948-1995.
Many other bilateral and regional agreements are being negotiated on a permanent basis, for example about 60 preferential trade agreements only in Asia. The share of world trade, currently covered by the PTA, is estimated at around 50%.
Europe and China have a century-old tradition of trade relations. The urge to connect the two regions can be found from the time of the old Silk road, which consists of a network of paths and mountain passes between cities and countries.
Persistent traders travel over 7,000 kilometers along this route linking China and Europe. This is a road without infrastructure, just an endless chain of local and regional trips and destinations, but it is something much more.
It is a symbol, an expression of determination to link markets and to seek the added value of goods exchanged between different cultures and levels of development, connecting civilizations.
Despite the dynamic world and the development of the economy, the markets and the technology, this momentum is being transferred from our ancestors to us as well. Today, even if we do not go the same way, we are walking in the same direction.
The future silk road can add great value to the economic development of China and the EU, and world trade will never be the same. All of this would be based on the determination of the ancient merchants and the centuries-old traditions.
The Silk Road is primarily a symbol of future relationships. This is indicative of China’s President Hu Jintao 2013 Strategic Statement on One Belt Road. Based on the ancient trade route to an area of modernized economic cooperation and development worldwide.
With this initiative, the old trade route has become a symbol of age-old motives, a desire for cooperation, exchange of culture, political communication and trade relations between the Euro-Asian countries.
Fixed, clear and fundamental principles of coexistence and integration of such a project are needed from the beginning. They start with maintaining peace, avoiding confrontations, going through the path of mutual respect, and continuing towards a vast future embraced by prospects for economic benefits.
The most significant economic step in this endeavor would be in the form of an EU-China Free Trade Agreement.
In developing the international trade strategy since 2006, the EU is focusing on the signing of free trade agreements (FTAs) with dynamic economies from East Asia. Until recently, due to political, social, economic, and historical reasons, the dialogue with China in this direction was slow.
For the EU, it is the largest and most dynamic economy as a potential candidate for a free trade agreement in the East Asian region and is a logical next step for the EU’s trade strategy for East Asia. The creation of a free trade agreement between China and the EU is based on existing arguments.
Greater economic potential, competitive market access, the creation of competitive mega-regions, conducting Chinese market reforms, and exposing the economy to foreign competition as well as a number of strategic and geopolitical advantages.
The following statistics will give us an indication of dimensions and scale in economic terms.
EU-China: Economic and Trade Indicators, 2016
- GDP: USD 16,518 billion For the EU and USD 11 383 billion For China (IMF data)
- GDP per capita: USD 32 384 For the EU and $ 8,239 For China (IMF data)
- Total bilateral trade in goods: EUR 514.7 billion (according to EC data)
- FDI-EU position with China (2015): External € 168.4 billion, € 34.9 billion (according to EC data)
- Average industrial tariffs: 3.8% for the EU and 8% for China
- Average agricultural tariffs: 7.2% for the EU and 13.9% for China
The economic potential of the Free Trade Agreement first most substantial of the arguments.
The economic potential of trade and investment relations between the EU and China is far greater than what has been demonstrated so far due to existing restrictions and prohibitions, despite the impressive growth of bilateral trade and investment between the two countries.
Simulations of future relations show much more economic potential, as far as modelling methods can assess such effects. Extensive qualitative evidence and business information has been observed in various studies and they all confirm this forecast.
Also, an overrun of these expectations is predicted because the quantitative simulations are limited in the volume of data that can be processed; however a clear trend and direction is emerging.
For the EU and China, achieving such economic potential is one of the main trade and investment missions and policies related to it. After successful completion and finishing of the communication on this pact, the generated mutual benefit would have unprecedented dimensions.
Another important argument in favour of a free trade agreement (FTA) is to provide access to their mutual markets. This should provide a penetration into the relevant national market as there is for other non-market or in-market trading companies.
Otherwise, competitors of European and Chinese companies from other trade destinations outside the pact as well as between parties, may have an unequal position, and market participants may be temporarily harmed and discriminated.
This justification is known as the “domino” theory or, alternatively, the “me-too” effect. Negotiations on the FTA between the EU and China are happening on the basis of an improved and closer form of mutual access to their national markets.
This generates comprehensible and reciprocal pressure as well as a strong interest in improving market access as a whole, as well as preparing the market for such relations on both sides.
Another argument for the EU-China FTA is the creation of “mega-regions.” As an example, we can look at some of the major FTAs that create directly pressure and need for balance and opposition.
The Transatlantic Agreement includes 12 countries plus the United States, Japan, Mexico and Vietnam in a partnership framework that directly affects business, including the establishment of labour and environmental regulations, the treatment of intellectual property, and the protection and fair treatment of foreign companies in national Jurisdictions.
The main objective is economic growth and opposition to competition, partly balancing China’s dominant role as production power.
Researchers of the economic landscape claim that this pact potentially represents “40% of the world economy”, this calculation is based on the GDP of the countries included in the Pact.
Current trade exchange under the TRP has a share of about 13% of the world economy. This is an example of creating a trade-oriented mega-region whose competition China has to resist.
On January 23, 2017, with executive order, Donald Trump diverted the United States from the political and economic route of the Trans Pacific Partnership (TPP), which would affect the 12 countries and about 40% of the world’s gross domestic product.
This would be a game changer for the Asian-Pacific region in economic terms. That leaves China without a prospect of opposition or partnership with the United States.
In its quest, China initiated an integration trade process in the region.
Expanding trade prospects with neighbouring countries as well as building an infrastructure project based on ancient trade routes to the Middle East and Europe
This is a pact between 16 countries for the United States comprehensive Regional Economic Partnership (RCEP) and has the potential to become the world’s largest free trade agreement and, according to preliminary data, it could cover about 46% of the world’s population Combined GDP of 17 trillion US dollars and 40% of world trade.
Negotiations have begun and, at an early stage, refer to Southeast Asian countries, including Japan, South Korea, Australia, New Zealand and India. Despite China’s desire to join a strong economic partnership, this is not yet a fact and is in the process of negotiation.
The Transatlantic Trade and Investment Partnership (TTIP) is under negotiation between the EU and the US from July 2013. The TTIP will be the most comprehensive free trade agreement to date.
It will have a liberalizing impact on trade in goods and services, developing trade and investment rules and focus on removing unnecessary regulatory barriers. The TTIP will be based on common objectives, including the protection and promotion of human rights and international security.
It will give market access to address regulatory issues and settle non-tariff barriers to trade and create new rules. This will have a turning effect for world trade while China has no free trade agreement with either the US or the EU at this stage and this puts it at a disadvantageous situation.
On the other hand, there are, but to a lesser extent, agreements such as the EU-Japan Free Trade Agreement, which is also under negotiation, as well as the EU-Canada Comprehensive Economic and Commercial Activity (CETA) that has not yet been ratified.
These pacts increase the interest from China to turn to its largest trading partner and source of the most serious foreign direct investments – the European Union – to improve market access, deepen investment relations, and strengthen economic and technical co-operation. This is one of the few options for China to oppose the fast-paced and vibrant economic world.
China’s internal reforms are preparing and facilitating the country to take the road to a free trade agreement.
Part of China’s internal policies and reforms for preparation and transition to better functioning and to be better prepared for foreign companies to enter the market are reforms aimed at avoiding the “average income” trap and preparing the internal market for its opening to direct competition of foreign goods and services and investment in all sectors.
For China, this is the “new logic”. One of the main priorities is to stimulate productivity growth as well as enhance quality while retaining competitive prices.
Since the current mass production model based on a low-skilled workers for extreme growth low prices and responding quality aiming strong export of a particular type of products, has begun to exhaust its strength. Higher quality and production trends and requirements require more and better quality services both for the domestic needs of the country and for exports.
The opening of the reformed Chinese economy is of mutual interest to both the EU and China. The close partnership in the form of a free trade agenda seems to be the fastest way to achieve this objective compared to the multilateral and more technically complicated approach that is possible through the WTO platform.
Another argument, but not so fundamental for the creating of a free trade pact between the EU and China is a geopolitical benefit. China may be disappointed from the Asia-Pacific Economic Cooperation (ATIS).
Countries in the region are now split between the Trans-Pacific Partnership (TPP) shaken by the US refusal to participate and Asia-Pacific Economic Cooperation in 21 countries, many of which are Members of the Regional Comprehensive Economic Partnership (RCEP).
China’s cooperation with BRICS also does not run smoothly. This is an economic bloc to a certain extent and a trade association of 5 countries that form a political club to channel “their growing economic power into a significant geopolitical influence.”
Part of China’s march to these agreements and endeavours goes through the “One Belt, One Road” policy and the Asian Investment Bank for Infrastructure (AIIB), but they are in the early stages of their development. Currently an agreement in place between China and America for free trade seems hard to exist at least because of the US political opinions.
Therefore, we can say that the EU is the ideal geopolitical partner for China and a reasonable response to the economic development of the international partnership policies of the PRC. The EU is a “civic” alliance and has the position of the largest trading partner and leading investor in China and is a suitable partner for a forthcoming comprehensive investment agreement and a promising common future.
On the global economic scene, Bulgaria is not a key player but, from a geopolitical perspective, is one of the most suitable trading countries between the EU and China. It is a place where China can take the important steps and establish its interests to the EU.
Bulgaria has excellent communication and relations with the PRC, built through a long years of close political dialogue, which makes the country ideal potential mediator of future relations.
