The EU-China Investment Agreement (CAI) was supposed to open up the Chinese market and restrict onerous practices such as technology transfer. Now the agreement is on hold for the time being. And that could have far-reaching consequences for European companies in the near future. Felix Lee spoke about this with Liu Wan-Hsin. The economist at the Kiel Institute for the World Economy warns: Beijing is striving for independence from foreign countries. Companies will soon have to relocate factories to China. The CAI, on the other hand, would have ensured fairer competition. The halt to ratification is understandable and, at the same time, regrettable, according to Liu.
A good two-thirds of China’s electricity mix is still based on climate-damaging coal-fired power. Therefore, companies that want to switch to 100 percent renewable energies do not have it easy, as Christiane Kuehl reports. Do it yourself, the German chemicals company BASF thinks. The giant has set up a mechanism for the direct purchase of green electricity with the provincial government in Guangdong which makes it a model for other local German companies.
Companies in southern China are currently considering the importance of a secure power supply. Electricity shortages have been occurring there for several days. Factories in some areas have to close three days a week. Climate change is also damaging green electricity from hydropower.
I wish you an exciting read and a great start to the week!
A large firm cannot, as a rule, simply buy the necessary green electricity for a large plant on the market. The necessary infrastructure is required to obtain electricity exclusively from renewable sources as well as the cooperation of the electricity grids and the electricity market operator. This is the only way to make climate targets practically feasible. The chemical company BASF has now initiated such cooperation in the southern province of Guangdong. The Ludwigshafen-based company wants to build a Verbund site in the city of Zhanjiang that will be supplied with 100 percent green electricity in its first phase – and has initiated a mechanism with the provincial government for the direct purchase of green electricity starting in 2019.
At the time, the company said it proposed the Renewable Direct Power Purchase (R-DPP) concept to local authorities, which it had developed together with the China Resources Power group. “Under this system, we purchase emission-free power directly from the relevant renewable energy source through the grid operator,” BASF’s Haryono Lim told China.Table. “In the traditional system, we could only get electricity from the public power grid,” adding that BASF was responsible for the “Project New Verbund Site China”. The German word “Verbund” has entered the international jargon of the industry here.
A mix of different energy sources with a high proportion of coal-fired power is fed into the normal power grid. Renewable energies currently account for only about a quarter of China’s electricity mix. Therefore, power grids have a crucial role to play in China’s transition to climate neutrality. They must break the coal primacy and pass on more green electricity on a pro-rata basis. They will need significantly more electricity storage capacities to do that since electricity from wind and sun is subject to strong fluctuations due to changing weather conditions. And finally, grid operators must make it possible for corporate customers to buy green power directly – as is now happening in Guangdong – through technical and regulatory means.
According to Lim, the R-DPP concept initiated by BASF triggered the drafting of a comprehensive new pilot regulatory framework for renewable energy trading in Guangdong in 2019, which includes this mechanism. The competent authority for these transactions is the Guangdong Power Exchange Center, established in 2016 for power trading. “As we learned from the Guangdong Power Exchange Center, there is no restriction on the sectors in which R-DPP trading can take place,” Lim said. So other companies in Guangdong will also be able to directly purchase green power.
The chemical industry is one of the most energy-intensive industrial sectors. A transformation of the chemical or even the steel sector is therefore considered indispensable for successful climate protection. BASF has announced its intention to operate in a carbon-neutral manner from 2050. The firm wants to reduce greenhouse gas emissions by 25 percent by 2025 (compared with 2018). At that time, BASF Group’s global emissions were 21.9 million metric tons of CO2 equivalents. That is only half of the emissions in 1990, according to the firm.
BASF plans to invest up to €1 billion in this by 2025, and another €2 to €3 billion by 2030, as the company recently announced. This is because new types of production processes – some of which do not even exist yet – will increase the demand for electricity, according to BASF because they can do without other energy sources such as fossil fuels. In turn, that would require the company to obtain electricity from renewable sources or to generate it itself. Therefore, together with energy producer RWE, BASF plans to build an offshore wind farm in the North Sea with a capacity of two gigawatts, as both companies recently announced. 19 BASF sites in Europe and North America obtain all or part of their electricity from renewable sources.
According to BASF, Zhanjiang is to become a model site for sustainable production. Beginning in 2022, engineering plastics and thermoplastic polyurethanes (TPU) will initially be produced there. “The first plants at the Zhanjiang Verbund site will be powered 100 percent by electricity from renewable sources such as wind energy and photovoltaics,” says Haryono Lim. BASF is also aiming for a high proportion of green power in future phases according to him. He also says the firm cannot yet give a precise target figure because of the long planning lead times. The site is not scheduled for full completion until 2030.
Production sites in every industry always need other forms of energy in addition to electricity. Generating or purchasing climate-neutral electricity is usually the first step in a climate-friendly transformation. In China, Volvo says it operates a plant in Daqing with 100 percent green electricity. VW also announced that it would run its new electric car factory in Anhui – construction of which has just started – on green electricity. BASF has installed photovoltaic systems in China at sites in Shanghai’s Caojing Chemical Park and at its large corporate headquarters in Pudong where the firm itself operates.
On the other hand, when it comes to overall energy demand, firms focus on energy savings first. “For example, we were able to reduce our steam requirements by optimizing condensate traps at BASF’s site in Caojing and by installing a steam cooler at the Nanjing site,” says Lim.
BASF reports greenhouse gas emissions according to the globally recognized Greenhouse Gas Protocol standard and the sector-specific standard for the chemical industry. This distinguishes between direct emissions from a site’s own production and generation of electricity and steam (Scope 1), emissions from the purchase of electricity (Scope 2), and emissions in the value chain (Scope 3). According to this assessment procedure, the industrial site is, therefore, also held accountable for the combustion of coal by the power plant.
If BASF were to purchase electricity for the new Verbund site from the South Grid, of which Guangdong is a part, the carbon dioxide emissions generated in the production of this electricity would be added to the new plant in Zhanjiang. In the Southern Grid, of which Guangdong is a part, the average carbon dioxide emission is about 0.5 to 0.6 kilograms per kilowatt-hour, Lim explained. Because R-DPP allows BASF to purchase renewable electricity directly from generators, it would avoid this accounting for emissions from the public grid. That serves to lower the site’s total reportable emissions.
Sichuan province also opened up retail electricity sales in 2020, according to a report in the South China Morning Post, allowing private companies to source 100 percent of their electricity needs from renewable sources. Previously, the maximum was 70 percent. Hopefully, other provinces will follow suit as soon as possible.
Ms. Liu, the EU Commission has put the investment agreement (CAI), which had already been largely negotiated with Beijing, on the back burner. Was that the right decision?
Liu Wan-Hsin: Of course, I can understand that it is difficult to move forward with this ratification process at the moment, given the political tensions between the EU and China, especially because of the human rights situation in Xinjiang. The spiral of sanctions and the escalating diplomatic tensions between the two sides are leading to a major loss of trust. However, mutual trust is essential for the conclusion of the agreement and, above all, for the implementation of the commitments agreed in the agreement. Nevertheless, I think it is regrettable that the EU Commission has taken this decision.
Why?
The agreement would have facilitated market access in China for German and European companies. The most important effect would presumably be the following: The investment agreement would create a contractually binding obligation for the market liberalizations that China has carried out unilaterally to date. The Chinese government would no longer be able to withdraw these liberalizations at its own discretion. This reduces uncertainties.
What could this look like in concrete terms?
The EU could use the intergovernmental dispute settlement mechanism agreed upon in the agreement in case of infringement. The agreement would also have ensured a fairer playing field in China. It contains commitments that European companies have long demanded: a ban on forced technology transfers, transparent and fair administrative procedures and regulations, transparency on subsidies and clear rules for state-owned enterprises.
You say so yourself: These unfair competitive conditions have existed for a long time. Nevertheless, many German companies in China are doing extremely well. Why this urgency?
At the last National People’s Congress, China adopted the new five-year plan. And it has a lot to live up to. It envisages nothing less than reducing dependence on foreign countries. The promotion of domestic innovation, domestic production and domestic demand has absolute priority. Supplier companies from abroad will feel more pressure in the medium term to relocate their factories to China and produce locally if they want to continue to serve the Chinese market with their products. The investment uncertainties and unfair competitive conditions that many foreign companies have faced in China for a long time can be reduced or improved by the investment agreement.
But why not put ratification on hold for the time being? When the political tensions have eased, a new attempt could then be made.
It depends on how long the ratification process is put on hold. Time-wise, it could be tight. And it’s also questionable whether it would be the best way to reduce political tensions. With its new five-year plan, the Chinese leadership has set itself the goal of no longer just being the workbench for cheap products but also being able to produce goods of high quality. Technologically, China wants to become the world market leader in several key sectors. It is perfectly legitimate for China to set this goal for itself. Nevertheless, a level playing field is needed. For example, the agreement would not allow the Chinese government to simply force technology transfers from foreign investors to a joint venture partner in China.
Shortly before the end of the year, the German government had hurriedly rushed through the negotiations on this investment agreement under its EU Council presidency. Critics of the agreement believe that the EU should have waited only a few weeks until Joe Biden was in office. A careless mistake?
I do not see it that way. Because it was by no means the case that the Europeans only started negotiations recently, but seven years ago. At that time, Trump’s trade war against China was not yet foreseeable. The EU and the German government wanted to finally bring the agreement to a conclusion. The EU negotiator has pointed out that the EU will not get a better result if it continues to wait. Incidentally, the US under Trump itself concluded an agreement with China at the beginning of 2020 with comparable elements, for example, in the area of financial services.
Where do you think we should go from here?
The EU Parliament has decided to put consultation on the investment agreement on hold until the Chinese sanctions are lifted. However, I think it is very unlikely that China – now the world’s second-largest economy and one of the few countries whose economy continues to grow despite the Covid crisis – will change its behavior because of sanctions. The spiral of sanctions and the loss of confidence do not make constructive dialogue between the EU and China any easier, but all the more urgent.
Liu Wan-Hsin is an economist at the Kiel Institute for the World Economy (IfW). Her research focuses on international trade, global supply chains, and the determinants of innovation activities with a focus on China. Born in Taiwan, she has also been coordinator for the Kiel Center for Globalization (KCG) since 2016.
Jeffrey Ding is one of the leading experts on Chinese AI research. When it comes to fathoming how China is progressing in this global race for one of the important technologies of the future, Ding is a sought-after interlocutor. The scholar from Oxford’s Future of Humanity Institute comes to an ambivalent verdict in his latest assessment. “In the field of AI, China is currently second only to the USA if we include all the important parameters,” says Ding.
He observes that China, and its leading technology companies, are making great strides but still lag behind the United States, particularly when it comes to innovation. “China continues to lack its own groundbreaking breakthroughs – in deep learning,” says Ding, who is fluent in Chinese himself and worked at the US State Department, among other places, before coming to Oxford.
The People’s Republic is good at driving forward existing developments with great financial power and personnel strength, but its own innovations have so far been the exception. Among other examples, Ding cites the development of high-performance graphics chips. Processing images is one of the most important elements in the field of artificial intelligence. The best chips are made by the US company Nvidia. Beijing currently has to rely on the US vendor’s technology. “However, China is making significant progress in chip development and has set out to invest heavily in this area,” Ding says.
However, the People’s Republic rarely develops its own AI innovations. According to Ding, this has structural reasons. In Silicon Valley, a cluster has formed in which more and more new companies are founded and from which more and more bright minds are attracted. China lacks such a cluster, even though there are efforts to build up smaller Silicon Valleys on its own east coast, according to Ding.
Concerns in the global West about China’s AI advances concern the technology’s possible use in violation of human rights. “Facial recognition is an area where China is leading,” Ding says. “Chinese companies are supported by the Ministry of Public Security, which provides them with facial data.” The government in Beijing is interested in making rapid progress because it sees itself as the first and biggest buyer of the technology.
Still, Beijing doesn’t want entirely centrally directed development. “The government doesn’t want to control AI research too much because that would eliminate competition for ideas.” Looking ahead over the next few years, meanwhile, Ding doesn’t expect China to become the world’s number one AI player. Other countries, especially the US, will not be easily overtaken in this field.
Ding was born in Shanghai and emigrated with his parents to the US state of Iowa at the age of three. He later returned to China and spent a year studying in Beijing, among other places. Ding first came to Oxford as a Rhodes Scholar and subsequently became a doctoral student at the Future of Humanity Institute. Constantin Eckner
The EU-China Investment Agreement (CAI) was supposed to open up the Chinese market and restrict onerous practices such as technology transfer. Now the agreement is on hold for the time being. And that could have far-reaching consequences for European companies in the near future. Felix Lee spoke about this with Liu Wan-Hsin. The economist at the Kiel Institute for the World Economy warns: Beijing is striving for independence from foreign countries. Companies will soon have to relocate factories to China. The CAI, on the other hand, would have ensured fairer competition. The halt to ratification is understandable and, at the same time, regrettable, according to Liu.
A good two-thirds of China’s electricity mix is still based on climate-damaging coal-fired power. Therefore, companies that want to switch to 100 percent renewable energies do not have it easy, as Christiane Kuehl reports. Do it yourself, the German chemicals company BASF thinks. The giant has set up a mechanism for the direct purchase of green electricity with the provincial government in Guangdong which makes it a model for other local German companies.
Companies in southern China are currently considering the importance of a secure power supply. Electricity shortages have been occurring there for several days. Factories in some areas have to close three days a week. Climate change is also damaging green electricity from hydropower.
I wish you an exciting read and a great start to the week!
A large firm cannot, as a rule, simply buy the necessary green electricity for a large plant on the market. The necessary infrastructure is required to obtain electricity exclusively from renewable sources as well as the cooperation of the electricity grids and the electricity market operator. This is the only way to make climate targets practically feasible. The chemical company BASF has now initiated such cooperation in the southern province of Guangdong. The Ludwigshafen-based company wants to build a Verbund site in the city of Zhanjiang that will be supplied with 100 percent green electricity in its first phase – and has initiated a mechanism with the provincial government for the direct purchase of green electricity starting in 2019.
At the time, the company said it proposed the Renewable Direct Power Purchase (R-DPP) concept to local authorities, which it had developed together with the China Resources Power group. “Under this system, we purchase emission-free power directly from the relevant renewable energy source through the grid operator,” BASF’s Haryono Lim told China.Table. “In the traditional system, we could only get electricity from the public power grid,” adding that BASF was responsible for the “Project New Verbund Site China”. The German word “Verbund” has entered the international jargon of the industry here.
A mix of different energy sources with a high proportion of coal-fired power is fed into the normal power grid. Renewable energies currently account for only about a quarter of China’s electricity mix. Therefore, power grids have a crucial role to play in China’s transition to climate neutrality. They must break the coal primacy and pass on more green electricity on a pro-rata basis. They will need significantly more electricity storage capacities to do that since electricity from wind and sun is subject to strong fluctuations due to changing weather conditions. And finally, grid operators must make it possible for corporate customers to buy green power directly – as is now happening in Guangdong – through technical and regulatory means.
According to Lim, the R-DPP concept initiated by BASF triggered the drafting of a comprehensive new pilot regulatory framework for renewable energy trading in Guangdong in 2019, which includes this mechanism. The competent authority for these transactions is the Guangdong Power Exchange Center, established in 2016 for power trading. “As we learned from the Guangdong Power Exchange Center, there is no restriction on the sectors in which R-DPP trading can take place,” Lim said. So other companies in Guangdong will also be able to directly purchase green power.
The chemical industry is one of the most energy-intensive industrial sectors. A transformation of the chemical or even the steel sector is therefore considered indispensable for successful climate protection. BASF has announced its intention to operate in a carbon-neutral manner from 2050. The firm wants to reduce greenhouse gas emissions by 25 percent by 2025 (compared with 2018). At that time, BASF Group’s global emissions were 21.9 million metric tons of CO2 equivalents. That is only half of the emissions in 1990, according to the firm.
BASF plans to invest up to €1 billion in this by 2025, and another €2 to €3 billion by 2030, as the company recently announced. This is because new types of production processes – some of which do not even exist yet – will increase the demand for electricity, according to BASF because they can do without other energy sources such as fossil fuels. In turn, that would require the company to obtain electricity from renewable sources or to generate it itself. Therefore, together with energy producer RWE, BASF plans to build an offshore wind farm in the North Sea with a capacity of two gigawatts, as both companies recently announced. 19 BASF sites in Europe and North America obtain all or part of their electricity from renewable sources.
According to BASF, Zhanjiang is to become a model site for sustainable production. Beginning in 2022, engineering plastics and thermoplastic polyurethanes (TPU) will initially be produced there. “The first plants at the Zhanjiang Verbund site will be powered 100 percent by electricity from renewable sources such as wind energy and photovoltaics,” says Haryono Lim. BASF is also aiming for a high proportion of green power in future phases according to him. He also says the firm cannot yet give a precise target figure because of the long planning lead times. The site is not scheduled for full completion until 2030.
Production sites in every industry always need other forms of energy in addition to electricity. Generating or purchasing climate-neutral electricity is usually the first step in a climate-friendly transformation. In China, Volvo says it operates a plant in Daqing with 100 percent green electricity. VW also announced that it would run its new electric car factory in Anhui – construction of which has just started – on green electricity. BASF has installed photovoltaic systems in China at sites in Shanghai’s Caojing Chemical Park and at its large corporate headquarters in Pudong where the firm itself operates.
On the other hand, when it comes to overall energy demand, firms focus on energy savings first. “For example, we were able to reduce our steam requirements by optimizing condensate traps at BASF’s site in Caojing and by installing a steam cooler at the Nanjing site,” says Lim.
BASF reports greenhouse gas emissions according to the globally recognized Greenhouse Gas Protocol standard and the sector-specific standard for the chemical industry. This distinguishes between direct emissions from a site’s own production and generation of electricity and steam (Scope 1), emissions from the purchase of electricity (Scope 2), and emissions in the value chain (Scope 3). According to this assessment procedure, the industrial site is, therefore, also held accountable for the combustion of coal by the power plant.
If BASF were to purchase electricity for the new Verbund site from the South Grid, of which Guangdong is a part, the carbon dioxide emissions generated in the production of this electricity would be added to the new plant in Zhanjiang. In the Southern Grid, of which Guangdong is a part, the average carbon dioxide emission is about 0.5 to 0.6 kilograms per kilowatt-hour, Lim explained. Because R-DPP allows BASF to purchase renewable electricity directly from generators, it would avoid this accounting for emissions from the public grid. That serves to lower the site’s total reportable emissions.
Sichuan province also opened up retail electricity sales in 2020, according to a report in the South China Morning Post, allowing private companies to source 100 percent of their electricity needs from renewable sources. Previously, the maximum was 70 percent. Hopefully, other provinces will follow suit as soon as possible.
Ms. Liu, the EU Commission has put the investment agreement (CAI), which had already been largely negotiated with Beijing, on the back burner. Was that the right decision?
Liu Wan-Hsin: Of course, I can understand that it is difficult to move forward with this ratification process at the moment, given the political tensions between the EU and China, especially because of the human rights situation in Xinjiang. The spiral of sanctions and the escalating diplomatic tensions between the two sides are leading to a major loss of trust. However, mutual trust is essential for the conclusion of the agreement and, above all, for the implementation of the commitments agreed in the agreement. Nevertheless, I think it is regrettable that the EU Commission has taken this decision.
Why?
The agreement would have facilitated market access in China for German and European companies. The most important effect would presumably be the following: The investment agreement would create a contractually binding obligation for the market liberalizations that China has carried out unilaterally to date. The Chinese government would no longer be able to withdraw these liberalizations at its own discretion. This reduces uncertainties.
What could this look like in concrete terms?
The EU could use the intergovernmental dispute settlement mechanism agreed upon in the agreement in case of infringement. The agreement would also have ensured a fairer playing field in China. It contains commitments that European companies have long demanded: a ban on forced technology transfers, transparent and fair administrative procedures and regulations, transparency on subsidies and clear rules for state-owned enterprises.
You say so yourself: These unfair competitive conditions have existed for a long time. Nevertheless, many German companies in China are doing extremely well. Why this urgency?
At the last National People’s Congress, China adopted the new five-year plan. And it has a lot to live up to. It envisages nothing less than reducing dependence on foreign countries. The promotion of domestic innovation, domestic production and domestic demand has absolute priority. Supplier companies from abroad will feel more pressure in the medium term to relocate their factories to China and produce locally if they want to continue to serve the Chinese market with their products. The investment uncertainties and unfair competitive conditions that many foreign companies have faced in China for a long time can be reduced or improved by the investment agreement.
But why not put ratification on hold for the time being? When the political tensions have eased, a new attempt could then be made.
It depends on how long the ratification process is put on hold. Time-wise, it could be tight. And it’s also questionable whether it would be the best way to reduce political tensions. With its new five-year plan, the Chinese leadership has set itself the goal of no longer just being the workbench for cheap products but also being able to produce goods of high quality. Technologically, China wants to become the world market leader in several key sectors. It is perfectly legitimate for China to set this goal for itself. Nevertheless, a level playing field is needed. For example, the agreement would not allow the Chinese government to simply force technology transfers from foreign investors to a joint venture partner in China.
Shortly before the end of the year, the German government had hurriedly rushed through the negotiations on this investment agreement under its EU Council presidency. Critics of the agreement believe that the EU should have waited only a few weeks until Joe Biden was in office. A careless mistake?
I do not see it that way. Because it was by no means the case that the Europeans only started negotiations recently, but seven years ago. At that time, Trump’s trade war against China was not yet foreseeable. The EU and the German government wanted to finally bring the agreement to a conclusion. The EU negotiator has pointed out that the EU will not get a better result if it continues to wait. Incidentally, the US under Trump itself concluded an agreement with China at the beginning of 2020 with comparable elements, for example, in the area of financial services.
Where do you think we should go from here?
The EU Parliament has decided to put consultation on the investment agreement on hold until the Chinese sanctions are lifted. However, I think it is very unlikely that China – now the world’s second-largest economy and one of the few countries whose economy continues to grow despite the Covid crisis – will change its behavior because of sanctions. The spiral of sanctions and the loss of confidence do not make constructive dialogue between the EU and China any easier, but all the more urgent.
Liu Wan-Hsin is an economist at the Kiel Institute for the World Economy (IfW). Her research focuses on international trade, global supply chains, and the determinants of innovation activities with a focus on China. Born in Taiwan, she has also been coordinator for the Kiel Center for Globalization (KCG) since 2016.
Jeffrey Ding is one of the leading experts on Chinese AI research. When it comes to fathoming how China is progressing in this global race for one of the important technologies of the future, Ding is a sought-after interlocutor. The scholar from Oxford’s Future of Humanity Institute comes to an ambivalent verdict in his latest assessment. “In the field of AI, China is currently second only to the USA if we include all the important parameters,” says Ding.
He observes that China, and its leading technology companies, are making great strides but still lag behind the United States, particularly when it comes to innovation. “China continues to lack its own groundbreaking breakthroughs – in deep learning,” says Ding, who is fluent in Chinese himself and worked at the US State Department, among other places, before coming to Oxford.
The People’s Republic is good at driving forward existing developments with great financial power and personnel strength, but its own innovations have so far been the exception. Among other examples, Ding cites the development of high-performance graphics chips. Processing images is one of the most important elements in the field of artificial intelligence. The best chips are made by the US company Nvidia. Beijing currently has to rely on the US vendor’s technology. “However, China is making significant progress in chip development and has set out to invest heavily in this area,” Ding says.
However, the People’s Republic rarely develops its own AI innovations. According to Ding, this has structural reasons. In Silicon Valley, a cluster has formed in which more and more new companies are founded and from which more and more bright minds are attracted. China lacks such a cluster, even though there are efforts to build up smaller Silicon Valleys on its own east coast, according to Ding.
Concerns in the global West about China’s AI advances concern the technology’s possible use in violation of human rights. “Facial recognition is an area where China is leading,” Ding says. “Chinese companies are supported by the Ministry of Public Security, which provides them with facial data.” The government in Beijing is interested in making rapid progress because it sees itself as the first and biggest buyer of the technology.
Still, Beijing doesn’t want entirely centrally directed development. “The government doesn’t want to control AI research too much because that would eliminate competition for ideas.” Looking ahead over the next few years, meanwhile, Ding doesn’t expect China to become the world’s number one AI player. Other countries, especially the US, will not be easily overtaken in this field.
Ding was born in Shanghai and emigrated with his parents to the US state of Iowa at the age of three. He later returned to China and spent a year studying in Beijing, among other places. Ding first came to Oxford as a Rhodes Scholar and subsequently became a doctoral student at the Future of Humanity Institute. Constantin Eckner
