Suggestion To China: Get Proactive On Telecoms Dispute

China needs to negotiate on EU telecoms complaint

China should be proud of itself for recently using negotiations to avoid a trade war with the EU over solar panels; but it is quickly falling back into old behavioral patterns that could cause a similar dispute involving telecoms equipment to quickly become a new crisis. My suggestion to Beijing is to seize the momentum from the recent solar success to quickly open new negotiations to try and resolve the new looming dispute over telecoms equipment sold in the EU by industry leaders Huawei and ZTE (HKEx: 763; Shenzhen: 000063). But instead of taking such a proactive approach, we’re seeing signs that Beijing is falling back into its old habit of not doing anything and instead waiting until a new crisis erupts before taking any action to try and resolve the matter.

Beijing achieved a major breakthrough 2 weeks ago when it reached a negotiated settlement with the EU over the sale of Chinese solar panels in Europe, avoiding punitive tariffs that would have dealt a major blow to the sector. Now the EU is sending clear signals that it will soon launch an investigation into Chinese telecoms equipment. In both cases, the EU claims that China provides unfair support to its companies through government assistance, allowing them to undercut their European rivals.

The latest news cites the EU denying a report that it will delay launching an investigation until results are announced from a major tender for telecoms equipment to build 4G networks in China. (English article) The implication was that the EU might scrap its investigation if European suppliers like Ericsson (Stockholm: ERICb) and Alcatel Lucent (Paris: ALUA) won big contracts in the multibillion-dollar tender.

But what caught my attention in the reports was a quote from an EU trade spokeswoman saying the EU would prefer to resolve the matter through negotiations. The spokeswoman goes on to say that no negotiations have occurred so far, which seems to indicate that China hasn’t shown any interest in such talks yet. EU trade commissioner Karel De Gucht hinted last year that he was seeking a similar negotiated settlement in the matter when he took the unusual step of asking Huawei to voluntarily raise its prices. (previous post)

I don’t have a particular view on the allegations in this case, though China does have a track record of subsidizing certain industries that it views as important to its economic development. But what I am certain of is that the EU is unhappy about Huawei’s rapid rise in Europe, and the threat that rise is posing to established local players. At the same time, De Gucht is also under pressure from European leaders to solve EU trade disputes with China through dialogue rather than damaging anti-dumping tariffs.

All the signs indicate that the EU will launch its telecoms equipment investigation within the next few months, and yet we haven’t seen any signs from China that it wants to negotiate a solution to the matter. In this situation, I would strongly advise Beijing to make some positive good will gestures, for example by having a top government official say publicly that China would like to resolve the telecoms dispute through negotiations.

But I fear we may not see any such gesture, and instead we won’t see any moves from China at all until the EU finally launches its formal anti-dumping investigation later this year. By then it could be too late, and China will have squandered the good will and positive momentum it recently received through the successful resolution to the solar panel dispute.

Bottom line: China should get more proactive on addressing the EU’s complaints about unfair state support for Huawei, but will probably ignore the issue until a crisis erupts.

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