China-Finland Economic Ties: Trade and Investment Highlights

• Finland holds the distinction of being the first Western nation to sign a government trade agreement with China. As China’s third-largest trading partner in the Nordic region, Finland has maintained a trade surplus with China, which has been its largest trading partner in Asia for over two decades. In 2023, China accounted for 44 percent of Finland’s global pulp exports, underscoring its significance as one of Finland’s primary export markets.

• Major Finnish corporations, including Nokia, Wärtsilä, UPM-Kymmene, Stora Enso, and KONE, have established substantial investment projects in China. Concurrently, Chinese investments in Finland have been on the rise, reflecting a deepening economic interdependence. 

• Despite disparities in market size and strategic priorities, Finland and China have fostered a robust economic partnership, strengthened by stable political ties and high-level dialogues. Finland’s advanced expertise in engineering, technology, and sustainability positions it as a vital ally for China, which seeks to leverage Finnish insights across various industries.

Relations between China and Finland have continued to flourish over the years, particularly in trade and investment, which form the backbone of their cooperation. Despite differences in size, geography, and global influence, both nations have established a robust economic partnership supported by stable political ties and frequent high-level dialogues.

Finland’s advanced expertise in technology, innovation, and sustainable solutions positions it as a valuable partner for China, which actively seeks Finnish insights in areas such as environmental protection, education, and reforms of state-owned enterprises. Notably, the trade volume between China and Finland reached EUR 12.5 billion (US$13.73 billion) in 2022, with China becoming Finland’s third-largest trading partner, as well as its largest trading partner in Asia for over two decades.

Finnish companies have made significant investments in China, capitalizing on emerging market opportunities and enhancing their global competitiveness. The two countries have further strengthened their collaboration through joint research initiatives in sectors like energy, information and communication technology (ICT), and nanotechnology, paving the way for new avenues of growth.

However, challenges persist, including rising production costs in China and the shifting dynamics of the global economic landscape. Finnish businesses must adapt to these changes while exploring prospects in sustainable development and addressing climate change.

China-Finland bilateral trade

Finland is China’s third-largest trading partner in the Nordic region, while China has been Finland’s largest trading partner in Asia. Notably, Finland has maintained a trade surplus with China.

Bilateral trade between China and Finland is highly complementary. On one hand, Finland boasts world-class products and technologies in forestry, electronics, machinery manufacturing, and metal processing, with advanced expertise in information and communication, energy, and environmental technologies.

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As China advances its modernization efforts and strives to build a resource-efficient and environmentally friendly society, there is a strong demand for Finland’s advanced products and high-tech solutions. On the other hand, China, as the largest developing country, offers high-quality and affordable textiles, clothing, audio-visual products, electronics, electrical appliances, and chemicals, which are well-received in Finland. Overall, the prospects for China-Finland bilateral trade remain broad.

The main categories of Finnish exports to China are pulp, paper, and electromechanical products. In 2023, 44 percent of Finland’s global fiber pulp exports were destined for China, highlighting China as one of Finland’s primary export markets for this product. However, the share of transportation equipment exports from Finland to China is lower than the global average, mainly because China has a competitive advantage in manufacturing transportation equipment, reducing its reliance on imports from Finland.

The largest category of Finnish imports from China is electromechanical products, accounting for approximately 30 percent of Finland’s global imports in this category in 2023, with an annual growth rate of 15 percent. Additionally, the value of textile imports from China to Finland is significantly higher than the global average. There has also been notable growth in the import of ships and vehicles from China to Finland.

According to the Bank of Finland, in 2023, Finland’s exports to China faced significant challenges, reflecting a contraction of 12 percent from the previous year, amounting to €3.56 billion (US$3.97 billion). This decline was largely attributed to China’s sluggish domestic demand, which negatively impacted Finnish goods. Additionally, the broader downturn in the global economy contributed to a 7 percent year-on-year decrease in Finnish exports overall.

Despite these setbacks, China remained Finland’s fifth most important export destination, accounting for 4.7 percent of Finland’s total exports (down from 4.9 percent in 2022). The primary categories driving Finnish exports to China were wood pulp and paper products, which comprised 38 percent of total exports, followed closely by machinery and electronics at 37 percent.

In 2023, Finland experienced an 18 percent year-on-year contraction in goods imports from China, reaching a total value of €6.91 billion (US$7.70 billion). This decline was slightly steeper than Finland’s overall imports, which decreased by 17 percent. As a result, Finland’s trade deficit with China narrowed to €3.36 billion (US$3.75 billion).

The modest import figures can be attributed primarily to Finland’s weak economic performance and a cooling off from the post-pandemic demand surge for goods.

Despite the drop, China remained Finland’s third-largest supplier of imports, holding a 9.0 percent share (down from 9.2 percent in 2022). The majority of imports from China consisted of machinery, equipment, and electronics, which made up 56 percent of total imports.

China-Finland bilateral investment

Finland has established itself as a significant partner for China within Europe. Finnish firms such as Nokia, Wärtsilä, and Stora Enso have made considerable investments in China, capitalizing on the country’s expansive market and manufacturing capabilities. Concurrently, an increasing number of Chinese companies, including Huawei and CATL, are expanding their presence in Finland, indicating a reciprocal interest in accessing technological expertise and innovative ecosystems.

This bilateral investment flow highlights the complementary economic strengths of both nations, particularly in sectors such as technology and clean energy. The strategic alignment between Finnish innovations and Chinese manufacturing capabilities suggests potential for enhanced collaboration.

As both countries seek to deepen their economic ties, innovation has emerged as a critical area for cooperation. Initiatives like the China-Finland Innovation Enterprise Cooperation Committee play a vital role in fostering joint ventures and partnerships, serving as platforms for knowledge exchange and technological development. The prospects for further investment and collaboration remain promising, particularly as both nations navigate an increasingly complex global economic landscape characterized by geopolitical shifts and evolving market demands.

Chinese FDI trends in Finland

Chinese foreign direct investment (FDI) into Finland has experienced notable shifts in recent years, reflecting broader global trends in FDI flows.

While FDI outflow from China to Finland declined in recent years, in Finland Chinese FDI has shown resilience despite these broader challenges, such as tighter government regulations on capital outflows, weakened corporate balance sheets, and heightened scrutiny. The latest statistics indicate that Finland has become an increasingly attractive destination for Chinese investment, particularly following the collapse of Russian trade, which has prompted Chinese firms to seek new markets.

Chinese investments in Finland are notably concentrated in key sectors such as technology and renewable energy. For example, the Finnish-China Green Industry Park Forum highlighted opportunities for collaboration in areas like clean energy technologies and smart infrastructure. Additionally, Finnish companies are increasingly engaging with Chinese partners to explore innovations in sustainable technologies, further enhancing bilateral economic ties.

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The potential for increased Chinese FDI in Finland remains promising. The country’s stable business environment, advanced technological landscape, and alignment with global sustainability goals position it as an attractive destination for Chinese firms looking to expand in Europe. As the demand for sustainable development and innovative technologies continues to rise, Finland could serve as a key partner for Chinese companies aiming to strengthen their presence in the European market.

Finnish FDI trends in China

Finland has emerged as a significant recipient of Chinese FDI in Europe, particularly in the technology sector, where major acquisitions have occurred.

Notably, companies like Nokia, which has been instrumental in building China’s telecommunications infrastructure, reported significant revenues from its partnerships in the region. In 2018, Nokia secured contracts worth approximately EUR 1.3 billion (US$1.45 billion) to support the rollout of 5G networks in China.

Similarly, Wärtsilä, known for its marine and energy solutions, has established joint ventures with local firms, focusing on eco-friendly technology; their collaboration has contributed to China’s goal of carbon neutrality by 2060.

Other Finnish companies, such as UPM-Kymmene and Stora Enso, have ventured into the renewable materials sector, with UPM investing around €500 million (US$557 million) in a new biorefinery in China to produce sustainable biofuels and biochemicals.

Despite Finland’s non-participation in initiatives like the Belt and Road Initiative BRI and regional groupings such as the 17+1, its strategic location and advanced technological capabilities continue to attract Chinese investors. This trend highlights Finland’s growing importance in fostering economic collaboration with China, particularly in clean technology and digital innovation, which align with both nations’ development goals.

Trade and investment treaties

China-Finland bilateral investment agreement

In 2004, China and Finland signed a bilateral investment agreement (BIT), aimed at promoting and protecting mutual investments between the two countries. This agreement fosters a stable and transparent environment for investors from both nations, contributing to economic cooperation and growth. Key provisions of the China-Finland BIT include:

• Investment protection: The agreement ensures that investments are protected from expropriation, nationalization, and discriminatory practices, guaranteeing fair treatment for investors in both countries. Compensation for expropriated assets is provided under fair market value principles.
• Fair and equitable treatment: Investors from both China and Finland are entitled to treatment no less favorable than that accorded to domestic investors or investors from any third country, ensuring fairness in the management, operation, and expansion of their investments.
• Dispute resolution mechanisms: The BIT provides a framework for resolving investment-related disputes through negotiation, mediation, or arbitration. It includes an investor-state dispute settlement (ISDS) clause that allows investors to seek legal remedies in cases of disputes.

The BIT guarantees the free transfer of investment-related funds, including profits, dividends, interest, and proceeds from sales, in and out of both countries. Transfers are to be made without delay, in freely convertible currencies at the prevailing exchange rate, ensuring smooth financial flows for investors.

Moreover, the BIT facilitates the temporary entry and stay of essential personnel involved in investment projects, ensuring smooth business operations. Immediate family members are also accorded similar privileges.

Lastly, in addition to these protections, the agreement encourages further investment by providing legal assurances and reinforcing the importance of rule of law, stability, and non-discrimination. This helps create favorable conditions for business development, fostering closer economic ties between China and Finland.

China-Finland double taxation avoidance agreement

In addition to the BIT, China and Finland signed a new double taxation agreement (DTA) on May 25, 2010, which replaces the previous 1986 treaty, amended by a 1995 protocol. The new DTA, which officially took effect on January 1, 2011, is designed to prevent double taxation on income derived from both countries and aligns with the 2008 OECD Model Convention, while introducing provisions that may impact business structuring between Finland and China.

The DTA pertains to income taxes imposed by both China and Finland. In China it covers:

• The Chinese individual income tax (IIT); and
• The Chinese corporate income tax (CIT).

On the other hand, in Finland the DTA applies to:

• The state income taxes (valtion tuloverot; de statliga inkomstskatterna);
• The corporate income tax (yhteisöjen tulovero; inkomstskatten för samfund);
• The communal tax (kunnallisvero; kommunalskatten);
• The church tax (kirkollisvero; kyrkoskatten);
• The tax withheld at source from interest (korkotulon lähdevero; källskatten på ränteinkomst); and
• The tax withheld at source from non residents’ income (rajoitetusti verovelvollisen lähdevero; källskatten för begränsat skattskyldig).

The DTA introduces a reduction in withholding tax rates on dividends to 5 percent, applicable when the parent company directly holds at least 25 percent of the subsidiary’s capital. This decrease from the previous 10 percent benefits Finnish companies with Chinese subsidiaries. Similarly, the Finnish withholding tax on dividends paid to Chinese parent companies is also reduced.

The withholding tax rates under the new DTA are as follows:

• Dividends: 5 percent for parent companies holding at least 25 percent of the paying company’s capital, otherwise 10 percent.
• Interest: Set at 10 percent.
• Royalties: Ranging from 7 to 10 percent, depending on the type of royalties.

The DTA also abolishes Finland’s tax sparing provision, which previously allowed Finnish entities to credit withholding taxes on Chinese-sourced dividends, interests, and royalties. This change may increase the overall tax burden for Finnish entities receiving income from China.

Additionally, the new agreement broadens the definition of “permanent establishment” (PE), specifically affecting insurance enterprises that collect premiums or insure risks within the other contracting state, even through non-independent agents.

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Capital gains provisions are also revised, allowing China to tax gains derived from the sale of shares by a Finnish resident if the Finnish seller had a 25 percent or greater ownership in a Chinese company at any time within the 12 months preceding the sale. However, this provision does not apply to the alienation of shares in Finnish companies.

Through these changes, the DTA aims to streamline tax policies between Finland and China, promoting smoother cross-border business operations.

Multilateral treaties

China and Finland, both members of the WTO, are signatories to various multilateral treaties concerning trade and investment. These include:

• The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which mandates WTO members to extend intellectual property rights to owners in any member state. It incorporates a most-favored-nation (MFN) clause, ensuring equal treatment for IP rights protection across all member countries. Additionally, it provides mechanisms for dispute resolution and compensation.
• The Agreement on Trade-Related Investment Measures (TRIMs), which prohibits the implementation of investment measures that restrict trade between members. This includes measures like local content requirements, which mandate the use of locally-produced goods or services by companies operating in a market.
• The General Agreement on Trade in Services (GATS), which grants most-favored-nation status to service providers of any WTO member, excluding governmental services such as social security, public health, education, and certain services related to air transport.

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